Imagine that you have a dream as you catnap in your favorite recliner. Well, more like a nightmare. You dream that your favorite recliner is precariously perched atop a ginormous powder keg, so full of gunpowder that it is flowing out of the seams of the keg. As you start to spring to your feet, a mass of impeccably dressed men and women tell you that everything is going to be okay. You face no danger from the powder keg. In fact, being perched atop an overflowing powder keg is the safest possible place one can find oneself. Meanwhile, some of the impeccably dressed men and women, most notably a bald man with a beard, nonchalantly flick lit cigarettes your way. Behind the impeccably-dressed-cigarette-flicking men and women, an elder man is jumping up and down, trying to push his way through the mass, yelling something about getting out of there before it’s too late. The impeccably-dressed-cigarette-flicking men and women look at the old man with disdain, then turn their attention back to you, smile, and say “never mind him, everything is going to be all right.” A few more lit cigarettes fly your way.

Unfortunately, this is no dream, but the situation in which Americans currently find themselves. The powder keg is our Ponzi economy, the gunpowder is a volatile mix of debt and an ever expanding money supply, the impeccably-dressed-cigarette-flicking men and women are the Establishment (politicians, academics, and the media) including Federal Reserve Chairman Ben Bernanke, and the old man is a certain congressman from Texas. The cigarettes are any number of events--a loss of faith in fiat currencies, war in the Middle East, another financial crisis, deepening stagflation--which could cause this whole thing to blow sky high.

It is impossible to predict the future, especially concrete time frames. But we are in a very serious situation. In 1971, Richard Nixon, fearing that the U.S. would no longer be able to meet its obligation to redeem dollars held by foreign governments for gold, closed the “gold window.” At that time, the price of gold was artificially capped at $35 per ounce. In order to fund LBJ’s Great Society and the Viet Nam War, i.e. Guns and Butter, the U.S. had engaged in monetary inflation. Many of these dollars found their way overseas and Nixon was advised that redeeming them would deplete the U.S.’s gold supply. At that time, the national debt was about $450 billion.

Freed from the constrains of any link to gold, the Fed was free to inflate at will. Within five years, the nation was in the grips of a horrendous stagflation--high inflation amid an economic downturn--something that the Keynesian economic paradigm claimed was impossible. Meanwhile, the price of gold had quadrupled. Many free market economists and newsletter writers advised their clients to head for the hills as the economy was in danger of a full blown meltdown. And it probably was. That is until Paul Volker assumed the helm of the Fed.

Volker raised interest rates, wringing inflation out of the system and causing a horrific recession. However, the economy recovered within a few years, setting up two decades of economic good times. Unfortunately, Volker didn’t solve the problem. It was just kicked down the road.

It is impossible for the current Fed to follow Volker’s example. The national debt is now over $15 trillion. In fiscal year 2010, the interest payment on debt was $197 billion. Raise interest rates and the year deficit balloons. Then you’ve got agency debt (Fannie and Freddie), unfunded liabilities such as Social Security and Medicare, underfunded pension funds, and state and municipal debt. Besides, Bernanke is philosophically married to the idea of devaluing the dollar by printing money. Meanwhile, the problems in Europe threaten to spill over to the States as US banks and money market funds have massive exposure to the European debt markets.

The crisis that so many feared in the 1970s is here. And it ain’t no dream.