COMEX gold gained $46.20 last week to settle at $913.60. On Friday, the FDIC closed four more U.S. banks taking the year’s total of failed institutions to 29 – not including two savings and loans. Also on Friday, the government informed 19 U.S. banks of their stress test results. Banks have been sworn to secrecy on their test results until the Treasury makes them public on 4 May. Over the course of last week, media covered the story that Bank of America’s Ken Lewis was essentially forced – by the Fed and Treasury – into buying Citigroup or (be responsible for) greater systemic weakness. Both the Fed and Treasury denied the claims, but some news sources actually came up with transcripts of meetings that leave little doubt Lewis had little choice in the matter. There was also news that federal regulators are preparing for Chrysler’s bankruptcy. It seems the government can’t get enough of corporate America. We are often questioned about our hyperinflationary forecast for the U.S. economy and, among other things, the main argument seems to be that – short of an interest in consumer borrowing – hyperinflation cannot ensue. We beg to differ. Inflation results from three events, all of which boil down to monetary phenomena. Inflation can gain traction with wage growth; with rising commodity prices; and/or with currency devaluation. Since joblessness continues to grow across the U.S., it doesn’t seem that wage-pull inflation will be a problem anytime soon. Those left with jobs work fewer hours and some retain hours, for lower wages. This is precisely the opposite of what happened during the 1970s, when skilled workers shipped off to Vietnam throughout the 1960s left employers in the position of raising wages to attract qualified help. By the early-1970s, contractions in global commodity production began to result in higher prices that escalated from the markets (exchanges) to wholesale levels and, ultimately to the retail level. It is worth noting that by 1981, when U.S. inflation averaged 13% per annum, neither China nor India were demand factors. Concomitant with rising wages and increasing commodity prices, the U.S. was involved in the Vietnam War, the War on Poverty and had just embarked on the War on Drugs. Globally, faith in governments was folding, adding to pressures on currencies’ values that eventually led to the floating exchange rate system. Today, the Fed and Treasury jawbone a great deal about the threat of deflation but the real threat facing the U.S. and world economies is inflation. While it may not commence with wage-growth, there is little reason to believe it cannot begin with commodity price inflation. Interest rates are, for instance, a major driver of commodity prices. When the Fed decides to get out of the interest rate manipulation business, we believe rates will turn higher in earnest, virtually overnight as a reflection of risk premium for the U.S.’ worsening fiscal position. Of course, physical supplies are critical to prices for staple commodities such as wheat, corn and soybeans. Strength in soybean prices over approximately the past two months is tied to gradually declining U.S. stocks and reduced output from South America. Despite price stabilization in recent months, relative to the July 2008 highs, there is little to indicate commodities in general – but perhaps agriculture in particular – have experienced resurgence in capacity utilization to offset the impact of peak demand. Subsidies in developed economies continue to reward non-productivity while the developing world still struggles to reach consistent levels of output. Subsidization also prevents the transfer of technology from industrialized economies to those in need of it most; those area s The ‘new economy’ made up of technological software and state-of-the-art hardware displaced capital from ‘old economy’ drivers such as agriculture. But since 2001, analysts, consumers, economists and traders have been witness to the resurgent old economy as gold, crude oil, industrial metals and agriculturals experienced supply declines and price rallies. As for agriculture, rising input costs and market volatility have done much to discourage what had been routine crop-year planning. And what input costs and volatility have failed to contribute to farmers’ uncertainties, a lack of available credit has supplied. In short, the reasons that agricultural commodities prices rallied to new highs in 2008 are no closer to being resolved than they were in 2001 at the bottom of the cycle. Given the existence of the credit crisis and the extreme likelihood the U.S. government will burden agriculture with additional climate change regulations the conditions that reignited the commodities bull in 2001 were less dire then, than they are now. Inflation is purely a monetary phenomenon. But that doesn’t necessarily mean money can only flow, for instance, from banks to borrowers as a means of stimulating the economy. Higher commodity prices – particularly higher agricultural commodity prices – can accomplish the same end. As CPI and PPI data (lame as it is) came out from end-2008 through most of the first quarter of 2009, declines in the indices were primarily a result of lower energy prices. Since consumers’ net incomes in the U.S. are stalled at about 1990 levels, heightened inflationary pressure over the past year or more has been the result of rising commodity values as banks began cutting credit lines reducing consumers’ access to cash. The dollar turned decidedly lower last week and, barring unforeseen government interference designed to prop it up, the greenback appears to be headed lower, adding to inflationary pressures already in place from commodity prices.