The US economy has been hollowed out by globalization to the point that there is insufficient organic growth potential left to sustain a healthy consumer based economy with balanced supply and demand.

The incentive for capital investment, innovation, and self renewal within the US has deteriorated to the point that positive real interest rates will collapse the economy.

That is the idea that keeps me awake at night. The stupid bastards gave away the store while we were on vacation.

So while inflation is rising core and headline, it is rally a distraction from the bigger issues that the Fed sees very clearly. Frankly, the Fed is happy to see the market debate inflation vs. no inflation as they no the insidious disease lurking around the corner is massive deflation. Greespan in FT discussing the home prices falls and the reast of the we must arrest the declines crowd, see it too. Houses are just the tipping poinbt. The overcapacity of unproductive capital in the US is legend. The move by the rest of the world to usurp our durables competitive advantage is proceeding apace. The US is ,losing the resource grab as itstands on principle in Congo but ignores it when it comes to a worthless I-bank.

In the end the US and RoW have to create credit, more and more, to plug the hole in the massive balance sheet. All this while velocity of spend / extenision slows. How exactly does all this credit generation get sucked out of the system. Short anwser it doesn’t. The bet that the near past was anything near a sustainable equilibrium is reaching even in the best scenario. Whether that measn hyper inflation in the near term, the long run is foretold: serious deflation across the entire complex.

Developing countries like China are infamous for fudging economic stats, but in reality, lying about inflation is as American as baseball.

Academic economists have long grumbled about the unreliability of official inflation data, but the belief that things are worse than governments are willing to admit is trickling down from the ivory tower. Even Charles Bean, the new deputy governor of the Bank of England, has publicly criticized central bankers’ use of “core inflation” data, which disregards food and energy prices, in setting policy. When “non-core” items like gas and cereal rise so much that consumers have little cash to spend on anything but those essentials, it’s hard to ignore.

The temptation to fudge numbers is one that bureaucrats worldwide find hard to resist. In Argentina, where government reassurances about single-digit inflation have long seemed unconnected to consumer reality, revamping the government statistics office became an issue in the last national election. In China, where data based on the prices for state-provided goods and services are increasingly irrelevant in a privatizing economy, the stats are so out of whack that Goldman Sachs has resorted to a movie-review-style system to rank the quality of official data on a scale from one to five. But the habit of playing fast and loose with numbers isn’t native to the developing countries where high inflation reigns. Indeed, the popular “core inflation” method for measuring changes in consumer prices is actually as all-American as Enron’s accounting practices.

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