But let us take a moment to bow our heads and offer this Prayer of Thanksgiving...

Thank you, good Lord, for everything.
We are still alive. We are still solvent.
Help us stay that way. If not both, at least the former.
Lead us not into temptation. Keep us in gold and cash until this is over.
And thank you for bringing the man called Obama to the White House...he might not be any better, but he could hardly be worse; or could he?

Okay, we've said our prayers...now, down to business...

Yesterday, the stock market continued its recovery. The Dow was up 247 points. Oil sank to $54. Gold lost $7.40 to come to rest at $811.

We have been waiting for a major rally. Perhaps it is here. But watch out. It is probably temptation coming...

Wait...this is national holiday in America. This is probably a good day to tell you:

What We Believe

Yes, dear reader, we may be cynics, scoffers and doubters here at The Daily Reckoning, but we're not nihilists. We have our beliefs. And feelings too. Really.

Here is what we think:

Financial markets are part of public life. As a consequence they follow the rules of all public spectacles. That is, they are one part rational and sensible...one part incomprehensible...and one part pure humbug. You never know exactly which part it is you're looking at.

But the markets are also moral, not mechanical. That is, they follow moral rules, such as - Thou Shalt Buy Low and Sell High...Thou Shalt Save Thy Money...Thou Shalt Not Speculate Unless Thou Knowest Exactly What Thou Art Doing.

Break those commandments...and you're on the road to money Hell. No point in tinkering with the machine. You can't 'fix' it. That's just the way it works. Financial sins are punished, one way or another.

But moral lessons - as opposed to mechanical knowledge - are cyclical, rather than cumulative. One generation learns. The next forgets. That's why the biggest market trends tend to follow great, long cycles - approximately generational in length. In 1929, for example, stocks hit a generational high. They didn't recover until 1954 - 25 years later. They reached a peak in 1966...and then declined until 1982. They didn't reach another major peak until 2000 - 34 years later.

We all know what has happened since. The market tried to correct in 2001-2002, but the feds wouldn't let it. They inflated the biggest bubble of credit and speculation in history...

...that bubble has just burst.

What now? Well, we can expect a long period of regret, reorganizing and repentance. It takes time to undo mistakes. It takes time to learn. It takes time to correct the errors of a 25-year bull market.

If the real top of the bull market cycle came in 2000, we will probably see the next peak around 2025. Meanwhile, there is a dark valley to cross.

But wait...there's more.

Because while the private economy is reluctantly owning up to its mistakes...going into rehab...making amends...rebuilding balance sheets....and promising never to do such stupid things again...

...our leaders are doing all they can to stop the learning process.

"Here's $800 billion," was yesterday's temptation. "Go out and have a good time."

"Rescue, Part 2" is how the International Herald Tribune describes it. The plan itself has two features. In the first, the feds will spend $200 billion to buy up loans made to consumers and small business. In the second, another $600 billion will be offered to the mortgage industry.

Our colleagues at contrarianprofits.com describe the program:

"It's an $800 billion slush fund aimed at loosening credit for homebuyers, consumers and small businesses.

"And it may get bigger...

"Treasury Secretary Hank Paulson has left the door open for more funds. He says, "The facility may be expanded over time and eligible asset classes may be expanded later."

"Why doesn't this come as a surprise?

"So there is still no telling how much more money the government will throw at this crisis. But our back-of-the-envelope calculations puts the running total at over $8 trillion."

The Washington Post sums it up beautifully. "A year ago, the central bank had assets of $868 billion, of which about 90 percent was in Treasuries. Last week, it had assets of $2.2 trillion on its books, of which 22 percent was in Treasuries."

How this will end, we don't really know.

But we know this: You can't pump $8 trillion in funny money into the economy and not expect consequences."

Meanwhile, the Europeans don't want to be left behind:

"The European Commission urged EU governments Wednesday to jointly combat the economic slowdown with euro200 billion (US$256.22 billion) in spending and tax cuts to boost growth and consumer and business confidence.

"If fully enacted, its two-year ``European Economic Recovery Plan'' would see the 27 EU governments spend 1.5 percent of the bloc's gross domestic product to halt the slowdown that has already pushed some European nations into recession."

