First, the basic facts:

The Dow rose a bit yesterday. The dollar went up too.

Commodities hit a new all-time high , with the CRB at 509 and wheat over $10 a bushel. U.S. stocks of spring wheat are expected to go down 25% compared to last year.

Gold rose $10 – to $910, and then went up another three bucks after the market closed.

From an inflationary point of view, these are all positive signs. The feds are desperately afraid prices will fall. They’re doing all they can to keep the party going.

It’s either “inflation...or the peace of the cemeteries,” an Argentine official once remarked. Inflation or death! Boom...or bust! Well...er...yes.

Still, the revelers seem to be putting on their coats, one by one, and heading for the door. A Wall Street Journal poll of economists gives dead even odds of a recession in 2008.

If the peace of the cemeteries is really creeping up on us, we should see consumers cutting back. And the giant retailers ought to confirm it. Sure enough, China’s American outlet store – Wal-Mart – tells us that sales are not as good as it has expected. Wal-Mart “leads the parade of sales misses” says a report on CNNMoney .

“I think its results show that its core of low-income shoppers and now the middle class households who shop there are cutting back,” remarked an analyst.

“Retailers struggle as Americans pull back,” is how the International Herald Tribune sees it. “You’re seeing the continuing unfolding of the consumer spending slowdown,” said another expert on retails sales.

It’s the next big thing, dear reader – downsizing, cutting back, making do. Barely on the radar screen now, thrift is coming into focus more clearly day by day. So far, people are a bit embarrassed about it, a bit ashamed that they have had to cut back. But soon, it will be popular, fashionable, and finally, almost obligatory.

Capitalism is a moral system, not an economic system. It rewards virtue and punishes error, and after punishment, atonement and then, a new appreciation for virtue.

“Virtue is what used to pay,” said an economist with a shrewd eye and a forgettable name. And if the economist whose name we can’t remember didn’t say that, we’ll say it. Saving money, self-discipline, forbearance – they’re all virtues because they paid off in the past. Not every year, not in every trend but, generally, over the long run they pay off. They will be virtues again because they will pay off again. Wasting money, spending recklessly and going into debt will soon be seen as social gaffes, as errors and as bad taste.

Of course, the feds are doing all they can to prevent saving. Lower interest rates and rising consumer prices discourage saving. But the struggle between Mr. Market and the market manipulators is as old as the struggle between vice and virtue. Sometimes one side wins. Sometimes the other. But in the end, what must happen sooner or later does happen. When consumers must cut back, they do cut back. People do what pays.

But what pays now?

What pays is saving money. But not in dollars and not in any other paper currency . The market manipulators are in charge of them all and they’re all determined to see them go down.

“ECB stands pat, but signals a new line of thinking,” is the headline in today’s International Herald Tribune . Recently, the dollar has been rising against the euro. Speculators thought the ECB wouldn’t follow through on its threat to raise rates to fight inflation. They were right. Instead, the ECB stood still – acknowledging that a slowdown in the United States may reduce demand and thereby slacken inflationary pressure in Europe.

The Bank of England, on the other hand, cut its key rate by a quarter point. And the ECB said it might do the same. Both the pound and the euro fell against the dollar.

*** Prices are rising in Europe as in America. Bread is up 12% in Germany over the last 12 months. Butter has gone up 45%. Milk 25%.

By the time the average European has finished his breakfast, he is feeling a little queasy. And by the time he has driven to work, after filling his gas tank with fuel that costs about four times as much as it does in the United States, he is sick.

The Europeans have been caught by the dollar too. As America emitted more pieces of green paper, foreign banks had to emit their own colored paper to keep up with it. Otherwise, their currencies would have gone up against the dollar, making their economies less competitive on the world market. It was a cycle that appeared virtuous for quite a while. More and more money in circulation had the effect of boosting up share prices and house prices. People thought they were better off.

But now, assets are falling in price; consumer products are going up. Now people are getting the kind of inflation that they don’t like...and now they want someone to do something about it. Opinion polls show that purchasing power is one of the main complaints of voters. Politicians are talking about solutions. And central bankers are under pressure to raise rates, not lower them.

At the same time, the pressures from deflation are mounting too. A spokesman for Price Waterhouse Coopers says the subprime debt problem has still not fully expressed itself.

And “the credit crunch gets worse,” writes Floyd Norris in the New York Times .

Bankruptcy filings by companies with leveraged loans outstanding are running more than four times last year’s rate.

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