The flags were out in London yesterday. Cars went by streaming flags from the windows. People wore them on their hats...on their shirts...on their front porches.

For a while, London looked like an American city. Americans are fond of displaying the flag too. But whereas here in London, the flags fly in support of sports teams, in the United States, flags are put out to show support for everybody's favorite home team - the federal government. The British diversion seems to us more innocuous...healthier...and more civilized.

People do seem to need to divert themselves from their own lives. If not sports, then movies, books, theatre, politics, celebrity magazines, newspapers, the stock market...there are almost an infinite number of ways the modern world supplies to interest yourself in someone else's affairs. Fans cheer their favorite players; when their hero scores a goal they feel almost as if they had done it themselves. That is why people watch TV shows in which their champions argue about politics too; every time the bigmouth scores a point, they feel smarter.

But in spite of the flags out today and the trains running here in London, the city is still as dead as public decency. Today is a "bank holiday," a "spring holiday" in the Economist's diary. In America it is "Memorial Day."

But, holiday or no holiday, we are hard at work, dear reader - on your behalf. We are connecting dots. And today, we hope to connect enough dots to make it worth your while to have tuned in on a holiday. You deserve something special. We have something.

Every once in a while, dot-connection comes with an insight. We have one for you today. As far as we know, no one has ever thought of it. But in our minds it is equal to the Law of Competitive Advantage... or the Law of Unintended Consequences...or at the very least a minor state law. We call it the Law of Limp. It describes the process of incremental degradation that eventually destroys an economy, a nation or a currency. The Law of Limp tells us that when giant strides are taken towards self-destruction...it is the defective leg of prudence that is dragged along behind.

And since this is a money-oriented service, today we look at how the law works in the area of currency. We demonstrate to you why it guarantees that the dollar will become worthless.

As we have mentioned many a time, a central bank can only directly control the quantity of the money it emits. If it limits the quantity, it controls and protects the quality of the stuff. But as any system matures, it develops the familiar aches and scleroses of age. Sooner or later, people find ways to "game the system" for their own advantage. And the advantage that can be gotten from a central bank is the simplest of all; it "creates" money. What could be more natural than that people should favor more money rather than less? Bankers, after all, are not robots. They have flesh and blood, brains and hallucinations just like everyone else.

"We are not Gods," we recall Peter Mullen saying his Sunday sermon a week ago. "We are human beings. And as human beings, we are prone to make mistakes. We look for temptation so that we may give into it. That is why we say in our prayers to 'deliver us from temptation,' because we know we have a hard time resisting."

Central bankers resist temptation for a while...and then give in to it. In Friday's essay we noted that this was the 'Way of all Cash." But bankers give in to their lust for lucre in unequal steps. First, they are asked to "stimulate" the slumping economy, for which they must take large steps. Then, as consumer prices rise and they realize that they are putting the quality of the nation's money in jeopardy, they must un-stimulate it. Thus they lower rates to stir things up and then raise them to soothe them down. But they do so unevenly...in a lurch. When a crisis comes up, they rush to lower rates as if they were Jesse Owens in the 100-yard dash. But when the crisis is over, they become gimpy legged. They hesitate. They want to make sure the trouble is well and truly over. All their friends tell them not to be too hasty. After all, who wants tighter money? So, they drag their feet.

We have only to look back a few months for evidence. The Greenspan Fed responded quickly to the slump of 2001 with rapid rate cuts. The recession was over after three quarters, but the cuts continued until the Fed was lending money for just 1% interest - or not even half the rate of consumer price inflation. This low rate lasted much longer than the emergency that provoked it. Three years later, the Fed was still lending money at 1%...and then began raising rates in tiny, "baby steps," of 25 basis points, so that it took another two years to get them back to normal.

Meanwhile, again in Washington, yet another form of incremental degradation has become routine. The theory lawmakers inherited from John Maynard Keynes was that government should counteract the business cycle by running deficits when the private economy was in a slump and surpluses when it was growing too fast. It was an idea that promised great benefits - people believed it would eliminate the booms and busts that plague free economies. But they failed to reckon with the Law of Limp. Politicians were Herculean in their efforts to offset the 2001 slump, dizzily spending $750 billion - in only 18 months. But when the crisis was over, where were the surpluses? They are yet to appear. The poor withered leg never catches up. The government's last real surplus came when Archie Bunker was still a TV hero. Now, measured honestly, the feds are running deficits over $800 billion every year.

You'd think we were at war or something.

Tomorrow, more on how the Law of Limp helps explain the war on terror...and dooms the dollar...

*** The Dow and the dollar are both in recovery. Or so it appears. But they are both bound for trouble. If not now, when?

Chris Mayer recently sent this note:

"Since the end of the Bretton Woods agreement in 1971, the dollar has been an irredeemable currency, no longer defined or measured in terms of gold. Nonetheless, in an ironic twist, it has become the world's dominant currency and the core reserve asset of central banks all over the world. It has replaced gold as an international currency. The transformation has not happened without consequences. One of these is that the discipline imposed by the gold standard is no longer operative. Another consequence, related to the first, is the profound effect this has had on international trade."

"Gold is the best money, because for centuries, as a result of countless individual choices, it has evolved as such," Mayer reasons.

Resource Trader Alert's Kevin Kerr is inclined to agree. "Gold may seem antiquated and a relic of days gone by; an impractical alternative - but it's far from that," he wrote in his weekly column for MarketWatch. "Central banks are adding to their reserves -- and so are individuals. Remember, gold has been around for millennia while the mighty U.S. dollar has only managed to survive a couple of hundred years - a rough couple of hundred years at that.

"Gold may not be on a perfectly straight road to higher prices as evidenced by the volatility of late, but one thing is clear, gold is the best alternative to the current fiat fiasco of fiscal policy.

"The U.S. dollar is on trial in the world financial markets and I for one am not waiting for the verdict. I am hedging the outcome with gold now while it's still very cheap."

*** Massachusetts. Is there anyone who knows how to spell that word? Not in this office. Not on a bank holiday. But you know which state we refer to. It is the one that burned witches in the 17th century. In the 18th century, it led the colonies in treason against the crown. "No taxation without representation," its banners demanded.

What were they thinking? The British imposed a few tariffs and taxes, but taking them altogether they were probably less than 5% of income. Most residents of the colony rarely or ever had any contact with the government of King George, which mostly let them alone. Today, the average person cannot get away from government. Everything is subject to license, regulation, taxation, restriction, certification, verification, and permit. Now it is the native government whose swarm of agents harass the people and eat out their substance like locusts. The tax burden per citizen of the New England states is nearly eight times higher since colonial days. Taxation with representation turned out to be worse than the other kind.

In the 19th century, Massachusetts led the push for war with the South. It was volunteers from the New England state who stirred up the mobs in Baltimore at the beginning of the war...and then fired on unarmed civilians. Here again, what were the Yankees thinking? The involuntary servitude of blacks needed to stop...but the involuntary servitude of whites to the state was not much of an improvement. In New York, the draft made Irish immigrants riot. The Yankees had to call in troops to put down their own people...before returning to their murderous campaigns against the South. Meanwhile, the rest of the world threw off slavery with hardly a fight.

There must be something in the water up there. In the 20th century, Massachusetts led the entire nation towards more and more taxes, regulation, debt, and destruction. It was the "best and brightest" from Harvard, who took the nation into the disastrous Vietnam War...and another Harvard grad who led the nation into Iraq.

We only mention Massachusetts because it is now the scene of a glut of unsold housing. Sales dropped 15% last month.

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