A section from John Williams' update today. The reason I pay my (worthless) dollars for this information is because he helps me keep my eyes on the big picture, and I thought you all could use to have that reinforced today:

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In response to reader requests, this Special Update provides a preliminary but brief assessment of the impact from the financial system solvency crisis and ongoing turmoil in the global financial markets on the outlook for the continuing inflationary recession and my prediction of a hyperinflationary great depression. These comments are provided in advance of more detailed analysis in the next full SGS Newsletter, targeted for publication over the weekend of October 25th. In general, the economic and inflation outlooks — other than intensified — are little changed.

– Best wishes to all, John Williams

Fed/Treasury Actions Should Stabilize Banking System
U.S. Equities, U.S. Dollar and U.S. Economy Face Significant Downsides

With the partial nationalization of the banking system, full FDIC backing to demand deposits and various other bank liabilities, extraordinary liquidity facilities offered by the Federal Reserve and indications of further flexibility as needed, the federal government and the Federal Reserve have taken actions or otherwise should have the ability to stabilize the functioning of financial services industry. As discussed previously, however, those actions will not prevent an already ongoing and deepening recession and will not provide a long term-prop to U.S. equities or to the U.S. dollar. The ultimate cost of systemic salvation remains inflation, driven by excessive monetary creation, irrespective of the short-term collapse in oil prices.

It is important to keep in mind that the current recession has been in place for some time, since before the systemic solvency crisis broke in August of 2007. It reflects a structural impairment in the U.S. economy that has prevented sustainable income growth from exceeding that of inflation (see the Hyperinflation Report of April 8, 2008 for further detail). The recent systemic and market turmoil only have exacerbated the downturn, they did not trigger it. As discussed below, reporting of retail sales and industrial production show an ongoing and deepening recession.

While those underlying economic numbers would be consistent with a third-quarter real (inflation-adjusted) GDP contraction, the Bureau of Economic Analysis so far has masked most of the GDP’s contraction in the current recession with heavily politicized reporting. The BEA has the ability to do so, again, in the upcoming "advance" estimate of the third-quarter GDP, due out on October 30th, the Thursday before the election. On the other hand, the concept of the U.S. economy being in recession is now so widespread that further obfuscation could just intensify the public’s distrust of government reporting, with little if any political gain. If consensus forecasts coming into the end of next week are for a GDP contraction, such would enhance the odds of an actual contraction being reported.

In recent weeks, the government and Wall Street talked up the "collapsing" economy in an effort to gain public support for the "bailout" package. The fear mongering has had its impact in hitting the economy harder than would have been seen otherwise from the liquidity crisis, accelerating the fall into an economic depression (see the Hyperinflation Report of April 8, 2008 for further definitions).

From the standpoint of inflation, the current level of oil prices, below $90 per barrel, has and will ease some of the immediate-term commodity-driven inflation pressures. Such will be more than offset in the next six-to-nine months as the impact from increased money supply growth starts to surface in inflation reporting. I still look for double-digit official CPI reporting in early 2009.

As to recent strength in the dollar, weakness in oil prices, and softness in gold prices, much has been distorted by the systemic solvency crisis, where forced liquidations of related financial instruments have caused prices movements well beyond or counter to underlying fundamentals. In particular, as the markets begin to stabilize, the U.S. dollar should come under intense selling pressures. Regardless of the global nature of some actions taken to stabilize the system, the primary solvency crisis and the fiscally and monetarily destructive corrective actions are predominantly U.S. issues, ones that materially have weakened the already miserable underlying fundamentals for the U.S. dollar.

When dollar selling resumes, eventually evolving into a massive flight-to-safety outside the dollar, that should put upside pressure on the prices of precious metals. Oil prices should surge in dollar terms, too, irrespective of any softening oil demand due to slower U.S. or global economic activity.

The hyperinflation forecast remains intact, but it may be moved closer to the present, depending on developments with the U.S. dollar. This shall be discussed in further detail in the upcoming SGS Newsletter.