We mean the fight between greed and fear, boom and bust, expansion and contraction.

This is a fight that goes on all the time. But it is usually kind of a 'cold war.' Years go by without much activity. Stocks meander. A few companies go bust. A few boom. Interest rates...the dollar...and commodities are fairly steady.

Then, there are periods when all Hell seems to break loose.

We've been in a shooting war for many years - since the bubble blew up in the tech sector at the beginning of the '00s. After 20 years of boom...suddenly we were in a bust. But the fear didn't last. Out came the feds with their big guns...both monetary and fiscal...and pretty soon it was boom again...and then bubble.

You know what happened next. The housing/finance bubble blew up with subprime. Then, the stock market gave way. And then the economy was in the worst contraction since the '30s.

Of course, the feds fought the correction with everything they had. In 18 months the Fed doubled the nation's monetary base. Federal spending went to the moon too - with budget deficits over $1 trillion...and no end in sight.

All this firepower had an effect. The banks were able to pay their bonuses. And big players were able to borrow at nearly zero interest and gamble against the dollar. So, the financial world could slide back into party mode.

But it was a wild and desperate kind of partying...like Berlin in 1945, as the Soviet Army approached the city. Because, outside the financial markets, fear has never gone away. And on Friday, it should have been obvious even to economists that there's not much to celebrate.

"Jobs gloom hits West's recovery hopes," says a headline.

After much anticipation of a stable jobs picture - or even rising employment - the figures came in showing that the US economy is still losing jobs.

About 7.5 million jobs have disappeared since the contraction began. All told, since the fighting began in January 2000, the US economy has not created a single new job...despite steady population growth.

As for the stock market, it too is no higher today than it was 10 years ago.

The battle between inflation and deflation - boom and bust - has been hot for a decade. Why? Because the feds try so hard to prevent nature from taking her course. Normal markets are never entirely stable. They boom and bust. But the busts happen naturally...and usually, quickly. People who make mistakes are punished. They take their lumps. The economy recovers.

But since the mini-recession of 2001, the feds have fought a pitched battle to keep the markets from doing what comes naturally. Ben Bernanke denies it, but their intervention caused the huge bubble in housing/finance of the 2002-2007 period. They put in so much new money and credit that it looked like they had won the war. Stocks hit record highs...and houses too.

But something that has to happen is going to happen, one way or another. Corrections have to happen. And now, the US economy is correcting - like it or not. That's the meaning of Friday's unemployment numbers. The jobs of the bubble époque are going away. Employers are reluctant to create new ones. They want to see a real recovery before they obligate themselves to more fixed expenses.

So stay tuned. The war isn't over...

Bill Bonner
for The Daily Reckoning Australia

• Gold Market Was Looking for an Excuse for a Breather
• Feds Think They Have Won This Fight Against the Depression
• From Bubble Watch to Bust Watch
• No Great Slump, but Stagnant Inflation Looms
• US Economy Still in a Deflationary Contraction

Even in the world of finance, there are momentous conversions. As they say on Wall Street, a rally ends when the last bear gives up. An old friend had been a source of inspiration for tech bears for many years. He suddenly saw the light and gave up in 1999. Shares he had formerly scorned - often dotcoms with no revenue and no business plans - were suddenly added to his own portfolio. This also heralded a big change - the end of the tech bubble. Tech stocks collapsed. Most disappeared. Then, Stephen Roach became vaguely bullish in 2007, after a long period of doubt and misgivings.

Now it is Jim Grant who has changed his mind. A generation of investors has gotten used to Grant's 'doom is nigh' warnings. Now, he says, it's a boom that is nigh.

What is remarkable about the Grant conversion is that his vision gives off so little heat and light. His WSJ article shillyshallies around; rehearses the history of previous recessions and comes to rest in front of a flickering match: "The deeper the slump, the zippier the recovery."

Many were the sheep in Grant's flock. They feel betrayed, as if their shepherd had gone over to the wolves. Here at The Daily Reckoning, we take no personal offense. In the following few words we merely stoke up the fire.

We will not argue with Newton's Third Law. For every action, there is a reaction. Every boom has a bust. And every busted bubble has a bounce. Even the Titanic's stern rose, before she slipped below the waves.

First, we consult the facts. But facts are survivors. They will tell whatever tale their interrogators want to hear. As for opinions, after six months of a stock market rally, the once half empty glass has become half full. We predicted it ourselves. But we'll let Robert Prechter say, 'I told you so.' Even before the rally began, Prechter foretold its story:

"Regardless of extent, it should generate feelings of optimism. At its peak, the President's popularity will be higher, the government will be taking credit for successfully bailing out the economy, the fed will appear to have saved the banking system and investors will be convinced that the bear market is behind us."

