The big news last week was that manufacturing was turning down. The August drop recorded in the Philadelphia area was the biggest in five years.

What does it mean?

No one knows. But we see things turning down...generally.

And here we offer an erratum serioso. Last week, we reported that the chestnut trees along the Champs-Élysées were still green. We were wrong. True, the plane trees - which are relatives of the sycamore - are still green. But the chestnut themselves have turned brown and gold.

Paris in the springtime is how the popular song goes, but it is in the autumn that we find the city most fetching. Walking to work today, after a rain last night, there was a heavy, moist, decadent odor in the air.

The Champs-Elysées is considered "La plus belle avenue du monde," (the most beautiful avenue in the world). From the Concorde Square to the Arc de Triomphe, fall fashions are on display. Russet flounced skirts match the color of the leaves above them. But like so many other things, autumn in Paris is sweetest because it has a hint of death about it.

We took the news from Philadelphia like a falling leaf. It floated down on Friday...to a swell of murmurs in the financial media...and then lay down on the ground along with the other indicators of fall. Interest rates are going down; the yield on the 10-year U.S. Treasury Note came down to 4.69% last week. Commodities are correcting. Oil seems ready to test the $60 mark. Hedge funds are going bust. And most important, the great bull market in housing is wheezing and gasping.

Four major markets in California now report housing in a death rattle, each one registering lower house prices. The National Association of Home Builders says 10 major markets in the United States are going down and provides a chart that shows what looks to us like the end of the season for the housing boom: one line shows sales collapsing...the other shows inventories soaring. No wonder homebuilders' stocks are at a 15-year low.

And, from Los Angeles comes news that desperate homeowners are offering whatever enticements they can come up with in order to unload their houses. Many provide buyers with news cars and pickup trucks. One offers a fur coat. Another proposes to give the buyer a bottle of Chateau Lafitte Rothschild.

The Idaho paper tells us that sales in Treasure Valley are down 25%.

"Maybe they need some more inflation," said Henry at the dinner table last night.

Henry's 11th grade class is studying economics at his French Catholic school. We were curious; what were they teaching him?

"That inflation is good for an economy," he tells us. "It helps boost economic activity...and it's especially good at increasing exports. At least that's what it says in the textbook."

On both sides of the Atlantic, dear reader, economics as it is commonly taught and commonly learned is more scam than science.

We tried to straighten Henry out:

"Yes, when you inflate the currency, at first the results do look good. Just imagine you had a small town where the total money supply was $100. If the local bank printed up just $10 more...the money supply would increase by 10%. People would feel richer. They'd spend more money. But the supply of eggs, land, and housing would still remain the same...so prices would soon go up...and people would be right back where the started
- with exactly the same purchasing power."

"Well, that's not exactly the way my teacher explained it," Henry cut in. "When people begin spending, the money it sets off a boom. People begin to produce more in order to get the extra money. They build more houses and produce more eggs...so people actually have more stuff. Inflation really works."

"No, it's a fraud," we insisted. "Manufacturers may produce more at first, because they get bamboozled into thinking that people really have more money to spend. But actually no one has anymore purchasing power than they had before. They've just got more pieces of paper in their hands. So, the merchants and manufacturers and businessmen may produce more at first...but after they've raised prices to compensate for inflation, then they discover that they can't sell their extra production any more. For the simple reason that people never did have any real increase in purchasing power. They'd just got more pieces of paper off the printing press...they just thought they had more 'money,' or more 'wealth,' or more purchasing power.

"Then, when the producers realize that they can't sell their extra production, they're forced to cut back...so then the economy experiences a contraction...a recession...a slump, equal and opposite to the fraud that preceded it..."

"What do you mean by that?"

"Just that inflated money is a fraud. A swindle. A scam. Inflation is just pieces of paper pretending to be real money. It's counterfeit money. The more of it you put into the system...the bigger the boom at first...but the greater the bust in the end."

"Why don't you just keep inflating?"

"Well, that's what the government tries to do...but the boom gets bigger and bigger...and soon people catch on, and prices rise. And then you've got to have a recession to 'squeeze out inflationary expectations,' as people call it. Then, when people no longer expect inflation, they will fall for the inflation trick all over again."

*** Is this a great business, or what? We read the news and learn about all manner of absurdity and stupidity. Susan Antilla at Bloomberg tells us that Amaranth was not only speculating on gas prices; it was also speculating on Spacs and Starts:

"Spacs are one of those wonderful financial contraptions that only a serious Wall Street mind could devise: A bunch of hedge fund and private-equity types get together with some executives and dream up a name of a new company that might own a business one day. What makes it great fun is that nobody has to work at the Spac full-time.

"With the company duly named, and nobody putting in a 40-hour week, papers are filed with the U.S. Securities and Exchange Commission. Then they invite public investors to fund their venture, which has no revenue, no earnings and, to keep it simple, no operations at all. If they don't find something to do with the initial public offering proceeds within 18 months, investors get most of their money back - that is, if nothing goes wrong, such as a lawsuit that drains the coffers.

"Spac, which stands for Special Purpose Acquisition Company, has a close cousin known as a Start (Specified Term Acquisition Reserve Trust Security). The main difference between the two is the number of different kinds of securities the two hawk to the public."

Warren Buffett says the hedge fund industry is primarily a compensation plan for hucksters in the financial industry. We disagree. We think hedge funds are primarily an entertainment business - for the cynics watching the financial industry. They provide us with an endless supply of laughs.

Amaranth had invested in 25 different Spacs and Starts in 2006. What did the companies do? How did they make money?

Make money? If you have to ask that question, dear reader, you just don't get it. The hedge funds make money by selling their services to unsuspecting investors - often including the most sophisticated unsuspecting investors in the world, those who manage money for Morgan Stanley and Goldman Sachs. The idea is to gamble - not invest - in the hope of hitting it big.

Spacs and Starts are merely another form of way-out-of-the-money speculation. They raise money...and then hope to think of something they can buy that would go up in price. Of course, whenever you buy a start-up company, it's a gamble, because you never know whether it will work out or not. But here, the gamblers gamble other peoples' money on a company even before it becomes a start-up. It is a little like giving money to your brother-in-law and asking him to go to a casino that hasn't been built yet and see what he can do with it. Good luck to all concerned.

*** "America IS a great economy," explained a friend last week. "It not only provides employment for Americans, but also for a big chunk of the Mexican labor force."

Yes, the United States is a great economy. It provides employment for millions...and millions. But the employment it provides illegal Mexicans in 2006 - not to mention recent high school graduates - is not the same as the employment it offered in the 1950s.

Wages, for a big portion of the population, ain't what they used to be. Mexicans do the hard work...but they don't earn very much. This influx of immigrant labor depresses average wage levels. So typical wages go down, even though almost everyone you know seems to be doing better.

Meanwhile, the economy has steadily grown. But are people really better off?

The immigrants are probably better off. But what about the natives?

In the '50s, the typical woman stayed at home. She made dinner. She did the laundry. She took care of the children...and aged parents. All of that activity was out of the moneyed economy...and not counted in the GDP. Since the '50s the GDP has risen - but much of the rise is merely the monetization of activities that were previously unrecorded. Day care centers. Senior centers. Fast-food eateries. Two cars (both husband and wife now commute daily). Gasoline. Lawn care. News clothes for new careers. All these things have boosted the GDP. But have they made life better?

We don't know.

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