I have been out the entire morning and haven’t been able to read any news reports on the GDP numbers. However, I have just now had a chance to look at the data and wanted to share my thoughts with you, unfiltered by the media reports. I would sum it up by calling it a story about the three I’s of imports, inflation and investment. But, I will also have a few words to say about state and local government spending as well.

The new $100,000,000,000,000 note is now out in Zimbabwe. It is worth 23 Euros ($30)

The United States Department of Labor released its monthly data on inflation today at 8:30AM. The data showed that inflation rose only 0.1% over the last year, the lowest reading since 1954. I should note that oil and food prices continue to fall. Combine this with slow consumer demand which will feed through into consumer prices and you have deflation by next month.

While we should welcome lower prices, we should be aware that they are due entirely to falling demand and excess supply; that is a world of difference to deflation from productivity gains. This is the environment of depressions. The economy is looking more and more like the 1930s every day.

The consensus is coming down on the bearish side for U.S. government bonds in 2009. There is ample reason to believe that Treasuries will be an asset class to avoid this year.

Yet, as I argue in a post a few days ago, “rates can go to unusually low levels for much longer than people think,” as Stephen Roach has said. And with the global economy in a serious state of unwind maybe treasuries are not going to tank. Does this mean, one should be loading up on U.S. Government debt? Not if you believe Andrew Barry of Barron’s Magazine.

This is the time of year when everyone tends to look back and sum up the year in one way or another. I have been doing much of the same.

In keeping with that theme, I have taken a good look through my nearly 1400 posts to get a better sense of what I got right and what I got wrong and how knowing that can help me going forward. Call it an exercise in intellectual honesty. This exercise has given me a good understanding of where things went wrong in the past year and why.

It may also give me some thoughts as to where we need to go in 2009. Let me share a little of what I learned with you. This is a long but thoughtful post, so take a few minutes. It should be worth it.

On the whole my predictive powers were working pretty well this year. But, I made a few lousy calls and some controversial ones along the way. Below is my view of how the year went, on some of those calls and links to the relevant posts. At the end, I’ll wrap it up with a few thoughts about where that leaves my thinking for 2009.

Is this an unorderly decline for the dollar?

These last two days have been bad for the dollar. We are seeing heavy losses against the Swiss Franc, the Euro, the Australian Dollar, and The Japanese Yen.

This video from the 1930s is a timeless piece of work, giving an explanation of what inflation and deflation are and how they work. (hat tip Tim Iacono)

I recently wrote a post about U.S. Treasury securities which have been rising in price as interest rates have come down. In the post, I called the Treasury rise a bubble and I stick by that moniker despite protests from some astute readers.

However, I do want to point out one reason why Treasurys are rising. Inflation.

Caroline Baum had a good column today at Bloomberg in which she suggests central banks consider asset prices in monetary policy going forward. In the piece she quoted William White, a former economist from the Bank for International Settlements. He said:
“The most calamitous downturns were not preceded by any degree of inflation. There [...]

As interest rates in the developed economies approach the zero bound, we must begin to ask ourselves how effective monetary policy can reasonably be in these circumstances. And if policy is to be effective, which policy tools will be most advantageous to use? Or are we just pushing on a string here?

In plain English: central banks are running out of bullets and the deflation bogeyman seems to be right on our doorstep. Can they even stop him from ripping our house to shreds and sending us into depression?