Central bankers and politicians have not really mastered the business cycle. Instead, what they have done is elaborated the art of socializing risk. That is, they’ve found new and more socially acceptable ways of taking losses from those who deserve them and passing them along to the general public.

When credit was expanding, offering default protection seemed like a no-brainer. But now the credit cycle has turned; credit is contracting, not expanding. And now, bonds are beginning to go bad. And so, the investor who bought a swap to protect himself turns to his insurer. Uh-oh. Here’s where it really starts to go bad. Because, real trouble rarely comes in the door alone. Typically, he comes with his drinking buddies and low-life friends.

Mr. Market wants to correct. But all the feds can do is to give Mr. Market more of the same medicine that made him queasy in the first place: more cash and credit. And whenever they force-feed the patient more cash and credit it causes a kind of gold fever, sending the price of gold up and driving down the dollar.

Mr. Market is clearly marching towards deflation – notably in the prices of houses and stocks. But the feds have a line on him. They’re pulling him in the opposite direction – inflating gold, oil and food prices. The combination of opposing ideas seems to rattle most observers. They can’t tell whether Mr. Market is coming or going.

The feds regard a Sushi Slump, a Japan-like recession, as the Greatest Of All Dangers. They want to avoid it in the worst possible way – by destroying the dollar .

In terms of real money – gold – oil is still cheap. Then again, in terms of real oil, gold is cheap . In terms of anything real, everything else is realistic. In terms of gold, the ordinary American house is cheaper today than it was five years ago. In terms of oil, the average stock is barely half what it was five years ago. In terms of soybeans, even health insurance is a bargain.

It appears that the economy is headed towards the dreaded synthesis of inflation and deflation known as ‘stagflation.’ Gold is rising. Oil has already risen. Up, up, up and yet, the economy can barely get out of bed in the morning. Consumers are running out of money to spend. And financial assets are going down instead.

Bill Bonner follows the theme of the first week of the year, and offers his forecast for 2008, or as he calls them, the financial obituaries.

The minutes from December’s FOMC meeting were released yesterday, showing that the Feds believe they may need to cut rates again. According to the minutes, “tighter credit conditions, higher gasoline prices and the continuing housing correction might be restraining growth in real consumer spending.”

Despite the volatility of the credit crunches, subprime bust, CDOs, SIVs and more billion-dollar writedowns than you can shake a stick at, 2007 will go down in the books as a positive year for the markets.