It isn't an accident that on the day that the Federal Reserve releases minutes that hint that their rate raising campaign is coming to an end that yield curve kinks back towards inversion, the Dow Jones Industrials rally to near an all time high, which is expected to be the start of a world wide rally for equities - and oil and copper hit all time nominal highs, with oil's peak nearing the peaks set the two great inflationary spikes of the 20th century. The September West Texas Intermediate - an important benchmark contract - briefly hit an eyepopping $74.06 a barrel.

Last year I was told by traders that the over/under number for oil was to close above 70. Even many energy bulls said they would take the "under" side of that number. At this point my same sources are saying that a good Katrina like disruption could bring us over the $80/bbl mark this year. As 70 was the new 60, 80 is the new 70. So what is going on?

Why inflation, just not the inflation of the late 1970's. Yet. (But we are getting closer according to the Labor Department, with even ostrich, I mean "core" inflation ticking upwards.)

Inflation is something that has to be believed to be seen. After all, to riff on Keynes, one man's inflation, is another man's pricing power. General macro-inflation, that's when everything seems to be going up at once, is the kind of inflation that we saw in the 1970's. It wrecks fiscal arrangements, because, to the extent that government drives it, it is a tax on holding currency, and to the extent that social choices drive it, it is a transfer of wealth from savings and loaning, to borrowing and consuming. Borrowers pay back in cheaper dollars, and people don't defer consumption, out of the fear that it will be more expensive tomorrow.

However, there is more than one way to skin a dollar. One way to adjust to pressures in an economy is indeed to erode the value of older assets with inflation. Another, however, is to shift wealth from one group of people to another. This will be seen by either falling rates of profits, if corporations are absorbing the higher costs, and by falling rates of wages, if labor is. Right now profits are very healthy, but median wages are suffering in the United States, and in Europe, unemployment is very high. These amount to the same thing, merely that in the United States we have chosen to spread the work out more, and in Europe they have chose to concentrate the pain more.

The signal that has been sent is that while interest rates have gone up from their very low levels, the Federal Reserve isn't about to stop the easy money spigot any time soon, instead, the easy money is going to continue. In the 1990's and to a lesser extent in this decade without a name, the deflationary pressure from China and other emerging economies has been used to offset price increases. Some, but by no means all, of that price pressure has been used to keep a lid on manufactured goods, and much has gone to profits. However, with China demanding more oil and minimum wages beginning to rise rapidly this time is coming to an end, not immediately, but fast enough. As China's prices equalize with world prices, this was bound to happen. China has also exported deflation by absorbing the profits of industries, and investing in US Treasuries, this keeping a lid on long term interest rates. This has helped slow price pressures, even as it has also slowed recovery, because normally there would have been a larger spread between short and long term interest rates - that spread is some of the fuel for fast economic recovery.

What labor arbitrage did was buy the developed world a decade to deal with structural problems, but that decade is coming to an end, and while some of the structural problems were addressed, primarily in deregulation, more glaring ones - dependence on oil for people's home values, and dependence on home values for people's retirement savings - have gotten much, much worse.

Just as in the early 1970's - through the first years of Carter's presidency - it was assumed that inflation was under control, and that the focus should be on supporting demand. Under Nixon and Carter that meant propping up consumer demand, and under Bush it means propping up investment demand - but the focus on demand side solutions is the weak link. It doesn't matter why we are choosing to burn rather than invest in substitutions, merely that we are.

With wages being squeezed, and more and more activity moving away from the US, and towards emerging economies and fuel exporters, the political pressure to put an end to labor arbitrage is growing, both among reactionary and progressive sides of the political ledger. Rising calls for protectionism - whether immigration or goods - are the political cutting edge of an electorate that no longer is seeing the gains for their pains. Until now, much of that pain was put on those just entering the job market - whose employment participation has dropped as more people stayed in college or lived on a shoe string, or simply lived with only one working member of a couple, and thus saw radically lower household income compared with the cohorts before them - and therefore was muted politically. Young people don't vote, and they don't have a good basis for comparison as to what their economic present could be, compared to what it is.

But when the pressure hits the retirees and those about to retire, the political valence is completely different. People at the end of their careers, or on what used to be called "fixed incomes", not only vote, but they have a very clear idea of how well they might be doing.

Pollkatz' graph of major polls tells the story in an instant. Bush has not been above fifty for over a year. His journey into the 40's is now as long, and as deep, as the trough of last fall, when dark weeks after Katrina saw rising gas prices, and a sharp drop in GDP that was to last through the first quarter of this year. Even with hiring continuing to pick up - the mood of the electorate grows uglier by the day. This is not necessarily the leading edge of a recession - even the bond market can't make up its mind about that yet - but it is typical of the "landings" in the middle of an economic cycle. People fear a general slowdown, and they want something done. They want an economic program or vision to carry them forward. Presidencies often turn on whether this moment is handled well or badly.

But Presidents are only one economic actor. And while they can often set the tone, the larger picture is this: the world is going through a prodigal phase of resource consumption. With over 2 billion people in China and India alone still not seeing the affluent life - the minimum wage raise in Shenzen is going to be from $86 to $100 dollars a month - this period is going to continue as long as the United States allows it to continue. Since it is not benefiting the majority of the electorate, but is, instead, forcing them to work longer, for less, with a lower quality of life in retirement - it can be expected that the electorate is going to rebel. This isn't necessarily good news, the only thing worse than a bad plan that is being well executed, is a worse plan that will be badly executed. Electorates when they reach the point of screaming pain do not always select the appropriate medication.

The reality is that, as with the early 1970's, the inflationary pressures we are seeing have not yet boiled over to being a general squeeze on the economy. Indeed, real wages rose in the early 1970's, just as they did for a time in the 00s - pronouced "ooze". But eventually the transfer of wealth from those who work and those who raise capital, to those who collect rents on resources and money, cannot continue indefinitely. Resources and money are only of use, so long as there is economic activity to support them.

However, for the time being, policy is on autopilot, and the only "ideas" coming down the pike are how to slash Federal spending so that it does as much damage to Democratic voters as possible, and as little damage to the stake holders in the current government. And that is going to lead to a yet angrier electorate.

And you won't like them when they get angry.