As to Mr. Obama's popularity, Prechter was wrong. But 4 out of 5 ain't bad.

Grant's brief tour of recession history seems to confirm his Newtonian position: the further an economy falls, the further up it rises to get back to normal. This downturn has clipped nearly 4% off America's GDP, substantially more than any previous downturn since WWII. Therefore, it will come back strong.

Today's slump in the United States hardly compares to the one of '29- '33, which took 27% off the GDP. Then, in the ranks of the unemployed, stood one out of every four able-bodied workers, as opposed to just one out of every 10, according to today's statistical legerdemain. Still, the depth of the drop did not prevent a vigorous bounce; on the contrary, it seemed to demand it. After '33, the US economy grew by nearly 10% in each of the next four years.

In the slump of '82, GDP sank at a 6.4% rate. Again, the reaction was nearly equal and opposite to the action. "Not until the third quarter of 1984," says Grant, "did real quarterly GDP growth drop below 5%."

Of course, even a US Congressman will bounce, if you push him down the Capitol steps. But not every one will get up again. In the '33 example, the US economy, still youthful and vigorous, got up nicely. But then it fell again. By the end of the decade he was still on his back, with 15% unemployment and 2% deflation. Only later, after four years of world war, did the economy begin a sustained recovery.

Now it is 2009. The poor fellow is down again. The feds rushed to help him to his feet. They gave him a combined fiscal and monetary shot-in- the-arm seven times stronger - in terms of GDP - than the average postwar countercyclical stimulus. The juice opened his eyes. But he still staggers. He has put on some weight over the years; he now carries three times the debt/GDP as he had in '82. His stocks are three times as expensive, in P/E terms, too. His bones are more brittle and his mind a little slower. What's more, in '82, he had been on a deleveraging diet for more than a decade. In '09, he has just begun.

What will happen next, we don't know. But if we turn bullish on this economy and urge you to buy stocks, it will surely be time to sell them.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

• US Dollar a Sort of Monetary Brand
• Jim Cramer Says The Depression is Over
• The Aussie Dollar as a Measure of Global Risk Appetite
• Talking About the First Home Buyer’s Grant Again
• Fred C. Kelly Declares the Crowd is Always Wrong

Now, we're on Bust Watch...

Tim Geithner, Obama's choice for Treasury Secretary, may not have seen the bust on Wall Street coming...but he promises action on a "dramatic scale" to fix it. That is probably what goosed-up the Dow yesterday - up 279 points. Oil rose to $43. Both gold and the dollar went down. The dollar fell to $1.29 per euro...while gold sellers got $5 less per ounce. The price of gold is $850.

"The End of the Reagan Era," is how the French newspaper, The Liberation, described the handover of power to Barack Obama's team.

The Liberation has it right. What we are witnessing is the end of an era. But it's not exactly the era most people think. The voters made a big symbolic change when they elected Obama. But politically, Obama is not so different from Reagan, Bush I, Clinton or Bush II.

A much bigger change has just occurred - and gone almost unnoticed. This one was wrought not by the voters, but by Mr. Market. He has brought an end to the world financial system that arose during the Reagan years.

For the last ten years, these Daily Reckonings have been on Bubble Watch...watching...wondering...marveling...sometimes appalled...sometimes amused...

...what we were watching was the blow up of a crazy system of imperial finance, in which the world's hegemony appeared to live at the expense of its rivals...and the imperial citizens - those in the homeland of the United States of America - drove themselves into bankruptcy so competitors could continue to sell their products at a profit.

It was strange. It was preposterous. But it wasn't dull. We thought it was coming to an end in 2001...when the bubble in dotcoms blew up. Then, well, you know what happened...the feds got to work...and pumped up more bubbles. Now, the Bubble Epoque is nearly over. But Mr. Obama is jumping the gun...

"Starting today, we must pick ourselves up, dust ourselves off and begin again the work of remaking America," he says.

Hold on...there are some huge busts that have to happen first... We're watching for busts in U.S. government debt (U.S. Treasury paper)...the dollar...and finally, after a big run-up, gold. Then, Americans can rebuild on a more solid foundation.

The gist of the world economy for the past quarter century was a division of delusion, which led to huge bubbles. Americans pretended to have good money. Asians pretended to have a good customer. Bankers pretended to have good credits. And Wall Street pretended that toxic assets were good ones.

