Last week we considered inflation as a disease of the human condition, and that once it starts, the course it runs is unstoppable.

The disease analogy is appropriate to continue, and will be more specific and name it as "The great financial pox". The "Great Pox" was not small pox as you may imagine, but syphilis. While The Black Death devastated the population of Europe, the "Great Pox" brought a different horror: instead of killing its victims over years, causing pain, disfigurement, and ultimately an agonizing death.

For a disease that was born is pleasure, the penalty was high. Such is the case with "The Great Financial Pox." Other than a few more similarities, such as "The Great Pox" being called "The French Disease", I will show you how a disease evolves, and how this model will help us understand the current presentation of "The Great Financial Pox".

Once the "Great Pox" swept Europe, populations developed resistance, and although the disease still struck, the presentation was different. Indeed syphilis became known as "the great masquerader" and was more difficult to detect. The eventual outcome was the same, death, and radical treatment was required. Prior to the advent of penicillin, arsenic was the only treatment available. This wasn't until 1909, after Ehrlich and Hata tested over 900 compounds, but eventually found that number 606 worked on mice, guinea pigs, and then rabbits with syphilis. They achieved complete cures within three weeks, with no dead animals. In 1910 the drug was released, called Salvarsan, or sometimes just 606. It was a foundation for Germany to become a leader in chemical and drug production. And it made syphilis a curable disease.

Germany features prominently also in our story of "The Great Financial Pox", as inflation presented in its virulent form as hyperinflation. We have also seen this form present in Asia and South America, where in its virulent form, it is easy to recognize.

How has "Great Financial Pox" of inflation mutated?

Let's start with the symptoms. We start looking at prices, and see that food is still affordable, car prices are low, and wage pressure is not apparent. These will all manifest in the last years of the process, for this has a multi-year incubation period. There is the "China factor" where a tidal wave of goods is able to overwhelm western markets. This will hold many prices down until "The Great Financial Pox" starts to run its course amongst the Chinese.

Food prices are kept artificially low by financial infusion to the financial sector, this occurs in Japan, Europe and the USA, where even nurse Greenspan knows that the patient is becoming waterlogged. We are seeing tightening in the metals markets, and this will soon be reflected in higher prices for farm equipment.

Once we start looking at wage pressure and energy costs, the rural sector will have to raise prices to survive. This has been absorbed to date in many countries, such as Australia, by changes in the rural economy, with conglomeration of family enterprises to large corporations. Previously, this sector had wage pressure resilience, as the family just worked for less, or nothing. With a farming corporation, even the most menial tasks have to be paid for.

The corporate sector has a louder voice in government. Net result: higher food prices and "the Great Financial Pox" grows even stronger in overtaking its latest victim.

To diagnose this disease in its early stages, we need to know what to look for. It is not rising prices. Price is determined by supply and demand. If you increase supply, such as Chinese goods, price will be held down. When prices rise despite an increase in supply, that is inflation, but by then it is a large stage of "The Great Financial Pox".

The underlying cause of the disease is the loss of value of money.

How do we detect this? How do we measure the value of money? The answer is gold of course, but we need to delve a little further. Sol at www.tacticalinvestor.com has been looking at gold in terms of the South African Rand. My own studies include the gold price in Australian Dollar terms.

When gold starts to rise in terms of multiple currencies, and not just the $US, we have the early signs of "The Great Financial Pox"

Dear readers, this is happening now.

Dec 2,2003

Sol Palha from the Tactical Investor Comments on the Inflation issue

The initial stages of inflation are not easy to detect, the untrained eye will simply miss them. Most consumers will only think of inflation when the cost of basic staple goods starts to skyrocket. However if one looks at the situation now, one is fooled into believing we are entering a deflationary spiral. The truth of the matter is that we have a paradox type situation; we have both deflationary and inflationary pressures co existing peacefully together.

China is the Power house when it comes to exporting deflationary forces, they have driven the cost of manufactured good to rock bottom prices and this can be seen in nose bleeding fall in prices in the consumer electronics. This pressure will be maintained for a substantial period of time as china has a huge untapped labour market and is desperately seeking to raise its standard of living. However the other part of the story is that these good need a steady supply of raw materials in order to be made. The price of raw materials is steadily increasing, one can see this very easily, prices of copper, aluminium, nickel, zinc etc are all shooting up. For a time these rising prices can be offset by the lower prices of labour, however there will come a time, when cheap labour will be unable to offset the rising cost in raw materials and that is when we will see a huge and sudden global Spike in prices across the board.

What is the best measure of inflation, rising Gold prices and Gold has been rising steadily in terms of the US dollar, and that is because a bunch of crack victims are running this country. We have imbeciles who make the rules and retards that enforce them, a super recipe for a financial melt down. As John has stated Inflation is here, it has always been here, however for a while it was buried because of illegal manipulation in the Gold markets, however the cat is out of the bag. Protect yourself Gold and Silver bullion are your saviours.

Click here to read Part III of the Great Financial Pox