First, the U.S. stock market did nothing yesterday. The Dow ended down 9 measly points. The Dow is about 10% above its November low; have we seen the rebound already?

Oil slipped slightly - down to $39. And gold lost $21. While some may see the drop in the gold price as disheartening, we see it as an opportunity to grab some more of the precious metal while the price is relatively low.

The Banque de France says the country's GDP is falling. It's expected to walk backwards by about 1% this year.

The Sarkozy government announced a $12 billion program to support France's auto industry. "We'll give you money," he said, "but you've got to promise not to cut salaries or close down."

Nissan, 40% owned by Renault, announced it was cutting 20,000 jobs worldwide - 9% of its workforce.

Japan is facing an "unimaginable" contraction, its central bank's chief economist warned yesterday. Orders are drying up...production is falling off...and consumers can't seem to find anything they want to buy. Industrial production in Japan fell a record 9.6% in December. The country is looking at an annual GDP decline of 1.7%.

Growth is collapsing throughout all of Asia. Singapore, for example, went from healthy 5.3% growth last year to minus 2.4% this year. India and China are still projecting decent rates of growth - though significantly below their highs. We'll see how long that growth continues...

And poor Latvia. Its economy is not just walking backward...it's running. Today's Financial Times tells us that output is falling there too at a depression rate of more than 10% per year.

But the big news yesterday was the sell-off in the bond market.

"All eyes on sudden spike in US Treasury yields," says the headline in the Financial Times.

The yield on the U.S. 10-year note rose above 3% for the first time in three months. The two-year note, meanwhile, moved above 1% yield. What does it mean?

We are bearish on U.S. government paper - in all its forms. And here's why. The latest estimate from Goldman Sachs puts US government borrowing for this fiscal year at $2.5 trillion. Meanwhile, foreigners are showing less and less interest in U.S. debt. They're switching to short term paper - bills and notes, which are less vulnerable to inflation and currency declines. And they're pulling out of U.S. Treasury market generally. The total percentage of U.S. debt owned by foreigners is falling from 60% down to about 40%...a huge drop.

Either one of two things will happen. If the government funds its deficits honestly - by borrowing from willing lenders - this huge extra demand for credit will force up yields...thereby lowering bond prices. Or, if the government resorts to "monetizing the debt" - that is, funding its debt with printing press money - investors will flee bonds, in fear of higher inflation.

Either way, it will be bad news for bond prices.

Remember, we are only in the Boondoggle Stage of the crisis. Using the collapsing economy as an excuse to waste money, the pols are having the time of their lives. Does your community need a bridge? A new drainage system? A shooting range for blind people? A study of the mating habits of fire ants (how do they get together without getting burnt?) Even in the best of times, politicians have trouble saying 'no.' Now, 'yes' is the answer to every request.

What strange madness is this? Why would anyone think the economy will be made better off by squandering money now on projects that were deemed unworthy or unaffordable only a few months ago? The country got into trouble because people squandered too much money; now they think they will get out of trouble by letting the government squander money. But we'll have to wonder about that later. Now, we're just trying to keep up with the torrent of boondoggles, bailouts and bunkum.

Let's see, Bloomberg reports that about $3 trillion has been spent fighting the downturn in the last two years by the United States of America. We pass over the issue of whether this has done any good, and stick to our figures... Another $5.7 trillion has been pledged. Plus, this latest Obama Bailout will cost about a trillion more.

Hmmm...a trillion here...a trillion there...pretty soon you're talking about real money.

"US Taxpayers Risk $9.7 Trillion on Bailout Programs," Bloomberg figures, or about two-thirds the entire national GDP.

Hmmm...that's about as much as the total burden of household mortgages. In other words, instead of all these boondoggles, bailouts and bunkum, Congress could have just paid off everyone's mortgage.

*** Inflation is now only a problem because there isn't any. In the United States, the consumer price index crested at nearly 6% last year. Now, it appears to be headed down to zero...and perhaps below. That is what the feds are desperate to avoid. When consumer prices fall, consumers become obsessively frugal. They know that if they just wait, they'll be able to get what they want at a lower price. And then, why not wait a little longer...and get the item even cheaper still? This "propensity to save," as economists call it, becomes self-reinforcing. As consumers stop spending, lower demand causes prices to fall further...which incites consumers to dilly dally even more...which causes prices to sink again.

That is the Japanese-style 'deflationary cycle' that gives Ben Bernanke a nightmare.

