Governments throughout the West have proven themselves functionally unable to steward their nations' finances. Labour had already made the forced redistribution of wealth from rich to "poor" a core component of its policy since election in 1997 (the net income gain for the poorest decile in the UK has been 12%; the net income loss for the most affluent decile has been 15%. But poverty has now become an entirely relative rather than an absolute concept, defined as a level of household income below 60% of the median income, thus ensuring that within a socialist culture, the poor will always be with us, at least statistically if not in fact, no matter how affluent our society becomes as a whole. That culture bears the seeds of its own ultimate collapse; as Margaret Thatcher is rumoured to have said, the problem with socialism is that eventually you run out of other people's money.) The more recent redistribution of the nation's resources from taxpayers to banking interests, while comparably involuntary, revealed just how much government was in thrall to the banking lobby, but it was hardly restricted to the UK alone. The problem may be rooted in the structure of the modern democratic system, in which the electorate increasingly and inevitably votes for putative self-enrichment (call it bread and circuses, if you will) as opposed to sustainable and productive national investment. In the words of Hans-Hermann Hoppe's book, democracy is the god that failed.

But then we are living through a period extraordinary for the failure of so many previously unchallenged wisdoms and almost religious beliefs. Faith in the free market has taken a severe if not fatal beating. That may be unfair: because the circumscribed circus in which today's investors perform, and in which yesterday's banks took the global financial system to the brink, was and is pretty far from being a free market. Now the price of money itself is essentially dictated by government fiat (at roughly zero, which would logically, ultimately, lead to some form of wealth-destroying inflationary inferno); money as a medium of exchange and unit of account is backed by nothing other than fast-depreciating political promises (whether it even qualifies as any form of store of value is up to the reader, if not to the market in gold); half of the West's banks are government owned, if not government directed; there are ominous and growing signs of further overly intrusive regulation of any private entities not supportive of whatever it is that Europe's crisis-afflicted governments think they are doing with their creaking balance sheets.

It feels, in short, like something akin to a phoney war. Just as with the slow deterioration in the health of the Western banking systems in 2007 and 2008, we are seeing isolated pockets of collapse or near-collapse (Iceland; Dubai; Greece..) punctuated by official statements from the likes of the EU that all is well and that the storm will soon blow over. The essential difference is that this time round, the problem is set in at a sovereign as opposed to private sector level. Unless we come to quickly colonise the solar system, there is no greater stage for the credit rot to migrate toward. We are already close to some kind of end-game. Awkwardly for our political "leaders", they are running out of ammunition. Short term interest rates rest at rock bottom. They cannot go any lower. Government finances are already hopelessly strained; they cannot be extended indefinitely. Future taxpayers have already been dreadfully mugged; all that remains is for them to wake up to the fact. Needless to say, few political parties or politicians are willing to make the extent of the pain to come remotely obvious or transparent. This past week's UK Budget was a masterpiece of sleight-of-hand. No real hint of the heaviness of the axe to come. And the grotesque indebtedness of the government was portrayed as a glowing improvement in deficit finance. The budget deficit was £11 billion better than expected. What about the absolute level of that deficit, a figure amounting to some £167 billion? We may or may not be lions, but we are certainly being led by donkeys.

And yet still the debate goes on: are we and our portfolios to be chilled by deflationary ice, or uncomfortably overheated by inflationary fire? Or do we get both?

David Fuller's view Regarding Hans-Hermann Hoppe's eye-catching title: Democracy: the God That Failed, at the risk of quibbling, I would say that it is human failures which weaken democracy.

What about the questions: "…Are we and our portfolios to be chilled by deflationary ice, or uncomfortably overheated by inflationary fire? Or do we get both?" I maintain that we are experiencing both deflation and inflation, which is not all that unusual.

For deflation, look at frozen or declining salaries, house prices (probably temporary, although that could still be a matter of years in some OECD countries), IT goods (the one clearly positive deflation today), and the prices for a number of collectibles (Damien Hurst's art, post Sotheby's 2008 auction).

For inflation, look at fiat money creation, and income taxes (which compound the deflation from frozen or declining salaries), the cost of most services, industrial commodities (in the case of petrol, compounded by taxes), collectibles with alternative currency status, or linked to or coming from countries with strong GDP growth.

Retail food prices are most often in the inflationary column, due to production costs, but abundant supply due to favourable growing conditions can produce some temporary regional deflation.

In financial markets, we have seen deflation in bond yields for over two decades but that will almost certainly be followed by yield inflation due to the mountain of sovereign debt in many countries. In turn, inflating long-dated government bond yields will eventually reverse the current inflation in prices for most equities.

Subscribers will have little difficulty in adding to the pockets of deflation or inflation cited above.