Dear Dan,

I shall buy Gold, Silver and some resource stocks NCM, WPL, BHP. That's about it. The balance will stay in Cash this year 2009.

Cheers

Tom P.
Western Australia

Dear DR,

My plan is not to try to predict anything, or believe predictions (Inflation? China going gangbusters again? New commodity boom?). I will just use what I have learned about technical analysis to:

1. Find the newly trending stocks/markets. I will use Diggers and Drillers to help identify commodity stocks with a bit of fundamental flavour.
2. Stay in them until my signal says sell
3. If the All Ords gives a sell signal with my favourite squiggly line I will look for new shorts

So I will trade like a robot - the only way to survive financially and emotionally!

Cheers,

David

Dan,

You asked, "It's an important question-probably the most important you can ask these days. So we're going to collect and write up our thoughts over the weekend. Stay tuned! And if you want to send us your plan, don't be shy."

Here's my plan:

1. Continue to pray
2. Continue to live below my means
3. Continue to purchase precious metals
4. Continue to build a "storm kit" We get pretty significant storms in Texas at times, so the kit is useful for the aftermath of nature's storms and man-made economic storms. My kit includes foodstuffs, a water purifier, gun/ammo (hey, this is Texas!), diesel fuel (for my diesel car, which I think that diesel will store a lot better than gasoline), mutually supportive friends and a plan to pull it all together. I'm checking into generators, but don't have one yet.

Thanks for the DR website. I really enjoy the contrarian analyses and the personality / humour the authors put in their contributions.

JL in Texas

Dear Dan,

To your question what should we do?

1. Take notice of the Daily Reckoning analysis (with co-benefit of getting sorely needed laughs from the writers' predilection' for understatement of the obvious).
2. Watch the original Mad Max movie and take some notes on survival techniques for 'a future world that is coming to suburbs near you'
3. Bemoan the fact that I am not living in a remote fully sustainable community of caring organic farmers with some ex SAS troopers and all the requisite equipment and supplies to sustain a long drawn-out cataclysm
4. Invest in arms manufacture, security technology companies and the pharmas manufacturing headache and analgesic medicines
5. Learn to speak Chinese

Hey Dan,

With the money supply going crazy surely mega inflation is inevitable in certain asset classes like energy (as China recovers) GOLD insurance and food. Probably as a more or less global phenomenon. Maybe everything except wages. I don't think housing will suffer a serious price decline as the domestic economy is not badly affected long term as far as I can see.

I wouldn't mind going into debt to buy local energy stocks. That's about my plan. Wait for oil to double in price and then re-evaluate. The Aussie dollar has been pretty weak and over a year or two I don't think it's likely to recover substantially in that time frame. Oil should. Possibly. SWFs and hedge funds have to pile into something.

Maybe with the profits I will buy gold coins (or mining companies) and guns, and bars for my windows. And for my vege garden. Not sure when gold's gonna do that 5th leg of the Elliott wave some of us are expecting. I prefer shorter time frames with all this volatility. What a ride. Whee!

I have been reading the DR for about two years and look forward to reading it. I really enjoy your, Bill and the rest of the crew's reckonings, keep up the great work.

Cheers

Bas H.
Brisbane, QLD

Dear DR,

I always read your column with interest as a balance to the optimists who seem to infest the newspapers.

My strategic rearrangement of investments began in late 2006 when this GFC was first mooted in the UK press and overseas investments were repatriated and spread around the Australian banks as a risk management strategy. I was still buying shares but cautiously & only in 1% of cash resources at a time.

I then sold of some of my shares late 2007 but took my eye off the share market despite advice from others to liquidate my position. Since then I have been looking for shares in which to park my cash but only recently found a few prospects that might be worthwhile.

I was in North Germany in my UK based motor home late October 08 and needing a spare part. I noticed from the highway a large motor home sales yard bursting with new motor homes and visited.

Whilst there I was fortunate to have an interesting conversation with the owner when I commented that he had a full yard well past the end of the summer sales period & at a time when financial predictions were already quite negative.

His response was insightful. He advised that there was a collective German memory of the Weimar republic of the 1920's/1930's and the aftermath of WW2.

His customers saw a motor home as something of real value on which to spend their saved Euros "before they became worthless" and which was a portable house which they could move to somewhere in the Mediterranean sun if life became really desperate!!!!

His sales were excellent.

There is clearly going to be hyper inflation in the cost of living in Australia which means that the real purchasing power of my cash at bank is diminishing rapidly.

As well, interest on cash at bank is derisory and is taxed at one's marginal rate so the question is what to do with it "before it becomes worthless".

In Australia every federal, state & local authority/city council is making a grab for income straight out of my pocket where they know I have no option except to pay up such as council rates, fees for government services, vehicle registration etc.

As well our collective or national wealth is being squandered on "feel good" and poorly conceived projects which will no doubt be executed with equal inefficiency. The National Broadband Network is such a plan that is not "Nation Building". It's "Nation Wealth Destroying".

It's worth recollecting the "Think Big" projects of the 1970's and 1980's in NZ which has left a legacy of national impoverishment that has lasted to today.

I agree with your sentiments that house prices are over-valued. This when taken with the unfavourable circumstances that landlords find themselves in when dealing with feral tenants due to an iniquitous "Residential Tenancy Act" makes rental properties an undesirable way of safeguarding wealth.

We have much to learn from the reformed Communists /Socialists who govern China and who have clearly understood their current strategic/financial advantages plus long term needs and are withdrawing their US$1.7 trillion of USA treasuries and converting it into a vice lock on all the mineral resources required for the long term prosperity of their economy when these resources are priced at desperation levels.

Clever chaps who are way smarter than those in UK & USA!!!

I am still at a quandary as what to do with my cash as fortunately I have few $ assets in Superannuation, no debts and I am a hands on person who can fix most broken things and maintain the prime items like cars and homes that I own so I am able to minimise my outgoings.

I don't see many safe investments and I can see the real value of cash being rapidly diminished by inflation.

Regards,

Ken

• Feds’ Plan is to Reflate the Economy
• The Chinese Stimulus Plan to Save the World
• Our Policy on Share Tipping
• Australia’s Response to the U.S. Bailout Plan
• Australia & China: Already Partners in the Commodity Boom

As you can see, after bouncing off 673 on March 9, the S&P 500 has surged a stunning 23% as of last Friday. That's some seriously bullish action.

The market has also bounced on higher average volume, which is indicated on the volume section of the chart by the black line. Significant? Certainly. When market moves to the upside are driven by higher-than-average volume, it's a clear sign that bullish investors are getting involved and are willing to buy shares to prove it.

But that's not all. To find a similar bounce to the one we're in the midst of right now, I have to go all the way back to last November. Then, the S&P surged from a low of 741 to 944 in January. That translated to a 203-point upswing, or a whopping 27% upside run.

My take: A bounce similar to the one we're in right now ignited a move of nearly one-third in U.S. stock prices just a few months ago. Considering that we've moved 23% in just a matter of days, my thoughts are the recent surge has decent legs.

Sure, we're not out of the woods yet, not by any stretch of the imagination. But facts are facts, and the recent market action bears that out: We're moving in the right direction... especially in one of the most important sectors - real estate.

Ever since the financial crisis began, I've said that one of the big triggers of a decent, well-founded recovery - in the economy and the stock market - will be an improvement in the real estate sector. And while the latest news isn't mind-blowing, there are a few positive morsels.

Remember, I'm looking for positive moves in real estate for a simple reason: Improvement in this sector means increased sales and stabilization in prices. That, in turn, will ignite new lending. After all, with reliable prices and positive sales movement, homebuyers know what they're buying won't get crushed. And lenders know what they're lending will likely be paid back.

Now, even when the real estate market recovers, we're not going to see the surge in prices and buying that started one of the biggest asset bubbles of all times. A ton of that was fueled by underqualified borrowers and downright lousy lending practices. And while banks have short memories, they aren't that short.

Rather, the recovery in real estate will begin with baby steps: small moves in the right direction. And the latest news is just that. Take a look...

As you can see from this chart, existing home sales in February jumped to the upside. In fact, compared with January, home sales were up 2.6% in the West, 6.1% in the South and a whopping 15.6% in the West. All told, existing home sales in the United States increased a solid 5.1%!

The news gets better. Sales comparisons with the same period last year - which tend to be less volatile than month-over-month numbers - show some huge bright spots. In fact, while overall home sales in the United States were down 4.6% in February compared with last year, sales in the West were up a stunning 30.4%.

That's right, February home sales in the West - which includes the super-important Southern California and Las Vegas real estate markets - rose nearly a third compared with last year. Plus, it marked the eighth straight month of year-over-year increases for the region.

Now get this: With the real estate market in the West generating a whopping 1.2 million units in annualized sales, sales activity is now a staggering 38% above its cyclical low point of 870,000 units marked in October 2007.

That means - from a sales angle - a market bottom in this key real estate region is way, way in... and has been so for months.

So what's driving the bullish numbers in real estate sales? No surprise here: The median home price in February was just $165,400, 15% below its year-ago level.

