Oh my…

Yesterday, the earth shook. It was an important day. The Dow dropped another 450 points. But what really moved yesterday was an inert metal - gold.

The gold market rumbled and shot hot prices into the air. Alert investors knew what the shaking was all about. Our modern financial Vesuvius is beginning to boil…

You'll recall the story of Pompeii. The mountain began groaning…and sending up clouds of smoke. Smart residents took to their boats. They didn't want to stick around and see what would happen next. Others stayed behind, believing it would blow over. But instead of blowing over, Vesuvius blew up, burying the whole town under ash and lava.

Gold rose as much as $100 in intraday trading yesterday and ended up $50 - its biggest move ever. Investors were looking for a safe place to put their money. From the time of Pompeii, gold has been the refuge of choice for investors everywhere. It still is. And, looking at the market, gold is going to become the obvious choice for more and more investors.

But what exactly is blowing up?

A few days ago we warned against a "collision of scams" - in which the desire to get something for nothing in the markets runs headlong into the desire to use government to live at someone else's expense. People invest in scammy investments - such as subprime MBOs - in the hope of getting rich…and then, when the investments go bad, they look to the government to bail them out. Then, when the scale of these deceits gets big enough…the whole system blows up.

That is what investors are worrying about now. Wall Street is melting down. Stock markets all over the world are headed down. Property prices in most places are going down. And the U.S. government is desperately trying to keep things going up - in the only way it can…by bailing out, injecting funds, lending money at negative interest rates, propping up, and guaranteeing everything.

Today brings news that the Fed is providing the biggest central banks in the world with liquidity to injection in the financial markets. MarketWatch reports:

"The move will allow the European Central Bank to auction as much as $110 billion in one-day and other short-term dollar loans to commercial banks in the 15-nation euro zone, up from its current level of $50 billion. The amount available through the Swiss National Bank was increased to $27 billion, a rise of $15 billion.

"The Fed also authorized new swap facilities that will enable the Bank of Japan to provide $60 billion in dollar liquidity, $40 billion by the Bank of England and $10 billion by the Bank of Canada."

A few weeks ago, the feds bailed out the mortgage industry…by nationalizing Fannie and Freddie and promising to put up $200 billion. Congratulations fellow taxpayer; now we own the world's largest source of mortgage finance. This week, it was the insurance industry. They nationalized the biggest insurer in the world - AIG - with an injection of $85 billion. Congratulations again. Now we own 80% of AIG. Next in line is the auto industry, asking for $25 billion.

Where in the U.S. Constitution does it authorize the executive branch of government to go into the insurance business? We don't know…but no one cares anyway…

The French nationalized their auto companies after the war. Then, when the socialists took control of the government in the '80s, they nationalized the banks too. "Silly frogs," said American economists. "Don't they know that a free market works best?" And so you see, dear reader, in all time zones and all languages, people are the same - always hustling up something for nothing, whenever they can get away with it.

But wait. Where do the feds get an extra $300 billion or so? The federal budget is already in deficit, about $400 billion worth. The only choice for the feds is to borrow more. But even the full faith and credit of the U.S. government has its limits. The sub-prime crisis came about because people borrowed money they couldn't pay back. When investors realized what they had done, they dumped the packaged, AAA subprime credits…and ended a 26-year-old credit expansion. And what did they do with the money? They took refuge in the prime credits of the U.S. Treasury. The dollar rose. Bond yields fell.

Now they're having second thoughts. And if they're not…they should. The more the economy and financial sector weaken, the more money the feds must put up to rescue them. The more dollars they need, the more they must borrow. And the more they borrow, the more they don't pay back… Already the amount unpaid - the official national debt - is almost $10 trillion. The interest alone is nearly $2 billion per day. Meanwhile, tax revenues are falling. Social costs - as people need more unemployment compensation, more free food and medicine, more subsidies and giveaways - are rising. Some economists are predicting budget deficits of $1 trillion…others say it could go to $2 trillion…

Oh yes…dear reader…this is where we hear the volcano heating up…

And this is when smart investors take to their golden barks… Not that they know what will happen. But they know the safest way to find out - from a distance…and, like refugees from time immemorial, with gold coins in their pockets.

*** "Nothing like this has ever happened before," said Peter Bernstein to Barron's. "There have been credit crunches and housing crises and dollar crises, but having all the chickens coming home to roost at the same time and interacting with one another is unique. We have historical perspective on the parts, but not the whole, and that makes things both interesting and scary…"

Goldman fell off a cliff yesterday. The stock sold for $240 last November. Now, you can buy all you want for just $120.

So far this year, the Dow is down 16%. That makes it one of the world's best performing markets! English stocks are down 22%. In Paris, the Bourse is off 27%. Indian stocks are down 33%. But Chinese stocks have lost twice as much - 67%.

Getting back to our "collision of scams," as Peter Bernstein puts it, there are a lot of feathered scams…and they're all coming home to roost at the same time. There's bound to be trouble in the coop.

In from the front yard comes the scam of ever-rising house prices. And it collides head on with the scam of the consumer finance coming from the henhouse roof (that people could borrow from their houses in order to increase spending)…

…that runs into the whole humbug of the consumer economy (that people can get richer by spending money they don't have)…

…that smashes into the flimflam of subprime mortgage lending…

…which bumps into the scam of the financial industry's business model (the masters of the universe claimed to be adding value by "allocating capital efficiently; what they were really doing was merely loading people up with debt)…

…which crashes into the big birds of Wall Street (now going broke)…

…which runs into the fraud of government bailouts (that the feds can put in money that comes out of thin air; in fact, any resources the put in to prop up failing institutions has to be taken from healthy ones…)…

…which creates one heck of a mess when it slams into the dollar and the counterfeit global monetary system since 1971 (in which the supply of paper money is unlimited…and the full faith and credit of the US government is thought to be infinite!)

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