Inflation is the “greater risk,” said Ben Bernanke earlier this week.

Greater than what? Greater than deflation, we presume he meant.

“Still,” continued the chairman of the world’s largest banking cartel, “uncertainties have arisen, and therefore a little more flexibility may be desirable.”

The main uncertainty that has arisen concerns the aforementioned deflation.

Look at what happened to Japan when its expansion turned into a
contraction: The land of the rising sun didn’t see daylight for nearly 17 years. Those poor sumo wrestlers and manga artists were bumping around in the dark.

Seventeen years is nothing unusual for the downside of a major financial cycle. And that’s why Ben Bernanke - who thinks we are still in an expansion - will do all he can to make sure it continues.

Today were are talking about Economic cycles - the final one of our 5 Big E’s - the inescapable, ineluctable, irreducible trends of our time. Up and down, in and out...life and death...day and night...dust to dust...inflation and deflation...boom and bust...ashes to ashes.

Even ol’ sol itself will someday burn out. There isn’t anything that doesn’t follow a cyclical pattern.

Even our Big E’s.

Energy is going up. The Exodus of money and power swings from West to East. The Experimental, faith-backed dollar is going the way of all paper money - to Hell. And the Empire is peaking out (about which, there is a little more below).

But where is the Economic cycle today? And where are you in it?

The Fed’s main man thinks we are still in the expansion stage of the credit cycle...and maybe he is right. The cycles can take a long time.

Stocks peaked in the United States in ’29 and didn’t hit a final bottom until after WWII...and then they began a major boom that lasted from ’49 to ’68 - almost 20 years. But, the cycle turned again. From ’68 to ’82 stocks went down.

Then, in January 2000, the Dow registered a new, record high - 11 times higher than the low recorded in August of ’82.

A flood of liquidity pushed many financial assets to unreal new highs. From 2000 to 2007, total credit market debt increased five times faster than GDP. That tide of money washed almost everything up.

But tides ebb and flow too, and the last seven years have seen little real stock appreciation. In fact, in real terms, the Dow has lost ground.

We look out the window and see mixed signals...eddies...crosscurrents...backwashes... It’s hard to know which way the water is going.

Big Ben says it is still coming in.

But maybe not.

Our old friend John Mauldin:

“As I have written for months, the problem is not just in the subprime loans, but extends to the level between prime and subprime, known as Alt-A loans. Alt-A loans were just 5% of the market back in 2002, yet were 20% last year. 81% of those loans were low- or no-documentation loans last year...Roughly 50% of all subprime borrowers in the past two years have provided limited documentation regarding their incomes.

“Remember the study I quoted last week from the Mortgage Asset Research Institute, which looked at low/no-documentation loans? 60% of the borrowers exaggerated their incomes by 50% or more!”

[Slipping standards, dear reader...tisk, tisk.]

“It stands to reason, then, that many borrowers simply will not be able to make their payments when the reset comes due, thus the prediction that as many as 20% of the subprime mortgages written in the last two years will default.

“Indeed, the subprime meltdown is now spreading to other parts of the mortgage and credit markets: Near prime and risky mortgages (option ARMS) are now in trouble and they accounted for over 50% of mortgage originations in 2005-2006; subprime auto loans and subprime credit cards are in trouble; bank loans to home builders are in trouble; and bank lending to non-residential construction will soon also show cracks as the CMBX - the indices showing the cost of insuring against commercial real estate default - has sharply fallen, signaling a much higher risk of default even in this market segment.”

All this suggests that consumers have less money to spend. And that means deflation...

Yes, it seems that even the market in hogs is deflating.

The Street.com reports:

“Thirty-day delinquencies (and loss trends) in Harley-Davidson’s receivables book offer a clear picture that credit-quality issues are broadening... a pattern of deterioration that we first began to see in subprime mortgage loans during the first half of 2006.

Harley-Davidson’s 30-Day Delinquencies

4Q2006 5.18%
3Q2006 4.46%
2Q2006 3.61%
1Q2006 3.69%
4Q2005 4.83%
3Q2005 4.07%
2Q2005 3.66%
1Q2005 3.60%

Source: Lehman Bros.


“...Harley’s finance subsidiary (HDFS) funded almost half of Harley-Davidson’s motorcycle loans. Like subprime mortgage loans, HDFS’ hog loans are pooled and securitized to institutional buyers. Unfortunately - in credit trends and terms - HDFS is also beginning to look more and more like New Century...”

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