But we explained yesterday, there's not much he can do about it - at least nothing honest. Rupert Murdoch says the financial crisis has caused $50 trillion in wealth to vanish. The feds have put back only $3 trillion (arguably) so far. Just looking at the numbers, it doesn't seem as though prices will be rising anytime soon. For every dollar the feds put into the system, $17 disappears.

What's a fellow to do? The only way out, as near as we can see, is the road taken by Gideon Gono. "Monetizing the debt"..."quantitative easing"..."printing press money" - it will no doubt go by a number of different euphemisms and code words. It's what happens when the Fed buys U.S. Treasury debt directly. For this purpose, it simply creates a ledger transaction...effectively adding to the money supply.

But even printing money does not automatically and immediately cause consumer price inflation. According to classical economic theory, the shelves must be cleared and the excess capacity must be re-absorbed before prices will rise. That could take a very long time. But we're not sure it works like that. If money were suddenly dropped from helicopters, as Ben Bernanke once pledged to do, merchants probably wouldn't wait for their inventory to disappear before raising prices. They'd be concerned that there were giving away something that was valuable in exchange for something that was not.

When this kind of inflation happens - perhaps worthy of the adjectival modifier 'hyper' - it can happen very suddenly, and very violently. That is why we suggest selling U.S. paper now...even if it turns out to be very early.

*** Drought...fires... plagues...

The poor Australians are battling blazes all over Victoria province. The total cost is climbing up towards 200 dead...and half a billion Australian dollars worth of property damage.

There's a terrible drought in China too...the worst in 50 years. Peking has put up 10 million euros to help the peasants.

Chris Mayer sends this note:

"China is in the midst of its worst drought since 1951. Beijing has gone 100 days without rain. Nearly one-fifth of China's wheat harvest is at risk and over 1.8 million head of livestock are short of water. Over 3.7 million people face water shortages, as do nearly 23 million acres of farmland. Rivers and lakes are drying up and farmers are drilling deeper than ever to reach falling water tables.

"As is the way with these things, it couldn't happen at a worse time. The economy is clearly slumping along with the rest of the world. Unemployment is on the rise. And now food prices may also climb. Not a good combination for a country that already has a fair amount of unrest bubbling just below the surface.

"Water mismanagement has long been a problem in China. Wasteful irrigation is one problem. So is pollution and mass urbanization to the cities, particularly in the more industrialized - but water-parched - areas in the north.

"The government knows this and has swung into action with a number of emergency measures, including financial aid for farmers. One of these measures also increases the subsidies to pay for irrigation projects.

"Over the next several years, I think irrigation equipment is going to play an ever-larger role in helping reduce water use. Water problems will get only worse before they get better. The companies that make the tools and have the expertise to solve those problems will be very valuable. And so will their shares."

*** And from Argentina comes bad news. Not only is the country parched, the drought seems to be centered on your editor's farm.

"It's dry...very dry..." says the farm manager. "We got almost no rain this season. The reservoirs are empty. There's no way to keep the cattle. There's nothing for them to eat. We just have sell as many of them as we can."

So far, the cattle business has not been a big winner for us.

"When the grass is too dry and too short," the farm manager explained, "the cattle pick up a lot of dirt and sand when they eat. The sand wears down their teeth, so even if they had good grass, they wouldn't be able to put on much weight. And since they can't find much to eat and can't eat it very well, they don't have the energy to go very far looking for better grass. It's a vicious circle. But that's what we've got up here...a difficult place to raise cattle."

Meanwhile, here in Europe, there's water everywhere. Fields are flooded in England. In France, it's been raining for days.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Cattle Prices Have Risen Only 1% This Year
• Our Cattle in Argentina
• Investors Now Treating Bad News for the Dollar as Bad News
• Bad News if You Are Afraid of Inflation in Consumer Prices
• A Chilly Trip to Argentina

All around us is virgin territory. No one has ever been here before. But watch out, these virgins are vicious amazons. In this wild place, you can forget living it up. Don't even think about getting rich. Riches? If you've got 'em...hide 'em. Luxury? Who needs it anyway? The best you'll be able to do is survive. And then, maybe, years from now, we can put our financial lives back together again...and get on with things...

Never before have seen so much wealth disappear in such a short time. The latest report from MSCI shows the planet's losses from the sell-off of equities has now reached more than $30 trillion - or more than twice the GDP of the U.S.A.!