Sure, we want to see these prices stabilize. But the fact is with 45% of home sales distressed - either in foreclosure or in short sales - these prices are going to take a hit. And while the process is painful, the market needs to clear off unwanted inventory before it can really begin to get back on its feet.

But mark my words: Lower prices aren't going to last forever. And it's not just because sales activity is beginning to accelerate. See for yourself...

As you can see from this graph, the National Association of Realtors says housing affordability is rising fast. In fact, at a current level of 167, home affordability is now 25% easier than the year-ago's 133 level.

So what does a Housing Affordability Index (HAI) level of 167 really mean? It's pretty straightforward. An index level of 100 means that the typical family earning the median income in the United States has exactly enough income to qualify for the average mortgage.

So with the HAI at a whopping 167, the average family in the U.S. has 167% of the income necessary to buy an average home. Talk about buying power!

Regards,

Wayne Burritt
for The Daily Reckoning Australia

P.S. Bottom line: The stock market is in the midst of a solid bounce. Plus, the real estate sector - a big key to a sustained recovery - is showing signs of life, especially in the important West region of the United States. Together, these factors point to more bullish action for stocks down the road.

Editor's Note: Wayne Burritt has spent over 28 years as a financial writer, investment analyst and business developer. A natural teacher with a lot of knowledge to impart, Wayne takes great pride in sharing his expertise on the subject of options and investing with anyone willing to learn. Wayne believes that given the right teaching, anyone can become an expert in options. Currently Wayne shares his knowledge with the readers of Easy Money Options.

• REIT Investors Grown Complacent About Risks in Commercial Real Estate Market
• Macmahon Holdings Limited (ASX:MAH) Near a 52 Week High
• An Insider’s View of the Real Estate Train Wreck
• Real Estate Brokers: The Latest Victims of the Housing Crunch
• Commercial Real Estate May Be the Next to Fall

"And now nothing shall be withheld from them which they have desired to do..." I mentioned this quote several weeks ago. It comes from one of the many attempts that foolish men have made to be as God. It also brought about one of the greatest cataclysms in history. You can read the whole thing in Genesis 11.

For us, it applies heavily to the advances of government into the field of business. It only makes sense: the occupants of the White House and the Capitol have done such a good job with their budgets over the years, they just want to help everyone else (over the cliff, that is).

It began, as it always does, with just the camel's nose in the tent. A bit of money here, some bank guarantees there. But then, as the fable tells us, the rest of the camel wanted in.

The government insisted on foisting money on companies that didn't even need it. Washington's excuse? If the only companies taking the money were the ones that needed it, those companies would suffer a "stigma." But if every company took the money, even if they didn't need it, the bad ones couldn't be singled out.

We, of course, would never know the difference between the two. So much for more transparency in government. Now the companies who didn't need the money are lashing back. Having to pay 5% interest on money they didn't need to borrow is only a greater liability to already burdened companies.

But the government's fun still wasn't over. It forced out a CEO at AIG, now one at GM... and it passed a stimulus plan that required contractual bonuses be paid, then issued a 90% tax on them when the public outcry became too great.

Now Chrysler is being pressured to bring green cars to the market by none other than their new "boss," the Obama administration. Of course, they already have a green car, but the "boss" says it's too expensive for the public to afford. So, essentially, he pulled the plug on it. Frankly, I'd like to know why he thinks that Chrysler's greenie is too expensive. It certainly could not cost more than the bailout price tag they have forced each of us to shoulder. Expensive is a relative term.

Make no mistake about it, we are living in times that will likely produce great changes in the world. There is a certain theory that attempts to explain the history of the world through great cataclysmic events.

Some are occurrences in Nature; some are wrought by the folly or the genius of men. Let me say at the outset that I am a subscriber to this philosophy, so have no illusions about what I am saying.

Actually, most people who ever think about such things believe that all of existence began with a great cataclysm. You can call it the "Big Bang" - no matter if you're referring to the "Big Bang" that set the evolutionary process in motion, or the "Big Bang" of God creating the heavens and the Earth.

At some point, life came into existence - a big event in the universal process of all things. Of course, this is the point where the two theories begin to diverge from one another. Evolution has no more "Bangs" left in its bag. It is a slow and relatively even process from there on. Which is, I suppose, why it takes them billions of years to get to the point that God was able to accomplish in six days.

But for the recorded history of men, it has been one cataclysm after another, of varying sizes and types. Famines, floods, pestilence, earthquakes, volcanoes... and other natural disasters take their toll, but seem to always right themselves over time.

The follies of men, however, are a different matter.

The wonderful world of economics is no exception, and has no exemption. As I have said before, economics bears within itself the very principles by which God has made it to be governed. The Law of Supply and Demand is not dependant upon Congress. It was not invented by the whim of elected or appointed regulators. It is not governed by the United Nations, the International Monetary Fund or the European Union.

It brings to mind a letter someone once sent to Congress. Perhaps you've heard about it before. If not, please enjoy:

Senator John W. Bricker

The Senate

Washington, D.C.

Dear Senator Bricker,

In my opinion I would suggest that if the Senate and Congress would abolish that awful law of supply and demand, it would increase production. Stop hoarding for high prices as is now being done by the government and others. Push all products for sale to the markets and start competition. The law of supply and demand is a burden to the Consumer because they foot all of the bills.

I trust you and your fellow senators and congressmen will act promptly.

Gerald V. __________

(Taken from Dear Mr. Congressman, by Juliet Lowell {New York: Duell, Sloan, and Pearce, 1948}, p. 91.)

I suppose we ought to give Gerald high marks for even knowing the term "supply and demand," since I tend to think you might be hard-pressed to find it in the vocabulary of modern high school students. I have long felt that it would be a good question for Jay Leno's "Jaywalking" segment of the Tonight Show.

At any rate, the laws of economics are established by a much Higher Power than we will ever be. And while we are at it, we should also understand that the Power is stronger than we can ever successfully contend with.

This is why, try as we might, we cannot substitute our own economic devices and have them succeed.

So let's put a finer point on all this. The value of a nation's currency is built upon the honesty behind it. Even a currency backed by gold becomes worthless if the government holding the gold cannot be trusted. While in days gone by it was easier for authorities to debase a metal and get away with it, all such obligations now are simply based on a government's willingness to part with its gold. Of course, these days it does not happen.

And while the United States has been an expert in telling other countries how to morally treat their people, we have been robbing them blind! It has gotten so bad that even the Evil Empire and the Red Menace have seen through our chicanery. We may look upon them as people less "evolved" than we are, but the jig is up. Our hypocrisy has been found out.

We have become like the man in the Biblical parable who tried to remove a speck from the eye of his friend, when he himself had a log in his own eye. "First remove the log from your own eye, and then you will see clearly to remove the speck that is from your friend's eye." Seems like pretty simple (and common-sense) advice. But in the words of newspaperman Horace Greeley, "Common sense is very uncommon."

I began this by saying that cataclysmic times are upon us. We are seeing the shaping of men and nations. We are setting the groundwork for the impoverishment of generations.

Spain fell in line with the prevailing models of economics by bailing out its first bank in a quarter of a century. And with a broad brush it painted its regional banks as "heavily exposed to property developers struggling during a deep recession."

I have told you often of the difficulties prevalent in Europe. Here is but one more piece of evidence. Authorities are planning to solve this with 2-3 billion euros - but, oddly enough, have promised up to 100 billion euros. Wow! That's a huge disparity. I believe they may think it will take more than just 2 or 3 billion.

On the same topic, European Central Bank President Jean-Claude Trichet sees more ongoing deterioration all across the Eurozone. Market forecasts believe Brussels will announce a 50-basis-point rate cut later this week. Germany, which makes up about 25% of the euro economy, is looking for an acceleration in economic deterioration.

This is a cataclysm.

Central Banks are flying blind with an instrument panel that has no configuration for the geography. The fixes they are trying will lead us to Zimbabwe (hyperinflation) or Tokyo (perpetual slump). Pick your poison.

In the meantime, I am forced to look for more overall dollar strength. The United States still possesses the deepest markets and the "deepest pockets" in the world. If other economies continue to fail, fiat currency supply and demand will favor the dollar. And by "deepest pockets," I mean they are committed to inflating their way out - and have more ability to do so than anybody else.

I know looking for dollar strength seems a little backward while they are inflating. But the truth is, ever since the credit crunch, everything has been turned on its ear. If you are new to the currency markets, say within the last couple of years or less, likely most of this action makes very little sense to you. But in these times we must remember this axiom: The market will eventually adjust to actual realities. In the meantime, it will be moved by perceived ones. As long as fear filters through the markets, the currency flows will come back to the dollar. When there are periods of vacillation between fear and risk, the currencies can swing wildly.

Regards,

Bill Jenkins
for The Daily Reckoning Australia

Editor's Note: Bill Jenkins, founder and managing editor of Master FX Options Trader, knows the Forex currency markets inside and out. After 20 years and a string of losses following other people's crack advice, Bill created his own system for cashing in on tiny currency fluctuations between the British pound and the U.S. dollar.

