Financial markets are on sharp edges despite the absence of significant economic data. This shutdown foolishness holds the media’s center stage, but that’s not what’s on the minds of markets.

One thing there towers over all: We’re either entering a spate of global inflation, with central banks late to the party … or we’re not.

The 10-year T-note is out of bounds, up at 3.6 percent and taking mortgages above 5 percent. Japan and Libya forgotten, oil is at $111 a barrel, gold at $1,468 an ounce, and silver at $40 an ounce.

That gold price is more than double the cost of new production, and silver easily quadruple — the sign that "momentum" traders are chasing each others’ tails. If we are ramping to global inflation, those tails are a good catch.

If this episode is a replay of the summer of 2008, the momentum boys are going to end up with a mouthful of fur and look really, really silly.


Civil War-era photo of cannons at the parapet of South Carolina’s Fort Sumter. Flickr image courtesy of SnapshotsofthePast.com.

Financial markets are on sharp edges despite the absence of significant economic data. This shutdown foolishness holds the media’s center stage, but that’s not what’s on the minds of markets.

One thing there towers over all: We’re either entering a spate of global inflation, with central banks late to the party … or we’re not.

The 10-year T-note is out of bounds, up at 3.6 percent and taking mortgages above 5 percent. Japan and Libya forgotten, oil is at $111 a barrel, gold at $1,468 an ounce, and silver at $40 an ounce.

That gold price is more than double the cost of new production, and silver easily quadruple — the sign that "momentum" traders are chasing each others’ tails. If we are ramping to global inflation, those tails are a good catch.

If this episode is a replay of the summer of 2008, the momentum boys are going to end up with a mouthful of fur and look really, really silly.

Limits on an inflation outbreak have been thought to be the following: The U.S. is more in recession than recovery, with wages not growing at all while rising costs of energy, food and health insurance keep consumers on the ropes. All still true.

Europe was supposed to be on the edge of a new debt meltdown among the "Club Med" nations. Instead, the new Irish government says, "All is OK, we’ll pay," Portugal will be bailed and accept the same vow of perpetual poverty that is not going well in Greece, and nobody wants to know what’s under Spanish covers.

Is Europe really OK after all, or is the European Central Bank tightening a suicidal sop to the Germans? Whether the European nations are OK or not, if they can kick the can far enough, European growth adds to global heat and possible inflation.

In the emerging nations, so long as they maintained undervalued currencies then inflation was inevitable — but it was supposed to be confined there. As they were forced to raise domestic interest rates, their currencies would at last rise and slow them down.

Brazil’s currencyhas broken upward, almost 10 percent in two weeks, maybe a trendsetter. However, early in a general revaluation of emerging currencies, all their exports would rise in price, adding inflation fuel, the long-run slowing over the horizon.

I’m going to stick with plan A: the U.S. economy is far too weak for global inflation to get going. Federal Reserve Chairman Bernanke is right: here, cost increases are transient, shifting U.S. patterns of consumption instead of raising the general price level.

A good friend and smart-money runner, Gary Beels gives his clients this inflation reminder: when boomers were kids in the ’50s, first-class postage cost 3 cents (it went to 4 cents in ’58).

The 15-fold increase to today’s 44 cents is not far off the 12-times increase in the Consumer Price Index since ’55.

However, today we can send messages at zero marginal cost and instant delivery. In ’55 a "long-distance call" to Grandma on Sunday cost $3 in those dollars, nearly $40 of today’s — but today, that call costs nothing.

Inflation bites into economic growth in strange ways and at different times. In Colorado, my home state, the cost of health insurance has risen more than 10 percent in each of the last 10 years. That’s tough to stomach.

Gasoline is weirdest of all: 1955’s 25 cents for a gallon of gas in today’s dollars translates to $3 per gallon, and the cost of gas, in real terms, actually fell steadily in real terms until 1997. We feel pain today because the cost has doubled since ’97 vs. incomes, which are unchanged for most citizens.

Shutdown … Congress first began to balk at increasing the debt limit back in ’82, and voting took on Kabuki-like charade until then-U.S. House Speaker Newt Gingrich’s shutdown try in ’95. Worries for U.S. bankruptcy in those days were minor, and then-President Bill Clinton left Gingrich and his supporters in Congress without their shoes.

Today, the debt threat is real, and frightened people will support dumb things. A temporary shutdown is not dangerous — the hazard lies in righteousness.

Our fiscal gulf is too big to bridge even if either party were granted its every wish. No conceivable taxation hikes by Democrats, nor Republican cuts of spending, will get it done. Neither party nor the President will deal with the cost of health care. Yet all have deep conviction of their moral superiority over the others.

Next week we mark the 150th anniversary of the Battle of Fort Sumter. In my reckoning, that was the last time this country was divided by such great moral certainty, and such contempt for our fellows.

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