Asians made; Americans took. Asians saved; Americans borrowed. Americans provided the demand. Asians provided the supply. Asians built a real economy, with real money, and real factories and real skills. America's economy was mostly a conceit, in which people became accustomed to a standard of living that very few of them could afford.

But now it has come to an end. And whom do you think will suffer most?

Our guess: the Chinese!

Eighty years ago, America was in China's position. It was the world's young, growing, dynamic economy. Manhattan soared then as Shanghai soars now. But when the collapse came in the '30s, the demand for American goods shriveled. Foreign and domestic purchasers pulled in their belts and cancelled their orders. For a while, America was out of business. It was only at the onset of WWII that the orders started coming in again in massive quantities.

This time, it's China that's going out of business.

Yes, dear reader, China is going to suffer even more than the United States. At least in the short run. America will lose its position in the world. The dollar will lose its status as the world's reserve currency. Americans will be beaten up - first by deflation, then by inflation. When it is over, they will be poorer, wiser, and probably better people... With a little luck and good leadership, maybe they can sink into a graceful post-imperial poverty...followed by genuine prosperity.

That is the story we'll be covering in The Daily Reckoning going forward. It is the story of BUSTS. Companies will go bust. Governments will go bust (Ireland and Iceland are already effectively broke.) Households will go broke by the millions. And, eventually, even the U.S. government itself will go bust. (A bankruptcy that will most likely be disguised by inflation...)

But China! There, the story will be even more dramatic...even more dangerous...even more explosive!

*** "Time to mobilize for all-out war," says a headline in the Financial Times, speaking of saving Britain's banks from themselves. But this could just as well refer to President Obama's attack on the correction. Nobody wants a correction. And Team Obama has pledged to fight it to the death.

Which is why we will stick with our "Trade of the Decade". Buy gold on dips; sell stocks on rallies. This trade - announced 9 years ago - has been good to us. Gold has closed every single year ahead of where it started. From under $300 an ounce it went up over $1,000 - briefly. Now, it trades in the $800 range.

What do you think, dear reader? Is the gold bull market over? Are the troubles in the world financial system all taken care of? Is it time for another bust in the gold market - the only market (aside from U.S. Treasuries) to resist last year's sell-off?

"My one recommendation for the longer term," says Felix Zulauf in Barron's, "is physical gold. Consider the basic set-up: World economies are so weak that we are seeing government stimulation of historic proportions. At first this is deflationary, but it will become inflationary. Gold is the only currency that won't get devalued. It will be revalued.

"If the Fed's liabilities had to be covered in gold, it would sell for more than $6,000 an ounce. We aren't going back to the gold standard, but the markets won't trust the central banks anymore. Gold is a very slow bull market...the gold market could have a shakeout in the next 6 months, and the price could fall back to $700 an ounce or below from today's $850. But two years from now it will be a lot higher. It is one of the few commodities that held up during the forced liquidation of almost everything else. "

*** If the United States catches the flu...the rest of the world throws up.

And now, with markets retching all over the planet, finance ministers are getting together to come up with a global solution. Somehow, demand must be stimulated in Asia. Supply must be coaxed out of the United States. Balance must be restored, they say.

But don't hold your breath. Any global bailout plan is bound to be a bad one. Because what the world really needs is a correction. And no country wants one. Instead, each nation does its best to push the correction onto its neighbors. An old friend, Lord Rees-Mogg, adds further comment:

"Between the mid nineteenth and mid twentieth century, there had been a vigorous debate about the causes of the trade cycle, and of the crises which had upset the growth of the world economy.

"That debate had, however, never reached a conclusion. Among economists there was no consensus on what caused the crises to occur or on what measures would help to stabilise another depression...

"...there are at least five different alleged causes, which are still arguable. If the Central Bankers and Treasury Ministers do not agree on the cause of the present crisis they are not likely to agree on the remedy. One needs to keep theory in mind because it influences decision-making.

"However, we are beginning to see that there is a consensus developing on the policy that is needed. Economists and politicians are concentrating on the need to restore confidence. The Inaugural Address of President Barack Obama repeated the theme of Franklin Roosevelt's Address in March, 1933: 'We have nothing to fear, but fear itself.' He also attacked the greed and irresponsibility of the bankers, who had behaved just as badly as they did in the early 1930s. The practical action of Governments around the world is to increase the money supply until businesses will borrow and banks will lend. Everyone recognises that this makes a risk of excessive inflation of the money supply, but it is a risk which Governments feel they have no choice but to take. They are not trying to rebalance the world economy; they are desperate to relight the boiler. In the end they will succeed."

