Perhaps it was because Ben Bernanke's extended his "extended period" pledge? He said, in effect, if this economy doesn't come out of its slump, it won't be his fault. He'll keep monetary policy as loose as possible for as long as possible. Not that we had any doubt about it. He has a theory. It's a bad theory, but it's all he has. And it tells him that you fight a depression with loose money.

So, what do you expect? Interest rates will remain artificially low as long as Bernanke can get away with it...or until the depression ends...whichever comes sooner. That said, he hardly has to lift a finger. Judging from the last auction of short-term Treasury debt, lenders can't think of anything better to do with their money than to give it to the government - in return for nothing. The last auction produced a yield of zero on one-month loans.

We went to visit a pair of clever Swiss bankers yesterday. These fellows manage money for clients all over the world. What do they think? They were focused on stocks:

"This year, the people who made the most money were those who were most heavily invested in equities. And if the patterns of the past hold up, 2010 will be a good year for equities too. Whenever the 10-year performance goes close to zero, the next few years tend to be very good for stock market investors. In fact, there has never been an exception, going all the way back to 1881. Last year was one of the worst years in stock market history. This has been one of the best. And next year should be one of the best too."

He handed us a chart to illustrate his point. It shows the 10-year performance of the stock market. We see that very rarely are stock market returns negative over a 10-year period. In fact, there are only two worth mentioning. One was in the '30s, when in August '39 stocks had returned MINUS 4.68% for the previous ten years. The other major losing period came in February of this year, when investors had gotten an average annual return of -3.43% since 1999.

The message seems simple enough. When the market turns down sharply...expect a sharp turn-up to follow. But studying the chart more carefully, we see two things. First, we see sloppiness in the figures. The thirties pattern was not a clean break and then a clean bounce...but a series of breaks and bounces. In fact, investors endured 10 years of losses running up to '30...and then more 10-year periods of losses in the years '37, '38, '39, and '40.

The other thing we notice is that an investor could have made a lot of money in the '30s...if he was lucky. The year 1933 was one of the best years ever. Of course, the investor was well advised to take his gains off the table. Prices slipped in '34...bounced...and then fell apart. By the end of the '40s, the poor long-term, buy and hold investor had not made a penny in two decades of investing. This pattern, by the way, is not so different from what the Japanese have suffered during the last 20 years. They've seen good times. They've seen bad times. But the general trend of the markets has been down for two decades.

We have a feeling that the worst is still ahead for this market too. Few of the mistakes of the bubble period have been corrected. None of the challenges of the new post-bubble economy have been met. Little of the huge mountain of debt trash has been taken away and disposed of properly. The big reckoning is still to come.

Which brings us back to the price of gold. It was over $1,200 just a few days ago. It's had a little correction. But we doubt that it has had the correction we've been waiting for. There is still no sign of consumer price inflation. Nor is there any sign that consumers are returning to their old spendthrift habits. Nor is there any sign that jobs are becoming more plentiful...or that this depression is going to end any time soon. When that becomes clearer, stocks will fall again. Gold should fall too.

People will want safety. But where will they seek it? Ah, that's another big question. In the first stage of the crisis, they sold gold and bought dollars. Will they do the same the next time? Or will they fear that the dollar may be part of the problem, rather than part of the solution? If so, won't they flee stocks for gold?

We don't know.

Bill Bonner
for The Daily Reckoning Australia

• The Correction in the U.S. Housing Market Made Its Sharpest Move Ever
• Typical Japanese Investor Would End Up With Less Than What He Started With
• Your Actively Managed Superannuation Fund Cannot Beat the Market
• Economy is the Source of Wealth for Us All
• Market Feels So Weak Because it IS So Weak

You can explain the model in a few simple sentences: Encourage people to spend. When they run out of money, encourage them to borrow. When they tire of borrowing and spending, lend them more at lower rates.

