We pick up today's missive where we left off - looking at the Big E's...

Our second Big E is the Experimental monetary system. Funny money bears on the price of energy and on everything else. It is quite possible, for example, for the price of gasoline to go up even with no change in the supply or demand for energy itself. That's because we are working with an elastic tape measure. As demand rises for energy resources, producers begin to see their oil and gas as precious assets and begin to ask what they are getting in return...and how they can get more. 

Oil is calibrated everywhere in dollars, they notice. But what is the dollar calibrated in? The answer is that it floats in the air like a willow leaf. If the winds are favorable, it stays up. If it gets caught in a downdraft, it falls.

Thus, we have an "experimental" financial system; nothing like it has ever existed before.  We do not mean this is the first experiment with money lighter than air. No, the U.S. Treasury did not invent pure-paper money. It has been tried many times - only, never with happy results. And never, ever on such a grand scale. Now, practically every currency in the world is backed by dollars, while the dollar itself is backed by nothing. In fact, the whole world's financial system rests on the shoulders of a single currency, which everyone knows to be a shirker. 

Until now, paper currencies were backed by gold or sometimes by both gold and silver. Occasionally, they were by land or something else that is presumed to have real value.  The reason is obvious: If you open up a central banker, he has the same internal organs as everyone else. And just like everyone else, he is susceptible to influence and temptation. If people are reluctant to use a currency that does not have sufficient precious metal backing, it is because they figure that the bankers in charge can succumb to temptation as well as anyone else; they can print up so much money that each bill sheds a part of its value. They can create as many pieces of paper as they want and default on their promises. Lie. Cheat. Steal. Central bankers can do all of those. But people also know that bankers can't create gold. And gold doesn't lie. It doesn't sneak out of town. It doesn't cook the books. It doesn't go up in smoke. It is what it is.

Indeed, the dollar was backed by gold, albeit imperfectly, until just 35 years ago. Then, on the 15th of August 1971, the Nixon administration cut the umbilical cord between the dollar and gold. We recall it nostalgically. We were driving cross-country and we drove into Albuquerque, NM, in the middle of a gasoline price war. Every gas station we passed quoted a lower price until we arrived almost in the middle of town to find regular gasoline for 25 cents a gallon. We cannot remember ever seeing it so cheap - before or after. Now, it is 1,200% higher. And we don't believe that that's solely because consumers want more or oil producers have less. In fact, output is higher than ever. It's more expensive for one reason only - because it's measured in dollars, and the dollar has been stretched out by inflation. Each bill now represents a tinier piece of the world's wealth.  

Thus have producers caught on to the science of modern central banking, which is nothing more than surreptitiously inflating the currency. Now that people know, the magic no longer works. Instead of increasing production in response to greater demand (more dollars), businessmen merely increase prices. Stagflation, it is called. We won't dwell on it here, but yesterday, we gave an interview to a documentary filmmaker who asked us what we thought of it. "What do you most fear - inflation, deflation or stagflation," he asked.

"We fear none of them," we replied. "What's more, we expect them all. The Fed is 'flating up the money supply, which means we will have stagflation - with rising prices and little or no real economic growth. Soon, expect general deflation, as consumers are forced to cut back. Then, the Fed will panic. They don't call the Fed chairman 'Helicopter Ben' for nothing. He has already told us what he will do if deflation menaces the economy: he will drop dollars from helicopters. This will cause hyperinflation and the destruction of the dollar." 

We only bring up out little chat to show that the Big E - our experimental monetary system - is unlikely to turn into a Big P - a permanent money system. In the first place, no money system is ever permanent. And a system not firmly attached to things of real value - such as gold - can be expected to last even less. Thirty-five years is already a record.  Our guess is that the dollar has a few years left, but not many. And when the end comes, it will be the same as in all such experiments. The world's monetary system - with the dollar floating on nothing but air - will collapse and be replaced with something else.  When, how...at what cost? We don't know, but judging from the way in which the quantity of dollars, debt, and derivatives has increased over the last 10 years, we guess that the change will come with crisis...within 10 years...and with much pain.

Which brings us to our next Big E: Economic Cycles - the normal ebb and flow of prices, as well as the big epochs in economic history. Temperature changes from day to night and from winter to summer, for example, but there are also extraordinary periods that last decades or thousands of years - ice ages followed by global warming. Indeed, Nicholai Kondratief described economic patterns as waves of growth and decline that last about as long as a human life. We suspect his work was mostly bogus, but there is nothing bogus about patterns. 

For instance, we know that from boom to bust in the stock market is usually a period of about 18 years. The bull market began in 1982 - or 1975, depending on how you look at it. It ended in 2000, a quarter of a century later. The bear market that began in 2000 was held off, but not reversed, by the biggest flood of liquidity in human history. But that bear market is still waiting around the corner. And it will probably carry the Dow down to about 5,000 or lower before it is over. And, it probably won't be over until 2015 or so.

We know that the bond market has similar patterns of boom and bust that last a very long time. Bonds fell from after World Ware II until Paul Volcker took charge at the Fed and managed to bring inflation under control 30 years later. Then, began a long bull market in bonds - with falling yields and rising bond prices - that either came to an end in June of 2003...or is still going. Looking at the chart, we think that bull market in bonds is over after lasting almost a quarter of a century. If we're right, we could be looking at falling bond prices for the next two decades.

But can't the Fed do something about either bear or bull market, you ask. That is one of the great illusions that begs correction. The Fed cannot control market cycles - or much of anything else. It can influence them, but then, only in a bad way. For example, after the boom/bubble of the 1990s, U.S. markets badly needed a rest; consumers needed to catch their breath and pay down their debt a little. But with 9/11 and visions of Japan's 10-year slump haunting their sleep, the Fed panicked and pumped out so much new liquidity that it stopped the correction in its tracks. Instead of paying down debt, consumers contracted more. And instead of allowing the markets to take a rest, the Fed set them off on a five-year wind sprint that has left consumers doubled up in exhaustion.  Now, they have their tongues hanging out and their pockets turned inside out. And so now, the United States faces not only a bear market in stocks and an economic slump, but the worst fate a country can face: the destitution of the masses. 

No one cares, particularly when speculators, punters, players, and gamblers take losses.  But it is another thing entirely when the middle and lower classes are wiped out. That is what happened in Germany in the 1920s. It is what happened in Argentina just a couple years ago. It is also what happened in France prior to the French revolution. You remember, a crowd of hungry peasants appeared at the palace gates. Marie Antoinette wanted to know what they were complaining about.  "They have no bread," explained an attendant. 

"Well, let them eat cake," she said carelessly. After all, how could she know it wasn't a matter of preference? In due course, of course, the mob leaped at her throat and she got her education. We wonder at whose throat the lumpen will leap this time, when they finally realize that the joke is on them?

The future is predictable, but who knows when it will happen.

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