First, a quick look at the news…

Dow up 29 points… Gold added $10.

Stocks are up about 100% from their March ’09 lows…

Guess we were wrong. We thought stocks were too dangerous… We’ve been out of them since the late ’90s.

Wait…you say stocks have gone nowhere since the late ’90s? Investors have made nothing.

Well, that makes us feel better about missing this rally.

Hey, what’s this? Oil is up too – it traded at more than $100 a barrel yesterday. And look at the other commodities:

“Wholesale prices hit two year high,” reports The Wall Street Journal.

Looks like everything is a good investment.

If only we had a Wall Street bank! We could borrow from the Fed at zero…and buy anything. Whatever we bought, it would go up. Especially if it were gold.

Is this evidence of a robust, growing economy? Or, is something else going on? We’ll come back to that…

Because today you’re in for a treat…

The World Explained! Or, at least part of it.

Ultimate Secrets Revealed! At Last…how an economy really works.

And as an added bonus – we’ll tell you what government is all about too. But that will have to wait until next week.

How’s that for a build-up? We’ve managed expectations so high they’ll need a parachute to come down.

But why not? Today, we reveal – for the first time ever – why Ben Bernanke is an idiot. And why almost all modern economists are wrong. And why all the trillion-dollar “recovery” schemes won’t work.

And no… We’re not forgetting the bonus. We’ll also tell you why all the chatter about democracy breaking out in the Mideast is just vain heavy breathing…

This is an important edition of The Daily Reckoning…print it out. Share it with your friends. Put it away for safekeeping. And then, in a quiet moment, pull it out…pour yourself a stiff drink…and throw it away.

Let’s get started.

The trouble with modern economists and most people who don’t work at The Daily Reckoning, we’ve said so many times, is that they have the wrong paradigm. The wrong idea. The wrong metaphor.

They think an economy is a kind of machine. They think they can make it work better, or fix it when it is broken, by tinkering with it. That’s why they have a fellow like Ben Bernanke – a techie kind of fellow with an adjustable wrench in his pocket – at the Fed. They think he can turn some valves…and make the juice flow.

‘The economy needs more liquidity,’ says one expert. ‘No, it’s time to raise rates,’ says another. ‘Forget it,’ says a third, ‘the federal government should launch a major infrastructure program.’

Each mechanic thinks he knows which screw to turn. Each has his theory…his idea…and his role to play.

In fact, each is paid to believe what isn’t true. If he admits that he has no idea which knob to turn, who will give him a job? Who will publish his book? Who will invest money in his hedge fund?

Not the government. They want solid mechanics…guys who know how to use a screwdriver. They think their job is to control this machine. At the Fed, for example, there are hundreds of economists paid to maintain the value of the dollar, full employment and (a mission Ben Bernanke has taken on recently) a bull market on Wall Street.

What about a university? Could he get a job there? Well, first, you need to be able to describe the machine even to get into the Ph.D. program. Then, you need to write a thesis about how it works…about how the Fed’s interest rates effect consumer purchasing…or how you can create a complex mathematical formula that predicts capital investment booms in medieval city states. You need to add to the world’s knowledge and understanding of the Great Machine, in other words. You need to give policymakers more and better tools to tinker with. Do it well enough and you may get to be the head of the Princeton economics department. Or, you might even get a Nobel Prize.

In practice, academia and government are as close as ticks on a hound dog. Why do they all think the same thing and why do they all believe in the mechanical model: they’re paid to believe it. This, from The Huffington Post:

How the Federal Reserve Bought the Economics Profession

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

“The Fed has a lock on the economics world,” says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. “There is no room for other views, which I guess is why economists got it so wrong.”

One critical way the Fed exerts control on academic economists is through its relationships with the field’s gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll – and the rest have been in the past.

The Fed has been dominating the profession for about three decades. “For the economics profession that came out of the [second world] war, the Federal Reserve was not a very important place as far as they were concerned, and their views on monetary policy were not framed by a working relationship with the Federal Reserve. So I would date it to maybe the mid-1970s,” says University of Texas economics professor – and Fed critic – James Galbraith. “The generation that I grew up under, which included both Milton Friedman on the right and Jim Tobin on the left, were independent of the Fed. They sent students to the Fed and they influenced the Fed, but there wasn’t a culture of consulting, and it wasn’t the same vast network of professional economists working there.”

But by 1993, when former Fed Chairman Greenspan provided the House banking committee with a breakdown of the number of economists on contract or employed by the Fed, he reported that 189 worked for the board itself and another 171 for the various regional banks. Adding in statisticians, support staff and “officers” – who are generally also economists – the total number came to 730. And then there were the contracts. Over a three-year period ending in October 1994, the Fed awarded 305 contracts to 209 professors worth a total of $3 million.