• Only Thing Rising Faster than Demand for Government Debt is Supply of It
• Dollar’s Demise Has Started a Chain Reaction in Currency and Commodity Markets
• US Dollar As Reserve Currency Not Working Very Well
• A Gold Standard, Without Gold
• Demand for Credit is Growing Less Fast

This Keynesian orthodoxy was shattered in the 1970s when the United States suffered through "stagflation," which was high unemployment and high inflation. This outcome was not supposed to be possible, according to the popular macroeconomics models, and it left policy makers with no clear choice. If the Fed raised rates to stem the inflation, it would hurt the economy even more, but if the Fed cut rates (through printing more money) the inflation problem would worsen. The vacuum created by this crisis in both theory and policy was filled by the Reagan Revolution and supply-side economics.

At this stage nothing is certain, but the country is currently headed straight into a period of very rapid price hikes and a very bad recession. It would not surprise me at all if the national unemployment rate and the annualized rate of consumer price inflation both broke through into double digits by the end of 2009. Moreover, regardless of when it actually starts, I predict that things will get much worse before they get better, and that the United States will be mired in a malfunctioning economy for at least a decade, with price inflation in the double-digits (possibly higher) the entire time. We can call this condition "hyper-depression."

As with stagflation during the 1970s, hyper-depression will blow up the prevailing "cutting edge" models of the macroeconomy. Back when he was an academic, Fed Chair Ben Bernanke was actually an expert on the Great Depression. Bernanke adheres to the (alleged) lesson taught by Milton Friedman and Anna Schwartz in their classic A Monetary History of the United States. F&S argued that Fed officials bore a large share of the blame for the Great Depression, because they did not pump in enough liquidity. The quantity of money actually declined by about a third from 1929-1933, as panicked customers withdrew cash from the banks. (In a fractional reserve banking system, when people withdraw deposits, the banks have to shrink their outstanding checking balances because of reserve requirements.)

As the following chart illustrates, Bernanke has taken Friedman's warning to heart: The Fed has more than doubled its balance sheet since the financial crisis began, leading to an unprecedented jump in the monetary base:

Thus far, this enormous injection of new reserves into the banking system hasn't caused the CPI to explode, but that is because (a) the banks are mostly sitting on the new reserves because they are all terrified, and (b) the public's demand for cash balances has risen sharply. But using very back-of-the-envelope calculations, there is now enough slack in the system so that if banks calmed down and lent out the maximum amount of reserves, the public's total money stock could increase by a factor of 10. There is no way that the public will simply add that new money to its checking accounts or home safes without increasing their spending. Eventually, prices quoted in U.S. dollars will start shooting upward.

All of the financial analysts are aware of this threat, but they foolishly reassure us, "Bernanke will unwind the Fed's holdings once the economy improves." But this commits the same mistake as the Keynesians during the 1970s: What happens when the CPI begins rising several percentage points per month, and unemployment is still in the double digits? What would Bernanke do at that point? Expecting the Fed chief to relinquish his new role of buying hundreds of billions in assets at whim, in the midst of a severe recession, would be akin to hoping that a dictator would end his declaration of "emergency" martial law in the middle of a civil war.

There are even many free market economists who are predicting that the Fed's massive money-pumping will "fix" the economy, at least for a while, but at the cost of high price inflation. Yet these analysts don't realize that they are buying into - what we all thought was - the discredited Phillips Curve. The 1970s proved that the Fed cannot fix structural problems with the economy by showering it with new money. Hyper-depression is simply stagflation squared.

People need to stop wondering, "When will the market find its bottom? This month? Next?" The federal government has already done an incalculable amount of damage to the American financial sector, and the insults keep growing. Think of it: Besides the unpredictable "sometimes we seize you, sometimes we take billions of bad assets off your books, sometimes we let you fail" strategy with respect to major financial institutions, the government has also done childish things such as ban short-selling of financial stocks. No one knows what the rules will be next week in these markets. Only a fool would expose new capital to the American financial sector at this point - and the politicians have the gall to wonder, "Why are the laissez-faire credit markets frozen?"

Market interest rates are prices and as such they communicate important information about real, underlying scarcity. When the central banks of the world decided to drive interest rates down to practically zero, they crippled the ability of the world economy to heal itself after the overconsumption of the housing boom. People all over the world need to be saving right now, and yet governments are doing everything they can to squander what's left of the capital stock.

I had resisted predicting that we are now living through the early period of the Great Depression II. After all, the conventional statistics today are nowhere near as bad as they were in the 1930s. However, the recent tussle over AIG bonus payments convinced me that we are in this one for the long haul. In particular, Senator Charles Schumer's comments - and the proposed legislation to back them up - show that we no longer have property rights in this country:

"My colleagues and I are sending a letter to [AIG CEO] Mr. Liddy informing him that he can go right ahead and tell these employees that are scheduled to get bonuses that they should voluntarily return them, because if they don't, we plan to virtually tax all of it. He should tell these employees if they don't give the money back, we'll put in place a new law, that will allow us to [tax] these bonuses at a very high rate, so that it's returned to its rightful owners, the taxpayers. So for those of you who are getting these bonuses, be forewarned: You will not be getting to keep them."

This is an extremely dangerous precedent. It's true - as many outraged callers to the AM talk shows explain - AIG received billions in government handouts, and so there is a plausible case to be made that those contractual arrangements with its executives should have been amended. But if that's the case, then the government should have made that a condition of the original "loan," or at the very least the government should now exercise its power as the de facto owner of AIG. Liddy was handpicked by the government to run the company, so if the politicians don't like his decisions, they should fire him.

In contrast, look what Schumer & Co. have done. They are establishing the precedent that if a particular group of rich people does something that angers the government, and if this group happens to be wildly unpopular with the general public, then it is noble for the government to implement ex post facto changes to the tax code, singling this people out and basically robbing them. Schumer's speech against AIG executives is not much different from him declaring, "So I say to Rush Limbaugh and other talk show hosts: Go ahead and continue preaching your hatred and pessimism about the U.S. economy; this is a free country and you have the right to do that. But be forewarned that we are crafting new legislation that will tax 90 percent of your ad revenues from doing so."

What people need to realize is that the government is going to keep making this worse. In other words, it is not enough to step back and say, "Well, the feds have already partially nationalized the entire banking system, and brought politics into all major business decisions - including how executives choose to travel to business meetings. What are the effects?" On the contrary, we need to realize that as things continue to deteriorate - and they will - the Obama Administration will keep upping the ante. "What? The first stimulus didn't work? OK let's borrow and spend another $1 trillion; maybe that will 'take.'"

The American people need to prepare themselves for hyper-depression. The future is still uncertain, and if the folks in Washington suddenly found free market religion, that terrible outcome could be avoided. But I'm not holding my breath.

Regards,

Robert Murphy
for The Daily Reckoning Australia

Editor's Note: Robert P. Murphy has a PhD in economics from NYU and is author of the forthcoming The Politically Incorrect Guide to the Great Depression and the New Deal (Regnery 2009). He runs the blog Free Advice.

• We’re Not Threatened by Inflation but by Depression
• Hyper-Deflation on the Streets of Paris
• The Solution to a Depression is a Depression
• This Reflation is Not Yet a Monster Hyper-inflation
• Feds Think They Have Won This Fight Against the Depression

But that’s a touch of an exaggeration. What it really means is that U.S. consumers are going to engage in less-conspicuous consumption than they used to. The days of consumers making up 70% of US GDP are likely to fade. I expect to see the economy move back toward consumers being 65% – a sustainable level that existed prior to the credit and housing boom of the 2000s.

Out goes the conspicuous consumption of the 1990s and 2000s... Lean and green is in; grotesque and self-indulgent are out. Downsize that McMansion! Replace the SUV with something fuel-efficient! Save, instead of consuming!

This is much more than a philosophical view – it’s what all of the economic data over the past year have been practically screaming.

This will have a significant impact on the overall economy. And businesses are going to have to pick up some of the slack. Capital expenditures are going to have to do their part as the balance between consumer and business consumption reverts to more normalized ratios.

The present environment makes it likely that businesses will focus on investments that can pay for themselves quickly. That means expenditures on items like business intelligence software, ways to become more energy efficient, and the like.

