There IS something funny going on. But it's not just at the banks.

Friday was a good day on Wall Street. The Dow fell only 127 points. And gold fell $36.

The feds closed a couple banks in Illinois and Michigan. The big banks are not going to close; they're going to be "recapitalized" - and partially taken over by the government. This process is already underway in Britain. Europe's leaders got together and said they'd do the same thing.

"Europe agrees to banking rescue," is today's front-page headline at the International Herald Tribune.

America's financial authorities are planning the same move. Where in the U.S. Constitution does it authorize the federal government to go into the banking business? Don't ask…

But there's nothing very odd about this. The banks did dumb things. Now, the politicians are doing dumb things. Just what you'd expect. The 'funny' part is still ahead…

"IMF warns of financial meltdown," is another major headline. Scanning the rest of the press we see the same sentiment. To hear the press tell it, fear is running wild in the streets.

"Anatomy of Fear," shouts a Newsweek header. "Can the G7 save the world?" asks TIME.

And all over the world, people are tallying their losses and beginning to sweat.

We don't have the figures, but it looked to us as though last week must have wiped out more 'wealth' than any week in history. Stocks fell on Monday and didn't stop falling until the rang the bell on Friday. When people dared to open their portfolios on Saturday, they found trillions of dollars missing.

Well, it was just 'paper profits,' you might say. Maybe. But it was wealth that people depended on - for retirement, for vacations, for new cars and…even healthcare. And now, it's gone - poof! What now?

"I'm thinking about going back to work," says one retiree to the New York Times. Another says he will not be able to retire when he had planned.

But these fellows have only just begun to sweat. Jobs were plentiful in the boom years - so easy to get that people assumed they could always find work. That, too, could be changing fast. Unemployment is rising. And after last week, every company executive in America must be considering a freeze on new hiring plans…and cutting unnecessary workers as fast as he can. The typical business spends more on labor than anything else. And in a downturn, labor is the one cost employers can control. So, the marginal worker could soon find himself with no money…no credit…and no job. Go back to work? Where?

*** We're working up to a big thought…

It begins with this item - barely reported in the mainstream press:

A Morgan Stanley economist says the U.S. federal deficit for 2009 could go as high as $2 trillion.

Let's see…there are the on-going wars in Iraq and Afghanistan…a $700 billion bailout plan…this year's $500 billion deficit…falling tax receipts…more bank 'recapitalizations'…

…and a simple, but irresistible humbug of modern political economy: if consumers can't spend…and businesses don't spend…and banks won't lend…it's all up to the government.

Every economist trained during the last 50 years believes it is government's responsibility to 'save' an economy…to give it the juice it needs to keep operating…and to provide the demand necessary to keep it expanding.

It is a theory that goes something like this: usually markets of private businessmen, consumers and investors are all-knowing; sometimes they are just dopes.

Now is one of the dopey times - at least, that's the theory. Investors, consumers, and businesses - they're all running scared. But there stands The Government…immoveable in its wisdom…unshakeable in its determination…and unflappable in a crisis. And now the feds must step in…checkbook in hand…truth and justice underfoot….bankruptcy ahead.

The feds must save the day. Everyone is counting on them. But what can they do - other than throw money around? And whence cometh this 'money'? They can borrow it. But here's the funny part. If they borrow money, they do not increase the world's supply of money by a single dime. They are merely taking it from one place - where, presumably, it performed some useful function - and transferring it elsewhere. Where? A banker's vault perhaps. An insurance company's reserves, maybe. Today's news, for example, tells us that giant insurer AIG is back. After getting an $85 billion loan from the feds, AIG is looking for $38 billion more.

In effect, the feds put the U.S. government's full faith and credit on the line so they can borrow in order to lend…or spend. And the more they borrow…lend…and spend, the less the faith lenders should have in its credit. As faith declines, interest rates should rise. And rising rates will further depress the economy.

Borrowing - in a macro-economic sense - doesn't really help anyway. It merely moves money around. What the world really needs is more purchasing power. More inflation, in other words. That is the 'funny' part that lies ahead. The 'funny money' part, to be more precise.

*** You will recall, dear reader, that an old Louie lost his head after the debt of France's monarch topped 80% of France's GDP. Seymour Durst put up a 'debt clock' in New York to keep track of the U.S. debt. When he put it up, the U.S. national debt was only $2.7 trillion. That was in 1989. Not even 20 years later and the debt has topped $10 trillion - forcing the owners of the debt scoreboard to add another digit. U.S. gross domestic output is about $13 trillion - and falling. This puts the national debt at 77% of GDP…and rising fast.

Whose head will roll this time?

*** Yes, dear reader, Shareholder Nation took it on the chin last week.

And now, many are wondering whether America will be able to get up from the mat…

"Debt saps U.S. power," says David Leonhardt in the New York Times. In effect, the U.S. has spent money it hasn't yet earned. Now, it must avoid spending so as to repay what it has already spent. This puts the nation at a huge competitive disadvantage, since it lacks the resources to fund new projects.

Our favorite columnist, Thomas L. Friedman, calls this the "post-binge world." We read Friedman to get insights: not as to what is really going on; Friedman has no idea. But Friedman gives voice to popular prejudices; he tells us what the unthinking masses are yearning for.

And here it is:

"This workout promises to be painful, complicated and protracted," he explains. No cause for panic, in other words. It will all be worked out. Then, he offers more reassurance, quoting the calming words of the world's richest man:

"I have no idea what the stock market is going to do next month or six months from now," said Warren Buffett on Friday. "I do know that the American economy, over a period of time, will do very well, and people who own a piece of it will do well."

The Sage of the Plains did not reveal how he knows these things. Maybe he is right; maybe he isn't. But here at The Daily Reckoning we've urged readers to panic out of U.S. assets for a long time. And now, readers are advised to stay in panic mode…and sell into the coming rally.

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