From today's issue of the Daily Reckoning:


Yesterday, driving back from a horse show in Bath, we stopped for gas.
Britain has gone metric in order to stay in harmony with her European
trading partners, but she still lists distances in miles. Gasoline is
measured out in liters, just as it is in France, but it is priced in
pounds.

The price for a liter of diesel fuel was 99.9 pounds. If we did the
math
right, this is equivalent to about $6.50 per gallon.

By comparison, we read today that the average price per gallon in
America
is $2.92. Gasoline is so cheap in the U.S. that Canadians are flocking
across the border to fill up their tanks.

If the British are confused about how their gas is priced, the Yanks
are
certain they know where it should be - at rock bottom. The U.S. economy
is
set up for much cheaper gasoline. People have organized their lives and
habits around the expectation of cheap fuel and cheap credit. They're
understandably disappointed to see prices rise.
But now, prices are rising; the dollar is falling; inflation is
increasing. And we begin to see how the great Credit Bubble Boat ends,
don't we? It runs into the iceberg of inflation.

It seems obvious.

College tuition, health care, commodities - all seem to be going up
quickly. Last week brought news that even salaries are going up. Pay
levels are said to be 3.8% above those of a year ago, despite very
sluggish job growth. Why would salaries go up when there is no apparent
pressure to recruit new employees or hold onto old ones? The answer is
simple: salaries are responding to inflation, not to job market. And on
Friday, even stocks went up. The Dow rose 138 points. Are business
conditions suddenly much better? No? Maybe it is just inflation.

Way up high, in the staterooms and luxury suites of this Titanic, the
price increases are even more dramatic. One painting by Picasso sold
for
$95 million. Another sold for $34 million and still another sold for
$18
million. That's a lot of money to pay for crude paintings of people
with
their noses in the wrong place.

But now, some fellow in China has figured out how to create his own
gimmick. He's picked up the advertising cartoon, Joe Camel, and turned
him
into an art-world icon. Look, he explains, this modern art is simple;
anyone can do it. In fact, you don't even have to do it yourself. He
pays
others to do the actual work. He just comes up with the idea.

You'd think the art world would be annoyed at the chutzpah; the Chinese
hustler is clearly pulling someone's leg. But it doesn't seem to
matter.
Aficionados are either too dumb to notice or too rich to care. They're
buying up the paintings of Joe Camel and hoping to score as big a coup
as
people who bought Picassos.

While prices rise, the dollar falls. Against yen, it dropped to a
seven-month low on Friday. Against the euro, it fell again, last week -
to
$1.27 per euro. And against gold, the dollar plummeted. June contracts
for
gold sold over $684 on Friday. Overall, the dollar has lost 4.5% of its
value in the last three weeks.

There is no question that prices are increasing. Nor is there doubt as
to
why. Central banks are desperate to keep up with the expanding supply
of
dollars. Remember, they can control either the quantity of their
currencies, or the quality of it, not both at the same time. As the
United
States emits billions and billions more dollars, the foreign central
banks
have to produce more of their own currencies. Otherwise, the falling
quality of the U.S. dollar will make the foreign currencies go up in
price. This will put their export industries at a disadvantage.

All over the world, central banks are favoring quantity over quality.
They
are inflating their currencies. Consumer price inflation is sure to
follow.

There might be more to the story. Yes, all central banks favor
inflation.
And yes, Americans would vote for inflation, if they could; they are
deep
in debt and would welcome inflation as a way out.

But for every debtor, there's a creditor. And for every fool who
borrowed
money to buy something he couldn't afford and didn't need, there's a
lender who lent to someone who might not be able to pay him back. The
big
question is: who will turn out to be dumber - the lenders or the
borrowers? We don't know the answer, but we suspect there is enough
dumbness to go around. When the ship goes down, there will be plenty of
losses for everyone.