The tightening of Money supply (hence raising interest rates) would eventually lead to lower demand as it slows down the economy.Therefore we will bound to see a decline in commodity prices.

The only relevant question is how high should the interest rates rise in order to see the effect that we all wished for (low commodity prices that is..). I believe the article should have focused in that direction.

What I am thinking is the "where" of the imbalance in Broad Money vs Credit is coming from. If it is simply the a gap between wealth and expenditure, Broad money and Credit (e.g. where we had 1 dollar the government or credit institutions create another we end up with 2 dollar available and no growth in real wealth, e.g. new road, another building, etc) then the problem fits your description. The easiest and most extreme example was the hyer-inflation of pre Nazi Germany.

But if the problem is an imbalance in the economy itself with rich sector causing problem for weaker sectors. An analogy is the problems that exist when a country has no middle class. The gap between wealthy and poor continues to grow. If this is not reversed the whole economy can collapse. Is Australia developing this problem in an industry sector sense. The cost of credit has gone up (America sub prime) and now with struggling sectors and rich sectors the middle ground is disappearing.

My though is this, using the term Wealth in place of Broad money to incorporate Companies who invest in themselves through infrastructure and product production. There is an increase in performance by some sectors caused by "supply and demand" pressures globally, e.g. the commodities boom. We still have no real wealth growth as described earlier. Yes we will have new mines built but old one will become exhausted eg nett growth does not equate with a growth in Wealth of the same proportion.

Now with this increase in Wealth in one sector the demand for Credit also increases, maintaining an acceptable ratio. The problem comes with the overall ratio, as demand for credit goes up, so does cost of credit. This in turn causes move in the ratio in other sectors not in the high demand commodity areas. Minor flow on growth does occur across the economy but these are more inflation growth rather than demand driven.

A high growth sector can now out demand resources from weaker sectors and continue to expand to supply demand. To do this they are willing to pay more. Weaker sectors also need resources to survive but do not have the increase in Wealth, only solution Credit. The car industry is a current example, hit by higher credit cost, higher commodities cost and failing demand. The nett result of this is inflation as the Wealth vs Credit ratio grows as industry sector imbalance grows.

It is not even a selling of the farm problem but a transfer of cash from one country (in this case China/India) into our economy. Now with one sector flush with funds the dissemination of this wealth through the rest of the economy is done by increase in prices, inflation. This will curb demand in weaker sectors true, but has no effect on the stronger sectors. Hence some "battlers" hurt and the Government politically needs to target the inflation, a symptom.

So in this case, your base premises of Wealth vs Credit holds true, but the inflation is driven to an extent via consumer demand. The real problem is the imbalance of the Wealth within an economy. Once demand settles the Wealth is dispersed, Credit vs Wealth rebalances in all sectors and inflation reduces.

Frank Hall

“The US is emerging as the one bright spot in the global gloom, despite the credit mayhem. A net 7pc of investors are overweight in US equities, clearly betting that most of the bad news is already in Wall Street prices. The figure was negative in May.

“With the tailwind of 2pc interest rates and a cheap dollar, America stands to benefit from the "first-in, first-out" principle. Others have yet to take their full punishment from the cycle.”

This is what I have been looking to happen in the aftermath of the 2007-08 crisis. A crisis that is a typical signal of a boom and bust ahead.

Ambrose’s observation is echoing 1928 after the crisis of 1927 and late 1998 after the crisis of 1997-98.

A recent new items pointed out that: “The S&P 500 Financials Index retreated to its lowest level since October 1998, two months after Russia's debt default sent the index down 23 percent in a month”.

The rhyme: The trouble in Thailand in May and July 1997 compares with trouble with Bear Stearns in June and July 2007.

The largest ever IMF rescue in December 1997, engineered by the USA for Korea, compares with Central Banks intervention in December 2007, especially the American assistance to Europe.

The New York Fed bank organized bailout of LTCM and the interest rate cuts of September, October and November 1998 compares with the ‘present’ Fed and Treasury support of Fannie Mae and Freddie Mac and the interest rate cuts of September, October and December 2007 and January, March and April 2008.

“The major stock market boom on Wall Street coincided with a virtual suspension of new international lending and a retreat of capital. New money from America stopped going to Germany, Latin America, or Central Europe in June 1928. All the hot money went to Wall Street instead. And much more foreign money, especially English money, was also attracted by high returns as compared to bleak prospects elsewhere” (Davidson & Rees-Mogg, “The “Great Reckoning”, p.207).

New nominal high for Dow in John McCain’s presidency? “Boom and Bust Republicans" - http://www.members.optusnet.com.au/futurewatch/boom_and_bust_republicans.htm

It makes you sick the amount of disinformation that is put out there! I say thank God for people like yourself who can put the record straight. You won't see this written up in the main stream press!

Richard Daughty (The Mogambo) uses more colourful language in describing this continual erosion in the value of currencies and purchasing power through money supply expansion...and quite rightly so!

Best Regards

Mal Moy