And this is just stocks. Reported write-downs, write-offs and credit losses have reached almost a trillion. And losses of housing prices in the United States alone - the only country for which we have reliable figures - has reached about $5 trillion.

Nor have we ever seen such a rapid reaction. In the space of a few months, people have gone from believing that nothing could go wrong to thinking that there's nothing that won't go wrong. Where once they thought that free-market capitalism would make them rich...they now believe that the government can save them from getting poor. And where only a year ago they thought the world's globalized economy would always give them everything they needed "just in time," they now believe they better keep a few sheckels on hand "just in case."

And just look at the bonds! A few months ago, investors stretched for yields. Now, it's safety they reach for. They dump corporate bonds for fear they may be "toxic," and grab U.S. Treasury debt with both hands. Investors now seem to have an unqualified trust in the full faith and credit of the world's largest debtor. Yields on 91-day T-bills have fallen to 0.11% - scarcely a tenth of one percent!

Yes, dear reader, the "Great Unwind"...the "Big Bust"...the "Great De-leveraging" - call it what you want; we've never seen anything like it.

The Dow rose 151 points yesterday - a limp and pathetic little attempt buck the downward trend. Gold lost $6.80...leaving it at $735.

China's stock market had managed an 18% rebound...following the announcement of its half-trillion dollar bailout plan. But yesterday, Chinese stocks were collapsing again.

The latest news from America tells us that housing prices are still going down in 4 out of 5 cities. Homebuilders' wives are hiding the shotguns and pouring out the whiskey; their husbands' confidence has never been lower, according to this morning's news report.

Big towns...little towns...in the sophisticated cities and out in bumpkin country, the story is the same. The Wall Street Journal tells us that the "fall in crop prices" is putting an end to the boom in the boonies.

U.S. producer prices fell 2.8% in October - the most they've ever fallen. And the Big Three automakers say that if they don't get some help soon, the results will be "catastrophic."

Meanwhile, over on the sunny California coast, the whole state is going up in smoke...it's not only going broke, it's burning up.

"I have to dust the ash off my car every morning," reports daughter Maria, recently arrived in LA and hoping to make it big in the motion pictures. "It's eerie...there's always a little smoke and soot in the air..."

Not only is the bust unlike anything we've ever seen before...so is the planet-wide effort to stop it. All over the globe, the feds are going 'into the wild' with extraordinary measures. They're mobilizing troops to fight the crisis in the boardrooms. They'll fight it in the stock markets. They'll fight it at home - with house-to-house combat to stop foreclosures and defaults. They'll fight it abroad - the U.S. government is even loaning money to foreign governments! They'll fight it with loans and giveaways. They'll fight it with fiscal policy. They'll fight it with monetary policy. They'll fight it with every weapon available to them - including the printing press.

And they will lose.

*** To give you an idea of the wild measures undertaken by the feds, we look at what is happening at the world's leading bank - the U.S. Federal Reserve.

The short form of how the Fed operates is this: it holds a certain amount of securities in its vault; this is the cornerstone capital - or monetary base - of the whole banking structure. How does it get this capital? It buys it, creating the money to pay for it as necessary. Naturally, the Fed doesn't want to create too much money or the inflation rate would get out of control and economists would point their fingers accusingly. But now, people fear dandruff more than inflation. So, the Fed has gone wild.

From the day of its founding in 1913 to September 24, 2008 the Fed's assets - the aforementioned cornerstone capital for the US financial system - grew to $1 trillion. By November 14, 2008 the amount had grown to over $2 trillion. And in a speech in Texas, the head of the Dallas branch of the Fed said he expected the total to reach $3 trillion by year-end.

For the moment, this explosion of monetary inflation is hardly noticed. Asset deflation has the headlines. People worry about having too few dollars, not about having too many.

Comes the news this morning that U.S. business chiefs are asking the up-coming Obama administration for another $500 billion 'stimulus' program. They'll get it. And much more. Trillions worth.

Trying to stimulate the economy with easier credit in the early 2000s, Alan Greenspan overdid it. He gave the world the credit it wanted, and created the biggest bubble in human history.

Now that bubble is collapsing and his successor - Ben Bernanke - is confronted with a new problem. Now it is cash that people want - income to pay their debts! Bernanke will give them what they want. And, most likely, he will overdo it too.

