The deed is done. The time has come to pay serious money for your fun. Bubbles has accomplished his mission, and the inflationary beast may be loose again. Does anyone remember President Ford’s Whip Inflation Now buttons. Get ready for a price control nightmare created by Washington. Soviet style ration books may be on the way.Why else has the government created WIC stores? We have a great bull market in oil. This is a verifiable fact. The money bubble has caught up with us. The question is what now?

We can say the cost of all energy is going up. Gasoline, diesel, fuel oil, natural gas, coal, and electric must go up. The entire hydrocarbon group must raise their prices, or cease operating. The downstream products such as chemicals, plastics, tires, and other products must increase their prices. There will be the usual wailing and gnashing of teeth, as reformers and politicians attempt to prevent price increases to the consumer, but ultimately prices will rise. Process industries such as steel, copper, and aluminum will have large increases in their energy costs. Therefore, they must have large increases in price, or shut down production.

The airline industry is going to the wall right now. US Airways is trying to avoid reentering bankruptcy. Delta Airlines has a very high chance of going into Chapter 11. American Airlines may need another restructuring, after narrowly avoiding bankruptcy last year. United Airlines is operating in Chapter 11, and has just suspended its pension payments. Fuel costs have just started going up! This industry is already buckling under the new energy costs. Alitalia, the Italian airline, is also on the verge of bankruptcy. Air Canada is operating in bankruptcy. The trucking industry is very fragmented, so the initial effects have not yet been tabulated.Dieel fuel is already at record highs. Local operators in California have already begun parking their trucks, rather than operate at a loss. The effect will not be seen in the railroads for some time due to the high degree of regulation in the industry. Ocean shipping will see the effect very soon.

The impact in retailing is already being seen. Wal-Mart has already mentioned that higher gasoline prices were affecting sales. Retail sales will be affected across the board. SUV sales will drop further. The travel industry must be affected. Every sector in the economy is involved. Even  Tthe price of school lunch is being raised. Rather than going through a long litany of the sectors that are impacted, we will jump to the big picture.

The big question is the stock market. Unfortunately, we have a precedent to use a guide. Approximately 30 years ago, inflation began being reflected in the US economy. The grain markets exploded in price. This occurred in 1972 and 1973. This was just the beginning of that inflationary wave. The combination of the Vietnam War and the massive social spending of the Great Society had created a massive inflationary wave that culminated on January 21, 1980. The economy contracted massively after that. Who remembers that President Ronald Reagan appointed Alan Greenspan as Chairman of the Federal Reserve Board? Who remembers that Reagan claimed that Greenspan was an inflation fighter? The truth is that Alan Greenspan did everything in his power to reflate the US economy, and he destroyed the value of the US dollar in his quest for reinflation. The stock market was a bad investment from the mid sixties until the early eighties. It was only when the value of the US dollar started down that the stock found it’s wings. Real estate and natural resources were terrible investments throughout the 1980’s. The falling dollar drove the stock market through the early 1990’s. The dollar stabilized in the early 1990’s and began recovering. The dollar recovered until 2002. Since then, Greenspan and the Congress have again dropped the value of the US dollar by approximately 28 percent.

We now begin a new era in economics. Cheap energy is over. We have a hyper inflated economy. Real estate has joined the tulip bulb craze in historic terms. All asset groups have risen in the last two years, which is a consequence of the Federal Reserve’s decision to break all historical norms in money creation. This is unique in modern financial history We must be prepared to throw out our comfortable assumptions, and deal with the reality in front of us. One-liners are useless to us now. We have an overheated economy at the beginning of this cycle. There is so much liquidity floating the world that the beast is fueling itself. It will collapse, but not in way we are expecting! We do know that the stock market hates uncertainty, and this economy is getting very uncertain. We need to understand that this is global in scope at this time. Marc Faber is a necessary read to complete the picture. Historically, financial assets tend to under perform during periods of real asset inflation. John Templeton has forecasted a negative environment for the next decade. The greatest threat to the US is the impairment of its credit mechanisms. If inflation gets too high, the entire credit business will collapse. Greenspan will not let this occur, for it would be the end of the giant consumer bubble.

How long do you think the US economy would last with a collapse of its consumer credit mechanisms? Scary thought, no? Remember, there has never been an economy in history that has based solely on credit. Neither earning power, nor asset wealth is driving this economy! No one has ever seen anything like this before.

Wayne N. Krautkramer onlypill@cox.net

WIC STORES http://www.cbpp.org/5-17-04wic.htm

SCHOOL LUNCH PRICES INCREASED http://www.lasvegassun.com/sunbin/stories/thrive/2004/aug/09/080902561.html

MARC FABER http://www.gloomboomdoom.com/

JOHN TEMPLETON http://chinese-school.netfirms.com/Sir-John-Templeton-interview.html