We spent Saturday looking at a certain part of the male anatomy. Big ones. Little ones. We had never seen so many.

Our guide at Pompeii told us that the masculine protuberances in front of us were seen as “a symbol of fertility, abundance and good luck,” said Carla, “So, as you can see, it is everywhere here. Even sticking out of the walls.”

There was one poking out over a doorway. Another was carved into the stone of the roadway itself, pointing the way to a brothel. Others were on the walls, some of mythic size. One man had his pride and joy on the scales. Others used them in more traditional ways...

But today is Monday, a working day. So, we set to work and leave our discussion of 2000-year-old dongs for later.

First, we look at how last week ended.

Stocks rose a bit; the dollar fell; gold held steady – but at $889, well below $900.

These are the times that try our confidence. Stocks and gold are going in opposite directions – opposite, that is, to the direction we think they should be going. Stocks seem to want to go up. Gold has wanted to go down for a long time; now it is doing so.

But if our guess is right – ’flation is inevitable in the financial system. And our guess is that this ’flation will show itself in rising prices for gold, commodities, and emerging markets...but lower (relative) prices for stocks, property and financial assets, generally.

’Flation is inevitable because there are billions...no, probably trillions...of dollars worth of financial mistakes in need of correction and a world full of financial authorities trying to prevent it.

“A lot of people made a lot of mistakes,” says former Treasury Secretary, Former CEO of Goldman, and now chief of Citigroup’s executive committee, Robert Rubin. Rubin made one himself, says today’s International Herald Tribune , by failing to rein in Citigroup’s excessive risk taking over the last five years.

But just because a lot of people made a lot of mistakes, it doesn’t prevent the authorities from making more. They’ve bailed out banks in Britain...and Wall Street brokers in America. The Fed has cut rates 6 times already...and is ready to cut a 7th time this week – bringing the key Fed lending rate to about half the level of consumer price inflation.

The result: money and credit flood the system...but many investors still drown.

Ours is not a common view. Most analysts think the authorities will either succeed or fail. If they fail, everything goes down. If they succeed, everything goes up.

Of course, no one really knows. We’ve never been in this financial situation before...so it is almost all guesswork. All we can do is to try to strip it down to the essentials to see if we can make sense of it.

“Is finance’s economic role ebbing?” asks a Wall Street Journal headline.

Yes, is our answer. Wall Street made money by ‘financializing’ the economy. Businessmen, for example, ceased thinking about how to produce better products at better prices; instead, they became much more interested in mergers, acquisitions, stock options, asset shuffling, IPOs and buybacks. Some of these activities may have added value, but not many. But for Wall Street, these were the glory days. Billions in fees could be charged...and, as long as prices were rising, few people complained. But when prices began to go down, lenders looked at the collateral and discovered it wasn’t worth what they thought it was. The triple-A credits were marked down...banks teetered and had to beg for more capital...the government stepped in to protect the rich and, so they said, avoid a meltdown.

Wall Street also helped turn homeowners into speculators. Instead of buying houses to live in, people bought them – often with no money down – in the belief that they would go up in price. What is a no-money-down mortgage but an option to buy a house later? And now that house prices are going down, the mom-and-pop options are expiring worthless. Housing speculators are putting the keys in the letterbox, dumping cement down the toilet, and walking away.

“The bright new financial system,” said Paul Volcker a couple of weeks ago, “has failed the test of the marketplace.”

Volcker is right. Wall Street has peaked. The credit cycle has peaked along with it. When Addison and Short Fuse met with him to interview him for I.O.U.S.A. this past December, Volcker said, “Right now we are in a very difficult circumstance in a financial world with a lot of excesses and lending, and particularly in the infamous subprime mortgages.

“A lot of the excesses are coming home to roost, and it puts a lot of pressure on economic institutions, and the question is how much pressure it will put on the economy as a whole. We’ve got a very good run of economic activity and a lot of success in the financial world in the past 20 years, but now it reached a point, I think, of excess and maladjustments and tensions that have to be corrected. And it’s gonna be a little bit painful.”

Instead, the current leaders of the Fed seem inclined to try to avoid pain at all cost. This week, they are expected to announce another quarter point rate cut. The smart money considers another 25-bps cut in the bag. The smart money is not wondering what the Fed will do...but what it will say. If it signals the end of the rate cuts – what more will investors have to look forward to?

But here at the mobile Daily Reckoning headquarters in Rome, we’re still trying to look at the essentials. And the essential condition is this: the boom in the financial industry and things that depend on it is over. Now it is time for painful but necessary adjustments. The only question is how those adjustments will be made – by inflation or deflation, or – our guess – both.

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