“What’s different?” asked colleague Manraaj Singh at this morning’s conference.

Early every morning, while most Americans are still in their beds, your editor joins a group of analysts and financial journalists to discuss the day’s news.

“What happened to the price of copper? Why are Asian stocks going down? Are they really going to cut rates today?” The answers are not always satisfying, but the questions keep coming.

And the question this morning was: what has really changed?

U.S. stocks held steady yesterday, but they’re down 5% so far this year. The dollar held steady yesterday too, but it is down for the year too – about 6% against the euro and the yen. The Europe- or Japan-based stock market investor has lost more than 10% of his money.

Meanwhile, the fall of the dollar has increased prices for imports. While the United States used to “import deflation” from Asia and elsewhere, now it imports inflation. Prices are rising all over the world.

Yesterday, European producer prices were reported rising at 6.1% per year. High prices have caused the biggest drop in retail sales on record. And yesterday, they had to call out the riot squad in Brussels, to battle fishermen who were kvetching about high fuel costs.

In China, retail prices are rising at an 8.5% rate – the fastest in 12 years.

In Russia, prices are going up at a 14.39% rate.

In Vietnam, the consumer price inflation rate is running at 25%.

In Venezuela, the inflation rate is 29%.

And in Zimbabwe...well, Zimbabwe is another story altogether, with inflation going up so fast they can’t even measure it. Prices are said to be increasing at 160,000% to 200,000% per year. But who can tell? There’s nothing to buy.

Back in Asia...the region’s central banks had hoped that Milton Friedman was wrong. They had hoped that a worldwide economic slowdown would reduce domestic inflation rates. So, they left their lending rates low – considerably lower than the CPI – in order to keep their economies turning over. In Thailand, for example, the central bank lends at 3.25%, while consumer prices rise at more than 6%.

Sound familiar? The United States also keeps its key-lending rate well below the inflation rate – and for the same reason. The Fed lends at 2%. Inflation was last clocked running twice as fast.

We pause here in honest admiration for our fellow investors – the kind of admiration we feel for members of a bomb disposal unit, or a knife-thrower’s assistant. What are we to think? They are lending money to world’s biggest debtor – the U.S. government – for 10 years at 3.94%. That’s yesterday’s yield on the 10-year T-note. If nothing changes, they will get nothing for their trouble. If inflation rates rise (or just happen to be understated), or the dollar falls, the speculation will blow up in their faces.

But along comes Ben Bernanke, with an apparent change of brain. Now, says the captain of the Fed’s rapid response recession-fighting team, further inflation is unwelcome in the United States of America. Supposedly, these words alone took $5 off the global oil price.

But what really has changed? Can the U.S. central bank really begin fighting inflation in a serious way?

The feds have discovered the same two things that their Asian central banker colleagues have found out: that the globalization street goes both ways...and that Milton Friedman was right. Inflation is a monetary phenomenon, observed Friedman. When you increase the amount of money in circulation, ceteris paribus, prices are going to go up. That they didn’t go up much in the last 15 years is merely because there were important other trends going on – notably, globalization, which was driving down prices. But now, traffic on the Avenida de Globalization is going in the other direction. And just as it was very difficult to cause inflation while globalized markets were cutting prices, so is it very difficult to stop inflation when globalized markets are increasing them.

*** Can the Fed really begin fighting inflation? Ah, dear reader...do you see the cruel twist to the story?

While the Fed couldn’t seem to create inflation in those wonderful years of the Great Moderation...now, it probably can’t do much to stop it. The U.S. imports an Everest of stuff from overseas. And stuff made overseas is becoming more expensive. The Fed can raise rates to try to cool the U.S. economy and reduce the amount of stuff Americans buy. But those darned Asians and Europeans can still buy more, and prices can still go up.

Besides, any further ‘cooling’ of the U.S. economy is risky. It could freeze up.

The crisis is said to be over on Wall Street. But the Financial Times says new IPOs are being taken off the schedule...short action on Lehman Bros. is at a record level (speculators are betting that the company is going down) and Moody’s says it might downgrade credit ratings for MBIA and Ambac.

The money just isn’t flowing as fluidly in Manhattan as it used to. An AP story tells us that apartment sales were off 21% in the first quarter. And over on Long Island, where the Wall Streeters have their weekend homes, lenders are said to cutting off home equity lines.

In the center of the country, bankruptcy filings are up 27% in Illinois. And out in Las Vegas, the mortgage fraud capital of the world, a $5 billion casino project has just been cancelled.

And this just in – California is officially suffering a drought.

Under these conditions, we’d expect Ben Bernanke to make some gestures toward protecting the dollar and reducing inflation. But we’d also expect that most of the air coming from the Fed will be hot, not cold.

“The Fed seems to be trying to create a situation whereby they are seen to be fighting inflation, simply by not lowering rates any further,” says MoneyMorning . “This is because, while the Fed may have no interest in fighting inflation, they have a big interest in fighting what they call ‘inflationary expectations’. In other words, they are more interested in fighting people’s perception of the problem, rather than the problem itself.

“The problem is that when inflation spread into homes and stocks, everything was just fine – unless you were a saver who rented of course. Now that inflation has moved from asset prices into energy and food, then there is a real problem for those who were unprepared....

“The next wave will be in the form of a derivatives crisis: the oft-mentioned collateral debt obligations and credit default swaps. It is apparent that few people really understand what they are and how deep they go. That is bad news. Because it means when the crisis hits, people are more likely to panic. Panics tend to be disproportionate to the problem, particularly when trust in institutions has disappeared, as is the case with banks today.”

*** To put it another way, the war between inflation and deflation is still going on. Inflation is in the news so much that you might think it has won. Just look in the papers; you can practically see the victory parades and hear the music playing.

But deflation isn’t giving up and isn’t going away. Americans are deep in debt. And debts cause a man to pull back...to retrench...to downsize. We see that in the headlines too. Retail sales are going down. People are driving less. They’re trading in their SUVs for smaller, more economical cars. They’d like to trade in their big houses too – but they can’t find a buyer.

Downsizing means spending less money. And spending less money means fewer sales...and lower incomes...and fewer profits. It means an economic slump – and, typically, falling prices.

In today’s globalized world, that slump would have to reach worldwide proportions in order to have a major effect on key commodity prices, such as oil and grains. But that is probably coming.

The cure for high prices is high prices. You’ve probably heard that before. It describes the way markets work. Prices go up. The higher prices encourage consumers to use less...and encourage producers to produce more. It’s not long before the supply increases...and demand falls. Then, prices adjust downward.

Part of the reason that oil is so expensive is that many places subsidize it. Most governments in Asia and South America have held fuel prices down in order to placate consumers and stimulate growth. They’re now being forced to raise prices. Yesterday, for example, Malaysia announced a 40% increase in fuel prices – sure to dampen demand.

And so the world economy stumbles and lurches forward.

Ben Bernanke may make a feint in the direction of fighting inflation – maybe raising rates slightly. Oil will drop back below $100. Bonds will rise. But consumer price inflation may still not go down; it may actually continue to worsen in the United States, as the economy sinks further into a slump. Then, the next phase of the War Between Inflation and Deflation can begin.

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