The markets are operating on two separate levels. The level it's operating on now is what I would term the "surface" level, the war, the current economic statistics, the current psychology.
But under the surface level, we have what Bill Gross is referring to, and that is the massive debts and deficits that could ultimately sink the dollar and topple the US as a super-power. Perhaps ironically, the path that Bush is putting this nation on will simply accelerate this process of debt and deficit building.
There are two main scenarios regarding the future of the US, at least two which I take seriously.
The first is held by a number of highly intelligent people such as Bill Gross above. This scenario holds that the US is headed for increasing inflation as the Fed is forced to print new oceans of money to cover our continuing deficits and debts.
The other scenario held by such analysts as Bob Prechter and James Dines is that we face a deflationary depression, as the bear market bears down relentlessly on the mountains of debt that is built into the US economy at every level.
Assuming that one of these scenarios is correct, what is our salvation as investors? In both cases, I believe the salvation of investors is real money, better known as gold.
In a major inflation, the purchasing power of the dollar is sure to decline. If that happens, the case for gold is obvious enough. As the value of paper money declines, the value of real money (gold) will become clear, even to the most stubborn anti-gold element.
In a major deflation, the pressure on business would be relentless. In this case, the Fed would go all out to fight the forces of deflation. Fed Governor has already announced that the Fed would not hesitate to use its chief weapon, its "printing press" to fight deflation. The Fed would also bring interest down to zero or even to a negative level, and it might even turn to buying stocks if necessary. So in the case of a deflationary depression, the Fed would flood the world in liquidity, putting massive pressure on the dollar - and here again investors would turn to the safety of gold.
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