But that’s just guesswork. In terms of actual data, here is what the new, leaner American economy looks like:

• Asset Deflation: Equity portfolios are on average down about 40%. Dividends are being slashed, stock repurchases canceled. Even with the recent rally, stocks are off more than 40% from their peaks. And on a national basis, home prices are down 25%
• Consumer Spending: Down significantly, after the US had its worst Christmas retail selling season in 40 years. The paradox of thrift – people saving at a time when the economy needs them to spend – has turned the savings rate positive. Conspicuous consumer consumption has been replaced with conscious capital conservation
• Retail Stores: Have been extremely hard hit. Many of the big chains are filing bankruptcy like Circuit City, Linens ‘n Things, The Sharper Image, Steve & Barry’s, Tweeter, Mervyns, and Fortunoff. The survivors like Starbucks, Macy’s, Sears, and Office Depot are closing stores left and right. In many cases, the surviving chains will see as many as 10- 20% or more of their existing stores close. By the time we finally emerge from this recession in 2010, retail shopping will have a much smaller footprint than before
• Employment: Over 4 million jobs lost already, with anywhere from 2-4 million more to go, the work force and labor pool are also being downsized. Unemployment broke through 25-year highs, to tag 8.1% last month. U-6, the broadest reading of unemployment (including part-time underemployment), was just under 15% in February; this is the highest reading in decades.The only age cohort seeing employment gains is the 55-plus group. This is due to their ugly realization that the market collapse means they cannot retire. Hence, it’s back to work for the silvered-hair crowd
• Finance & Wall Street: The Street has been hard hit – look for much smaller revenue, with staff cuts of 25-35%. The asset managers that get paid a percentage of assets under management have seen the value of their assets drop 45-50% – and with that comes a revenue drop of the same percentage. Who are the safest players? Those with green profit and losses, and/or substantial assets under management. And who is at risk, besides finance employees? Everyone else
• Autos: US auto sales have simply plunged. Annual sales are down 37- 50%, depending upon the nameplate – from an annual US rate of 15 million to barely 10 million cars per year. Its not just Detroit, either – Toyota, Honda, BMW, Lexus, Nissan, and Mercedes are also suffering
• University Endowments: The intellectual engine of America’s brain trust has just taken an enormous hit to the frontal lobe: Harvard, Yale, Stanford, MIT, and others are down 25-30%-plus over the past 6 months alone. These big endowments fund professorships, grants, student scholarships, and pure research. The loss will be deeply felt over ensuing years, and even decades
• Wages: US wages have been punished by globalization. They have been stagnant over the past 10 years. We are likely to see contractions in wages over the next 1-2 years or longer. This is consistent with our thesis of the downsizing of the US consumer
• Media: Circulation and advertising dollars at major newspapers are falling. It’s likely that 50% of print newspapers will be gone, or web only, in 5 years. The Seattle Post-Intelligencer just went web only, the biggest such paper to do so yet. Will Fox Business channel, which launched at the peak of the stock market in 2007, manage to survive this onslaught? I’d say it’s less than even money
• Pharmaceuticals: We witnessed huge 15-20% R&D cuts at several major pharmas (Pfizer’s huge research layoffs most recently). That means staff cuts also. This doesn’t bode well for new drug development and cures; the misallocated resources over the past decade have led to lots of dead ends. I expect to see a lot more consolidation in the pharma area, and more mergers between pharma and biotechs.

What is the sum total of all this? US GDP will contract 5-7% in 2009 Q1 and Q2, 2-4% in the second half of 2009, and will flatten in 2010. Back in 2001, we forecast the US economy could hit $15 trillion by 2010-11; that now gets pushed back to 2015-17.

There is a silver lining to all of this: First, the unhealthy reliance on credit seems to be going away. We cannot grow by borrowing and spending – but we can grow by producing and spending.

Second, the massive misallocation of capital in society has also been revealed. Out goes financial engineering, in comes making money the old-fashioned way – earning it.

Lastly, for those of you who managed to avoid the worst of the bloodshed – you may have moved to cash in early 2008 or (God bless) you were short for some of the run downward – this is a “target-rich environment.” Whether you are looking for value stocks, artwork, rare collectible automobiles, or vacation properties – there is many a deal to be had.

Those contractors who didn’t return your calls in 2005? They are begging for work. Toxic paper at 10-20 cents on the dollar ain’t all that toxic. And the owner of that 40-foot sports cruiser who can’t make payments is a motivated seller.

Note that this isn’t being heartless or greedy. Recessions end when values become so compelling that activity begins to pick up. We are not quite there yet, but we are much closer than we were a year ago.

Distressed sales create opportunities for the cash-rich buyer who was cool enough not to chase the top or get panicked at the bottom. Make a low-ball offer and see what comes of it.

Who knows, you might even help turn the economy.

Regards,

Barry Ritholtz
for The Daily Reckoning Australia

Editor’s Note: In addition to Bailout Nation and The Big Picture, Barry Ritholtz is CEO of FusionIQ, a research firm that provides web-based services to individual investors and traders.

• A ‘Draw’ in the ’Flationary War
• What’s a Consumer Economy Need in Order to Keep Growing?
• Market Driven by the News
• The Last Capitalist in America
• U.S. Markets Could Rally on Oil Price Decline

In 2009, the focus will broaden to include a range of calamities that will leave no sector unscathed. Next in line is retail, which accounts for some 70 percent of consumer spending, 26 percent of which is holiday sales.

After the numbers are tallied to reveal a dismal retail Christmas, more big chain bankruptcies will follow. Besides leaving masses unemployed, defunct retailers will leave behind thousands of empty stores. Who will rent them? Nobody!

Add to these empties commercial space vacated by defunct financial firms and an array of troubled businesses, from restaurants to architectural firms, to high tech operations, to offset printers, etc., etc. The inescapable result (that we predicted over a year ago and is only now being discussed in the business media) is a commercial real estate bust that will be costlier, wreak greater havoc and prove more intractable than the residential market decline.

Because most people don't live and shop on Wall Street, the "Panic of '08" was viewed by Main Street as if from afar - even though many were losing money. But when commercial real estate crashes it will hit much closer to home. The depressive atmosphere of thinly shopped, half- vacant malls will strike emotional chords and all the senses.

In office buildings, vacant floors and empty cubicles will dampen the workday spirit of the still-employed; ever present reminders of laid- off friends and colleagues and of the fragility of employment.

Abandoned, untended business and industrial parks will highlight the already mournful scene. In cities studded with soaring towers and new construction predicated on eternal economic growth, streets lined with "For Rent/For Sale" signs will complement stilled cranes and uncompleted buildings.

As retail and commercial real estate collapse, the credit card sector and all its interrelated processing and back office support businesses will suffer and be forced to scale back. Hordes of consumers who have been living off credit cards and racking up debt to the limit will lack the funds to service their debt... much less pay it off, and they will be forced to default. Given the nearly $3 trillion in consumer debt at risk (excluding auto and mortgage) an inevitable default snowball will add momentum to the in-progress Collapse of '09.

While we alone predicted the "Panic of '08" (and even took out the domain name "Panicof08.com" on 7 November 2007), we are not alone in predicting a Depression.

The "D" word is being uttered - in some cases by those who have the most to lose and whose best interests are not served by spreading gloom and doom. "The world and country are in a depression," said celebrity tycoon Donald Trump. He then later softened the blow, downgrading it to a "virtual depression."

"Virtual" to the few who will never have to worry where the next dollar will come from, it will be painfully real and hardly virtual to the multitudes who are and will be worrying. The virally proliferating Greatest Depression is the Trend of Trends for 2009.

Even so, beware! Over the course of free-falling 2009, the word from most official sources will be "recession," and from the few mainstream trophy pessimists, "deep recession."

For example, the oft-quoted naysayer, Nouriel Roubini, New York University professor of economics, forecasts a two year recession ... not Depression. On the sunnier side of Wall Street, the Federal Reserve predicts the US economy will contract only through the middle of 2009 and pledged, "In any event, the Committee agreed to take whatever steps were necessary to support the recovery."

What "steps?" The Bernanke Two-Step? Adjust interest rates or print more money? Neither stopped the credit crisis from worsening, the real estate market from tanking or the stock markets from crashing.

It was Fed finagling, Washington deregulation and Wall Street's compulsive gambling that created the crisis. To trust or to seriously consider pronouncements, analyses and predictions made by any of these sources is an exercise in willful self-deception. Yet, with pensions, IRAs, 401ks, stocks and mutual funds evaporating, many of those most affected deny reality and take hope that forecasts made by proven incompetents will miraculously restore their losses.

Throughout the many years leading up to what we term the "Greatest Depression," The Trends Research Institute provided copious data and Globalnomic analysis to support our forecasts of economic upheaval. In the past year alone, we have provided so much hard evidence (housings starts, home sales, foreclosures, bankruptcies, bank failures, unemployment figures, stock indices, leading economic indicators, retail sales, etc.) that further elaboration should be superfluous.

Those waiting to hear the "D" word from economic experts, talking heads and TV anchors before taking action will most certainly regret their indecisiveness.

Absent from the economic scenarios ranging from second quarter recovery, deep recession and "virtual" depression are the multiplicity of social, environmental, health, political, emotional/psychological and geopolitical factors that point beyond just Depression. They point to The Decline and Fall of Empire America.

Well before Inauguration Day, Barack Obama was cast as the next Franklin Delano Roosevelt. If he follows in FDR's footsteps he could freeze deposits by declaring a "holiday" to stop a run on the banks. While FDIC insurance may cover deposits, even after banks reopen, withdrawal amounts may be restricted. (As the Argentine government did in 2001-2002.)

Author's Note: Suspicious of the soundness of the banking system, I requested to withdraw a substantial sum from our Key Bank account, leaving funds sufficient to cover ongoing business operations. First they tried to dissuade me, then they stonewalled me, and finally they turned openly hostile.

I was forced to sign a series of documents, including one acknowledging that since I was carrying a large sum I could be the target of a robbery. To enhance that possibility, the teller slammed down the bag of cash on the counter and publicly announced the sum.

