Stocks down yesterday. Gold down. Oil down. Everything was down. The beginning of the end? Beats us. The Fed is still pumping in money. But investors are beginning to look beyond QE2.

If the economy really is recovering, they say to themselves, the Fed will be able to back off from money printing. Stocks, gold, commodities – everything should go down.

Did we mention a “hyperinflationary depression”?

What’s that, you’re probably wondering.

Well, it’s when you have a deflationary correction…and soaring prices too. And that’s what happens when the feds try to stop a major correction by pumping in huge amounts of money and credit.

But let’s stop and look at how an economy works.

As an expansion gets underway, first consumers spend money that they earn. Then, they spend money that they will earn in the future. And then, they spend money that they will never earn.

The private economies of many of the world’s developed nations reached the “never earn” stage in 2007. All of a sudden, lenders realized that they were never going to see their money again. Many borrowers would never earn enough money to pay off their loans.

The economy began a contraction…correcting its mistakes by writing down the value of those loans.

Markets are always discovering what things are worth. In 2007, they began to discover that a lot of the world’s credits weren’t worth as much as people had thought.

But then the feds were on the case.

While an individual person might run up debts greater than he can pay, the feds go one step further.

First, an expanding government lives on what taxpayers give it. Then, it lives on what taxpayers give it, plus what it can borrow from them. Then, it spends everything that it can squeeze out of taxpayers, plus what it plans to squeeze out of generations of taxpayers who haven’t been born yet. Finally, when it has crushed all the blood out of the turnips, current and future, it spends money that no taxpayer will ever earn or pay in taxes. It just prints money.

This creates a far bigger problem. Because, no one knows what to make of this new money. Where did it come from? Who earned it? What does it mean?

Since the economy is contracting, the new money doesn’t have much traction…at first. It is lent to hedge funds, banks, and other speculators. Soon, it finds its way into asset markets and basic commodity prices.

That’s why we’ve seen so many record setting prices in recent weeks.

But this is a special kind of inflation. Instead of stimulating people to buy, spend, borrow, and invest…it makes them feel poor. They pay more for gasoline and have less left over for other things. If they have a job, their earnings barely creep up…while prices race ahead.

Want to see the process in action? It’s happening already in the US. And it is even more advanced in England. Here’s the report from The Telegraph:

The Centre for Economics and Business Research (CEBR) said soaring inflation coupled with low pay rises means household peacetime disposable income is at its lowest since 1921.

Rising food, clothing and energy prices mean the average British family will have £910 less to spend this year than they did in 2009.

The CEBR calculates that household disposable income will fall by 2pc this year, more than double last year’s fall of 0.8pc and the biggest drop since the savage 1919 to 1921 post-First World War recession.

It forecasts inflation will average 3.9pc in 2011, its highest since 1992, as January’s increase in VAT from 17.5pc to 20pc and the rising cost of oil and other commodities continue to drive up prices.

At the same time, salaries will rise just 1.9pc as unemployment remains high and the public sector makes cutbacks.

Is this the description of a hyperinflation depression? Nope. Just an inflationary recession…so far. But wait until the feds pump some more…

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