The dramatic destruction of what Buffet called Weapons of Mass Financial Destruction before our very eyes, with hundreds of Trillions of Dollars of Derivatives collapsing in value, has dramatically lowered the available liquidity, risking serious deflation. That's why the venerable Reserve Primary Fund (money market fund) 'broke the buck'. That's why the London Interbank Offered Rate (LIBOR) spiked so high last week. That's why every single remaining one of the Investment Banks on Wall Street has died (Lehman), been taken over for pennies on the dollar (Merrill and Bear) , or (Morgan and Goldman) have morphed into a bank holding companies seeking (Morgan) or getting (Goldman, from Buffett) massive cash infusions. That's why some companies would soon have had trouble meeting payroll. That's why GM, Ford and GE were crying out for help, warning (behind closed doors) of catastrophic collapse if help was not massive and immediate. That's why well respected Chinese experts were warning us of a financial tsunami. If AIG had gone down hard, that would have added substantial accelerant, risking turning this into a financial holocaust. AIG might have been (I'm not sure) the worlds biggest counter party to these Credit Default Swap derivatives
Whether we head down the inflation or deflation path is a onetime political decision.
With the passage of the (what was it ... $600 Billion ?) omnibus spending bill last week, and the likely passage of the $700 Billion dollar bailout this week, that political decision will have been made, in favor of inflation.
Once made, like a decision to go off to war, the decision is close to absolutely irrevocable.
I anticipate the Fed dropping the Funds rate from 2.0% to 1.5% within the week, as the final seal of approval on this decision.
Inflation it shall be. A few lucky, or wise, heads never doubted that it would be inflation. Most of us, sooner or later, doubted everything including our spouse, our dog and our names ;).
Not every company, country or citizen will see Benanke's Fiat Fleet of Financial Helicopters circling overhead, dropping pallets of dollars and Treasuries. I know I sure don't see any outside my window. As a Freeper, I'm perhaps at greater risk of seeing the CIA's black helicopters.
Some financial casualties, like Lehman and Bear Stearns already, will fall in the desert, their bones picked over by the likes of JPMorgan, Citigroup, Goldman or Bank of America, with the U.S.Treasury serving up a hefty dose of Pepto Bismol Treasuries to neutralize the more Toxic financial byproducts in the corpse.