We’re back at home, back in Merry Ol’ England, back in our London office, after a long trip that took us to South America, Germany and France.

What’s new in England?

The British pound (GBP) hit a 26-year high against the dollar while we were gone. It now costs $2.07 to buy a poun, which means, our breakfast (coffee and two pieces of bread with butter and jam) cost us more than $10.

Pull out a dollar bill in Europe today and shopkeepers are likely to snicker. Moneychangers check the news regularly, just to make sure they are not short-changing themselves.

How come the pound is so strong? The English are spendthrifts too, just like Americans. They’ve loaded themselves up with debt, just like their yankee cousins, and now have the lowest disposable (after debt service) income in 10 years. Britain even has a current account deficit of 3%, not as much as the United States, but still not very healthy.

So why is the pound so robust?

Our answer: because it is not the dollar.

The pound is not going up against the euro (EUR) or against gold or against oil. It is going up against the dollar, which is to say the dollar is going down; it makes everything else look like it is going up. Almost every foreign currency, with the exception of the Zimbabwe dollar, is going up against the American money. And so are things that aren’t made from trees, such as coal, wheat, steel, shipping prices, health care insurance, tuition, and gold.

Over the last eight years, we have made a number of suggestions and given out a number of ideas here at The Daily Reckoning. Dear Readers might recall how we thought Canada was a good buy and Argentina and even Japan. We also have liked commodities, generally, and oil. But we have made only one recommendation: buy gold.

This is because we are not clever enough to know any better. You might have made more money by investing in a go-go emerging market, such as China or Brazil. But what do we know about Chinese stocks? You would have made a lot more by buying Google when it went public, too. But what do we know about technology? Individual stock research is hard work. You can’t buy Starbucks stock just because you just had a good cup of coffee. And you can’t buy a health care stock just because you notice that people are getting older. No, you have to do a lot more research. You have to study the business, study the finances, get to know the industry and the people in it. That is, of course, what Warren Buffett does. It is why he is perhaps the greatest investor who ever lived. And it is precisely not what most people do and why they are not investors at all, but merely yahoo speculators, hoping that prices go up.

That’s why we stick to the big picture. And the big picture circa 1999, 2000, 2001...and so on...told us to buy gold.

We urged Dear Readers to buy gold when it was $300, when it $400, when it was $500, and when it was $600. Yesterday, the price shot up $14.80, to over $808 per ounce. And guess what, dear reader? It’s probably not finished.

Uh...long-term Daily Reckoning sufferers will notice that slippery word – ‘probably.’ Yes, Dear Reader, we weren’t born yesterday. We know that there is more under heaven and earth than is contained in our philosophy. Our guess is that gold has a lot further to go, a lot further. But let us pause a moment and look at how things might go in a different direction.

Last week, the stock market quaked. The Dow fell more than 350 points on Thursday. Commentators said investors were ‘disappointed’ with the Fed’s quarter-point cut. We don’t believe it. They saw that cut coming a mile away. Instead, stocks sold off because that’s what stocks do, occasionally. And they could have sold off a lot more. The Dow could go down 500 points in a single day, or more. Then, it could keep going down. No law says it couldn’t. And there are plenty of examples of similar crashes. We keep our “Crash Alert” flag flying over The Daily Reckoning headquarters, just in case.

A crash in the stock market would knock down the only solid pillar still holding up American wealth. Residential housing is already down a little more than 4% according to Case/Shiller. No one knows how much more it could go down, but 10%, 20% or 30% are reasonable numbers. This alone represents trillions of dollars worth of ‘wealth’ that people thought they had – vanished!

Could the stock market go down 10% too? It not only could; it will. The only question is ‘when’. But when it does, it too will take trillions of dollars out of Americans’ wealth.

And then, there’s the dollar. Already this year, the greenback is down about 10% against major currencies. The estimate we remember is that all the stocks, property and other wealth of Americans – quoted in dollars – is worth about $50 trillion. Take 10% off that number and you have a loss of “implied wealth” of $5 trillion.

This, dear reader, is flation with a capital ‘D’ in front of it. Deflation, at least according to our definition, means that people just don’t have as much money one day as they had the last. Then, their whole outlook quickly changes. Where once they were bold, they quickly become fearful. Where once they foolishly trod, they now are afraid to rush in. Where once they spent, now they leave their money in their pockets.

The pollsters tell us that Americans are growing more pessimistic. They’re afraid things aren’t working out, neither in Iraq, nor in Washington, nor on Wall Street. It is as if they had awoken from a long sleep. They find themselves with a long gray beard and no money in their pockets. For thirty years, their hourly earnings have not really increased. Now, because their expenses and debt service have gone up, they find themselves with less discretionary income than they had during the Carter administration. What is going wrong, they ask themselves?

No ready answer comes to them. But a gloomy sentiment creeps upon them. “No...” they say to themselves. “Maybe we won’t buy a new car this year...”

And now, Dear, Dear Reader, consider this:

One out of every five dollars of consumer spending worldwide is spent by an American.

So you see, it is not just the U.S. economy that depends on U.S. consumers; it is the whole world economy. Everything depends on the willingness of people who don’t have any money to keep spending it. When they stop spending it, the world economy enters a new phase, a Japan-like phase of slump and deflation.

Ah, there’s the rub. At least, there’s the possibility of a rub. Consumer prices in Japan are, believe it or not, still going down. People in Japan do not need to buy gold as protection against inflation. Their own currency is protection enough. And if the world were to enter a Japan-like funk, the bull market in gold would be over. The bear market in the dollar would be over too.

Gold is a traditional measure of wealth. It took about an ounce to buy a toga during the Roman era. It takes about an ounce to buy a nice suit now. (Actually, since new supplies of gold are running behind GDP growth rates, you can reasonably expect to be able to buy two or three suits for an ounce. But it depends where you shop.) Gold will not really go down, but its price in dollars may vary. And if the dollar stops going down, it will look as though the price of gold is no longer going up.

Do we expect this to happen? Not exactly. Not soon, anyway. And not for long.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.