As a way for people to build wealth, this economic model of the Bubble Period was as ineffective as a bad banker. It was a 'have your cake and eat it too' school of financial success with an obvious flaw. People noticed it when the correction began. They went to their cupboards and found there was nothing there. Homeowners - who had borrowed heavily against their houses - found their equity had disappeared. Capitalists found they had no capital. Workers lost their work.

And this year, governments' tax receipts are collapsing too. In the United States, they're down 14% in the first half of this fiscal year. Expenses, on the other hand, are exploding. This leads to a question: governments must borrow on a Herculean scale - but from whom? The United States is expected to float a record $2 trillion in I.O.Us. for 2009 - about 15% of GDP. If the downturn persists, as it has in Japan, we could see the U.S. national debt rise to Japanese levels - close to 200% of GDP.

In London, the numbers are smaller, but the math is the similar. The government has projected $175 billion deficits over the next two years. But this might be just the beginning. If deficits continue at this rate, Britain too could find itself back in the 1950s' - after two world wars, with public debt at two times GDP.

What justifies such sacrifices? In time of war, citizens collect scrap iron...sell their jewelry...and buy bonds - anything to help pay for bullets and keep the Huns East of the Rhine. But what now? People clamp even bigger balls and longer chains on themselves...and for what? Taking flowers to the recovery room, they look in on the bubble model as though on a weary friend. "He supported us all," says an anxious relative... "We must do all we can to save him."

"Pull the plug," is our advice.

Of course, when he was in his prime the bubble was fun - laughing, singing, spending...a grasshopper on stilts! And there were all those friendly ants in Asia ready to lend him money. At the peak, the U.S.A. had net borrowing of some $2 billion per day (trade deficit/365).

But now, take America's anticipated budget deficit and divide it by 365. You get a figure of nearly $6 billion per day. Even at his peak, the old bug didn't bring in that kind of money. And now, the foreigners are in recession too. They've got their own aches and pains to cure. So, how will the United States finance the biggest deficit of all time? How has Japan done it?

Japan's economy has been locked up for 19 long years. It financed its confinement itself - drawing on the savings of a remarkably long- suffering population. Stimulus packages came and went. On average, they cost about 3% of GDP per year. The biggest came in 1998 - with a price of 6% of GDP. Financing this house arrest was easy - Japan began the period with a savings rate of 14% of GDP.

America, on the other hand, began with a savings rate of zero. More recently, the savings rate has been reported as high as 5% - as middle- aged squirrels desperately hide a few nuts for a long winter retirement. But the gods can add it up. Even if every dollar of U.S. savings is tossed down the public hole, it will still be two thirds empty.

Anticipating the problem, the Fed has already leapt into the hole itself. It offers to buy the government's bonds itself. Of course, the Fed has no real money. It must 'create' money to make the purchase. It's the latest miracle treatment, say the quacks in charge. If the Fed creates enough new money, it will offset the losses caused by the downturn. Then, happy days will be here again. The whole world seems to believe it. Stocks are rising. Ben Bernanke, this week, said the U.S. economy would recover before Christmas. The convalescence may be long, he continued, with his vision apparently restored; but it will be steady.

How the gods must howl! "In the Bubble Epoque people tried to get something for nothing... Imagine, they thought they could get rich by borrowing money and spending it. Have you ever heard of something so ridiculous? Ha ha! Now, they think they can get rich by spending money that doesn't even exist."

"But that's not the half of it," one of them is sure to notice. "They're digging themselves deeper into debt - trying to revive the very oaf who pushed them down in the hole in the first place. Ha ha. Ha ha."

Until next time,

Bill Bonner
for The Daily Reckoning Australia

• China Was the Maker and the United States Was the Taker
• Saving Money, Not Spending it, is the Key to Getting Wealthier
• The Codependent Relationship Between China and the United States
• Zero Percent Interest Rate Didn’t Work for the Japanese
• Difference Between the Dollar and the Yen