Our Chairman, who art at Goldman
Blankfein be thy name
The rally's come
God's work be done
On earth as there's no fear of correction
Give us our daily gains...

Poor Goldman Sachs. Everyone is on its case. Criticizing. Carping. Jealous. Envious.

So, today we rise in defense of the Wall Street giant. Yes, the Goldmen may be shysters. But they are honest shysters...

We pick up sword and shield, ready to fight for Goldman, after reading The Financial Times. The FT has devoted a whole page to Goldman bashing. It's time someone stood up to say a kind word for the firm.

Besides, Lloyd Blankfein said he was sorry. That's right. He announced that the firm regretted its role in the world financial crisis. And if that weren't enough, he pledged half a billion dollars to helping small business through tough times.

In his apology, Blankfein mentioned that he thought Goldman was doing "God's work." That is what prompted humorists to make up the "Lloyd's Prayer," we have republished above. On the surface of it, it does seem absurd. If any group of people ever worshipped Mammon, it is the bunch that works at Goldman. Money is what makes that mare run; no one doubts it.

In 2008, the average compensation of the average Goldman employee averaged $364,000 - or more than 6 times the earnings of the average American who was not employed by Goldman. Naturally, the widespread publication of this fact caused a surge of envy. Now comes news that the average Goldman man expects to make about twice as much this year - or about $765,000. As you can imagine, this did nothing to soothe the jealous spirits. Instead, it inflamed them.

And now, everyone has Goldman in his sights. Newspaper editorials kvetch and moan. Union-organized yahoos demonstrate in front of Goldman's offices. Cartoons make fun of Blankfein. Commentators say the Goldman crew is greedy. The Rolling Stone magazine described Goldman as a "vampire squid." Saturday Night Live mocked the company. Stand up comics stock up on Goldman jokes. Even priests criticize the firm's claim to be doing 'God's work.'

The regulators cannot be far behind. It is illegal to trade on "inside information." So, when a company targets the shares of a rival, and passes its buy orders through a Wall Street firm, the traders are forbidden from trading the shares on their own account. They cannot profit from 'front running' shares, based information not yet available to the public.

Goldman clearly profits from front running. But it does it by aggregating information from clients rather than using the inside information from a single client. This gives them a "market color," rather than precise trading targets. In other words, if you have a client who sets out to acquire Acme Cement Company, you can't buy up the shares yourself in anticipation of the rise in the share prices. That information is "protected, inside information." But suppose you have two clients, each of whom targets a cement firm? You quickly get a "market color," don't you? You put two and two together. If they're both after cement makers, probably, the whole cement sector will go up. You buy cement makers, though not those that your clients are buying.

This aggregated inside information gives Goldman a big advantage. So do its close contacts with the feds. Goldman has its former operatives in key posts throughout the government. It knows what the government is doing; it has a fair idea of what the government will do next. In trading US government securities, the biggest business in the financial world, this "insider" knowledge is no doubt a handy thing to have. It doesn't hurt either that the Fed is making money available to Goldman at practically no cost. Nor, that the Fed is buying its mortgage backed securities - perhaps even ones that would be hard to unload on the private market.

These contacts and sources of 'insider' information are what George Soros has called the "hidden gifts" that Goldman enjoys...and that contribute mightily to its success.

But so what? As far as we know, Goldman holds no gun to any counterparty's head. Nor does it lie...unless you call saying things that aren't true "lying." Goldman merely says the same falsehoods as the rest of the financial industry...the things people want to hear...which almost everyone believes anyway. And is there anything wrong with taking money from the US government? Doesn't every retiree do so? Doesn't every larcenous Congressman and every conniving contractor and every shiftless welfare addict aim to do the same thing? Isn't the whole idea of government to take from someone and give to someone else? Then, why not to those who are most able to claim it? The swift...the strong...the smart...the Goldmans!

No, dear reader, we cannot criticize Goldman. Instead, we admire it. Goldman took advantage of the financial boom by selling debt and derivatives all over the world. Now, it takes advantage of the 'recovery,' by trading on its client information. And who can blame it for wanting to do business with the richest and dumbest client of all, the US government?

In God's plan, at least as we see it, the lowly are raised up. The rich...the proud...and the foolish are brought down. God deals with the meek on his own. Goldman helps him bring the boom down on the others.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

• Meredith Whitney and the Buy Recommendation on Goldman Sachs
• China’s Economy is Now Freer and More Competitive than the United States
• Warren Buffett is Buying Four Percent of Goldman Sachs
• Who Was the SEC Harassing Instead of Madoff?
• JPMorgan and Goldman Sachs Making Billions in Profits

A survey showed that only 1 in 10 workers say his income is going up. This is the lowest reading since 1946.

