Inflation delenda est. Viva deflation!

And now Congress has passed a bailout bill…the fix is in…everyone will be protected…spared…saved. Inflation is going away. Prosperity is just around the corner. Hallelujah!

But wait…

Where's the catch? There's a crack in every bell God ever made…a little hairline fracture. Perhaps invisible to the human eye. Perhaps unnoticeable for many years. But hit the thing hard enough…and it falls to pieces. We'll come back to this in a moment… First, let's reminisce.

The last two weeks have been exhilarating.

What a joy it is to see the loopy humbugs of the financial world finally destroyed. The Efficient Market Hypothesis…Wall Street's claim that it added value by "allocating capital efficient"…mergers, acquisitions, private equity…investment banking…the eternal bull market in housing…MBSs, CDOs, SIVs… almost every mention of these things today is accompanied by a knowing laugh.

And now we have a whole new bunch of loopy humbugs to take their places.

Now we have bailouts and recapitalizations…new restrictions, new villains…and 'taxpayer funded' rescues…

Half the countries of the world seem to have banned short selling - at least the half that knows what short selling is.

Archbishop John Sentamu, of York, said that short sellers were nothing more than "bank robbers and asset strippers." It's no wonder the Church of England is losing market share. It's run by people who can't tell a short seller from a bank robber. A bank robber steals money that isn't his…and if he gets caught, he goes to prison. The short seller merely SELLS something that isn't his. If he gets caught out, he goes to the poor house. If they still had poor houses.

Over the weekend, Germany became the latest government to ban losing money. Angela Merkel told the huns that their money was secure in German banks:

"We want to tell people that their savings are safe," said she.

"I was out in LA when IndyMac went under," said a friend over the weekend. "Of course, the FDIC guaranteed deposits up to $100,000. But I remember people standing in line for days to get their money. And there were fistfights in the line. When a bank goes down, it's not pretty."

No, it is not a pretty sight. It was the photo of people lined up in front of Northern Rock that caused the government to step in to protect depositors in Britain. And now, nervous depositors all over the world are causing governments to react…and over-react.

This morning, according to the Financial Times, Britain is considering some 'drastic measures," to recapitalize its banking sector.

"Iceland in talks to prevent meltdown," is another headline this morning.

"Massachussetts may seek a US loan," says the Boston Globe. Why not? The door's open.

LA faces a $400 million budget deficit, says the local press.

And California itself is only two weeks away from being unable to pay teachers and firefighters, says the FT. The Golden State, unlike a sovereign country, has little room to maneuver. Although it is the world's 6th largest economy, California can't print its own money. Too bad. Printing money has been a great refuge of scoundrels since the printing press was first invented. Inflation erases debts and it lowers obligations. In a real inflationary surge, even things that are supposed to be "adjusted to the CPI" prove to be a great boon to the government and a great bust to people who depend on them.

Inflationary adjustment mechanisms aren't able to keep up. In Zimbabwe for example, inflation is running at 200,000%. By the time a Social Security check or indexed bond is adjusted for the previous quarter's inflation, it's worthless.

Without the ability to print your own money, you have to live within your means - and that means…you can spend no more than you can beg, borrow or steal. And that is what has so many people so desperately afraid. Borrowing is out; the banks aren't lending. Stealing is still big business, but the feds have a near-monopoly on it. Jobs are disappearing, too. The latest jobs reports shows rising unemployment. That leaves only begging - so get out the bowl…or learn how to fend for yourself.

*** "Glut of retail failures forecast," says the Financial Times. Every businessman we know is cutting back…trimming…saving…trying to protect his business. And consumers too are beginning to grow more cautious.

"Consumers Tighten Belts," says the New York Times. Airline travel is collapsing.

Economic activity is collapsing in Europe; in Britain, reports the Wall Street Journal, private output is falling faster than it ever has since they began keeping records.

*** Stocks tumbled at the open this morning, with the Dow falling below the 10,000 mark for the first time in almost four years. Across the globe, the picture wasn't much better…in Japan, the Nikkei fell to a four-year low, and in Europe, governments rushed to prop up failing banks.

A new report released by the Group of 30 (G30), which consists of top economists and financial experts, found that - gasp! - there is a lack of appropriate and necessary banking regulation, not just in the United States, but worldwide. We wonder what tipped them off?

"There is great unanimity in the feeling that regulation and supervision need to be revised," said Paul Volcker, chairman of the board of trustees for the G30, at a press conference. "The current situation is an apt illustration of the need for reform."

The former Fed Chairman is the first person to come to mind when looking for perspective on financial disasters - after all, he presided over one of the gloomiest periods in American economic history in the late '70s and early '80s.

Addison and Short Fuse went to Volcker's office in New York City last winter to interview him for I.O.U.S.A. They asked him questions about his epic battle with inflation as Fed Chairman, and naturally, the conversation came around the current financial difficulties the Unites States faces.

"With respect to the fiscal crisis looming out there in the future," says Paul Volcker, "We'll see whether a democracy can deal with an obvious problem that's going to be present in not too many years. The earlier we take action to deal with it the better."

But as usual, U.S. officials waited until the last minute to act. Nothing new there.

And keeping with I.O.U.S.A. news, Addison and David Walker will be speaking to the National Press Club on this coming Wednesday, October 8. Short Fuse will have a full report on Thursday. Stay tuned…

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