A short Daily Reckoning today…

…not that there isn’t plenty to reckon with…it's just that we’re running off to give a speech to a group of American investors.

Maybe we’re wrong. If yesterday illustrated the essence of this market, we are definitely wrong.

Our hypothesis is that the fed’s efforts to inflate will show up more in the gold market than in the stock market. That - and an instinct for self-preservation - is why we’re long gold and short stocks. Stock prices depend, ultimately, on earnings. Gold’s price depends, ultimately, on inflation. The feds can make more cash and credit available…but they can’t wipe away all those bad debts, which are hurting earnings. That is, they can increase the rate of inflation…but not make businesses more prosperous.

We’re witnessing a War of the Worlds - between inflation and deflation. We don’t know which side will win, but we’re betting that while inflation favours gold, deflation has it in for stocks.

But what’s this? Yesterday, the Fed promised inflation - big time. It said it would pump in an extra $200 billion to fight deflation. Europe and Canada said they were in too - for another $45 billion.

Where does all this moolah come from…savings? Don’t make us laugh, dear reader. It comes “out of thin air”�, as Keynes once said.

And what is the effect of pulling money ‘out of thin air’ and putting it in the money supply? More dollars…more monetary inflation.

According to our hypothesis, investors should see what’s coming a mile away. They should have jumped to buy gold. Instead, they bought stocks. The Dow roared up more than 400 points. Gold barely went up $4.

So go figure. Still, oil hit a new high over $108. And sometimes it takes investors a little while to put two and two together. So, let’s see what happens tomorrow before we come to a conclusion.

Besides, stocks may have gone up yesterday anyway; a rally was probably overdue. Commodities are at an all time high. Oil too. And more and more evidence comes to us that consumers are feeling squeezed…and forced to cut back on spending - which will further hurt business earnings.

“Surging cost of groceries hits home,”� says the Boston Globe.

“Paying at the pump, in a big way,”� says the New York Times. “Record fuel prices blow budgets,”� adds the USA Today.

“401(k)s tapped to save homes,”� it continues.

While rising prices pinch family budgets, everyone is pinched by falling asset prices. Most of the economy seems to be deflating. Housing is going down. Household incomes are going down. We’ll have to wait a few days to find out what direction stocks are going.

The big picture shows still shows the same scene: America is getting poorer. Its money buys less stuff. Its working people earn less money. Its assets are worth less than they used to be.

“This thing is not about a recession or not a recession…and it’s not about inflation or deflation. It’s about re-pricing the USA, downward. Sell America…sell its money…sell its stocks…sell its property…sell its politics…sell its economy…sell its I.O.Us. Sell it all,”� said a friend over the weekend. “It’s clear to me that America’s best days are behind it. The US has had a disproportionate share of everything for too long - stock market valuations…the world’s savings…the world’s energy…the world’s calories…the world’s military power. That’s what is changing. The world is readjusting…it’s not getting out of balance; it’s getting back in balance. It will be a world where the US plays less of a role…and takes less of the world’s resources.”�

He is probably right. Asia is growing much, much faster than the US. Wages are going up 10% per year in China…15% per year in India. Stock markets are booming. GDP growth in many foreign countries has averaged about three times the US rate for the last ten years. Now, with the US economy not growing at all…the Asians are racing ahead.

We have no particular quarrel with this. America has enjoyed an extraordinary run of luck. She had cheap energy…history’s most powerful military…and the world’s reserve currency. Now she has the world’s biggest debts…its highest deficits…and the most colossal financial problem ever. In short, it has passed its I.O.Us out all over town and now owes more money to more people than anyone ever did. It now has more financial commitments than any nation ever had (with a financing gap of $60 trillion - not including the cost of the Iraq War…which is expected to be as much as $5 trillion)…and has a competitive disadvantage against much of the rest of the globe. Asians make things cheaper. Europe makes them better.

How did such nice people get themselves into such a mess? Are Americans stupider than other people? Are they lazier? More reckless…more feckless?

Nah…we’re just victims of our own good fortune. We had it too good for too long. A unique set of circumstances allowed Americans to borrow and spend more than anyone ever could before…and so they did.

*** “It’s the credit bubble, stupid,”� says Forbes.

Yes, that is what it is…a credit bubble that is deflating. The tide is going out, as Warren Buffett puts it. Now we see who’s been swimming naked. Not a pretty sight. So ugly, in fact, that people can’t stand to look.

“Fed takes boldest action since the Depression,”� says an article in the London Telegraph.

Yes, dear reader, our leaders are doing something. Now, we just wait to find out how much damage they have done.

The hardest thing to do is nothing.

But in matters of politics and money that is usually the best thing to do.

As we’ve pointed out many times, nothing gets no respect. “Do something,”� come the cries from all corners. Even those who should know better implore public officials to take action:

“When a man is having a heart attack, you have to intervene…you can give lectures about his diet later,”� they say.

But the US economy is not dying. It is merely adjusting to a new set of circumstances. The consumer is tapped out. Without more income he cannot increase his buying. And without more spending, the consumer economy stalls…and contracts. No, don’t even think of lending the consumer more money - he has too much debt already.

This is an election year and the politicians want to dodge a contraction in the worst possible way. What would be the worst possible way? Easy - add more debt. That is precisely what the Bernanke Fed is doing. Yesterday, they offered another $200 billion to their friends in the banking industry - lent against the trashy collateral that no one else would accept. Now, the Peoples’ Bank of America - ultimately, the taxpayer - will be holding the bag.

*** Take heart there are still plenty of billionaires left in this world. But get this, of the top ten billionaires of the world, four are from India.

Number one billionaire is Warren Buffett with $62 billion. Buffett is the only person I know who made his billions just by investing. Warren just passed number three Bill Gates who is down to $58 billion. Second on the billionaire list is Carlos Slim from Mexico. Carlos owns Mexico telecom and just about half of the companies on the Mexican stock exchange.

Four on the list is Lakshmi Mittal of India, steel magnet worth $45 billion. Five is Mulkesh Ambani of India who made his fortune in petrochemicals. Number six is Anil Ambani of India who is into just about everything. Seventh is Ingvar Kamrad, who owns Ikea, the furniture outfit. He's from Sweden and is worth $31 billion.

K.P Singh is from India and he made his money in real estate. He's numero eight. Nine is Oleg Deripaska of Russia - the aluminium king. And number ten is Karl Albrecht of Germany, who (with his brother) owns the Albertson's grocery chain plus my favourite food store chain, Trader Joe's. Karl is worth $31 billion.

And what's this? Mark who? Why it's Mark Zuckerberg (age 23) of the US who started Facebook four years ago. According to the statisticians, Mark is now worth $1.5 billion. Now that's a darn good start.

As things stand, there are now 50 billionaires in the world all under 40, and 34 of them are self-made. Forbes magazine now counts 1,125 billionaires from all over. Of these, 469 are from the US. What city has the most billionaires? Would you believe - it's Moscow.

But don't be envious. Nobody has it all. In my experience, everybody's got at least one major problem and most have more than one. Furthermore, remember that the greatest democrat in the world is death. Everybody eventually pays tribute to the great democrat, no matter how much money one makes on this, the good earth.

Bill Bonner

Bill Bonner [send him mail] is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter publishing companies, and the author of the free daily e-mail The Daily Reckoning. He is the author, with Addison Wiggin, of New York Times Business best sellers "Financial Reckoning Day: Surviving the Soft Depression of The 21st Century" and "Empire of Debt: The Rise Of An Epic Financial Crisis", and with Lila Rajiva, "Mobs, Messiahs, and Markets". Copyright © 2008 Bill Bonner