But let's not get distracted by the details. The markets are teaching people a lesson. The feds don't like it. They want people to believe that the economy is a mechanical system...that they just need to find the right screws to turn...and the right levers to pull.

Since the "machine" is visibly slowing down, these simpletons think they can get it going again. Just add more fuel!

Of course, as we saw in 2001-2007, the feds can certainly have a big effect on the economy. Their "economy as a machine" theory often seems to work. In fact, practically everyone believes it will work. They just argue about which screw to turn...and who should do the screwing.

The Keynesians say you turn the screw marked "fiscal policy." When private spending slumps, just replace it with government spending. Pretty simple, no? But when the feds turned that screw - arguably, too far - in the '60s and '70s, it didn't seem to work. Instead, they got stagflation.

So, Milton Friedman pointed to the lever marked "monetary policy." Give that a pull, he said. It will make sure that the economy always has just the right amount of credit at just the right price. So, Maggie Thatcher and Ronald Reagan both pulled on the monetary policy lever. And Alan Greenspan swore by it. He yanked it so hard in the recession of 2001-2002, the handle practically broke off. Milton Friedman was still alive at the time and actually approved of Greenspan's handiwork, saying that he had 'spared the economy a worse recession,' or words to that effect.

Now the machine has broken down again. It has thrown itself into reverse; the 3rd quarter showed an absolute decline in US output - and it's speeding up in the wrong direction! And now the terrified feds are 'pulling out all the stops.' Which means they using both Keynes and Friedman, and every other tool they can get their hands on.

But the real problem is this: the "economy as a machine" theory is much too simple. No theory, said the philosopher Godel, is ever complete. In science, each one is a stepping stone, towards a fuller and more complete theory. Even theories that take you in the wrong direction are useful - at least in science. They are eliminated...and discarded, so science can take a new direction.

In economics, no theory is ever discarded. Instead, they are merely recycled as market conditions change. "Markets make opinions," say the oldtimers. In a boom, it is the free market theories everyone wants. "Leave the market alone...it will take care of itself," they say. But in a bust, the cry goes up: "Help!"

For the moment, Mr. Market's correction still dominates the economy. One way or another, it will continue for many years. But the Feds are turning the screws and pulling on the levers. Keynes is in fashion...for the present. But Friedman is still around too. Between the lot of them, they ought to be able to do some spectacular damage

But there is plenty of room for surprises...and more mischief from the feds. At some point, we presume the feds will succumb to the lure of the printing press. By some accounts, they already have. Then, we'll really see some excitement.

So, enjoy your Thanksgiving turkey...and stay tuned.

*** Frugalista. It's the latest thing, dear reader. Just as we predicted, being thrifty has become fashionable again...so fashionable they even have a word for it: frugalista. It means someone who doesn't like to spend money but it nevertheless very stylish.

Spending money is soooo 2007...appearing rich is soooo passé.....having a big car, a big house, a big bank account is soooo, like, yesterday.

Chic poverty. Coming soon, to neighborhoods near you.

Bill Bonner
for The Daily Reckoning Australia

• The Fed Will Cut Rates Today
• 2009 Federal Deficit Could Go As High As $2 Trillion
• The Fed Continues to Bamboozle Consumers Into Thinking They Are Richer Than They Really Are
• They Say the Stock Market ‘Looks Ahead’
• How Much Worse Can the Stock Market Get? A Lot Worse

The Dow rose more than 400 points. Gold was up $46 at the close of the day. The dollar is falling...oil is holding steady.

We're hosting a meeting of financial analysts here at our conference center in Normandy. Last night, after dinner, we all gathered around a computer screen - amazed, aghast and appalled.

"I can't believe it..." "Incredible..." "What will they think of next?"

Your Daily Reckoning editor loved it. He didn't know what to laugh at first!

From England came word that the financial regulators had banned short selling of financial stocks. What did they think...that they could keep prices up by decree?

But the Americans did the same thing, only dumber. The SEC issued an emergency edict prohibiting "abusive" short selling. What the heck is that, we wondered?

Maybe it's when you sell a company when the share price has already fallen more than 10%... Like kicking a man when he's down; it's not very sporting.

The feds announced a program of coordinated intervention...with $250 billion to be made available to the financial industry to cover its bad debts...