*** At a recent hearing on Treasury Department use of government assistance funds, Ron Paul, who is well-known for often calling out the Federal Reserve chairman on their liberal use of the printing press, took on Big Ben. Here is the transcript of their interaction, in case you missed the C-SPAN coverage:

Ron Paul: The Austrian free market economists had predicted all these problems would come, and they were certainly correct in everything that they said. Of course they're not very satisfied including myself with the so-called solutions, because it looks like we're spending a lot of energy and a lot of money trying to patch a system together that is unworkable.

So we have Congress spending a lot of money, we have Treasury very much involved in trying to pick and choose which worthless asset that we're going to buy, and of course the Federal Reserve is involved in injecting trillions of dollars that nobody seems to be keeping track of.

But what we're failing to do I think is to recognize that the system no longer works, but I can understand why we do this because if Congress couldn't do this and if the Fed couldn't do this and Treasury couldn't do this, it would make us all irrelevant. And instead of looking at the causes of this, and then finding the solutions aren't going to be found here, we have to make ourselves feel pretty important.

But I think there's another reason we think we're pretty important, it's because in a way our interference in the market corrections that tried to come about since 1971 seem to work. I mean, the failure was established in 1971 with a system that had no way of automatically correcting the balance of payment and the current account deficits.

And that's where the problems have been, and economists - whether they were left or right or middle - over the last several decades have always said, this current account deficit is a big problem. And now it's totally out of hand. So here we are struggling with all these rules and shifting back and forth and really getting nowhere.

My question is directed toward, when we come to the full realization that the system is unworkable, what are we going to do, what have you thought about doing, and already we see talk in the newspapers. We see articles about a new international world reserve currency, and to me that's pretty important, because the fiat dollar reserve system is not going to work anymore, and that's the information that we have to accept and decide what we're going to do in the future.

Also, this is not new in history. Currencies have failed, financial systems have failed, and generally, to restore the confidence that everybody is talking about, they usually have to go back to a currency with integrity to it, rather than just fiat money.

And, you know, the stages is there. It's not impossible, already the central banks of the world still own 15% of all the gold that was ever mined in all of history. So they hold on to this gold for some reason, and therefore something has to give, or are we going to keep trying to waste more money and time patching this system together.

Just last week there was a report that Iran purchased 75 billion dollars worth of gold, took their reserves out of Europe, bought gold and put it in Asia. So is that a sign of the times, is that moving on?

My question is, in your meetings, and you had a meeting just recently with other central bankers, does this thought come up about a new international world reserve currency, and if so, does the subject of gold ever come up?

How do you restore the confidence? Have you recently had conversations with any central banker, and is there a move on to replace the dollar system, because the dollar system is essentially declared dead, because it's not working, but this indeed was predictable because of these tremendous imbalances that were never allowed to be corrected, and they were always patched up. We always came in. We'd spend, we'd inflate, we would run up deficits, and since '71 we've been able to correct these problems.

Could you tell me what kind of conversations you've had regarding a new reserve currency?

Ben Bernanke: Yes, Congressman. I don't think the dollar system is dead. I think the dollar remains the premier international currency. We've seen a good deal of appreciation in the dollar recently during the crisis precisely because there's been a lot of interest in the safe haven and the liquidity of dollar markets.

And the Federal Reserve has been engaged in swap agreements to make sure there's enough dollar liquidity in other countries because the need for dollars is so strong. So I think the dollar system remains quite strong.

I do agree with you very much on one point, which is about the current accounts. The current account imbalances have proved to a very serious problem. It was in fact the large capital inflows in those current accounts which created a lot of the financial imbalances we saw and have led to some of the problems we are seeing, and one of the silver linings in this huge grey cloud is that we're seeing some improvement and greater balance in our current account deficits.

Ron Paul: But does the subject of a new regime ever come up?

Ben Bernanke: No, it doesn't.

Ron Paul: And does the subject of gold ever come up in any of your conversations?

Ben Bernanke: Only in terms of the sales that the central banks are planning.

The I.O.U.S.A. team interviewed the Congressman for the documentary. If you didn't have a chance to see the film when it was in theaters, now's your chance. We are offering an exclusive package to long time DR sufferers: you can get the DVD (before it is released to the general public), the companion book and your own personal bailout package. Don't let this opportunity pass you by...quantities are limited, and are going fast.

