Ben Bernanke and Hank Paulson are planning the biggest bailout of financial markets in history. It could cost the taxpayer somewhere in the region of $1 trillion. But the market will triumph over the interventionists, says Bill Bonner.

The biggest credit bubble in history is due a correction, and there is little the Fed or Treasury can do to stop it. The more they try, the more money they have to print.

This makes the outlook for the dollar and US Treasury bonds ever more perilous… and the outlook for gold ever more attractive.

This from The Daily Reckoning:

There’s a war going on…a battle between a natural market correction…and an artificial attempt to avoid it. On the one hand, Mr. Market wants to correct the excesses of the boom/bubble period that began in 1982. On the other, Misters Bernanke and Paulson want to prevent him. Mr. Market takes down asset prices. Mr. Market Manipulators push them back up.

We know who the ultimate victor will be. Mr. Market never loses. One way or another, real prices must come down. That’s just the way it works. Night follows day…whether you like it or not. Stocks, bonds, property, art become expensive…and then they become cheap. Recently, they’ve been expensive…soon, they will be cheap.

As recently as a few months ago, it looked like the feds might be able to hold off a correction. Government-caused inflation was pushing up prices all over the world. Oil hit $147. Gold shot over $1000. Investors were getting rich in Chinese stocks and London property. Consumer price inflation was rising everywhere. Back then, it looked like consumers would be the big casualties of this war. They were facing much higher prices…with declining incomes.

But then, financial institutions began to take incoming…and pretty soon…the whole battalion of investors, worldwide, were getting beaten back. Stock market investors suffered flesh wounds in the United States; the Dow is down about 17%. In China, investors have practically had their heads blown off; the Shanghai index has lost 67%. Commodity investors got whacked too. Oil is down a third from its high. Yesterday, it closed at $97. Gold lost a quarter of its value, from the high. And investors in many of the safest, surest and smartest companies on earth – investment banks, mortgage lenders, and other financial institutions – have been wiped out.

But this week reminds us that the war isn’t over. The feds still have some ammunition left. The Fed has 200 basis points left to zero; it can cut rates further. The government can intervene directly in markets; it can seize companies; it can lend to anyone at half the rate of inflation; it can send out checks… In fact, judging on recent evidence, it can do anything…

…but the one thing it cannot do is create real money. Every intervention costs money. And money is the one thing the feds don’t have. Not real money. They only have phony money. And when investors finally realize the difference – between real money and funny money – that’s when things will get very, very interesting.

So far, only one major asset class has escaped Mr. Market’s correction: bonds. U.S. Treasury bonds have gone up (meaning, yields have gone down) as investors sought the safety of what used to be, and should be, the surest credit on earth. But bonds depend on not only on the ability of the issuer to repay…but also the value of the money in which they are calibrated. And if that money starts to sink in value, bonds take a hit.

U.S. Treasury bonds are unique. They depend on the value of the dollar…which the issuer itself controls. But as the war between Mr. Market and the feds continues, the U.S. Treasury will have a harder and harder time maintaining the value of the dollar. Because wars are costly. The feds will have to stretch the dollar farther and farther in order to meet the expense. Eventually, the elastic dollar will snap…and bonds investors will have their turn. Bonds will crumple over too…

Dear Reader, this war has already caused millions of casualties…from Wall Street’s masters of the universe…to the little guy with a sub-prime mortgage on his double-wide. But when the shooting stops and the smoke clears – only one man will be left standing. That man will be gold. Make sure you are standing next to him. Find out how you can get some golden insurance – without making a dent in your bank account.

Last 5 posts by Bill Bonner

• Goldman Sachs – Defending the biggest kid on the block - November 19th, 2009
• Crash Alert: The Future and Failure of the U.S. Dollar - November 16th, 2009
• Japan’s Lost Decade – is it too late for U.S. to learn from their mistakes? - November 12th, 2009
• What the German experiment can teach us about the future of U.S. wealth - November 10th, 2009
• The best way to get through a debt crisis? - November 5th, 2009