Inflation is what they want; inflation is what they will get.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• China Reduces Holdings of Treasury Securities
• The Fight Between Greed and Fear, Boom and Bust, Expansion and Contraction
• Capitalism Has to Do its Work
• GSEs Fannie Mae & Freddie Mac on Death Watch
• Gold Headed Higher and the New Bubble in the US Treasury Market

Amid the blah...blah...blah...of Bernanke's response was this:

"The tendency of financial systems to boom and bust ...is a very long-standing problem... but I think it's very important for us to try to put out the fire...then you think about the fire code."

In his 1988 book, The Collapse of Complex Societies, Joseph Tainter argued that all societies - like all organisms - are doomed. Tainter studied ancient Rome as well as the Mayan civilization. He noticed that problems always blaze up. Each one - whether climatic, political or economic - rings the firehall bell. And each solution - and readers may substitute the word "bailout" for solution - brings more challenges and takes more resources. Finally, the available resources are worn out.

Tainter observes that when the costs become high enough, people seem to give up. By the end of Roman era, for example, the burdens of empire were so heavy that people sold themselves into slavery to get free of them. So many people did so at one point that the authorities had to come up with another solution; they outlawed the practice. Henceforth, Roman citizens were required by law to remain free!

Another philosopher, Giambattista Vico, writing in the 18th century, put the beginning of the decline of Rome roughly at the time of the Great Fire during Nero's reign. Nero, partly to pay for his post-fire reforms and reconstruction, began taking the gold and silver out of the coins. All civilizations go through three stages, Vico said - divine, heroic, and human. The divine period is ruled by the gods. The heroic period is adorned with victories and statues. Then, comes the human era. (Here, we permit ourselves to add a footnote to Vico's oeuvre: the coin of the realm in early periods is the gods' money - gold. Later, people switch to money of their own invention - the kind of money you make from trees.) This last stage, says Vico, is when popular democracy arises, along with rational thinking and what Vico delightfully calls the "barbarie della reflessione" [the barbarism of reflection]. In earlier eras, people do what their gods and leaders ask of them. In the final era, they ask, "what's in it for me?"

Even as late as the early ‘60s, John F. Kennedy could still appeal to heroic urge without drawing a laugh. "Ask not what your country can do for you," he said in his inaugural address, "ask what you can do for your country."

But 11 years later, Richard Nixon, like Nero before him, began the process of debasing the country's money. That was a solution too; the United States had spent too much. Nixon could worry about the fire code later. First he opened up with the fire hose; he defaulted on America's promise to exchange dollars for gold at the statutory rate.

Barack Obama tried a Kennedyesque appeal to civic high-mindedness last week. We need to "insist that the first question each of us asks isn't 'what's good for me' but 'what's good for the country my children will inherit,'" said the president-elect. But now, like Doric columns in a trailer park, the words are ornamental, not structural. They are the homage that one age pays to a better one.

We are in the 21st century now. Barbarous reflections rise up like swamp gas. The whole place stinks of them. Bernanke and Obama offer solutions. But their plans to save the world from a correction are little more than a swindle. They offer to bail out the mistakes of one generation with trillions of dollars' worth of debt laid onto the next.

"Regarding the current financial meltdown," writes Rony Teitelbaum, "it is very clear that two main factors underlie the political reactions to the crisis, the first being pressure originating from ties between the financial and the political elect, manifested by taxpayer bailouts of large institutions that continue to deliver bonuses to the executives and donate to political campaigns. For those of us who are not blind, these are clear signs of political corruption which would have made the worst Roman emperor blush. The second factor is political pressure originating from the mass public. The kind of solutions offered so far, and I may add which were received with very warm enthusiasm, were tax rebates and gasoline tax holidays. These are actions aimed at a public who "impatiently expected quick and obvious results," to quote Cary's description of Roman society in AD300. (A History of Rome)."

Circa 2009, there is hardly a soul in the entire world who has not been corrupted by the barbarie della reflessione of the late imperial period. Both patricians and plebes are for bailouts. Both business and labor back stimulus programs. The taxpayers and the politicians who rule them are of one mind. Liberal, conservative, rich, poor, Republican, Democrat all speak with a single voice: 'Screw the next generation!"

The golden age is over, in other words. In the space of 40 years it passed from gold, to silver, to paper...and is now somewhere between plastic and navel lint.

Bill Bonner
for The Daily Reckoning Australia

• I Love Coming to Rome
• The U.S. Federal Reserve’s Inflationary Feast
• General Motors: A Forerunner for What’s to Come for the Broader Economy
• U.S. Fed Leaves Rates Unchanged, Morons
• Any Money That You Don’t Earn is Stimulus