The Fed is now bailing out the whole world! But who will bail out the Fed?

After the news came out yesterday, the Dow rose 249 points. Gold was up $2.

Here’s the latest from Bloomberg:

Stocks jumped, sending US benchmark indexes to their biggest gains in three months, while the euro and commodities rallied and Treasuries slid amid improving data on the American and Chinese economies and speculation of a larger effort to end Europe’s debt crisis.

The Standard & Poor’s 500 Index gained 2.2 percent, the most since Sept. 1. The MSCI Emerging Markets Index rose 2.2 percent, its biggest gain since Aug. 2. The euro rebounded above $1.31 while Spanish 10-year bonds snapped an 11-day drop. The rate on 10-year Treasury notes increased 17 basis points to 2.97 percent, a four-month high. Oil and copper advanced more than 3 percent. After the US close, S&P 500 futures added 0.1 percent at 7 p.m. in New York and Japan’s stocks rose in early trading.

European Central Bank President Jean-Claude Trichet said yesterday that investors are underestimating policy makers’ determination to halt the region’s debt crisis and shore up the euro ahead of a meeting of the bank’s Governing Council tomorrow.

The Dow Jones Industrial Average surged 249.76 points, or 2.3 percent, to 11,255.78. The Dow has rallied in December more than in any other month over the last century, according to Bespoke Investment Group. The 30-stock gauge rose 1.3 percent on average in the month during the past 100 years and gained 1.5 percent and 1.7 percent over the last 50 and 20 years, respectively, the Bespoke data show.

Stocks and the euro extended gains after Reuters reported that an unidentified official said the US may support enlarging a European financial rescue program by adding cash from the International Monetary Fund. The US is not discussing extra IMF money for Europe, a US official in Washington told Bloomberg News.

“Whoa…did you see that?” asked an Indian analyst we met this morning. “This is it. They’re really turning on the presses now. They’re trying to bail out the entire world. I never would have believed it. But it makes sense.”

The US official may not be discussing it openly, but Fed figures show that the US central banks is already bailing out foreigners. Reports tell us that 35 foreign banks took advantage of its EZ money policies. It appears that the Fed is supporting Europe’s banking sector.

And it would not be surprising if the US also backed the IMF. It’s not just the banks that are in trouble in Europe. Governments are deep in debt too. They are so intertwined, that it’s hard to know where private debt ends and public debt begins.

Americans may see the dollar rising against the euro and feel a little patriotic pride. But this is not a good thing for Americans. If Europe comes unhinged, the crisis will waste no time in hitting American banks and the US economy. Ben Bernanke has been trying to get the dollar to go down. A rising greenback makes Germany’s products less expensive and US exports less competitive. It contributes to the threat of deflation…and encourages a long, drawn-out Japanese-style slump by prompting people to save, rather than spend.

Not only that, collapse of European economies would kill world trade. Exporters would be out of business. Importers would be out of money. The whole planet would be out of luck. The crisis would make its way around the world like a giant tsunami…wiping out stock markets immediately…and then swamping almost all economies.

Yes, dear reader…this is the downside of globalization.. One region’s problem can easily become a disaster for everyone.

So, what’s going to happen? We wish you wouldn’t ask us questions like that, dear reader.

But we’ll take a guess.

The European situation is more dangerous than most Americans realize.

It could still melt down. US authorities must know this. And they must know too that if Europe melts down, so will the USA.

So, the rumors will probably turn out to be true. The US will back the IMF. The IMF will back Europe. Europe will back Ireland. Ireland will back its banks. And the banks will back their lenders.

Meanwhile, the euro will be backed by the dollar, which will also back the US economy, US banks, the US government, and about half the households in Christendom…not to mention the others!

Who’s got the kind of money you need to do all this backing?

Ah…there’s the rub… There’s the weak link in this strange and magical chain.

Let’s see, if all the world’s debts are guaranteed by paper money…isn’t the paper money itself impaired by the amount of the losses? Won’t the losses be passed along to dollar holders everywhere?

Yes. But, no one knows how much the losses are. And no one knows how much extra “stimulus” money the feds are going to put out. And no one knows when people will get scared and flee the dollar…the euro…and all paper currencies. And no one knows what a panic out of the dollar would produce. And no one wants to find out.

So, what’s the solution? We won’t bother to offer a solution to the world’s financial authorities. They won’t pay any attention anyway.

But how about a solution for you? Did you buy gold when we suggested it, dear reader?

We hope so.

And more thoughts…

The New York Times tells us that astronomers had seriously underestimated the number of stars in the universe. They can’t see the little ones. Which means, their last count was probably a few trillion off. Or maybe a few gazillion off.

Which suggests to us that astronomers and federal debt analysts must be using the same calculators. Both are trillions off the mark.

But the reason we bring this up is to give dear readers hope. Maybe…circulating around one of these invisible stars…a few billion light years away from earth…is a habitable planet. And maybe, the people who live there are very good with figures…and money. And maybe they’re also very accomplished space travelers. And very generous.

And maybe they’ll show up – any time now – and offer to bail out the whole Milky Way …if not the whole damned universe.

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