"All the perplexities, confusion and distresses in America arise not from defects in the constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation."

- John Adams

BALTIMORE, MD -- After reading the tea leaves and the chicken entrails earlier this month white smoke was finally seen billowing from under the conference room door on Tuesday. It signaled to the anxious markets that a decision had been made.

Emerging from the temple, the smartest guy in the room told the awaiting crowd that his next move was to do nothing. A pause.

The markets naturally yawned. They had been expecting this stance since the end of July when their own divining of something called the "beige book" gave them reason to believe that the rate hiking was over. This cake as they say was baked.

But as one cake was removed from the oven on Tuesday another dish was being readied for the next course. Unable to decide between roast pig or cooked goose Chef Ben chose to cook the goose-the goose of course being the dollar.

Now how long Chef Ben plans to cook the goose is a matter of speculation, after all, he is new to the kitchen. Some food critics fear that it will be overdone. Chef Ben, however, has assured us that it will be delicious.

Besides he opined its way easier than cooking the pig!

As such pigs everywhere were heard to snort sighs of relief and back to the trough they went.

But in choosing to ignore the very real threat of inflation in return for the promise of continued growth the Fed has put us on a dangerous course that could lead to stagflation.

The Fed, however, seems to dismiss this scenario since it runs counter to the Keynesian notion that slower growth inevitably leads to lower inflation. According to the playbook it will all go away.

And this is the Bernanke play book that prompted the pause.

In short, the playbook reads something like this:

1. Fed Rate hiking has slowed the economy.
2. The slowing economy will tame inflation.
3. A pause will ward off recession and enable a "soft landing"
4. And we all live happily ever after.

It sounds like a great plan if only it would work out that way, but it won't because it ignores reality.

Here's why: A growing economy doesn't explain every instance of inflation. It never has.

Just look at the 90's. It was a period of enormous growth yet there was very little inflation. Using the Keynesian model inflation should have soared but it didn't.

And look also at the 70's- the last time our economy tangled with stagflation. The period was marked by soaring unemployment, little or no growth and rampant inflation. The conditions were so bad they gave birth to the misery index.

In the Keynesian world it shouldn't have happened but it did.

Cleary there is a ghost in the Keynesian inflation machine.

The truth is it's the monetarists that have it right. Inflation is not about demand as much as it is about supply. When the supply of money is larger than the demand for money inflation is the natural result. Inflation is, in other words, a monetary phenomenon.

Simply put, the expansion of the money supply itself can cause inflation.

And in case you weren't paying attention the printing presses have been running to the max for years now.

In fact, in ten short years the money supply has doubled!

And now all of those dollars created when the Fed Funds Rate went to an all time low of 1% are coming back to us in the form of inflation.

And it not over.

Because nobody will ever confuse Chef Ben with Paul Volcker.

Instead of raising rates as Mr.Volcker did in the late seventies, the current fed has blinked in its stare down with inflation.

And it is the Feds seeming refusal to deal with inflation through further rate hikes that will likely put us on a course with stagflation.

Don't think so?

Well consider this scenario because its not that far fetched. In fact it is beginning to happen now.

It plays out something like this and is quite different from the Feds rosy scenario:

1. Housing crashes despite low rates. Home prices fall and the net worth of most Americans falls with it. (Note to the Fed: Housing can not be saved.)
2. Consumer spending-70% of the economy- takes a massive hit since the housing ATM has been closed by falling home values.
3. Unemployment rises since the 3 million jobs created during the run up in housing are no longer needed.
4. Consumers and businesses both stop spending. (Note to the Fed: Most current business spending has gone to stock buy backs)
5. The stock market tanks. The bond market tanks.
6. Interest rates rise.
7. Inflation persists despite the drop in demand. (Keynesian it seems are wrong.)
8. A recession ensues.
9. The Fed begins to cut rates again as it lives up to Bernanke's promise to throw money from helicopters if necessary to induce spending.
10. The money supply surges and inflation goes even higher.

In short the economy is plunged into a nasty dose of stagflation and it not pretty.

But that's not the worst of it. All along this road the dollar gets cooked...cooked.... and cooked some more.

Its value drops dramatically as its "store house of value" disintegrates under the many pressures of inflation.

The Fed's refusal to defend it will seal its fate. And foreign banks will begin to abandon it. In the end it will lose its long time place on top of the currency heap.

The ramifications of this, needless to say, are enormous.

But this is the world that we have placed ourselves in when we turn the power of the monetary printing presses over to the smartest guys in the room.

In doing so we have given them the power over coin, credit and circulation. In the wrong hands this can be devastating as we're about to find out.

Think about it- your money and your freedom are inseparable. To do what you want in this world requires money. Without it your hopes are just dreams...figments of your imagination.

When the very value of the dollar in your wallet erodes your freedoms erode with it.

It's true...inflation is the hidden tax that we could all well live without.

The Fed may talk tough but I have my doubts. The market it seems agrees. Fed fund futures seem to suggest that the Fed is done for the year.

Others even predict that rate cuts are next on the Feds menu.

The dollar it seems is on its own.

But it's not all bad news. Holders of gold should prosper as the dollar declines. Naturally this will send more and more investors into hard currencies.

This should continue well into the future as it becomes more and more apparent that inflation persists despite the slowing of the economy. As such gold will power to new highs.

So break out the bell bottoms, the black lights, and the Jiffy Pop. Climb into the magic bus and crank up the Doors. Chef Ben is driving. He says we're just detouring the 30's but I don't beleive him. The truth is he's got the wrong map.

This bus is headed back to the 70's.

Buckle your seat belts though... it could be a wild ride.

Word to the wise... Don't sit next to the goose.

- Steve Christ