Meanwhile, the news two days ago was that homebuilding took a dive in October. Work began on 11% fewer houses than the month before. On multi-family dwellings, the figures were worse - down 35%.

Why would homebuilding go down when the economy is supposedly gathering strength? Well, builders were wondering what would happen when they finished the houses. The new house tax credit was due to expire; they weren't sure the politicians would be witless enough to renew it.

They need not have worried. Give the politicos a chance to do something stupid and they will come through every time. Since the end of October, Congress passed and President Obama signed an extension of the housing credit. Until next April, at least, first time buyers will get an $8,000 credit.

You'd think that would have revived animal spirits a bit in the residential construction industry. But today's news tells us that mortgage applications are falling - even with lower interest rates.

How come interest rates are falling? Well, here again, we see the heavy hand of the feds. The "quantitative easing" has come to a halt...that is, the Fed is no longer buying US Treasury debt (it doesn't need to). But its buying of mortgage backed securities continues. That program will last until March of next year.

Still...housing is not cooperating.

This news hasn't had much impact on Wall Street. All that can be said is that investors have seemed to hesitate for the last couple of days.

Stocks fell softly yesterday, with the Dow down only 11 points. Oil stayed at $79. Gold rose to $1,141. And the euro remained at $1.49.

Investors must still believe in what The Washington Post calls a "lukewarm recovery." It is like finding a body on the street. You feel for a pulse and discover that it has not quite reached room temperature. It is tepid... Not quite alive. Not quite dead.

Too close to the quick to bury...too close to the grave to boogaloo.

Bill Bonner
for The Daily Reckoning Australia

• Housing and Unemployment Are Weaknesses in the U.S. Economy
• Most People Still Think – “You Can’t Go Wrong in Property”
• Economy Free to Recover?
• Aussie Housing Market Actually Leads the U.S. by Three Years
• Take Away Stimulus Spending and You’ve Got an Economy Entering Depression

Gold didn't move yesterday. It remained at $1,139.

Mortgage delinquencies hit a new record in the third quarter. And producer prices came in lower than expected. These are both indications of a weakening, deflation-prone economy.

Perhaps this is what prompted Mr. Ben Bernanke to tell the world that he may keep rates lower, for longer, than he thought...and perhaps forever.

"Bernanke signals 'extended' low-rate period may become longer," reports Bloomberg.

Today, we discover that "1 in 6 hungry in America last year." That is the headline in the USA Today. If you believe the report, 49 million people went hungry at some point in 2008, the highest number since the government began keeping track in 1995.

Meanwhile, we learn - in the same paper - that "Rising obesity will cost the USA $344 billion." That's what fat people cost the nation annually, equal to 21% of health-care spending.

The two problems should cancel each other out, shouldn't they?

Oddly, the states with the greatest girths are also the poorest. Mississippi is number one in fat. It's also the poorest state. Could it be that fat people are going hungry? Is this a good thing; or a bad thing?

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Lending Rates Will Go Up With Inflation
• Things That Matter in the Economy are Going in the Wrong Direction
• Consumers are Suffering Because European Governments Boosted Spending
• IMF Deems Gold An Idle Asset
• Eurozone Drops GDP Bombs

'We didn't ask you to stock up all those dollars,' as Obama might have put it. 'It's not our fault if the dollar goes down and you lose money.'

Perhaps Mr. Obama should have quoted the immortal words of a former US Secretary of the Treasury, John Connolly. "It may be our dollar, but it's your problem."

Over at USA Today, the editors are more concerned about human rights. The paper must imagine itself back in the days of Woodrow Wilson or George W. Bush, when the US nobly embarked on a mission to raise all of mankind out of sin and error. In effect, Mr. Obama said that all people have 'universal rights,' including the right to a free press. China figured this was just the sort of opinion that its people didn't need to hear. So, it killed the story in its own press. The American president might as well have been talking to himself.

China is today's big story. Throughout the world's media there is much buzz and blather about the "romance"...the "historic relationship"...between the two titans. Some reporters see love. Some see jealousy. Some see rivalry.

Here at The Daily Reckoning we are suckers for romance. Give us some "a cigarette that bears a lipstick's traces...an airline ticket to romantic places..." and we are moonstruck. But we don't see much romance in the US and China hook up. What we see is the sort of things that delight psychologists and bore everyone else - perversion, co- dependency, and enabling.