Despite repeated requests in the days preceding my withdrawal to get the cash in hundreds, they gave it to me in twenties, making for a bag five times the size and more robber-friendly. When I complained to the bank manager who had processed the request, the response amounted to "take it or leave it."

This will not be an isolated event. If you attempt to withdraw a large chunk of money from your account, negotiate the details in advance and anticipate possible hassle and obstruction.

We've heard similar accounts from clients and Trends Journal subscribers who, over the past several months, tried to close out mutual funds, 401ks and assorted sinking equities. They were dissuaded, cajoled, belittled and arm-twisted by brokers desperate to keep their accounts. Many caved in under the pressure, didn't close them and lost most of what they had.

So, we leave you with a Greatest Depression consideration: How safe is your money? How sound is your bank? At the end of November, Citigroup, once America's largest bank, was on the rocks. Fifty-two thousand employees were laid off. In just three days its stock lost more than half its value. Rumors swirled that Citi was so desperate they were looking to sell or split up the company.

Is your money deposited in a local bank whose reputation you can bank on? Are you with a teetering giant or a poorly-managed regional? If either of the latter, it would be in your best interest to assess the risks.

Take some out if you think there is risk; take it all out if you think there's high risk. You may consider spreading it around and even banking abroad...after all, this is the Global Age.

Regards,

Gerald Celente
for The Daily Reckoning Australia

• The Collapse of the U.S. Housing Market and Mortgage Bubble
• The Retail Collapse Continues
• The Collapse of Complex Asset Values
• “Going for Broke” to Avoid a “Financial Collapse”
• Stock Market Collapse Can Be Explained By Panicked Forced Selling

Can sound money really bring about peace? Actually, it plays a big part in peaceful international relationships. Money based on commodities, rather than paper, is not subject to government manipulation, and is a key component to free and honest trade. History shows that if countries engage in trade with each other, their governments tend to find ways to get along for the same reason you do not kill your customers at your place of business, even if they occasionally annoy you. If someone outright cheats you, however, you may engage in "war" by taking them to court, for example, and the relationship will sour. Governments and central banks with unfettered power to manipulate currency also have the ability to cheat their creditors. One way they do this is to simply create enough currency to pay off debts. This devalues the currency and "cheats" the recipient out of what they are owed. It would not be fair if you watered down your product the way our government waters down its currency, so it is not hard to understand, in these simplified terms, why loose monetary policy contributes so much to ill will and war around the world.

Sound money, on the other hand, simply is what it is. Removing governmental power to manipulate money, removes the temptation for government to spend, print and cheat. Sound money ensures that our government's spending priorities would be brought into sharp focus and reduced to only what we can afford.

Sound money also limits the ability to wage wars of aggression. Imagine how much more careful Washington would have to be about starting a war if they did not have this financial sleight of hand at their disposal! Fiat currency allows government do expensive things they should not be doing while paying the bills with cheap money. The Federal Reserve has lately been auctioning off large amounts of treasury bills as a way to finance the wars in Iraq and Afghanistan, and our crushing entitlement burden. The resulting devaluation of the dollar is quickly eroding our image as a good trading partner in the world. As a consequence, there is therefore more talk of economic isolation and war.

This vicious cycle of spending, fighting and inflating is not what Americans want. It is what the government wants, and it has had to deceive the citizens into allowing and supporting it. Sound money curbs the government's ability to engage in these shenanigans and reduces the wars we fight to only truly defensive ones, for which Americans are more than willing to stand and fight. So in these ways, sound money is very conducive to peace.

Another benefit of sound money is financial security.

Can sound money give you financial security? There is something very comforting in knowing that what you earn today will retain its purchasing power in the years to come. Indeed, the same silver dime that bought a loaf of bread in the 1960's can still buy a loaf of bread with its precious metal content - which is worth about $1.00 today. An ounce of gold has always been about evenly exchangeable for a finely tailored men's suit, which these days is roughly $800. And in these days of fluctuating gas prices, when priced in gold, oil has been stable. Meanwhile, since the creation of the Federal Reserve, the fiat dollar has lost 94 percent of its purchasing power. The erosion of purchasing power rapidly accelerated when it was completely uncoupled from gold in 1971. This sort of fluctuation in the medium of exchange creates a lot of uncertainty in the marketplace and necessitates that you either take extraordinary defensive maneuvers, or face financial ruin. Trusting in government for financial security in retirement is not a safe option. Indeed, a recent study by the Consumer Bankruptcy Project shows that bankruptcies among those 75 and older has more than quadrupled since 1991. This represents wealth and savings that have been eroded by inflation, and trust in entitlement promises that were more fantasy than reality. Even with the pittance that social security pays to seniors, it is bankrupt and bringing the economy to its knees. It is no wonder that many in the younger generations want no part of it, and they should not be forced into a failed system.

On the other hand, holding physical gold can defend against aggressive government monetary policies that threaten to inflate away the value of your life savings. During the hyperinflation in post WWI Germany, what used to be a comfortable nest egg was suddenly the value of a postage stamp. If one held just a portion of their savings in precious metals, the crisis was greatly softened. Gold will never be worth nothing, even if the exact price fluctuates. There is a famous photograph, however, of a German woman during this time period burning piles of tightly bound banknotes to keep warm.

Imagine if the money you earned had honest, stable value, or even appreciated like an investment! No such special measures, like converting dollars to gold, would be required to ensure that your savings would sustain you in your golden years. That is the way it could be and is supposed to be. However, the government's thirst for power will not be easily, or cheaply, quenched. Fiat currency is one tool governments have to extract wealth quietly from the working class. It is time for the people to wake up to this ruse and look to the Constitution to restore sound currency.

Sound money keeps government spending in check, keeps trade fair and honest, which reduces the temptations, and many underlying causes, for governments to wage wars. It also gives you the peace of mind of knowing that your savings will be able to sustain you in your retirement.

So if sound money is such a good thing, what is stopping people from simply trading with each other in gold and silver? Why are you still being paid in fiat dollars, and why can't you pay for gas in gold? The answer is that the government has enacted policies that provide considerable stumbling blocks to such transactions.

One of the main stumbling blocks is Federal legal tender laws, which state that government-controlled fiat currency MUST be accepted for many kinds of monetary transactions. In light of this, Gresham's Law takes effect. Gresham's Law states that bad money drives out good money. Meaning, if someone is forced to accept your bad money, it is to your advantage to pass it off, like a hot potato, in exchange for something of value. Any good money you have, you will hoard. Eventually, real money is driven out of circulation and under people's mattresses, so to speak. In the absence of legal tender laws, people are free to accept the medium of exchange of their choice, and are likely to insist on payment in something of real value.

Related to legal tender laws, contracts in gold are not enforced. Meaning if two parties agree to exchange goods or services for gold, and end up in a dispute, the courts will simply settle the dispute in Federal Reserve notes. While gold clauses have been legally enforceable since the late 1970's the fact remains that disputes over gold clauses might well be resolved in court with a dollar figure calculated in terms of Federal Reserve Notes. In the recently decided case of 216 Jamaica Ave v. S&R Playhouse, which reversed a district court decision, the court upheld the enforceability of a gold clause, but sent the case back to the district court to decide what obligations the gold clause imposed on the defendant. It is not inconceivable that this will result in a decision that the value of the "gold coin" referred to could be valued by the court in terms of Federal Reserve Notes, not in terms of ounces of gold. Furthermore, given the federal government's actions against Robert Kahre (the Nevada businessman who paid his employees at the legal tender face value of gold bullion coins) it is obvious that the government is still waging a war on gold. Whether either of these cases establishes a precedent remains to be seen. Additionally, because 31 USC 5103 establishes Federal Reserve Notes as legal tender, it would likely take a court challenge to determine whether a gold clause or legal tender law takes precedence.

Governments should do very little, in my estimation, but it should enforce contracts and property rights through the courts. But in this instance it shirks this basic duty, when it comes to gold, as one way to keep control of our economy and the medium of exchange. One is also expected to pay sales tax on the purchase of gold. This is as ludicrous as if you paid sales tax at the bank when you converted dollars into quarters! The IRS also expects you to pay capital gains tax on gold, which is so backwards, since gains on gold really represent decline in the value of the dollar!

Legal tender laws should be repealed at the Federal level. Congress has the Constitutional duty to protect the integrity of our money. However, since it has passed this duty off, and the Federal Reserve has only debased our currency, Congress should no longer force Americans to do business in dollars if they would prefer to transact in gold, or silver, or cigarettes or seashells, for that matter. Free people should be free to associate and do business in ways that benefit them. Instead they are forced to use the unstable dollar to their own detriment, and the benefit the government.

Regards,

Congressman Ron Paul
for The Daily Reckoning Australia

Editor's Note: Dr. Ron Paul is a Republican member of Congress from Texas and perhaps the only voice in Washington still advocating "limited" government in the Jeffersonian tradition. He has delivered several stunning addresses before Congress, including: "Sorry, Mr. Franklin, We Are All Democrats Now" and "We've Been Neo-Conned."

• The Destruction of the Dollar by the Federal Reserve
• Embrace Inflation
• US Dollar As Reserve Currency Not Working Very Well
• David Ricardo’s Economic Theory is Sound Doctrine
• Can China Change the Rules of Global Capitalism?

