Few will argue that we are in for a recession, probably a long one (stagnation?). What is at issue is inflation vs deflation.

I believe deflation is the route we are headed not hyper inflation (>5%). Right now diddly squat for new money is being made and money is being destroyed very fast. If we destroy money faster than we create it, it becomes more scarce and therefore more valuable. Assuming demand for money remains the same, this results in delfation.

In a reserve system, debt is money. As debt is closed either by payed off or write off, that money is taken out of the money supply and therefore destroyed. Right now far more debts are being something-offed than are being originated. To add to this debts have been bought using more borrowed money. So as the original debt is payed off, all debts in the chain get payed off. This compounds the reduction in the money supply.

There are two trends that are emerging that indicate that this force will grow stronger. Both originate in apparent shifts in comumer attitude/behavior. First, debt is now viewed as a bad thing. This attitude is growing in numbers. Look at the growing popularitey of personal finance blogs offering advice on debt reduction. This will have the above mentioned affect on debt money.

Second, and related, with the reduction in using debt to purchase things comes a reduction in spending. This is where some of the recessionary force is comming from. As people spend less, buisness have less money and have no need to invest to grow. Look at the number of reatil chains that are reducing the number of stores they have. This trend will likely continue as consumers become more unsure in a recessionary environment.

Oil and commodoties will have to rise astronomicially to generate enough inflationary pressure to offset deflationary pressures and I dont think China and India can grow that fast. Especially considering a slowdown in the US will affect them too.

~joe