The big news so far this year is the steep rise in the price of gold. The old yellow metal is telling us something. But most people are deaf to gold. They can't hear it laughing.

Most people believe that gold is a “speculation.” They've heard that it pays no dividends. They've never heard of any “progress” or any quarterly earnings projections from gold. Gold never announces any fancy new technology. It never tells investors how fast it is growing or how many new customers it has.

Nor do people have any reason to think that the world's financial system is in danger. “Hasn't it always been this way?” they ask.

The answer is “no.” The present international financial system is an experiment. It has only existed since 1971, when the United States cut the umbilical cord between the dollar and gold. Before that, gold almost always stood behind the dollar, and other paper currencies. Why? You might just as well ask us “Why do fools fall in love?” or “Why is there air?”

If central bankers could create “money” simply by printing paper currency on a printing press, the world would soon be full of paper currency. And everywhere and always, the price of a thing varies with its availability. The more there is, the cheaper it is. Generally, as the volume of paper money increases, its unit price falls. Always has; always will.

This is not the first time central bankers have tried a system of purely faith-based currency. Every previous experiment ended in the predictable way: the bankers created more and more “money.” And as the quantity increased, the quality decreased. Eventually, the “money” was of such poor quality that people would no longer accept it. In recent history, the Argentine currency lost 90% of its value in a single year. In less-recent history, the German currency lost 999% of its value in a matter of weeks. Between the time a man ordered a beer and the time he finished it, the price might have risen two or three times.

“Money” comes in many forms and guises. In our wallet, we have paper notes that remind us of our travels. There are British pounds, of course. But we also have a few euros, a few hundred Argentine pesos, one half-torn 10-cordoba note from Nicaragua, and exactly two U.S. dollars.

We also have a collection of credit cards, each one of which has a certain purchasing power. And if we check our accounts, we find that we have “dollars” or “euros” in various forms and various amounts. At least, we believe we have dollars and euros. We have had them for many years, but we've never actually seen them. As far as we know, they exist in no other form than the electronic information that arrives to our computer terminal.

Still, we are confident that we could convert them into goods or services at any time we needed to. We could even sell our farm in America. According to friends, its value has more than doubled in the last six years. That is, we could get twice as many dollars for it today as we would have gotten in 1999. Where did this extra purchasing power come from, we wonder?

The trouble is, depending upon time and circumstance, the amount of goods and services we would get for our dollars is subject to change. That's why gold is chuckling to itself. It is watching the supply of “money” and potential purchasing power increase at shocking rate. As it goes up, the quality of the money we hold goes down.

For the first time since the Great Depression, Americans are spending more than they earn. The savings rate is negative. This gap has to be filled with “money.” The nation's trade deficit was $664 billion in 2004. In 2005, it rose to $806 billion. And the IMF estimates that it will hit $890 billion this year. These gaps, too, must be filled. Each deficit ends up in foreigners' hands as purchasing power. In three years time, more dollars are added to the world's supply than the current price of all the gold ever mined since the beginning of time.

Meanwhile, the U.S. federal budget deficits shoot up, too. During the two terms of George W. Bush alone, the feds have borrowed more money from foreign governments and banks than was borrowed by all other American administrations put together, from 1776 to 2000. So too will more debt be added to the national burden in the eight Bush years than in the previous 224.

According to the Bush-friendly Heritage Foundation, federal deficits are expected to rise to $1 trillion per year, by the year 2017, with a $16 trillion national debt, twice today's level. After that, deficits should grow to $2 trillion per year.

Money, money, money...the Fed is also recreating new money at the fastest pace in history. At the present rate, M3 is ballooning even more rapidly than the trade deficit.

Gold guffaws...snorts...and chortles. It knows something, but it isn't talking. Yesterday, it rose to another new high - over $550. It's even higher than Google.

*** “Housing market shows clear signs of slowing,” says MSNBC. Experts quoted in the article say the market peaked in the summer. Now, there are record inventories of unsold houses. Here in the United Kingdom, housing seemed to peak out more than a year ago. But it has not crashed. “UK housing prices growing at slowest rate in 10 years,” says a Financial Times headline.

In China, however, property prices have reacted more decisively. After more than doubling in three years, Shanghai real estate is on its way down. Average up-market prices are off 30%, say reports in the British press. One Taiwanese man jumped from the 33rd floor of an apartment tower, perhaps in desperation. Others are dropping sales contracts, walking away from expensive apartments and suing each other.

*** The Dow ended 2005 lower than it began, but managed to scrape its way over 11,000 yesterday. The typical stock sells for about what it did six or seven years ago, with a current P/E ratio of about 20.

The lead stock is, of course, Google. We recall mocking the editor of Kiplinger magazine when he bought the stock at $200. Now the stock is over $400. Should we call him to apologize? Nah...

Unless you really do your homework, every stock is a speculation. We have run our own business for the last quarter of a century. Even so, we can never know in January how the year will turn out. Sales could be up...or down. Profits could be good, or terrible. Sometimes we hit our projections; sometimes we do not. Many businesses may be a lot more predictable. Still, unless you really understand the business as an insider would, you are just guessing. He guessed right, but this is not serious investing.

*** Well...finally...good news! “Wages growing fastest in 3 years,” says a headline in USA Today. When the economy is really making progress...when people really are getting wealthier...we will see it in wages. Businesses can make profits in a number of ways, many of them short-term or fraudulent. The GDP, job growth, and productivity figures are all distorted. The judgments of economists and politicians tend to be self-serving swindles. But when ordinary working stiffs can earn more money for each hour they work, then you have real prosperity.

And here is the evidence in USAT. Wages per hour rose in 2005 by 3.1%. Glory hallelujah!

But wait, the official figure for inflation is 3.5%. Ooooh...another disappointment. The poor working stiff actually got poorer, not richer. How could America's dynamic, job-creating, super-productive, high-tech, hyper-capitalist economy actually reduce the value of the time that goes into it? Isn't the whole idea of economic progress to make people wealthier...making it possible for them to earn more money while working fewer hours? What kind of scam is this?

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