On the surface, the two giants bicker over money like any other couple. The US accuses China of being a tightwad...holding its currency down and saving too much. China accuses the US of being a spendthrift, destroying its own purchasing power by wanton and reckless expenditures.

"US president's currency call breaks with script," says a headline in The Financial Times today. US economists think China should raise the value of the yuan. This would immediately lower the value, domestically, of the trillion(s?) worth of US-dollar assets China holds as reserves. It would also make Chinese products less competitive on the world market.

Mr. Obama wasn't supposed to say anything about it on his trip. It would be like bringing up your husband's drinking problem on your wedding anniversary; it would spoil the occasion.

Apparently, Obama couldn't help himself. Or maybe he just thought the folks back home would like to hear him give the Chinese a piece of his mind.

But how does the American president know what price to put on the yuan? A sinking dollar is good for the goose over in the US. Why isn't it okay for the gander in the Middle Kingdom?

A strong yuan would help the world economy "rebalance," say economists who think they know what they are talking about. In a nutshell, the Chinese produce too much; Americans consume too much. A higher yuan would come down on the high side of the scale - giving the Chinese more purchasing power (thus increasing consumption in the Peoples' Republic)...and making Chinese exports more expensive (thus decreasing consumption across the Pacific). With a stronger yuan, the Anglo-Saxon economies would be able to produce and sell more things to the Chinese...thus tilting the US economy more towards capital formation and production.

Chinese authorities are no dopes. They know they have a "floating" population of some 150,000 million people who are looking for work. They know that if they don't find some way to keep these people occupied they are likely to cause trouble. Trouble is the thing China's leaders most don't want.

"You think you've got trouble," Premier Hu Jintao might have replied to Mr. Obama. "Did you know that there are something like 200 million Chinese who still get by on as little as a dollar a day? Let's face facts. You're sitting there in Washington, comfortably talking about how much free health care and unemployment benefits to give the American people. We don't have the time...or the money for those kinds of things. Too many Chinese people. They don't earn enough to afford the kind of cradle-to-grave bribes you give your people. We have to keep them working; there's no other way.

"Besides, we don't quite see why we should pay for your mistakes. It wasn't our economy that blew up. It wasn't our financial industry that sold houses to people who couldn't afford them. It wasn't our consumers who spent more than they had and went too deeply into debt.

"It's the debtor who's supposed to pay, not the lender. We're the lender!"

Behind all the superficial arguing, accusing and kvetching, however, is a sick relationship. It has give and take. But the US is all take. China is all give. And now, on both sides, public authorities make the same mistake. In the US, they try desperately to prod Americans to take more...to continue doing what they were doing wrong. They offer incentives of every sort to lure consumers to consume even more. And their solution to the debt overhang is to hang on even more debt.

In China, meanwhile, the authorities desperately prod their people to give more...to produce more. Or, at least to build more plant and equipment with which to turn out more goods.

In the US, consumer spending is about 70% of the economy. In China, fixed capital formation is estimated to have made up 70% of China's growth in 2008 and as much as 90% in the first half of this year.

Is this a formula for a happy marriage? Over the last two years, this co-dependent relationship has broken down. Paul Krugman wrote in The New York Times that we've seen "the greatest collapse in world trade in history."

But neither side has learned a thing. The taker now proposes to take more. The giver now proposes to give more.

They don't need counseling. They need a divorce.

Bill Bonner
for The Daily Reckoning Australia

• Chinese Yuan Marches Towards World Domination
• Admonishment from China and the Decline of U.S. Credibility
• US Has Highest Unemployment Rate of All Major Economies
• Chinese Consumers Are Getting Shiny New Credit Cards
• Geithner Reassures China that America Takes Financial Obligations Seriously

And today we take up a foul and disagreeable task. We ask ourselves: what if we are wrong?

If you bought gold when we first recommended it, ten years ago, you are in a very comfortable position. Gold sells for more than 4 times as much today. But what should you do now? And what if you didn't go for broke on gold in the early '00s? Is it too late to get in on the bull market?

To give you a warning, in the following windy ambulation we come to no conclusion we haven't come to before. We say gold is going to the moon. If we are wrong about when...we will be delighted sooner than expected...self-satisfied...and insufferable for years. If we are right, we may have to wait a long time before saying "I told you so."

