SH

I didn't get back to your post the other day because I had to go out for a bit.

Here's my take for what it is worth.

Mish is right in thinking the U.S. economy will take a horrible beating and suffer an extreme depression. Most people think of the economy as creating an inflationary or deflationary experience. The economy is the tail and the monetary actions or currency are the dog. The dog wags the tail and not the other way around.

Inflation/hyperinflation is and always will be a monetary or currency event. Times get tough (usually because of monetary excesses) and the government prints more money to get out of the mess. It works for a while and then inflation begins to show its ugly head and the government tightens up the money supply. The economy has a recession. This back and forth cycle gets bigger and bigger on each succesive iteration (Ty Andros "wolf wave") until the economy blows apart.

By this time, there is over capacity throughout the sytem which favors deflation (this in part is what Mish sees) but there is also an excess of money in the system which would favor inflation. The government cannot control the fact that the economy will suffer terribly but they can control whether the system suffers from deflationary effects or inflationary effects. They control this by either locking up the money and letting things crash. Let the chips fall where they may (a deflationary depression). This has the effect of cleansing the system and after a reasonably brief period of time the system can reboot and grow again; the excesses having been eliminated. The other course, which politicians favor and Bernanke is committed to, is to increase the money supply (however much it takes) and keep the system going as long as they can. It will crash in either scenario.

Politicians favor the latter (inflationary) course because it will happen on someone else's watch if they pump enough money (paper) into the system.

What happens though is that it gets out of control. When the populace figures out that the currency is no different that monopoly money and is worth nothing; that the government can, will, and is committed to printing it without end a switch flips in their collective mind. All of a sudden they "see" and they spend their money on things as fast as they get it they get rid of it. They will buy anything that they can buy, store, and sell or barter later for a profit. As a result the velocity of money increases hugely and the fuse is lit for a hyperinflationary explosion. We are about six months to a year from the point of recognition IMO.

Between now and the late spring of 2010 I expect we will see gold go on a tear, this will open peoples eyes. They will "see." The market will correct for a while (nothing ever goes straight up) but the die will have been cast and the subsequent runup (the 5th wave) will be unfathomable as the dollar is reduced to the value that all paper currency eventually attains --- zero.

P.