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By flooding the financial system with money, Federal Reserve Chairman Ben S. Bernanke is seemingly betting that the country’s highest jobless rate in 25 years, combined with the most idle factory capacity on record, will hold down inflation, and it’s textbook Keynesian economics.

If Bernanke’s gamble pays off, then he and the whole Obama administration will be viewed as saviors, but if instead, Milton Friedman’s theories prove correct, and the country lurches from the present financial crisis into rampant inflation, then they will not be so kindly remembered.

Several statements that have recently been made by experts suggest that Bernanke is batting on a very sticky wicket, and many of them have stated on record, their belief that reflation is still in its early stages, and they have pointed out that there are already signs of growing inflation.

John Brynjolfsson, who is the chief investment officer of the hedge fund Armored Wolf, said in a recent TV interview, “We’ve got at least nine innings of reflation ahead of us, ultimately ending with probably double-digit inflation”.

Allan Meltzer who is the Fed historian, and a professor of political economy at Carnegie Mellon University in Pittsburgh says, “If history is any guide, then the effort will end in tears and inflation will get higher than it was in the 1970s”.

Consumer prices rose at a year-over-year rate of 13.3% at the end of the ‘70s, mainly because political pressure from Richard Nixon’s White House prevented Chairman Arthur Burns from removing liquidity as quickly as was then necessary.

Former Fed economist John Ryding, who is the founder of RDQ Economics LLC in New York, concurs with Melzer and says that the central bank will be slow to withdraw all the excess cash it has injected into the financial system. “They pay lip service to inflation being a monetary phenomenon, but they’re too much concerned with the Keynesian explanation of inflation”.

The signs that are said to be pointing strongly to inflation are;

• A swelling Fed balance sheet that has climbed $1.2 trillion in the past year to $2.09 trillion.

• M2, which is a broad measure of the money supply that includes checking accounts and money-market mutual funds, rose in the last six months at an annual rate of 14% which is up from 6.3% a during the last decade.

• Copper is now at a five-month high and platinum reached a six-month peak on April 9th and there are those that expect oil prices to double from the present price of $52 a barrel now.

Moreover, Ken Mayland, who is the president of ClearView Economics LLC says he sees, “oil prices increasing to “$80, $90, $100 before the end of next year. All that money is going to find a home”.

According to a just published, PMI (Private Mortgage Insurance Co.) interview, “Home prices will fall in more than half of the largest U.S. cities through 2010, as the recession slashes jobs and reduces buying power”.

PMI, is the second largest U.S. mortgage insurer and the company’s chief economist, David Berson, said “21 of the 50 biggest U.S. metropolitan areas have more than a 75% chance of lower home prices in two years. Six others have more than a 50% chance. Prices will lag because of the large number of homes for sale and those that are vacant but not yet on the market, and we’ll see sales start to recover before the job market”.

The present economic collapse was caused by sub-prime lending to the riskiest U.S. mortgage borrowers, which in turn fueled a five-year housing boom and drove the median U.S. home price to an all-time high of $230,000 in 2006. The housing collapse led to more than $1 trillion in write-downs and credit losses, by the financial institutions that packaged the toxic loans into securities, and then sold them to investors.

Stats issued by the Chicago-based National Association of Realtors show however, that a record number of foreclosures have so far forced overall prices down by 28%, bringing the average price of a house down to $165,400.

Berson went on to say that, “The ten areas with the highest probability of lower prices in 2010, each with a 99 percent chance, include Miami, Fort Lauderdale, Tampa, Orlando and Jacksonville in Florida; Los Angeles, Riverside and Santa Ana in California; Las Vegas and Phoenix. Risky lending and speculators in “sand states” led to rapid property appreciation that is now correcting. The suburbs of New York and D.C. are high-cost areas that had substantial run-ups in prices. They are the next group down from the sand states”.

In depth figures indicate that New York City has a 67% chance of declining prices, whilst Portland, Oregon; Minneapolis-St. Paul; Boston; Atlanta; and San Jose, California all have between a 50% and 70% chance of declining prices.

The city most at risk is New Jersey, and the Edison-New Brunswick area has an 89%, and Newark an 84% likelihood of lower prices over the next two years. Nassau-Suffolk in New York has a 78%; Washington an 88% and Baltimore has an 84% chance.

The areas that are least likely to suffer a drop in house prices are Pittsburgh; Cleveland; Columbus, Ohio; Dallas; Houston and Memphis, Tennessee which is mostly because prices didn’t surge so much or at all during the boom.