In short, it initiated a new change in currency relationships. Up until this point in the last several months, any time the U.S. dollar weakened against the pound or euro, it strengthened against the yen, and vice versa. Now the U.S. dollar is taking on all challengers. All three of the other majors weakened together, while the U.S. dollar went on to make new credit crisis highs.

However, on Friday of last week, it appeared that the old correlations may have been coming back. The end of the week brought U.S. dollar weakness against the yen, but strength against the euro and pound.

So let's look at the skinny on this dollar/yen relationship a bit more.

It wasn't just last week that brought about a revival in the yen's weakness. Since Jan. 21, the yen has lost 12% against the greenback. That's in only five weeks... a pretty substantial move. On the technical side we saw it put in the infamous double bottom formation. It has moved steadily in favor of the dollar ever since.

The question in my mind is this: While Japan's GDP number was deplorable, it wasn't entirely unexpected, was it? It came at the end of a long line of bad news. Consider that industrial output fell 8.5% in November, 9.8% in December and then 10% in January. Exports dropped a whopping 45% in the last year. Many pundits bemoan the U.S. plight of being a non-manufacturing economy, but Japan's numbers show that manufacturing economies are faring no better than service economies.

But in spite of all this bad news, how has Japan's currency continued its stellar rise, and why now does it appear to be reversing? Have the fundamentals become just too bad to ignore? Or is something else afoot?

Currencies do not rise and fall on the sheer strength or weakness inherent in them or in their economies. They rise and fall because of the factors of supply and demand. The yen was not appreciating because it was the strongest or the surest or the safest. It was driven to these levels simply because the money flows from the long-held carry trade absolutely overwhelmed the market's ability to distribute them quickly enough.

In other words, for years, a popular trade was to borrow yen and use them to buy just about any other currency. Since the yen had an official interest rate of zero, traders could borrow them practically for free. Then they'd use the yen to buy a currency producing a higher rate of interest. The profit came from the appreciation of other currencies against the yen, as well as in the form of the interest rate differential. This is what is commonly called the yen carry, or the carry trade.

Its simplicity made it exceptionally valuable. How could you go wrong? If you can get something for free, and then sell it at any price, you will always make a profit.

But when the housing crisis began to unfold, followed by the credit crunch, traders began to worry that their high-paying interest rate differentials might be in serious trouble. What if the high-paying currency they were holding defaulted? What if the banks started cutting interest rates and they could no longer get that primo return? What if pigs started flying? What if? What if? What if?

And so, the panic began. and traders began "unwinding" (getting out of) their carry positions.

What did this do to the yen?

As you know, all currencies are traded in pairs. That is, you sell one currency then buy another. For the years of the successful carry trade, traders sold the yen to buy other money. In doing so, the yen became less and less valuable the more it was sold. Japan, as an exporting manufacturing economy, was perfectly content for it to be so, as it made their goods cheaper for the rest of the world to buy.

But when panic and fear gripped the market, and traders started to get out of their carry positions, it meant that they were selling everything else and buying back the yen. More buyers meant fewer yen. More demand on less yen meant higher prices. So the yen began appreciating like a rocket, especially against the dollar.

Was it fundamentally more sound? Was it an interest rate acceleration that propelled it? Not at all.

Just as there was no real reason for the U.S. dollar to be at 123.50 during the middle of 2007, there was also no economic rationale for the yen to be at 88.00 either.

As the world was flooded with euros, pounds, Aussies and kiwis, the yen was forced higher and higher. The money flows were essentially a one- way street, and the yen could only go in a single direction: up.

But now that the vast majority of these trades are unwound, and the money flows are subsiding in this trade, the fundamentals are again reasserting themselves.

Japan's economic condition is considerably weaker than that of the United States, and it appears that there is little the country can do about it. Printing money has not worked in the past, and it is not likely to start working now. Perhaps world demand for their goods will increase. It is doubtful, but even so, there is nothing that they can do to alter that factor either. Finally, in a world where no one is buying, trying to change from a manufacturing/exporting economy to an economy that favors domestic consumption does not happen overnight.

Regards,

Bill Jenkins
for The Daily Reckoning Australia

• Dollar’s Demise Has Started a Chain Reaction in Currency and Commodity Markets
• Borrowing and Paying Back in a Foreign Currency
• Price of Gold Communicates U.S. Monetary and Fiscal Policy is Lousy
• 4 Ways to Protect Against a Falling Dollar
• The Trouble With a Sovereign Debt Crisis

In 1986, as the U.S. Mint began issuing gold coins for the first time since 1933, a tax rule against holding "collectibles" in an IRA was relaxed to allow gold and silver Eagles. Later, in 1997, the Tax Payer Relief Act opened the IRA door for a broad spectrum of precious metals (gold, silver, platinum, and palladium), whether in the form of bullion or coin. The easier rules now apply to all types of IRAs, including traditional, Roth, Simplified Employee Pension (SEP) and Simplified Incentive Match Plans for Employees (SIMPLE).

The only stipulation is that all bars and all coins other than Eagles must be .995 fine. Thus Canadian Maple Leafs and Austrian Philharmonics qualify, but the South African Krugerrand, minted with an alloy, does not. Numismatic coins are also impermissible for an IRA.

The procedure for putting gold into an IRA is somewhat more complicated than with paper assets, but the requirements aren't onerous.

To begin with, you have to find an IRA custodian that handles investments in metals, and they are few. Don't look to your discount broker or a fund family like Vanguard; they won't touch the stuff. Instead, you'll need a specialist like the two original gold IRA custodial companies, American Church Trust (acquired by GoldStar Trust in 2007) and Sterling Trust. These are the most respected names in the business. An Internet search will turn up others, and if you do your due diligence on them, you might find one that works for you.

But remember that it's especially important to choose a custodian with a solid reputation, because your gold will be stored at a location twice removed from you. A firm such as GoldStar or Sterling would be merely your IRA's legal custodian; for vaulting your IRA gold, it will employ a certified depository, likely either HSBC Bank USA (which is also a COMEX gold depository) or Delaware Depository Services.

So chances are you'll have to open a separate IRA for physical gold, which will be a matter of doing a little paperwork and paying some fees. Then you put money into your account and tell the custodian what to buy. (Dropping in coins you already own is against the rules - a "prohibited transaction.") And if you want to mix in some paper - for example, to consolidate your gold, ETF, and mining stock holdings into one account - that's fine, too.

The custodian will charge either a fixed annual fee or a percentage of the IRA's value, with a ceiling. And the depository will charge its own fee for safekeeping. There also may be a transaction fee each time you add to your IRA. In all, you can expect the basic cost to run between $160 and $340 per year, depending on the fee structure of the custodian you choose.

You can make the same tax-deductible contribution each year to a gold IRA as with any other IRA. The current limit is $5,000, or a "catch-up" limit of $6,000 for those 50 and over. Custodians generally set their minimum initial investment at that $5,000 mark but will accept smaller subsequent contributions.

When the time comes to withdraw from your gold IRA, you don't get any coins or bars, alas. You get cash. The custodian sells the gold and distributes the proceeds, with the money then taxed at your ordinary income rate, just as with any other asset held in an IRA.

That takes care of the how-to. The trickier part is whether it's a good idea. For most readers, the answer is likely no. Here's why.

The idea behind a traditional IRA is twofold. First, reduce present taxes by taking a deduction upfront for your yearly contribution of $5K or $6K. Second, defer taxes on the investment income and gains that build up inside the IRA until after retirement.

Physical gold, of course, doesn't generate income. So you might be wasting part of your IRA's tax-saving power by filling it with gold instead of investments that earn interest, dividends, or trading profits.

Does that mean it never makes sense to have physical gold in an IRA? No. There are some situations when an IRA may be the right place to hold part or all of your investment in physical gold.

No-income portfolio. If you've decided that the outlook for bonds and dividend-paying stocks is so bleak that you don't want any at all, then putting gold into your IRA won't crowd out any income-earning investments.

Strategic switching. Perhaps you plan at some point, when you judge that the gold bull market probably has run its course, to liquidate part of your gold. Whatever gold you have in an IRA then could be sold and reinvested, with no loss to current tax, in something else.

IRA Only. If your IRA is the only investment vehicle you have, and you want gold, then using funds within the IRA to buy gold may be the only way for you to hold it.

In researching this, we chatted with Glen Kirsch of Asset Strategies International, who has been dealing with gold and gold-related investments for more than thirty years. We asked Glen what would be the benefit of a gold IRA. His experience accords with our analysis of when putting gold in an IRA makes sense.

He said he rarely if ever sees people open a gold IRA just to deposit that five grand a year. What he does see is individuals making the flight to quality with their accumulated retirement assets. Say, someone with most of his wealth in a pension fund limited by a menu of poor investments is searching for a way out. If the individual is generally suspicious of paper investments, a gold IRA will look attractive.

Making the move is simple if the pension fund is already an IRA. You're free to transfer funds from an IRA that's invested in stocks or anything else directly into a gold IRA.

Or if the pension fund is run by your employer, when you leave (quit, retire, or get fired), you can roll your interest in the pension fund over into an IRA, without tax consequences, and use the money to buy gold.

