War always produces surprises. And the battle between inflation and deflation is no exception.

U.S. stock prices are down about 9% so far this year. House prices are said to be down about 10% from their top. And the financial industry is still reeling from the subprime debt crisis.

The Dow rose a bit yesterday. The dollar went up too. Commodities hit a new all-time high. Gold rose. From an inflationary point of view, these are all positive signs. The feds are desperately afraid prices will fall. They’re doing all they can to keep the party going.

Bill Bonner writes that even great companies with unbeatable brands are going down.

Americans misunderstood the nature of capitalism itself. The market system merely provides the setting in which people get what they deserve. They could get rich, if they were to do the right thing: work hard, save money, innovate, take chances, forgo consumption. But do the wrong thing, and they will pay for it.

There is no magic to Free Enterprise. It is the best way to create wealth, but it does not prevent people from making mistakes. Capitalism offers people a chance to make money. But it also offers them a chance to make fools of themselves.

Capitalism produces wealth; it makes people richer than any other system. The more you tamper with it, the less well it works.

Bill Bonner writes that capitalism is a jungle, not a zoo.  It lets animals get fat, but only so they can be eaten by hungrier beasts.

Another possibility, now, for speculators is the obvious one. One of the surest bull markets on the planet is in gold. And as the dollar continues its decent toward its true value – and indeed the true value of all paper currencies – our Trade of this Decade is one thing that will always be worth having .

It seems obvious to us that the U.S. middle class needs to reverse course. Stop spending so much, stop working so many hours, focus on quality of output and quality of life. In a word: downsize.