"Hedge Fund Manager Describes Rock Bottom," says a New York Times headline.

Poor Mr. John Devaney. He had to sell his Renoir. His Gulfstream. One of his mansions. And his yacht. Ouch. He says he's personally lost $150 million trying to keep his funds alive. Alas, in vain!

"Devaney funds wiped out," Bloomberg reports.

Now, the sad victim of the credit crunch is reduced to living in his remaining mansion in Aspen…and flying first class in commercial aircraft.

But is Mr. Devaney beaten? Not at all. "Do I retire?" (Even in his straightened circumstances, he allows himself a rhetorical flourish…) "No," he replies, as if there were any doubt about it.

And why should he? He may have wiped out a handful of unlucky investors, but there are still plenty more.

Yes, dear reader…the battle between inflation and deflation…between truth and malarkey…between comeuppance and postponement continues.

Elizabeth's stockbroker kindly wrote her a letter, explaining why her account had lost money:

"On the one hand, fixed income markets were signaling a weak economy and even deflationary conditions as interest rates were below the rate of inflation. On the other hand, commodity markets were signaling a strengthening economy and even highly inflationary conditions as the prices of almost all raw materials rose sharply…housing problems were getting worse, not stabilizing…[leading to] fears that the banks might be in worse shape than had been thought…this prompted analysts to predict continuing losses at financial institutions in what seemed like a competition to see who could generate the most frightening numbers…"

(We would say Bridgewater Associates won the competition with last week's prediction that $1.6 trillion would be lost directly…and $12 trillion of credit would be withdrawn from the economy…)

"To top off the anxiety," the broker continued, "oil prices spiked dramatically to more than double the level they had reached only months earlier, stoking inflation worries."

Sound familiar? Inflation and deflation…both hitting hard.

What's he doing about this situation? He's "taking profits" and holding cash.

What happened yesterday on Wall Street? The Dow rose 81 points. The euro rose slightly.

Most of the headlines this week told of deflation's hearty counter-offensive, which began only about a week ago. Foreclosures rose 53% in June, from a year ago. Bank seizures have almost tripled, according to Bloomberg.

And poor Freddie and Fannie.

He that did ride so high doth lie so low, as Marc Antony said of Caesar, after the latter was stabbed to death. Freddie and Fannie were the darlings of Wall Street…the leaders of the house price bubble…with nearly half the nation's $12 trillion worth of mortgages. A couple of years ago, they could do no wrong.

Now, they can do no right.

The government-chartered mortgage lenders are "in turmoil," says the Financial Times.

They should be in Chapter 11, says former St. Louis Fed chief, William Poole. Fannie has $5.2 billion more in liabilities than in assets, he says. Both lenders are insolvent, he maintains. Like a racehorse in the Kentucky Derby, they should be given the coup de grace as quickly as possible, he believes.

That is not likely to happen. The feds are counting on Fannie and Freddie to end the nation's housing misery, not make it worse. They're not going to let the twins go under. Instead, they're going to give them more rope…and show them the steps to the scaffold.

Yes, dear reader…this is what it has come to. It's not just a war between inflation and deflation. It's also a fight between the forces of delusion…and the forces of reality. The delusion is that you can make the problems caused by too much credit go away - by giving more credit! A related delusion: that you can make people richer by printing up more money for them. Yet another: that you can spend your way out of a slump caused by too much spending. And here's another: the federal bureaucrats can manage the economy better than it can manage itself. And how's this: that hedge fund hustlers such as Mr. Devaney can make you rich by making huge gambles with your money. Or this: that if you just allow capitalism to work, we'll all get rich.

The reality is that you can't get something for nothing. Asians are gaining wealth because they work for peanuts and save their money. Americans are losing wealth because they spend too much and don't save at all. And when a bubble is ready to pop, it will pop…no matter what you do. Sometimes you can delay it…or push the damage onto to someone who doesn't deserve it - such as the taxpayer. But all interventions just make the situation worse…causing more, and bigger problems elsewhere.

Fannie's shares fell 13% yesterday. The whole financial sector went down too…and now is at a loss of about 46% for the year.

*** How do they do it? The Los Angeles Times wanted to know how commuters coped with such high gasoline price.

We wondered the same thing. Yesterday, we had to take a long drive for an important meeting. We drove for three and a half hours through a beautiful part of France, between Limoges and Le Mans, roughly. The fields were lush and green. Sunflowers were in bloom. Combines were harvesting what we took to be wheat, but we weren't sure.

Making the drive more interesting, there was a huge antique car rally going on in Le Mans. We passed old Jaguars, Triumphs, MGs…all the brands the British sold to foreigners. There were also many cars we couldn't identify.

When we stopped for gas, a mint condition Austin Healey 3000 drove up next to us. We saw the driver had English license plates.

"Hey, we haven't seen one of those in years," we began a conversation.

"Well, they're still around…but they're not as cheap as they used to be."

Nothing is as cheap as it used to be. Coming and going on our journey, we had to fill the gas tank twice, which cost a total of 186 euros - or about $260. We can afford it - barely. But what about people who only earn minimum wage? Or even an average income?

Well, the LA Times tells us that they are spending less on food, movies and clothes.

The Wall Street Journal addresses the subject more broadly. They are "trading down…" it says. What else can they do? They're getting rid of the gas-guzzlers…and the big houses. They're cutting back.

"Gas use at 5-year low," further reports the WSJ.

Oil added $5 yesterday - to $141. And gold jumped $13.

Has oil topped out? It didn't seem so yesterday. Inflation hasn't gone away. Japan reports price increases at the wholesale level at a 27-year high.

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