Regards,

The editors of BIG GOLD, Casey Research
for The Daily Reckoning Australia

• Rare Coins as an Informal Way of Estate Planning
• The Price of Gold is Low – But It Won’t Stay There Forever!
• The Advice to Never Touch Your 401(k) is Not So Cut-and-Dried
• Baby Boomers Are Ill-Prepared for Retirement
• Gold Coins for $870-$890 An Ounce

Steve Forbes: Well, the United States is an empire of freedom. We think of empire as- as imperialistic ventures like the Roman Empire or the Persian Empire, things like that, but the United States is an empire of the human spirit, people coming there trying to find opportunities. The essence of the American Dream is allowing each of us and all of us the opportunity to discover our talents, develop our talents to the fullest. That is what opportunity is about. And so the United States as a result not only is a large land mass, is one of the most populous countries in the world, but also is able to absorb people when we stick to our basic principles from all around the world and in a generation or two, there as American as anyone else, and no other entity has been able to do that. You look around the world; look at the breakup of the Soviet Union, the conflict in Lebanon, other parts of the world ethnic fighting, communal fighting. The United States has avoided that because we do have these basic principles and if you adhere to them, you're part of the American empire.

Q: That's great. There's this great experiment in freedom and the republic has, particularly in recent years, has an extraordinary explosion in borrowing. How much of a threat is the national debt to the sovereignty of the country?

Steve Forbes: Well, the national debt in and of itself is not the problem because when you look at the assets of the nation, if you add up all the assets of the nation, it's over a hundred and sixty trillion dollars. The problem, they're the unfunded liabilities of Social Security, Medicare, Medicaid; tens of trillions of dollars, about eight to ten times the size of the national debt. That doesn't show up on the politicians' balance sheet. They don't want you to know what a mess they've created. In the private sector if you had those kind of liabilities, why you'd be joining the ranks of Enron. And so that is the real problem. And we can deal with Social Security, we can deal with the problems of healthcare, but that is where the real debt is and that's what the politicians don't want us to talk about.

Q: Looking back at 20th century America, can you point to a couple of pivotal moments when monetary policy as administered by the United States government created, if you will, this sort of economic mess of ignoring the idea that you shouldn't be spending more than you have?

Steve Forbes: I think the real turning point was probably the Great Depression. When you have warfare, the power of the government expands, government borrowings go up, [and] you always get hit with inflation. But up to the 1930s, '40s in America, after a conflict, the government geared back. It happened after the Civil War. Massive powers, but the powers are stripped away. The income tax was enacted in the Civil War and was repealed a few years later. World War I racked up a lot of debt, but in the 1920s we reduced it by a third. Tax rates were brought down. It's hard to believe, but in the early '20s the highest rate was 77 percent wartime taxes, cut it down to 25 percent, so we were still in the tradition.

Then came the Great Depression. Nobody then knew why it happened and it was seen as a failure of free enterprise and therefore the government had to do in peacetime to help us recover from this disaster what it did in wartime. And so with the New Deal, even with Herbert Hoover, the government assumed new powers to try to correct the flaws of private enterprise, so you had the rise of the alphabet agencies. Then in the late 1930s, the New Deal sputtered to a halt. It clearly wasn't pulling us out of the Depression. But no sooner did that thing look like it was finally going to end, the worst of it, came the Second World War, another ratcheting up of government powers. After the Second World War, we started to ratchet back a little bit, then we had the Cold War. Everything was done for national security. Even the great Interstate Highway Bill of the mid 1950s established and eventually built 40 thousand miles of freeways around the country was done in the name of national se curity. Government involvement in education; had to have more scientists, national security. So as a result of this constant warfare we've had to fight, hot wars, Cold War and now again, the war against Islamic fanaticism, fascism, government powers have always gone up. And I think what the real challenge for the United States now is to show that we can fight these forces that threaten our basic freedoms and preserve our freedoms from excess government at the same time. No other states, no other nation, no other empire's been able to do it. No other republic's been able to do it. I think that's the challenge that we face and I think we've got to show ourselves and the world that a free people can defend their freedoms and not give up more sovereignty to government bureaucracies.

Q: As you said, you know, after a war, we're going to cut spending a little bit. We're going to reduce government involvement. That doesn't seem to ever happen. There always seems to be a reason why the government needs to spend more. So we've heard about cutting taxes; we've never heard about cutting spending. People talk about it, but it never happens. Why is that?

Steve Forbes: I think to be blunt, the reason why it's been so difficult to cut back on government spending, to cut back on the government's reach over the economy is because we've done it the wrong way. When you go after a specific government program, obviously, the beneficiaries are going to fight you tooth and nail. And beneficiaries of other programs are going to fight you because they figure, "Boy, they knock off that one, they're gonna come after us." You saw that 10 years ago in the mid 1990s when the Republicans took over Congress for the first time in decades, controlled both Houses of Congress. They made a real effort to ratchet back government spending. It lasted about a little over a year. They made some progress like trench warfare in World War I; they gained some ground and then lost it. They retreated. Now why? I think it's because they were too limited in their ambitions and they made it sound like they were going take something away from people.

Well, turn the tables on the big spenders. Take, for example, one of the biggest sources of power, the tax code. Simplifying the tax code, people don't think you're taking something away from them, they think you're helping them. Take, for example, Social Security. The money is there for the elderly, for those on the system or about to go on the system; the real problem is people in their 20s, 30s and 40s. So why not say, "We need to help them. We're not going to cut their benefits; we're going to allow them to control the money. You're going to have the money. It's going go into your own personal account. There will be safeguards for it, but it belongs to you, not the politicians." People aren't going to see that as taking something away; they're going to think, "Yeah, we're taking away from the politicians, not us. We own it." Same thing on healthcare. It's all third party. You don't get to use it until you use it. And in the workplace, healthcare is counted as a fringe benefit, but it's not the same thing as getting money in your pay envelope or your check. You don't have it until you use it; whereas with something like health savings accounts properly structured, the money goes into your account. You control it so you have something. Now, if you go to say a General Motors worker, they may spend what, eight, ten, twelve, fifteen thousand dollars on your healthcare, but you don't see it unless you go to the doc. If you had a system where you had a high deductible policy, but you got several thousand bucks a year to go into your account and what you don't use you get to keep and have it grow tax-free, you save money, but most workers are going to think, "I'm coming out ahead."

So that's what you have to do. Use a little imagination; flanking movements instead of charting the machinegun. Bring in some artillery, bring in some air attack and then we can beat them. And we go after the big things like healthcare, Social Security, education, huge source of government power. Why shouldn't parents be able to control where their kids go to school? Now, there's a suit just filed in my home state of New Jersey, a parent saying, "The school's failed my kid; I want to be able to take the money you spent on my kid and go to another school." If an automobile company sells you a lemon car, they give you a refund and you go buy a car elsewhere. You don't give the auto company more government money. So too with an education. If the school fails you, you should be able to take the money and go to a school that isn't a lemon school. People aren't going think that's a cutback. The unions will, but most people think, "Yeah, right. If the school doesn't work, I shoul d be able to put my kid in a school that's doing a good job."

So go after the big things; healthcare, education, Social Security, taxes. You win there, and by golly, you've given a real blow to the leviathan and then you can start going after these other things because you've established in the people there's a right way to do it, people think they're coming out ahead, and then you occupy the high moral ground. So don't fight by the rules of the other side; we should rewrite the rules and then we can win.

Q: One of the things that we're taught is in times of war, the people in general have to make sacrifice. It doesn't seem that in recent years in this War on Terror that the American people in general have been called upon to make a sacrifice and, at the same time, government spending in non-defense areas has grown. Are we in jeopardy of essentially bankrupting America if the policies that are in place now continue?

Steve Forbes: Well, this is where I think this whole area of how do we finance this war against Islamic fanaticism, how do we stop this crazy spending? Comparing the spending to drunken sailors is an insult to sailors. They are defending the country and they spend their own money; they're not spending other people's money. And so the government in terms of this kind of war, it's a different kind of war, so it's not the total war that we had say in World War II, but one of the reasons the American people are so upset with both political parties is they see there's no firm hand on the tiller in Washington. They read about bridges to nowhere. Here we're asking young people to go to Iraq and Afghanistan and sometimes they don't have the equipment they need and yet we're spending this money on frivolous stuff because a politician thinks it's going to help him win reelection, that is what got people upset. People are willing to do what is necessary to defend the country, but we as a free people now have to take the next step. It's not enough to be angry at these characters; we have to say, "Who are they? Let's challenge 'em in a primary," as they did with state legislators in Pennsylvania who abused the public trust and beat most of them, even though the challengers had very little money, weren't well known. We have to take on these folks and say, "Here's what you did. You have no good explanation for it." We as a free people are going to say, "It's time for you to find new opportunities."

Q: What was from your point of view in the last 25 years what Alan Greenspan did that was great and what he did will not be looked at as one day in history people will look back and say, "What was he thinking?"

