The Dow Jones Industrial Average followed yesterday’s 247 point drop with a 180 point gain. The news looks the same, as seen with these Wall Street Journal headlines:
Markdowns Put Goldman in the Red
BofA Swings to Profit in Muddled Quarter
France’s Credit Rating Under Pressure
But today the market’s real nemesis fired another alarming headline:
Wholesale Prices Indicate Continued Inflation Pressures
This is the fly in the ointment.
As mentioned in previous blogs, inflation
is a great threat to economic condition. It will force interest rates higher, as the cost of debt (interest rates) increases with the cost of money (inflation). Higher interest rates will slow this already sluggish economy; add more trouble to adjustable rate mortgagees; and increase unemployment (as the cost of doing business increases.)
But even more importantly, inflation eliminates one of the government’s greatest tools to spur on economic activity – as inflation will drive interest rates, not the Federal Reserve.
This adds to the trouble.
Runaway interest rates will wreak havoc on “the market” – the stock market will selloff, gold will resume its bull-run, and loan defaults will add stress to an already troubled banking system.
Prepare now. There’s plenty of time. (DJIA 11,577)