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Talk about good timing. I wrote this post for my CAPS blog at 7:00 AM this morning. At the time oil was hovering at around $105 or so.

"Inflation vs. Deflation

There are basically two camps of people out there right now. I call them "Inflationists" and "Deflationists."

The Deflationists believe the fact that liquidity is drying up because that banks will be unbelievably tight with credit going forward, that the likely death of the type of 30-to-1 leverage that so many were employing over the past several years, and a massive global economic slowdown will suck the life out of the prices of all assets.

Inflationists on the other hand believe that Ben Bernanke, who has studied the causes of the Great Depression in great detail and has talked about how Japan should have "dropped money from a helicopter" to prevent the deflation that it experienced, will join forces with Hank Paulson, who will do everything within his power to protect his Wall St. friends, to completely flood the United States with money and lower the value off the U.S. dollar to prop up asset values. This, combined with the economies of foreign countries, particularly emerging markets, which will continue to grow at a nice clip will keep the demand for and prices of natural resources fairly high.

I am in the latter camp. The Federal Reserve and the Treasury have way too much power and it is completely within their ability to pull the rug out from under the dollar if they want to. Our out of control government spending and massive current account deficit probably would have eventually steered things in that direction anyhow. Our Friends Hank and Ben are just going to speed up the process.

Which camp are you in and why?"

As I type, the dollar is tumbling and oil is sitting at $126.50. Time will tell if this trend will last, but my call is looking fairly prescient today.

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