The Dow rose 177 points yesterday, amid a flurry of gloomy headlines.

“New homes sales fall by record amount,” says the Associated Press, referring to the 26% drop in 2007.

In Florida, housing is in a ‘death grip,’ adds the Dallas Morning News.

And the whole U.S. economy “faces the guillotine,” is how Newsweek sums up the situation.

The big battle, as always, is between greed and fear. Greed pushes up prices. Fear drags them down.

As of yesterday, fear was winning.

“Fear stalks the markets,” says the Economist.

Yes, dear reader, fear – the force of deflation – is getting the headline coverage. Recession, say the papers, is either coming or it is already here.

As we pointed out yesterday, when Mr. Market turns to fear, it is hard for Mr. Market Manipulator to stop him. Frightened investors have knocked down stocks – wiping out more than a trillion dollars worth of implied wealth. Frightened homeowners have sold off houses – taking nearly $2 trillion off the implied value of the U.S. housing stock. The subprime crisis is said to be taking out another half a trillion. A trillion here, a trillion there...

What can the forces of inflation do against these huge attacks? Mr. Politician has come forward with a plan to pump $150 billion back into the U.S. economy. Mr. Central Bank manager has cut rates by 75 basis points and threatens to cut more.

But the problem, as the Financial Times so elegantly put it, is that the “credit orgy” is over. The liquor ran out. The music stopped. And someone called the cops. Bush and Bernanke show up with a few more bottles of booze, but the guests are already putting on their coats and fumbling for their car keys.

If we’re right, one of two things will follow:

If Mr. Market has his way, fear will dominate the market, and stocks will fall while gold stagnates.

If Mr. Market Manipulator prevails, greed will return, but not necessarily where he wants it. Stocks will stagnate while gold soars.

Most likely, each will have his victories and his defeats as the fortunes of this war shift back and forth.

We got a hint of which way things were going yesterday. The Dow rose, but the real action was in gold, which shot up $16, to a new record of $927. Analysts mentioned that the power went off in South Africa, putting the gold mines out of commission. But a healthy boom wouldn’t care and investors wouldn’t have cared a few years ago. A healthy boom produces rising stock prices, leaving gold behind. This is no healthy boom at all. It is a fraudulent boom and investors know it, shifting their speculations from stocks to gold.

Thus begins a new stage in the bull market in gold. Do you remember when we were able to buy gold around $300 an ounce – 7 years ago? It rose hesitantly, often giving back gains. People wondered if gold had not been made completely obsolete by sophisticated financial instruments. We at The Daily Reckoning know better. With the decline of the dollar (and indeed the worthlessness of all paper currency) gold is one thing that will always have value.

If you’re worried about a bear market, buy some put options, said the experts. If you’re worried about depreciation of the dollar, buy euros. If you want protection against defaults, buy some swaps.

The experts could not imagine that a day would come when we’d be worried about the whole dollar-based financial structure, about the ability of the biggest banks to survive and the capacity of the biggest Wall Street firms to make good on their obligations.

But here we are and gold is rising. And now it goes up by $10, $15, $20 in a single day. And now people are starting to read about it in the papers. And people are starting to wonder how high the price will go and where they can buy Krugerrands.

Yesterday, Peter Munk, CEO of the world’s largest gold miner, Barrick Gold (NYSE:ABX), told the worthies at Davos that the bull market in gold had a ways to go. He said the price would go into the “$2,000 bracket” before it was over. We couldn’t agree more.

*** “The real story is the decline of America,” said David Fuller yesterday at lunch. David has been writing his Fuller Money, a careful analysis of global money trends, for as long as we can remember.

The rest of the world is in pretty good shape, economically, says David, adding that if he had to make one “buy-it and forget-it” investment for the next 10 years he’d buy stocks in India.

India (Asia generally) and much of the rest of the world have expanding economies, rising incomes, and plenty of room for growth, he says. The problems, on the other hand, are mostly concentrated in the United States.

Martin Hutchinson adds this:

“The US is currently in the position of General Motors in about 1970, splendid in its possession of a majority share of the US automobile market, and apparently invulnerable to competitive threat, yet in reality burdened with impossible welfare programs that a foolish management had negotiated during the good years. For General Motors, the future after 1970 was one of steadily slipping market share, from 60% of the US market to about 25%, of a steadily aging workforce, and of a retiree health benefit obligation that if valued appropriately is today worth far more than the value of the company itself. Had GM not undertaken its excessive pension and healthcare obligations, it would have had more capital to compete effectively, would have been less likely to lose oodles of money in every downturn, and might still retain primacy in the world automobile market today, albeit by a lesser margin than in 1970.

“For the US, the position is the same. Its workforce will be older than its competitors’ and entitled to benefits that absorb an increasing share of the national income as its relative earnings decline.”

We probably all had the same thought. Yesterday, if you were to buy a 30-year Treasury bond you would have gotten a 4.28% yield. That yield is only a few basis points from the current U.S. consumer price inflation level, as announced by the government’s own number torturers. Assuming the number is more-or-less honest, and assuming things don’t change, this means that a person who buys a long Treasury bond gives up money now for the right to receive zero return over the next 30 years. Of course, things do change. But the changes that are most likely are those that make this investment even worse. The inflation rate is likely to go up. At 10% inflation, the investor loses 5.72% per year. If the dollar falls against other major currencies, he is out even more.

The only way the bet on long bonds could work out for investors would be if the United States were to sink into such a fear-driven recession that inflation and interest rates fell substantially. Nominal prices could actually go down, for example, as they did in Japan. Real yields could rise, for a while.

But the United States of America controls the value of the currency in which the United States of America’s debts and obligations are calibrated. Even before a slump has begun, the Fed has panicked and Washington has rushed to get the checks in the mail. A serious downturn would produce even more desperate attempts to bring prices up and the dollar down. It is the only way the feds can service their enormous debts and obligations. One way or another, they will find a way to keep inflation rates high, and sooner or later, certainly sometime with the next 30 years, they are almost sure to lose control altogether. Holders of long U.S. treasury bonds will continue receiving their coupon payments. Perhaps they will be able to buy a cup of coffee with them.

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