The Federal Reserve’s Board of Governors employs 220 PhD economists and a host of researchers and support staff, according to a Fed spokeswoman. The 12 regional banks employ scores more. (HuffPost placed calls to them but was unable to get exact numbers.) The Fed also doles out millions of dollars in contracts to economists for consulting assignments, papers, presentations, workshops, and that plum gig known as a “visiting scholarship.” A Fed spokeswoman says that exact figures for the number of economists contracted with weren’t available. But, she says, the Federal Reserve spent $389.2 million in 2008 on “monetary and economic policy,” money spent on analysis, research, data gathering, and studies on market structure; $433 million is budgeted for 2009.

That’s a lot of money for a relatively small number of economists. According to the American Economic Association, a total of only 487 economists list “monetary policy, central banking, and the supply of money and credit,” as either their primary or secondary specialty; 310 list “money and interest rates”; and 244 list “macroeconomic policy formation [and] aspects of public finance and general policy.” The National Association of Business Economists tells HuffPost that 611 of its roughly 2,400 members are part of their “Financial Roundtable,” the closest way they can approximate a focus on monetary policy and central banking.

The Fed keeps many of the influential editors of prominent academic journals on its payroll. It is common for a journal editor to review submissions dealing with Fed policy while also taking the bank’s money. A HuffPost review of seven top journals found that 84 of the 190 editorial board members were affiliated with the Federal Reserve in one way or another.

“Try to publish an article critical of the Fed with an editor who works for the Fed,” says [James] Galbraith. And the journals, in turn, determine which economists get tenure and what ideas are considered respectable.

The Huffington Post reviewed the mastheads of the American Journal of Economics, the Journal of Economic Perspectives, Journal of Economic Literature, the American Economic Journal: Applied Economics, American Economic Journal: Economic Policy, the Journal of Political Economy and the Journal of Monetary Economics.

HuffPost interns Googled around looking for resumes and otherwise searched for Fed connections for the 190 people on those mastheads. Of the 84 that were affiliated with the Federal Reserve at one point in their careers, 21 were on the Fed payroll even as they served as gatekeepers at prominent journals.

At the Journal of Monetary Economics, every single member of the editorial board is or has been affiliated with the Fed and 14 of the 26 board members are presently on the Fed payroll.

What if you didn’t believe that the grease-monkeys working for the Fed really could make things better? What if you thought an economy wasn’t like a machine at all? What if you didn’t believe economists could control it? Or improve it? Or even understand it? What if you thought that you could not predict what would happen…nor could you turn any screws or valves or knobs and be able to tell what effect it would have? Who would hire you? Who would publish your book? Who would ask your opinion at cocktail parties or invite you to submit articles to The Financial Times? No one.

But you would be right.

An economy is not really like a machine at all. It is not a mechanical system. It is a moral system.

Yes, dear reader, it is a system that punishes sin and rewards virtue. It gives no one what he expects…and ALMOST everyone what he deserves. The “almost” is an important qualifier, to which we will return…

What do we mean when we say it “rewards virtue”? Well, that’s what it does. It rewards saving, thrift, hard work, innovation, honesty, thinking about others, self-discipline, creativity and all the other qualities you normally associate with decent people and financial progress.

As for sin, it punishes the obvious ones – greed, vanity, short-sightedness, extravagance, envy, laziness, lying, cheating, stealing, stupidity, self-indulgence…and so forth.

When the Fed creates money out of thin air, for example, it is a lie. It is a sort of fraud. It is trying to get something for nothing. It is distorting the facts and encouraging mistakes. It surely will be punished. When? How? We can take a guess, but it’s not for us to say….

Likewise, take a fellow who works hard and saves his money… Will he be wealthy? Again, we don’t know. All we know is that he OUGHT to do well…

So, we should return to our qualifier…it USUALLY works that way.

Some greedy bastards do get rich. Some lazy fools win the lottery. We never know for sure who will make money and who won’t.

Why not? First, because we’re not God. He sees things we don’t see…and He has his own plans that he doesn’t share with us.

Second, because there is sin and virtue IN THE SYSTEM itself…to which we are all subject. When the Roman Empire fell apart, and Rome was sacked by barbarians, even the most virtuous Roman probably suffered a decline in his standard of living. Not much he could do about it.

Why would a system that rewards virtue and punishes sin be so frustratingly unreliable?

Well, that’s just the way it is. It’s a moral system, remember. And moral systems do not make it easy for you. If all you had to do to get rich were to respect the moral rules it would not be a moral system. It would be a simpleton’s system. Everyone would follow the rules. Moral systems are more demanding. They require you to follow the rules without being sure what it will do for you.

As every theological thinker from St. Augustine to Billy Sunday has noticed, you can’t get to heaven just by following the rules. That would be too easy. Instead, you follow the rules…and HOPE to get heaven by the grace of God. Similarly, you have to follow the rules of an economy…knowing you might not get rich after all.

There’s no gaming the system. There’s no pretending. There are no quick fixes…no shortcuts…and no guarantees. And even if this isn’t true, you’re better off believing it anyway.

You have to love virtue for its own sake. And hate sin.

And keep your fingers crossed.

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