The boys that make the Consumer Price Index, or CPI, are cooking the books. We use the CPI to keep track of inflation, which is a measure of how prices are going up. If inflation’s negative, then it means prices overall are going down. Simple enough… so how do they cook the books if all they do is look at prices?

Well, they take $4500 off the price of every car in the USA because the “Cash for Clunkers” program was in effect. That’s a fudge of biblical proportions: now all the inflation-indexed payments will be slashed because if inflation goes negative, everything tied to inflation for monthly adjustments also take a walk on the negative side.

While I think deflation is on its way, this is just a way of the USG dodging its financial commitments. It has the power to do it and get away with it. It wouldn’t matter who runs the Congress or presidency: this is a bureaucratic thing, for which the only cure is stronger leadership.

Great article in the Washington Post about moral hazard on the anniversary of the collapse of Lehman Brothers. Basically, the government said it wouldn’t back up Lehman and when it didn’t, the collateral damage to the economy was so massive that the government came back, begging for forgiveness, and promise no more Lehmans.

The result? Banks could get riskier than ever. Read the article and more about what moral hazard is on the ol’ Wikipedia, and then suggest what you think the government should do. If it lets banks fail, we could have massive and deep recessions. If it doesn’t, then they’ll carry on with the bubble party because they know there’s a sugar daddy waiting to give them a bailout, no matter what.

A few years ago, we had a pretty high velocity of money. That meant, as a nation, we spent our dollars pretty rapidly. We had a lot of financial activity, and it kept our economy scooting along at top speed.

Now, we have low velocity of money. That means we’re not spending like we used to. Our demand is really low, and we’re in a recession.

The USG is going to start printing lots and lots of money. Given our current velocity of money, that will help fend off deflation… if we’re lucky. Once our velocity of money picks up again with an uptick in demand, though, we could be looking at the possibility of almost instantaneous high inflation.

Ouch and ouch, in other words.

“It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that. So we can’t lose.” – Lou Jiwei, Chairman of China’s sovereign wealth fund

Translation: Oh no, not again.

I thought we were going to deal with the damage from the housing bubble, which came about because we didn’t deal with the dotcom bubble properly. Now I read this and I guess we need to gear up for the commodity bubble that will be coming up soon. Eventually, we’re going to run out of bubbles or the ability to create bubbles and the whole thing comes crashing down that much harder.

Get ready for more Minsky Moments in the future. And if you don’t know what one is, fire up the Wikipedia and add something to this discussion when you’re familiar with the concept.