The rise in the gold price above $1,100 per ounce last week is a pretty good indicator that something has changed. For 18 months, the gold price had been in a trading range topping out around $1,000. It has now broken out decisively from that range. The opportunity for the world’s central banks to change policy and affect the economic outcome has been lost. The world economy is now locked on to an undeviating track towards another train wreck.

At most times, the gold price is not an economically significant indicator. In 1980-2000, it declined irregularly from $850 to around $280, and movements in it seemed to have had little or no effect on the global economy. That’s what you’d expect; even at $1,000 per ounce, the global production of gold is only around $100 billion annually, which would put the entire world’s gold extraction industry only 17th on the Fortune 500. When Gordon Brown sold Britain’s entire gold reserves in 1999, at a price below $300 per ounce, it seemed a defensible decision. I went to a meeting in 2001 hosted by a diverse group which believed that the U.S. Treasury was conspiring to suppress the gold price, and my main thought was: why would Treasury bother?

However, in relatively few periods, gold becomes of immense importance. When investors lose trust in conventional currencies, because monetary policy appears set to debauch them, gold is the immediately available safe haven. During such periods, gold’s former importance as a store of value becomes uppermost in the public mind, and its price becomes a major economic indicator.

Gold became important from about July 1978 to early 1980, during which period its price rose from $185 to $850 per ounce. For that 18 month period, the price of gold was the most important factor in day-to-day market fluctuations. The gold price, more than the inflation rate directly, moved markets and by extension moved monetary and to some extent fiscal policy in the major economies. Only after Paul Volcker took over at the Fed in late 1979 did M3 money supply begin to supplant it in investors’ analyses.

We now appear to be at the beginning of another such period. The exceptional monetary stimulus entered into around the world during the financial crisis last year has prevented a downward liquidity spiral, but at the cost of destabilizing markets. Both monetary and fiscal policy dials are stuck at settings that would have been unimaginable two years ago. While this has produced only the beginnings of economic recovery, it has brought a 50% bounce in the U.S. stock market, a return in the oil price to around $80 – at the top end of the historic range, adjusted for inflation – and now a breakout by gold above its historic high. The repeated previous failure of gold to break above $1,000 per ounce made it all the more significant when it finally succeeded in doing so.

Ben Bernanke’s Fed is ignoring this. It insists that it will maintain interest rates at the current near-zero level for an extended period, regardless of what the gold price does. By this, it is ensuring that the present bubble in gold and commodities will play out to its full extent. Had the Fed begun to tighten gently during the late spring or early summer, when it had become obvious that the U.S. economy was bottoming out, but while stock markets remained subdued and gold remained within its 2008-09 trading range, it’s possible that it could have deflated the incipient bubble, steering the U.S. and global economies back on to a sustainable growth path. The U.S. Treasury would have had to cooperate by beginning to reduce the federal deficit, but at this stage with unemployment in the 10% range, there would have been no need for draconian action on that front.

With current Fed policy, gold is headed rapidly toward $2,000 per ounce, probably within six months. The forecasters who see such a price, but suggest it would take four to five years to get there, are ignoring history. Since gold was able to get from $185 to $850 in 18 months in 1978-80, there is no reason why it cannot get from $1,100 to $2,000 in six months now. What’s more, although 1980’s peak seemed madness at the time, and was equivalent to nearly $2,400 today, there is no reason why gold cannot go much higher if it is given another year or so to get there. The supply of gold from new mining is around 1 million ounces per year LESS than in 1980 and the supply of speculative capital that could flow into gold is many times greater. Hence, a $5,000 gold price is possible though not certain, if present monetary policy is continued or only modestly modified – and that price could be reached by the end of 2010.

As was demonstrated by the housing bubble of 2004-06, modest rises in interest rates are not sufficient to stop a bubble once it is well under way. Given the Fed’s recent track record, it is most unlikely that we will get any more than modest and very reluctant interest-rate rises. Even if inflation is moving at a brisk pace by the latter part of next year, the price rises will be explained away, or possibly massaged out of the figures as happened in the early part of 2008. Hence the bubble will inexorably move to its denouement, at which point gold will probably be north of $3,000 an ounce and oil well north of $150 per barrel. Even though there will be no supply/demand reason why oil should get to those levels, and gold has almost no genuine demand at all, the weight of money behind those commodities in a speculative situation will push their prices inexorably upwards, beyond all reason until something intervenes to stop it.

At some point, probably before the end of 2010, the bubble will burst. The deflationary effect on the U.S. economy of $150 plus oil will overwhelm the modest forces of genuine economic expansion. The Treasury bond market will collapse, overwhelmed by the weight of deficit financing. Once again, the banking system will be in deep trouble. The industrial sector, beyond the largest and most liquid companies and the extractive industries, will in any case have remained in recession – it is notable that, in spite of the Fed’s frenzy of activity, bank lending has fallen $600 billion in the last year. Unemployment, which will probably enter the second downturn at around current levels, will spike further upwards. The dollar will probably not collapse, but only because it will have been declining inexorably in the intervening year, to give a euro value of $2 and a yen value of 60 to 65 yen to the dollar.

In the next downturn, the Fed will not be able to cut interest rates, because inflation will be spiraling, as in 1980. Instead it will need to raise them while dealing with a profound crisis in the bond markets. Capital in the U.S. will become still more difficult to come by, and unemployment will approach 15%. The U.S.’s only saving graces will be that the inflation will have prevented much further decline in the nominal prices of houses, while the decline in the dollar will have finally swung the payments deficit towards balance. U.S. real wages will be forced downwards by high unemployment, while banks’ relief on the home mortgage front will be balanced by a tsunami of collapsed credit card debt and other consumer debt.

2011 and 2012 will be very unpleasant years, as the Obama administration struggles to get closer to budget balance without pushing up taxes so far as to cause yet a third recession. Stock prices will be at or below their March 2009 lows, and will stay there even as earnings of export-oriented companies will be robust. (Conversely, retailers dealing in cheap imported goods, such as Wal-Mart, will be devastated.)  Wages will be generally declining relative to prices, although may show some growth in nominal terms as inflation will be considerable. Foreign goods and services will be inordinately expensive in dollar terms.

The danger in those years will be that Ben Bernanke will attempt yet again to refloat the U.S. economy through inflation, buying government debt to fund the deficit and forcing short term rates well below the inflation rate. This danger is exacerbated by the Obama administration’s insouciance about deficits. Ben Bernanke on his own (and his predecessor Alan Greenspan) bears a large share of responsibility for the 2008 crash, but the Bernanke/Obama combination is potentially even more dangerous. If expansionary monetary and fiscal policies are pursued regardless of market signals, the U.S. will head towards Weimar-style trillion-percent inflation. That would make the government’s position easier as its mountain of Treasury debt became worthless, but devastate everybody else’s savings and impoverish the American people as Weimar impoverished 1920s Germany.

As I said, a train wreck. Probability of arrival: close to 100%. Time of arrival: around the end of 2010, or possibly a bit earlier. And at this stage, there’s very little anyone can do about it; the definitive rise of gold above $1,000 marked the point of no return.

The Bears Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long ’90s boom, the proportion of “sell” recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.

Martin Hutchinson is the author of “Great Conservatives” (Academica Press, 2005). Details can be found on the Web site www.greatconservatives.com