Inflation is not supposed to be a problem. If it is not under house arrest it is at least wearing an ankle bracelet. But there is growing evidence that it is on the loose.

As to why it is supposed to be under control, the usual explanation is that the entry of Asia into the world economy has reduced labor costs. Since labor is such a big part of both manufactured goods and services, it is reasonable to think that lower wages will lead to lower prices.

As to why inflation may now be at large, we offer the following: the Asians have to eat too.

Wages in mainland China are said to be going up at nearly 20% per year. In other words, the cheap labor is not as cheap as it once was, and getting more expensive each year. And now that these wage earners are coming up in the world, they want a little more meat in their soup.

Money, as we all know, practically grows on trees. But food does not. (Readers can try to fix that metaphor on their own time.) And putting more Asians to work does not automatically increase the supply of farmland or what grows on top of it or what lies underneath of it. So, what we’ve been seeing is just what you’d expect. While increased industrial output has managed to hold prices down for manufactured goods, the rising supply of money has forced up prices for things that don’t come out of factories. Gold, contemporary art, land, and cooking oil come to mind.

Cooking oil comes to mind because it was in the news this week:

“...this past Saturday in Chongqing,” reports the New York Times , “people began lining up before dawn when a Carrefour store offered a discount on large jugs of cooking oil, an essential for a lot of Chinese cooking. When the doors opened, a stampede ensued, killing 3 people and injuring 31. China’s commerce ministry responded on Monday by ordering a ban on limited-time sales promotions.”

Officially, prices are rising at a 6.5% annual rate in China. Even at the official rate, the Chinese have not seen so much inflation in nearly 11 years. But food is rising faster, at a 17.6% rate. This is a big problem in China because people don’t earn much money; they have to spend a lot of it on food. That’s why people got killed trying to get a good deal on cooking oil.

We recall what Jacques Diouf, director general of the UN’s Food and Agriculture Organization had predicted only weeks ago: “If prices continue to rise, I would not be surprised if we began to see food riots.”

Well, there you are, Mr. Diouf. You were right.

Meanwhile, let us turn back to the big picture. This from the Financial Times ...

“‘The mortgage black hole is, I think, worse than anyone saw,’ said Tony James, president of Blackstone, the big private equity firm. ‘Deeper, darker, scarier. [The banks] are now looking at new reserves and my sense...is they don’t have a clear picture of how this will play out and confidence is low.’”

It looks to us as if there has been a big sea change in the world’s markets. Yesterday brought more evidence.

Housing prices in Southern California have now fallen back far enough to erase the last two and a half years worth of gains, says the LA Times.

In Atlanta, 5,244 houses are going on the auction block next month; already, 53,365 houses have been auctioned this year, a total that is rising at about 36% per year.

And the Chicago Tribune reports on a study by the Center for Responsible Lending that predicts a ‘foreclosure hit’ equal to $223 billion.

A hundred billion here,a hundred billion there; pretty soon you’re talking real money.

Americans are the world’s biggest spenders, with a 20% share of total global consumption. They are the world’s biggest users of oil. They are also the most indebted people in the world. And now, Americans are running out of money. Their houses are sinking in value. Their wages are stagnant or falling. Their dollar is so depressed it can’t get out of bed in the morning.

Again, yesterday, the buck took a beating. When is it going to get a break?

On Tuesday, it looked like a correction had begun; gold and oil were going down; stocks and the dollar were going up. But then, Wednesday came. The Dow went down 93 points. Oil rose nearly $3. And gold added more than $15, putting it back over $800.

Not much of a correction, in our opinion, not enough of a correction. We would expect a bit more.

“You are either a contrarian, or you are a victim,” we said to Elizabeth, quoting our old friend Rick Rule.

Rick uses the expression to describe how the resource markets chew up trend-following investors. We use it in a broader sense. What follows seemed like such an interesting conversation; we decided to pass it along:

“The average person spends, votes, invests, and signs up for military service driven by the same impulse...” we said, “...to do his duty...to take his place in the great mass of his brethren...to fit in...to go along. Typically, he spends money he doesn’t have on things he doesn’t need – just because everyone else is doing it. He wastes his time in the voting booth, because the candidates are usually as hollow as an empty jug; and the odds that his vote will determine the outcome are vanishingly small, anyway. Then, investing along with everyone else, he is a chump for the financial industry, the insiders, and the hustlers. He comes too late, stays too long, and pays too much.

“But it is in war where he really suffers. England [we were watching the old veterans go by] hasn’t faced a serious threat of foreign invasion for 1,000 years. But millions of English, Scottish, Welsh and Irish soldiers have served and died in countless wars...all pretending to protect the homeland. Everyone would have been better off if they had stayed home and delivered the milk. But to do that, they would have had to be real contrarians... And even if you don’t pay with your life...you pay with your time, your money, your attention, your emotion. Either in war or in the investment markets, or in trivial consumption...you get caught up in the spirit of the thing...and pretty soon, you’re in it. It is you; you are it. You’re wearing a Che t-shirt and standing in line at the polling station. You care. It’s a part of your life...”

“I see your point,” said Elizabeth. “But I also see the danger you are running. By alienating yourself from what you consider the fads and fashions of group thinking, you are alienating yourself from the group itself, from feeling like a part of it, from being a part of it. I understand; you don’t want to buy a Ralph Lauren shirt because you don’t want to be a victim of the fashion industry or pay more than you have to for a brand name. Maybe you don’t bother to vote.

“You invest as a contrarian, of course, doing the opposite of what everyone else does. And you don’t want to get caught up in some great, patriotic war that you think is a fraud. Of course, some of that may be commendable. But you run the risk of alienating yourself too much, of becoming a victim of your own contrarianism, a man without a country, without a people, without a vote, without a say in how things work out, a man without a home. You run the risk of becoming marginalized, a permanent outsider, an outcast. Maybe it makes sense intellectually but we were not meant to live that way. We have instincts and emotions, not just a brain. And those instincts and emotions are what make us what we are. They make us part of a group, not solitary animals. You can deny those emotions and instincts but you can’t escape them.”

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.