Steve Forbes: Well, Alan Greenspan was a good crisis manager when things went wrong in Asia, when things went wrong in Russia. When we had a stock market crash in 1987, he was right in there making sure that panic didn't spread, containing it. But his greatest failure was he was like a pilot who didn't fly with instruments; he flew by the seat of his pants. He had good instincts, but if you're flying by the seat of the pants and you get some adverse weather, sometimes you're going to hit a tree or a mountainside. And so as a result, he left no legacy to a successor on how you properly conduct monetary policy, i.e. how does he know on a day-to-day basis whether he's doing his job right or wrong? There is no fuel gauge. Imagine driving a car without a speedometer and without a fuel gauge. You're going to always be wondering. So he didn't provide the speedometer, he didn't provide the fuel gauge. What's the best speedometer, fuel gauge for monetary policy? Look at the price of gold. If it's zooming up, that means you're printing too much money. If it's crashing down in price for a period of time, it means you're printing too little money. Gold reflects the markets. Let markets tell the Federal Reserve whether it's doing its job right or wrong instead of always guessing what is the right interest rate and getting sidetracked and detoured on things they shouldn't be concerned about. Keep the dollar stable in value. Tie it to the price of gold or to a range, a little bit of flexibility. You've got to give these people something to do each day, but have that kind of gauge and then guess what? You don't make huge mistakes like we have today with oil zooming up and other crises out there. That kind of instability hurts. We want stability, not instability. We don't want inflation or deflation, we want 'flation.

Q: Should we be back on the gold standard?

Steve Forbes: Should we be back on the gold standard in terms of having a pile of gold? No. All you need to do is look at the price of gold and base your monetary policy based on the price of gold. In short, I'll pick a number, 400 dollars an ounce. If it goes above 400 dollars an ounce, you're printing too much money, mop it up like you spill something in the kitchen, you mop it up. If it goes well below 400 for a period of time, you know, you're not creating enough credit for the needs of the economy, so you print a little more. You let the markets, the economy tell you what to do. You don't try to second guess what's needed like setting interest rates and hoping you targeted it right. Markets will tell you.

Q: As a holder of some dollars, is the value of the dollar starting to depreciate at a rate that is of concern to you?

Steve Forbes: The dollar should never depreciate or appreciate. It should be stable in value. It should be fixed in value. Say a foot has twelve inches; you don't change that each day, appreciate it or depreciate it. It's a fixed measure. Same thing with an hour; sixty minutes in an hour, it's fixed. You don't change the number of minutes in an hour each day. The dollar should have a fixed, basic value. Gold, for all its imperfections, is like a Polaris. It's the best thing we have out there. Experience shows that. Keep the dollar stable in value and then you can focus your energies on more productive things like innovating, starting a business, building a house or buying a house, being responsible, moving ahead in life.

If you don't have a currency that is fixed and has a fixed measure of value, then the temptation always is to, as they said in times of old, clip the coins, reduce the content. Politicians love to spend and they hate the idea that there's any discipline out there. So without discipline, guess what happens? You get inflation, you get chaos, you undermine it. Lenin said the best way to undermine a society is to debauch the currency because not one in a million people understand what is happening. Inflation is great for those who want terrorism, for those who want totalitarianism, for those who want chaos. That kind of chaos is the enemy of freedom. Stability is the friend of freedom; chaos is the enemy.

Q: Given that, how dangerous is our profligate spending to creating the inflation that could create chaos?

Steve Forbes: Well, the spending is not just a monetary issue, spending is a moral issue. You're taking money from people and wasting it. People are forced to give money to the government, presumably in return for services. As we said in our Declaration of Independence, to secure certain rights, period, not all the other stuff they've gotten into. And then Liberals will say, "Well, you mean you want to take away Social Security?" No, we want a system where people own the assets so they truly have something of true value there. They're not burdening other generations. They've earned it, they've built it, the assets are there. They can have a far better, richer retirement than they can when the politicians control it. This is the way you fight these things, by emphasizing we come out ahead. We do better when it's in the hands of we, the people and not politicians who have no sense of restraint or discipline.

Q: That's great. Thank you. What do you think is the greatest threat to the stability of the United States at this point?

Steve Forbes: The real threat is bad ideas. A lot of bad ideas came out of the Great Depression, that government could be a stabilizer of the economy, that government could do better than free markets. We're recovering from the devastation of the Great Depression, but bad ideas are always out there, that high taxes are good, that low taxes mean deficits. No, low taxes mean a more vibrant economy. The problem with deficits comes from spending, not from a lack of revenue. So fighting these bad ideas, fighting bad conventional wisdom, those are the things that ultimately can undermine a society.

Q: What's the worst conventional wisdom in Washington today?

Steve Forbes: What's the worst conventional wisdom in Washington today? Oh, where does one begin? It's the idea that these folks are there to help you.

Q: How big a mess are we facing with the major entitlement programs, Social Security and Medicaid; as they say, the rat moving to the snake as it gets closer to retirement each year?

Steve Forbes: Well, the problem with entitlements is that someday you have to pay for them. And if you haven't built the assets to pay for them, then you got a big problem. And I think that's why properly putting out there proper Social Security reform where it doesn't look like you're taking something away from grandma, who thought she was promised something, but actually helping younger people with their own personal retirement accounts, that's a positive. You change the entitlement to something where people feel they've earned it. Part of the problem with Social Security is people who are on it felt, "Well, we put money in the system, but the politicians mishandled it." So people were cheated. They were deceived. Now we're going to finally tell the truth to younger people. "The money that you put in is actually yours. It's not been stolen by politicians." So truth is the way you fight these things.

Q: Mr. Forbes, in Flat Tax Revolution , you spoke about how taxes breed corruption. Can you elaborate on that? What do you mean when you say taxes breed corruption?

Steve Forbes: Well, the Federal Income Tax Code is the biggest source of corruption in Washington because of its complexity; politicians know it's a source of power. If you sit on a tax-writing committee, you're always going to be guaranteed political contributions for your election cycle, and as a result, half the lobbying revolves around it, trying to put changes in, amendments in. Each Bill has literally hundreds of amendments; nobody knows what they really mean. They're for special interest, special things to change in the code which is why the code now has nine million words. Politicians love it because it's a source of power. You have to go to them to fix the thing or to get help or to get relief or to hit your competitors. So they love it, but the American people pay a price for it.

Q: Thank you. We're not getting into the numbers of them, but the idea of a flat tax that you're talking about, is that something that would help us pay off this nine trillion dollars that's sitting there so that we wouldn't be spending all that money on debt service and we could actually rebuild the infrastructure? Is the flat tax a good tool towards that?

Steve Forbes: The flat tax wins on all fronts. It's a great blow against political corruption, great blow against the current system of a tax code that brings out the worst in us, always thinking, "Do I get a deduction here, do I get a deduction there?" Instead, we do things for the right reasons instead of the wrong reasons. And finally, and very importantly, it means more economic growth. It means higher asset values. Ask yourself, why did housing prices go up starting in 1998? It's because there was a change in the tax code that in effect, I won't bore you with numbers, that removed the capital gains tax on your first- on your primary residence if you sold it. Suddenly, for most people, it did not have a capital gains tax. When you remove a tax on something, the value of it goes up; very, very basic. So by lowering tax rates, by making it simple so that people can actually understand what's happening to them, we have a better civil life, we have a better political life, and we have a s tronger economy, higher assets, more businesses being created, better jobs being created. Boy, if we can't- with that kind of a situation, if we can't deal with the mess that's been created in the past, then I don't know what will.

Q: As a proponent of the American people getting the truth, if you could pick one truth about money, monetary policy, debt, gold, what would be the most important message that the audience would get from this film?

Steve Forbes: The key thing for the American people to realize is that don't get caught up in all the numbers. Just remember, it's your money. When politicians spend, they get it from you. And if they say they're going to give you a free lunch, just remember, they're using your credit card, your money. You're eventually going to be getting the bill.

Q: And once the American people have that knowledge and it has become second nature to them, if you will, what would be the right action for them to take?

Steve Forbes: The American people as a start should say, "Who are my representatives? Who is my state representative, state senator, congressperson, U.S. senator, governor? What are they doing, why are they doing it and start badgering them. Challenge them in primaries even if they're not doing the job right. Go online, write a letter to the editor, be active. It only takes a few minutes each month. By golly, that's how you get results.

Editor's Note: The above was taken from the companion book to the critically-acclaimed documentary I.O.U.S.A. Included in the book you'll find interviews from some of the most revered voices in the nation, including Warren Buffett; former Treasury Secretaries Paul O'Neill and Robert Rubin; Pete Peterson, CEO of The Blackstone Group; Congressman Ron Paul (R-Texas); and bestselling Empire of Debt author Bill Bonner. Defiantly non-partisan, the empowering solutions outlined in these pages are a must-read for any American who wants to help change "business-as-usual" in Washington as a new administration heads towards the Oval Office.

To get your copy, along with the I.O.U.S.A. DVD and a special "Emergency 'Personal Bailout' Bundle" click here .

• Trust Funds Con
• America’s Decline as a Great Empire
• Austerity is Missing from the Financial Bailout Debate
• Social Security a Bigger Scam Than What Bernard Madoff Schemed
• America, An Empire You Can Trust?