Well, it doesn’t seem like winter down here. That’s because it’s not winter; it’s the first day of summer in the Southern Hemisphere.

Here at The Daily Reckoning, we tend to be skeptical. Someone tells us something; we don’t quite believe it. There’s always a different angle and always more to the story.

Since we were little, we’ve been told that the earth was round and that the people on the bottom don’t fall off because of ‘gravity.’ Well, now we can report that it is true. Or, at least it seems to be true. Newton and Copernicus were right; the celestial system works just as they said it did.

But first let us turn to what makes the world go ’round – money. What’s new in the world of money?

The tide of cash and credit is receding, credit is drying up, and credit-driven markets are falling.

Housing hit its high water mark last year. It’s been going down ever since.

Stocks, too, reached a level that was equivalent to a 40-year flood this year. The larger story on stocks is that they hit a flood-tide high three times in the last century – in ’29, again in ’66, and finally in ’99/’00. What we’ve seen this year was merely a follow-on gush of liquidity. In terms of gold, the euro, or real dollars (adjusted to consumer price inflation), stocks were actually down from their January ’00 level.

Of course, we’ve also seen high water records set in markets all over the world. Many emerging markets hit all-time highs. Many stock markets are still near all-time highs. So are many peripheral markets. Shares in Sothebys, the celebrated auction house, ran up 600% from 2003 to 2007. A tide of liquidity floats heavy boats, as well as a lot of light, trivial trash. Nothing is more unsubstantial than contemporary art. Now it too seems to be coming down; the art market itself reached a peak this year.

Likewise, gold is near an all-time high. Oil seems to have hit its high at almost $100...and has since eased off. The commodity index is in record territory still. But there are different types of commodities. Industrial commodities – copper, iron, tin – peaked out back in May. Agricultural commodities are a different story...about which, more in a minute.

Certain marginal tidal basins and low-lying marshes have already been left high and dry by the receding waters. House builders, house financers, and financing generally have dried up. Big financial stocks – such as Merrill (MER) and KKR (KPE) – are down nearly 50%. Here is where the story has been most exciting, and most alarming. Because investors and lenders don’t know how much liquidity these outfits have left. Often, they don’t know themselves. Many of the derivative contracts they sold to others, and sold to themselves, were never ‘marked to market.’ Instead, they were ‘marked to model,’ mathematical models with deep, obvious flaws. Worse, many were ‘marked to make-believe’ in a way similar to subprime mortgages themselves. The borrower lied about his income, his assets, his age, his employment, his marital status and how many points were on his driver’s license. The appraiser lied about the value of the collateral. The lender lied about the terms and conditions of the loan. And then Merrill, or Citigroup C), or Goldman (GS) lied about the quality of loans generally and Moody’s backed them up!

As we noted yesterday, in the heyday of the credit bubble, bank robbers set aside their handguns and ski masks; it was easier just to borrow the money like everyone else, and not pay it back.

Investors knocked MBIA (MBI) shares down 25% yesterday, after the big lender disclosed that it had $8.1 billion in exposure to subprime debt.

Investors are now reluctant to put money into lenders. And lenders are reluctant to lend. This is the basis of the ‘credit crunch’ you read about. And it is what is worrying central bankers. It is why the Fed cut rates again this month and why, this week, the European Central Bank put up an extraordinary half a trillion dollars to try to get cash moving.

Here is where we find the dramatic tension in our story...the War of the Titans...the Clash between Unstoppable and Immoveable Forces...the Battle of the Market and the Manipulators...

Will we get the widespread correction the market seems to want? Or will the feds manage to get enough liquidity in the system to keep things wet and slippery? Inflation...or deflation?

Our stock answer is ‘yes.’ We will get them both. Everything in due course...

*** “Food prices soar in America,” says one headline. The price of milk, we discover, has gone up nearly 25% since the beginning of the year.

We can see the cold, miserable crowds gathering in front of the White House already.

“Our children have no milk,” say the impoverished ones.

“Then, let them drink Diet Coke,” comes the answer from the West Wing.

No, that is a scene you are not likely to see. Today’s politicians always have a soft word for the lonely, the poor, and the disheartened. And then they have a solution! Right this minute there is probably some nerdy staff worker figuring out a bill that will end the ‘milk crisis.’ But ending all this nonsense about ethanol has never crossed anyone’s mind.

Nope, in the energy bill passed by Bush yesterday, he “mandated a sixfold increase in ethanol production, including up to a 150% increase in corn-based ethanol production. Oh yeah, and you’ve got to find a way to make energy out of dead hunks of wood and grass, and make it nearly twice as big as the whole ethanol market,” quips Addison.

Ethanol is fraud. That’s our story and we’re sticking to it.

You see, dear reader, in this age of Win-Win Capitalism politicians cannot permit real capitalism to work. They cannot leave bad enough alone. Got a problem? They will figure out a solution so we all come out winners.

The trouble is that the government’s solution to one problem is the cause of two more. The feds man the pumps 24/7 to try to keep the consumer economy from drying up. But the extra liquidity drives up consumer prices!

(Here we pose the problem in philosophical terms: if you could really solve problems by passing laws and printing money, wouldn’t we all be rich and happy by now?)

Meanwhile, in China, food prices are rising at 18% per year. Officials fear ‘social unrest.’ But what can they do? Well, they can take a page of Richard Nixon’s playbook; they can put on price controls. And they can put up interest rates too; now at a 9-year high.

But where’s the Paul Volcker of Beijing? And how can the Chinese stop the flood of money coming from their main customer – the United States of America? It is that very cash coming from North America that is the source of China’s rising food prices. It is also the source of China’s rising wealth. When the money stops flowing, it will as if the Yangtze had dried up and the Good Earth is no longer quite as bountiful as it had been.

Of course, when the money stops flowing from the U.S. consumer the whole world economy is likely to feel a little dry and thirsty.

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