Another exciting day in the world of money...

Yesterday, U.S. stocks took another round of in-coming. The Dow dropped 372 points. The dollar went down too – the euro is headed back to $1.50.

Oil and gold, on the other hand, managed good progress. Investors may not know what causes the dollar to fall...or why the world’s post-’71 financial system is busting up...but they can smell trouble.

Oil rose $6.62, to $109. Gold had one of its best days ever – up $43...to $908.

We’ve recently begun to worry about our gold, dear reader. You see, many years ago, we bought gold coins. These we hid in various places. No problem. But after a while, it seemed so much simpler to buy the ETF! What the heck, we figured; we may not have the yellow metal in our hands, but it will be a cold day in Hell before the gold ETF goes bad.

Well, the temperature is dropping...

“Some of these ETFs in London are going to wind up operations...because they were backed by AIG,” said an English colleague this morning.

“People are getting frightened of even holding cash,” he went on. “My girlfriend’s parents are afraid their bank will go under. So, they’re dividing their money up...and putting 35,000 pounds in each account...which is the maximum amount guaranteed by the government, per account.”

As a contraction deepens, people lose faith. They wonder if corporate executives are hiding something; and if the stocks they own are worth less than they thought. They question whether loans will be repaid. They doubt that their insurer will have the money when they need it.

Bad debts multiply. Defaults increase. Bankruptcies soar.

Leveraged loan values have just hit a record low, reports Bloomberg .

And the New York Times reports that older Americans are “terrified.” They staked their retirements on housing and stocks. Both now are losing value. Worse still, they have fewer savings than any generation since WWII...and the meager savings they do have pay almost nothing!

As people fly to the safety of U.S Treasuries, yields fall. If you put money into a 91-day Treasury bill, for example, you’ll get less than 1% interest on your money. Try to live on that!

Those old people would be better with a stash of gold coins somewhere. Coins have no counterparties. No hidden liabilities. No explosive “investments” in the vault. They yield nothing...but nor do they lose value when people get scared. Instead, when the going gets rough, they typically go up in price.

Our guess is that we will hear a lot more about gold in the years ahead. Because the world’s paper money system...a system that depends on hope, faith, and the kindness of strangers...is going bust. Maybe not this week. Maybe not this year. But eventually. And each day that passes brings us closer.

At some point – and here we are just guessing, of course – investors are going to put two and two together. They’re going to realize that every increase in the U.S. government’s debts and financial obligations DECREASES the value of its paper – notably, the U.S. dollar...and U.S. Treasury bills, notes and bonds.

We don’t know...but it looked to us as though they were getting out their calculators last week. The feds announced their new bailout plan; and the price of the yellow metal suddenly shot up by $50. Again, yesterday, the $43 boost in the price of gold seemed to whisper in our ear: “they’re catching on...”

As the correction continues, we expect more and more frantic efforts on the part of the government to stop it. Look for the Fed to cut rates. Look for more bailouts...more junk on the Fed’s balance sheet...more guarantees...and more intervention. Both candidates for president, along with the media, and the voters themselves are all in favor of “doing something” to prevent assets from falling to what they are really worth.

“The time to fix this mess was a couple of years ago,” chimes in Dan Amoss. “Unless our political leaders understand how we got here in the first place, ‘fixing’ the system with regulation will only make things worse. Unfortunately, based on the public statements we’ve heard thus far, future regulations will likely include measures that throw savers and taxpayers under the bus. But on the bright side, such an environment would make it even easier to make money on the short side of the stock market. We’ll know more after this fall’s elections add some visibility to what is now an ad hoc response to each new crisis.”

*** Mr. Market has something to say about what things are worth. The feds, however, want to serve him with a gag order.

They’ve already banned short-selling on 799 financial stocks. They’ve nationalized major industries. They’ve loaded the taxpayer with a trillion worth of Wall Street’s losses. And the Bush administration, supposedly a “conservative” government, will leave office having put in place such liberal programs that they would have embarrassed Franklin Roosevelt. What won’t they do?

Most likely, Mr. Market will have his say anyway. The Japanese tried almost all these measures during the ’90s. Still, their economy sank.

In the end, U.S. financial authorities will do the math too. How can we save the average citizen? ‘We can ease his debts via inflation,’ will come the answer. How can we ease the debts on the U.S. government? Inflation will help there too. And how about all that money we owe to foreigners...and all those dollars in the vaults of foreign banks and sovereign wealth funds; what can we do about those? At some point, the politicians and U.S. financial authorities will put two and two together for themselves:

More voters are debtors...than creditors. Foreigners don’t vote at all. It would be reckless and irresponsible to print money, of course. Foreigners would stop lending; the dollar would collapse; treasuries would be wiped out. But...at some point, the math will be clear: they will have more to gain from inflation than to lose.

Of course, investors will smell it coming. They will push up the gold price...to $1,000...to $1,500...maybe to $3,000. And then, the financial authorities will prohibit trading gold. Franklin Roosevelt already set the pace; he confiscated it.

That’s when you will most want to have gold coins, rather than ETFs. And you can get an ounce of gold for just a penny...no foolin’.

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