So says Barclay’s, as it predicts widespread inflation:

"We’re in a nasty environment," said Tim Bond, the bank’s chief equity strategist. "There is an inflation shock underway. This is going to be very negative for financial assets. We are going into tortoise mood and are retreating into our shell. Investors will do well if they can preserve their wealth."…

…Traders said the Fed seemed to be rowing back from rate rises. The effect was to propel oil to $138 a barrel, confirming its role as a sort of "anti-dollar" and as a market reproach to Washington’s easy-money policies.

The Fed’s stimulus is being transmitted to the 45-odd countries linked to the dollar around world. The result is surging commodity prices. Global inflation has jumped from 3.2pc to 5pc over the last year.

None of this is going to sound odd to regular readers. I have been warning about inflation for some time, and predicting stagflation (high inflation, high unemployment). I have also noted that the problems were not going to be confined to the US and that the idea that other economies were "decoupling" was absurd.

Note also the mention of oil as an "anti-dollar". This is something Stirling, Oldman and myself were discussing as far back as 2004. Simply put, oil is the "unit of ultimate scarcity" in modern economies because it’s very hard to substitute away from it. Sure, you can try, with foolishness like corn ethanol, but we’re seeing where that leads. Oil makes the modern suburban economy possible. It is deeply embedded in how we make food, so much so that decades ago the late author Robert A. Heinlein came to the conclusion that the limits on food growth were based on oil, and that food wouldn’t become a problem till oil became scarce. He’s looking rather prescient today. The suburban economy of the US, likewise, simply requires oil to run. Suburbs and exurbs require automobiles and automobiles require oil.

At one time the dollar was backed by gold. What a lot of people failed to realize is that now the dollar has been backed by oil. Countries throughout the world wanted dollars, because dollars bought oil. As the dollar has been inflated by massive money printing, the price of oil has soared. This isn’t the only cause of the increase in oil prices, but it is a significant reason. There is no reason for producers of a scarce, essential resource, to accept inflation unless you, well, have them over a barrel. For a long time the US did have them over a barrel—dollars, which were also the key currency for buying securities and various high tech devices, were more rare than oil was. Then Greenspan put the pedal to the metal. It is not a coincidence that oil prices begin to rise after Greenspan started providing huge liquidity hits in the late nineties.

Barclay’s goes on to warn that the financial crisis is not over and that the monoline insurers are still in danger. The bank crisis is still ongoing as well. Again, this should be no surprise to anyone. Deleveraging is still occurring and it will continue, because higher default rates than modeled into return assumptions mean securities are overvalued, and since no one is sure what the default rates will be, except really bad, it’s impossible to provide new prices for the securities and thus to provide new market clearing prices. Assuming that financial firms wanted real prices, which they don’t, since if forced to value their portfolios properly many of them would be forced into actual, as opposed to virtual, bankruptcy. And once you’re bankrupt you can’t pay yourself millions in bonuses for driving the company and the economy into the ground.

Finally there’s this bit on the threat of deflation, which I think is worthy of commentary:

A small chorus of City bankers dissent from the view that inflation is the chief danger in the US and other rich OECD countries. The teams at Société Générale, Dresdner Kleinwort, and Banque AIG all warn that deflation may loom as housing markets crumble under record levels of household debt.

Bernard Connolly, global strategist at Banque AIG, said inflation targeting by central banks had become a "totemism that threatens to crush the world economy".

He said it would be madness to throw millions out of work by deflating part of the economy to offset a rise in imported fuel and food prices. Real wages are being squeezed by oil, come what may. It may be healthier for society to let it happen gently.

The threat of deflation has been looming for some time due to the housing crisis and how housing is tied to the money stock. It isn’t actually a contradiction to be concerned with both inflation and deflation. What I’ve been expecting for a long time was first stagflation and then deflation (with an outside chance at hyperinflation, if the response by central banks is blown badly). Moreover, both can occur simultaneously, in a very nasty squeeze. There’s no real contradiction in having food and fuel prices rise while prices for other items crash.

However notice the words "real wages are being squeezed by oil, come what may." Those words should send a chill of fear down your spine. Both because of their undeniable truth, and because of what they imply, which is that the world’s elites intend for the peons to pay for this by having their real wages slashed in half. In fact, while it’s inevitable there be some decline in real wages (I would guesstimate about 20%), there’s a lot that could be done to mitigate such declines and to spread the pain around. But spreading the pain around means the rich would take an even bigger hit than they’re going to take, and that’s not acceptable. What will happen instead is that Bernanke and other central bankers will continue to provide huge sums of money in an attempt to bail the rich out of their losses and to avoid real, serious restructuring and regulation of the financial industry, despite the fact that the finance sector has a huge portion of the responsibility for this crisis, as it has for multiple bubbles over the last 30 years.

In the end though, what Barclays is saying is more interesting because Barclays is saying it than because it’s great analysis. It isn’t. It would have been good analysis a year ago. it would have been great analysis 3 years ago. There are bloggers who did most of this analysis 3 or even 4 years ago. Still, where the conventional wisdom is is important, because the conventional wisdom tells you what actions are now considered possible. And the debate right now doesn’t include heavy re-regulation, or taking over banks, or even allowing banks to fail and go into government receivership. It doesn’t include huge incentives for conservation of oil. It doesn’t include the possibility of currency controls. What it comes down to is a simple debate between brute monetary policy approaches – easy money, or expensive money. High interest rates, or lower interest rates. Squeeze inflation out and suffer the consequences or don’t squeeze it out and let inflation destroy real wages, wiping out all the gains of the post-war period.

Welcome to the world created by the rich when they think they can be rich while ordinary people become more poor. Welcome to the world that gets created when people think that they can have prosperity now and put the bill off till tomorrow.

Tomorrow has come.