As this year draws to a close, it would be appropriate to take a look at the best of 2009. Since the last months of 2008, I’ve been a follower of Jim Puplava and his excellent weekly financial news talk show. The second hour of each Financial Sense Newshour features an author of a book written about economics or finance. Here’s my top 8 for the year that was. Enjoy!

1. Inflation vs. Deflation debate – 2009 was a year of endless debate for inflationists and deflationists and it seems that neither side has settled down yet. In the previous show Mr. Puplava hinted that there would be another inflation vs. deflation debate in January 2010.

2. Trend of 2009 – interview with Gerald Celente, the trends forecaster.

3. Fallen Giant: The Amazing Story of Hank Greenberg and the History of AIG – this is the story of how AIG grew to be such a large institution and what undid the company.

4. Oil 101 – the best guide to the oil industry: from the well to the pump.

5. Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy - if you like Barry’s style, you should check out his blog at www.ritholtz.com

6. Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts

7. “The New Market Wizards: Conversations with America’s Top Traders - an excellent interview based on the best-selling book by Jack Schwager

8. “Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse” – another great book by Thomas Woods. There are more interviews and presentations with Thomas Woods at the Mises Institute.

The full list of 2nd hour interviews is available here.

UPDATE! Apparently, WSJ has also done an interview with Volcker. Here it is.

Der Spiegel has done an interview with Paul Volcker that sheds some light on his opinion of the economic recovery.

SPIEGEL: The US has not yet instituted any kind of reform policy. What we see is the government and the Federal Reserve pouring money into the economy. If one looks beyond that money, one sees that the economy is in fact still shrinking.

Volcker: What should I say? That’s right. We have not yet achieved self-reinforcing recovery. We are heavily dependent upon government support so far. We are on a government support system, both in the financial markets and in the economy.

Paul Volcker was the Chairman of the Federal Reserve from 1979 to 1987. During the time he took office, inflation was running at 12% annually and people were buying gold, art, real estate, anything to and everything that had real value because there was no end in sight. When Volcker took office, he raised fed funds rate to around 20%, which plunged the United States into a recession. Truth be told, raising interest rates was the only cure and had to be done sooner or later to cure rampant inflation and put the US back on track. Although Volcker was heavily criticized for his actions, he is now viewed as the only person who had a clear head and the spine to do what he did. The interview is short, but it is well worth reading.

This is from Bill Gross’s Investment Outlook for the month of December, published this morning. I recommend reading the entire article, but here is the punchline:

“…before moving on, let me state the obvious, but often forgotten bold-face fact: The Fed is trying to reflate the U.S. economy. The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks. Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation – not until.”

Mr. Gross publishes his Investment Outlook every month and it is always a worthwhile read. Sometimes his letters seem sort of like stating the obvious, but that is actually not a bad thing. Mr. Gross works for PIMCO, which is said to be the biggest bond fund in the world. The people at PIMCO are as professional as you can get – people all around the world would pay thousands, and indeed they do, to get some idea of what people like Bill Gross, Warren Buffet and Marc Faber think about the markets and the economy*. They’ve been in this business far longer than most investors and as a consequence, they know more and it pays to listen to what they’ve got to say.

You can sign up for e-mail updates. In addition, there are other contributors worth reading at PIMCO – check them out!

*These three names are just an example, they are by no means the only geniuses out there.

It has been evident for a while that local governments in the US have to cut back on spending. While the federal government can run  huge deficits (last year it was around $1.4 trillion), states have to balance their budgets. Although states are reliant on creative accounting and to some extent, illegal practices, they cannot hope to balance their budgets using the same old tricks for much longer because states’ revenues are down dramatically. According to a new report by the Pew Center “the same economic pressures that pushed California to the brink of insolvency are wreaking havoc on other states”.

The first state that comes to mind when talking about fiscal problems is California with its 49% budget hole and a 16.2% drop in revenue. But there are other states out there whose fiscal problems come eerily close to California: Illinois’ budget is off by 47% while Oregon’s revenue has fallen 19%, which is even worse than California. According to the law, states have to balance their budgets just like every enterprise interested in survival (companies can rely on debt, but they have to service that debt and eventually pay it off, unlike the federal government or the government of Japan, for that matter).

What to expect from all of this?

Well, first off, states will most likely use every possible means to raise revenue – meaning more traffic tickets, higher fees, giving out casino licenses (some states are seriously thinking about legalizing gambling to collect taxes) and downright stupid requirements like the one that New York just imposed on its vehicle owners by requiring them to buy new license plates for no other reason than to collect funds. But aside from collecting more taxes, states will start cutting back on vital public services like the maintenance of roads, bridges, waterfronts, levees, railroad crossings – all the while infrastructure is in a terrible shape and needs immediate fixing. This is very sad indeed – while I remain critical of the way the country is run, I am still very much fond of America. I would like to see America recover as much as Americans themselves, but given the current trends I don’t see that happening. It is indeed a sad chapter in American history.