And get this...CNBC: "Bad Debt Plan May Cost up to a Half a Trillion Dollars."

Where do the feds get that kind of money? Ha...ha...ha...

But we're not the only ones... Russia is new to the ways of late, degenerate capitalism. But it's getting the hang of it fast. It too is manipulating markets with a $20 billion injection "to boost the stock market."

And then, there's this item from Bloomberg:

The latest crises "expose the flaws" and "tarnish the image" of the U.S. economy.

They're missing the point completely. It is not "flaws" that are being exposed - it's the whole consumer economic model and the whole generation of jackass economists who created it. They rejected the insights of classical economics. Instead of encouraging saving and capital formation, they thought they could nurture growth by luring consumers to spend more money.

"Tarnish the image?" No, this crisis will eventually destroy the image altogether, not tarnish it.

But let us return to the story as we've been telling it. There's a war going on...a battle between a natural market correction...and an artificial attempt to avoid it. On the one hand, Mr. Market wants to correct the excesses of the boom/bubble period that began in 1982. On the other, Misters Bernanke and Paulson want to prevent him. Mr. Market takes down asset prices. Mr. Market Manipulators push them back up.

We know who the ultimate victor will be. Mr. Market never loses. One way or another, real prices must come down. That's just the way it works. Night follows day...whether you like it or not. Stocks, bonds, property, art become expensive...and then they become cheap. Recently, they've been expensive...soon, they will be cheap.

As recently as a few months ago, it looked like the feds might be able to hold off a correction. Government-caused inflation was pushing up prices all over the world. Oil hit $147. Gold shot over $1000. Investors were getting rich in Chinese stocks and London property. Consumer price inflation was rising everywhere. Back then, it looked like consumers would be the big casualties of this war. They were facing much higher prices...with declining incomes.

But then, financial institutions began to take incoming...and pretty soon...the whole battalion of investors, worldwide, were getting beaten back. Stock market investors suffered flesh wounds in the United States; the Dow is down about 17%. In China, investors have practically had their heads blown off; the Shanghai index has lost 67%. Commodity investors got whacked too. Oil is down a third from its high. Yesterday, it closed at $97. Gold lost a quarter of its value, from the high. And investors in many of the safest, surest and smartest companies on earth - investment banks, mortgage lenders, and other financial institutions - have been wiped out.

But this week reminds us that the war isn't over. The feds still have some ammunition left. The Fed has 200 basis points left to zero; it can cut rates further. The government can intervene directly in markets; it can seize companies; it can lend to anyone at half the rate of inflation; it can send out checks... In fact, judging on recent evidence, it can do anything...

...but the one thing it cannot do is create real money. Every intervention costs money. And money is the one thing the feds don't have. Not real money. They only have phony money. And when investors finally realize the difference - between real money and funny money - that's when things will get very, very interesting.

So far, only one major asset class has escaped Mr. Market's correction: bonds. U.S. Treasury bonds have gone up (meaning, yields have gone down) as investors sought the safety of what used to be, and should be, the surest credit on earth. But bonds depend on not only on the ability of the issuer to repay...but also the value of the money in which they are calibrated. And if that money starts to sink in value, bonds take a hit.

U.S. Treasury bonds are unique. They depend on the value of the dollar...which the issuer itself controls. But as the war between Mr. Market and the feds continues, the U.S. Treasury will have a harder and harder time maintaining the value of the dollar. Because wars are costly. The feds will have to stretch the dollar farther and farther in order to meet the expense. Eventually, the elastic dollar will snap...and bonds investors will have their turn. Bonds will crumple over too...

Dear Reader, this war has already caused millions of casualties...from Wall Street's masters of the universe...to the little guy with a sub- prime mortgage on his double-wide. But when the shooting stops and the smoke clears - only one man will be left standing. That man will be gold. Make sure you are standing next to him.

Bill Bonner
for The Daily Reckoning Australia

• The Fed Cut Rates – But How Low Will They Go?
• Americans Have No Money to Spend Because They Already Spent It!
• The Feds Are Trying to Avoid Deflation
• What’s Going to Happen to the Mortgage Twins – Fannie and Freddie
• Feds See Every Emergency as an Opportunity