For the third week in a row, our Inflation/Deflation Watch has declined. It has fallen from its “B Wave” peak of 136.70 to 129.12 at the end of this past week.

Could this be another false downturn like I thought we had back in July? I suppose so, but keep in mind that despite the most draconian stimulus measures ever undertaken in this country, the housing market remains in the crapper and the country’s unemployment rate is still rising to levels ahead of this stage of the Great Depression—even if you use the current government numbers, which are manipulated to make the numbers look better than they did back in the 1930s. Yes, we have had a quarter of positive GDP, if you believe our government’s numbers. But we had some exceptionally strong GDP quarters during the 1930s, as well.

I continue to believe we are now in the early stages of what Dr. Robert McHugh calls the C Wave down, which is the same thing Robert Prechter refers to as Wave 3 down. In addition to Dr. Robert McHugh’s work, which has him saying we have definitely seen the peak of Wave B up, and in addition to our own IDW upward bullish momentum turning from a +3 to a +2 for the first time since July 2009, there are many more warning signs that suggest the stimulus program, big as it was, is running out of gas.

The gold/silver ratio rose to 67 this week. As Bob Hoye has noted, when it rises above 65 this ratio has been very accurate in predicting liquidity problems dead ahead.

Regarding liquidity issues, we want to mention again Charlie Clough’s Global U.S. Dollar Liquidity Measure. Look at how drastically it has plunged in the last several weeks. Note the two prior bubbles in liquidity were followed by massive declines in equity prices and asset prices overall. Of course, the phony housing prices that were goosed by all manner of excessive liquidity by the Greenspan Fed kept our false sense of security alive through the end of the decade. But with the Lehman Brothers collapse, the Fed’s ability to fool the public with a phony stock market and phony economy had run its course.

Out of desperation, Bernanke pumped money into the system that made the Greenspan orgy look like child’s play. Our fear now is that with Global U.S. Dollar Liquidity plunging from over 48% per year to about 16%, the deflationary implosion will eclipse the Lehman Brothers implosion, triggering what Dr. Robert McHugh refers to as “the cataclysmic nation changing event to correct the bull market that began in 1718!”

The rise in the dollar comes with a return of risk aversion that suggests the beginning of margin calls and a dollar short covering. As Bob Hoye has frequently pointed out, when a global credit system contracts, the senior currency becomes the “strongest” currency. Bob Hoye, Robert Prechter, and most other deflationists (Ian Gordon being the exception) are calling for a “strong” dollar. The only difference is that some deflationists think the dollar will be strong, relative to other paper currencies but not to gold. That would fit John Exter’s inverted pyramid and the thinking of Trace Meyer as well. Hoye sees 0.80 on the dollar index as being the first major resistance, with the next being at 0.85.

Gold continues to hold up, vis-à-vis stocks and commodities in general. Check out the Gold/Rogers chart on your left. This tells us that real money—gold—is doing quite well as an asset that retains its value while everything else, save the dollar for now, is in decline. We note the tiny curl up on this ratio and if we get over .365, it will suggest more credit problems may be in the wind. We would also suggest that if the world’s credit markets were not in such a mess, gold to commodities would plunge, as the “good times” for most of Wall Street and the country in general would return.