It was all quiet on the Western front yesterday.

The Dow gained a couple of yards. Oil gained $1.82. The CRB hit a new record high (which it seems to do everyday). Gold went up another $4.40 to $926.

At the G7 meeting it was revealed that subprime losses could reach $400 billion. So far, only $120 billion have been acknowledged. Where are the rest?

Either the G7 estimate is wrong or there are some new shocks waiting. Banks, hedge funds, investment firms – many of them could be hiding losses or not even be aware (as was the case with the Societe Generale) that they have any losses.

As we said yesterday, war always produces surprises. And the battle between inflation and deflation is no exception.

There have already been big surprises in the soft commodities market.

“I can’t believe it,” said our French neighbor, Pierre. “We’re getting more than twice as much for wheat this year. Everybody is planting all he can. Farmers always do that, of course. We have very short memories. We’re going to buy new tractors...plant a lot more...and then the price will go down.”

The latest data from the CFTC shows that speculators are taking more and more long positions in wheat, corn, soybeans and sugar. Greed clearly has the upper hand in these markets.

Of course, you already know the background for this story. The world’s financial authorities are alarmed by the danger of a global slowdown. They’re fighting it by making money and credit easier to get. Speculators are encouraged to borrow – especially now that they can get money at rates scarcely above the rate of consumer price inflation. After the Fed’s latest rate cuts, its key-lending rate is below the inflation level.

The 10-year T-note yields only 3.61%. The CPI is over 4%. You do the math.

But what can borrowers do with the money? Not buy a house! House prices are falling nearly 10% per year. Add the cost of money and maintenance and a house investor is likely to be down 20% in a 12-month period.

Stocks are no sure thing either; so far this year, they’re down in almost every market.
But commodities are soaring . If you look at a chart of wheat prices, for example, you will see a very frightening picture. Wheat was selling for less than $4 a bushel in 2005. It went over $10 a few weeks ago. And yesterday, top quality MGE March spring wheat hit an all-time high of $16.13. Minneapolis spring wheat has traded over $21 a bushel.

Meanwhile, the U.S. Department of Agriculture tells us that inventories of wheat are at their lowest levels since 1947.

Whenever a chart has a line going straight up it is only a matter of time before it has a line going straight down. Nature prefers symmetry. When she takes her time building something up – whether it is a company, a market, a city, or an empire – she generally takes her time tearing it down. But when a fire burns hot, it burns fast and burns itself out quickly.

Right now, the commodity markets are on fire – and nowhere does the blaze burn hotter than in the wheat fields. We don’t know how high soft commodities will go. But we have confidence in the world’s farmers. Practically every one of them is now buying extra equipment and more land: draining, clearing, plowing, planting and praying that he can get $16 per bushel of wheat later in the year. Prices may rise in the face of all this frenetic farming, but not forever.

Speculators may be in for a surprise, in other words. So might we all. That’s why we keep our “Crash Alert” flag flying. Stocks are only down about 8% so far this year.

Another bit of bad news and they could crash another 10%, 20% or more. What would it take? Maybe the sudden discovery of those $280 billion of missing subprime losses? Maybe an awkward number from the Labor Department? A clumsy move by the Pentagon, or Iran?

Who knows? All we know is that this episode is likely to claim many, many victims before it is over. Some will be killed by inflation. Some will be shot down by deflation. We just want to be sure we’re not among them. So we keep our heads down. We do not speculate. Instead, we stick to our principles: find good investments, good businesses, good houses, good husbands and wives – and hold onto them.

*** Warren Buffett is bullish on the United States. “It is not a smart thing to sell the United States short,” he told an audience in Canada.

We do not like to contradict the greatest investor who ever lived. But selling the U.S. short has been a pretty good investment for the last eight years. Against the euro, the American I.O.U. dollar has gone from about 90 cents to $1.45 – a loss of about 60%.

Against gold, well, you know the numbers...the U.S. money has lost about 15% per year. And U.S. companies, in real, inflation-adjusted terms, are down about 25%.

Since George W. Bush entered the White House, an investor would have been much better off in almost any other country – Brazil, for example or Europe or China. But maybe the Sage of Omaha knows something we don’t know. Maybe he knows that the trend of the last eight years has now come to an end. Maybe the United States is oversold, and ready for a remarkable comeback.

Anything is possible, dear reader, anything is possible.

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