As you know, there are lots of negative market stimuli out there. Yet corporate earnings continue to show strength. Today, Staples posted a bold 36% year over year increase in earnings, John Deere’s grew at a 15% clip, and the profits for discount retailer Target grew 4% in a tough market.

And for a time the Dow responded positively, advancing more the 120 points before throwing it all away. Why did this happen?

Put succinctly by one Wall Street Journal headline: Wholesale Prices Increase

Depreciating currencies create inflationary pressures like higher costs of goods and wholesale prices. Higher wholesale prices translate into higher retail prices for consumers. That’s inflation, the general rise in retail prices.

Retail inflation will force interest rates higher. Higher interest rates will cause even higher prices and increase duress on an already fragile consumer base. That’s not good for the market, business, or consumers.

Inflation is the cost of money. When the cost of money increases, so does the cost of borrowing – for businesses and consumers. That’s why banks aren’t lending. They’re waiting for the cost of money to increase (a condition the government seems hell-bent on producing) so they can add a premium to it and start lending at 10% interest rates or more. (Today long-term rates are around 4%).

Inflation, in tandem with higher interest rates, will threaten a lot of people trying to hold onto their homes and mortgages. This will threaten banks. That’s the point of yesterday’s blog.

There is a currency crisis going on right now and inflation will only make it worse. Inflation will shrink the economy even more, and more importantly, will force interest rates higher. When that happens, the government loses one its most powerful tools in its arsenal to manage monetary policy – interest rates – and it will be inflation that takes it away.

That’s why banks led the DJIA down yesterday and why gold keeps rolling. And that’s why the Dow couldn’t hang on to her gains today.

Keep your eyes open…and stay tuned…