Economic data continues to come in very soft, but the inflation meme is still strong.

Portugal got a bailout, much whining about an expected 2% fall in GDP. Hello out there, if you are running up the credit cards, you’ve got to cut back on spending. That means less consumption. I can’t imagine that 2% is anywhere near enough of a cut. I expect, for example, that consumption in the US would have to fall more than 30% to re-establish a stable economy – stable debt, adequate capital investment and sustainable growth. That’s not going to be pleasant or politically acceptable, so the can will be kicked down the road until the economy crashes. Depending on how long the can-kicking goes on, the eventual cut in living standards may well be worse than that. Basically the lack of investment is going to have to be made up sooner or later, and the later the bigger the hole that has to be filled.

At least some of the European countries are taking the bull by the horns, so to speak. The US continues to live in a Keynesian fantasy world. The Fed is monetizing government borrowings to stave off a debt crisis while it attempts to re-capitalize the banks in the traditional manner, through the interest rate spread. But the monetization is flooding the financial markets with liquidity, resulting in a run-up in most asset classes and consequently consumer price inflation, driven by commodity stockpiling. This tax on the consumer is now starting to bite, with the result that even th eillusion of growth is rapidly disappearing.

What will the Fed do? Administer more of the same medicine? – then the result will be more of the same loss of consumption and an inflationary depression. Back off? Then the result will be a deflationary depression. Fudge? Who konws, we’ll see. But there is no magic answer that doesn’t involve pain for the fat cats on the government payroll, either as employees, contractors or transfer recipients. Mohamed El-Erian says it well:

Unemployment remains stubbornly high. Youth joblessness is at alarming levels, with too many of the country’s teenagers getting close to the point where they go from being unemployed to being unemployable. Various budget constraints have limited the scope for easy solutions, even if these were desirable. The debt and deficit dynamics are bad and deteriorating at both state and federal levels. A major rating agency, Standard & Poor’s, has already taken the previously unthinkable step of placing the country’s AAA credit rating on negative outlook. And Americans can no longer rely on their central bank for yet another round of imaginative pump priming to buy them time, options and flexibility.

In effect, America can’t buy itself out of its economic problems, nor can it again kick the can down the road for much longer. Meanwhile, the rest of the world continues to outpace the U.S. in growth, competitiveness and wealth creation.

These structural problems were years in the making, and they require structural solutions that will need to be implemented steadfastly for a number of years.

History may not repeat itself, but that doesn’t mean you should ignore it either. I guess someone else has noticed the parallels between 2008 and today. To my mind, the main question is where the new financial crisis will start. My guess is Europe. And yes, I am fading the inflation hysteria.

Bernanke’s prepared remarks and Q&A on Wednesday mentioned the word “inflation” 82 times. (The word “deflation”: twice.) It is unfortunate that “inflation” was far and away the dominant theme on Wednesday, swamping “jobs,” “employment,” and “unemployment” which, in my opinion, should have been the focus.

Of course, no two business cycles or economic environments are exactly the same, but as I pointed out recently here, it is unlikely that we will enter a period of sustained high inflation absent a more taut labor market, and that, unfortunately, still seems a ways off.

Precious metals are hot hot hot as momentum chasers drive prices higher and higher, although silver got taken down a pretty good whack today. One might as well bet on a fly on the wall. As Warren Buffett said about gold: “Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Every gold bug knows that this is nonsense, poor Warren just doesn’t get it. If we just went back to the gold standard, everything would be OK, therefore gold is going to resume its role and we’ll all be rich. Forgetting for a moment that the Great Depression got started while we were on the gold standard. Also forgetting that gold currencies have been debased just like paper ones for thousands of years. But never mind, gold glitters and so long as there are speculators they will be willing to be on whether the fly will go up or down the wall. What Warren doesn’t get is that there is no point in arguing with speculative manias. They are matters of faith, not logic. He, like me, is constitutionally unable to participate. We can only look on with wonder as the trees are encouraged to grow to the sky.