*** GWB - you can't say we didn't warn you. A top British judge has just announced that he considers the Bush administration's attack on Iraq as a violation of international law. Years from now, George W. Bush is likely to be charged with war crimes and human rights violations. Normally, this would pose no problem. A former U.S. president could expect the protection of the U.S. government. But as Americans sink into depression they are not likely to feel kindly towards their ex-president. They will blame him for the decline of their incomes...and for the fall of their empire. They are likely to want to cooperate with the world's new institutions...and throw over their own former commander-in-chief.

Advice to GWB: Go back to Texas. Don't ever leave home again.

*** Colleague Patrick Cox, at Breakthrough Technology Alert offers some rare optimism into this otherwise downright gloomy market:

"Yes, we have been swindled by politicians who pushed the U.S. banking system into the shape it's in today. The people who tried to stop the meltdown have utterly failed to explain the root of the problem to the American people. We've officially entered recession now and policymakers will do little to address the real problems.

"Though the hit the economy has suffered recently pales in comparison with the drain on world resources associated with that war, our situation is similar. We are at a point of incredible opportunities.

"The reason is, in a word, science. The accelerating pace of breakthrough discoveries will deliver economic benefits that few fathom today. While the entire world will gain from these discoveries, investors who understand what we are going through now will profit most and earliest. Even better, the return on these stocks will be so great that even relatively modest investments will produce fortunes.

"Let me give you a few hints about the shape of things to come. Just in the last few weeks, two groups of scientists announced the discovery of microorganisms that produce biodiesel naturally. Professor Gary Strobel from Montana State University discovered a fungus deep in the Patagonian rain forests of Argentina. This organism naturally produces the long chain hydrocarbons needed to create fuels.

"Even bigger news is coming on the medical front. I predict that real stem cell therapies will be offered offshore within the year. Currently, there is a billion-dollar industry offering stem cell snake oil, but real lifesaving and life-extending therapies are already available in the laboratory. These therapies are relatively inexpensive to produce and will revolutionize medicine. Even the FDA will come around when wealthy early adopters begin reporting true rejuvenation results. By the end of Obama's first term, we will see SC and other therapies that will radically cut the cost of treating horrendously expensive illnesses."

Patrick has been alerting us to a breakthrough that could change the way we view modern medicine. And when news breaks - which is rumored to happen tonight - those who have gotten in on this revolutionary idea stand to make some pretty major gains.

*** We got a letter from Her Majesty's government.

"Winter Fuel Payments...don't miss out!"

Yes, dear reader, this is how societies collapse. People invent problems. Then, they find solutions to the problems. Then, the solutions cause more problems. And finally the cost of all the solutions brings the whole system falling down.

A news report out today tells us that the weekend will be cold. An "arctic blast" is said to be on its way.

Of course, some parts of the city already feel as though they were in a nuclear winter. London's main industry is finance. And finance has iced up. A headline in yesterday's paper told us that London is expected to lose 370,000 jobs over the next two years.

But thank God for the world improvers:

"Our records show that you may become eligible for a payment this winter," begins the letter.

Why? Because your editor is enrolled in the Britain's national health service (a requirement for employment). NHS records must have revealed to the authorities that your editor turned 60 in September. Accordingly, he is eligible for 125 pounds to help him with his heating costs this winter.

Imagine the miserable bureaucrats administering this program. They have computers to program...letters to write...records to keep...internal procedures to devise, administer and respect. They have to hire people...and then support them for the rest of their lives, paying for pensions and holiday, just like any other business. Then, they have to work out internal disputes...make sure the coffee maker is working properly...and organize an annual Christmas party. It probably costs more than 125 pounds to send out each check!

And why should someone over 60 get money and not someone under 30? The older person has had 30 more years to stuff newspaper in the cracks, firewood in his garage and money in his bank account. If he's cold this winter...it's his own damn fault.

But if you're going to give him money to help him keep warm, why not some extra money to help him with his eating needs? He has to eat, doesn't he? And why doesn't HM Government just send him a bottle of Chateau Margaux? Maybe 1985. To help him with his drinking needs.

Until tomorrow,

Bill Bonner
The Daily Reckoning Australia

• Oil Prices Decline but Consumers Aren’t Out of the Woods Yet
• Housing Market Drops Housing Prices by 16%
• The Feds Are Counting on Fannie and Freddie to End the Nation’s Housing Misery
• Dealing with Future Economic Problems Today
• Denmark, Spain, the U.K. and Ireland Have Begun to Register Falling Housing Prices