First, the press has certainly noticed the bull market in gold. How could it not? Most reporters say gold is going up simply because the dollar is going down. In the popular press, we found no other explanation. In fact, much of the notice of gold seems to occur within articles about the dollar. We found, for example, that the dollar is at a 15 month low...and, coincidentally, gold has just hit an all-time high.

There's something lopsided about this account of things. If the yellow metal has hit a record high, how come the dollar is down for only 15 months and not since the Flood? Makes you wonder if the dollar isn't the whole story.

Elsewhere, we find that the dollar is trading at $1.49 per euro. Wait a minute. We remember the dollar at the exact same level...was it a year ago...more...? And it's been at that same level, more or less, all the while gold has gone up more than 10%.

It's not the fall of the dollar that is driving the gold market, in other words, it's something else...it's the fall of ALL paper currencies. For when the dollar goes down, so do the rest of them - more or less. No nation wants its currency to rise too much against the greenback. Americans are still the world's biggest spenders. They spend dollars...not rubles...not euros...not zloties. A nation whose currency rises against the dollar is in a competitively weaker position. Its costs - in local currency - go up while its sales - in dollars - go down (it has to charge higher prices). Typically, central banks buy up dollars with money created for that purpose...thus increasing their own money supply and thus decreasing the value of their own local currencies relative to the dollar.

Since all the world's central banks, more or less, are doing this, all paper currencies are going down together - compared to gold.

But wait, wouldn't they be going down together against everything else too? If currencies are getting weaker...shouldn't they be getting weaker against oil...and McDonalds' hamburgers...and woolen underwear? The oil price is at $78 - where it's been stuck for a while. Oil is a special case, but almost all consumer prices are stuck too. Take out energy and food, and consumer prices are deflating in the US. Put back in the energy and food and they're just stuck. There is no sign of generalized consumer inflation - not in the USA and not in Europe either.

The only thing that is going up is gold. There is a bull market in gold and gold alone. But why?

According to the law of supply and demand, you expect the price of a thing to fall when its supply increases faster than the demand for it. In today's news are two reports on gold production. One, from South Africa, tells that a scientist says the nation's residual gold in-the- ground is much less than expected. It has been overstated by 900%, he says. Another report shows the output of from the gold mining industry clearly topping out. Gold supply, in other words, is increasing, but not as fast as it used to.

The supply of paper money, on the other hand, needs no new discoveries. Since there have been huge increases in the monetary base of paper money all over the world, it is reasonable to expect the price of paper money to go down. Gold, traditionally the thing that paper money is priced in, should go up. Speculators are buying it now in anticipation. Even central banks are buying again. And nearly everyone expects the price to continue going up.

As near as we can tell, gold is properly priced already. Comparisons are rough, but an ounce of it appears to buy about as much stuff as it did 2,000 years ago. You can buy a suit of clothes for an ounce of gold - no problem. Go to Wal-Mart; you can buy 4 suits.

As Roy W. Jastram wrote in his 1977 book, The Golden Constant, gold's "price has been remarkably similar for centuries at a time. Its purchasing power in the middle of the twentieth century was very nearly the same as in the midst of the seventeenth century."

Gold...or the people who speculate in it...may be looking ahead. Or, they are dreaming. If gold is already about where it should be why would you pay more? You must expect paper currencies to go down...to buy less stuff. In other words, you'd have to be anticipating a fall- off in the value of the paper currency.

It may come to pass exactly as they imagine it. Gold may rise and rise and rise...as paper currencies fall and fall and fall some more. In that case, we here at The Daily Reckoning headquarters as well as all of our dear readers who followed our advice 10 years ago will be delighted. Gold may hit $1,500 by the end of the year. By the end of next year it may be $3,000. By the year after, well...who knows...? "We told you so," we will say.

But there is almost always more under Heaven than speculators think. When we look into it, we see gaudy increases in the monetary base...but only very modest increases in M2, the money that buys stuff. What's more the rate of increase for M2 has fallen in half over the last 8 months. It's now only about 7% annually in the US. And when we look at the CPI we see no increase at all. And despite the 'recovery,' unemployment is still rising and house prices are still falling. So, if speculators see the price of stuff going up in paper currency terms, they must be looking way over our heads.

To more fully describe our own state of mind, we don't doubt that all the liquidity added to the world's monetary system will eventually be soaked up by paper currencies. But it could take a long time; we might be dead before it actually happens.

But since we are entertaining the possibility that we might be wrong; let us look at what is going on in more detail. If there were a real recovery - as announced in the world's newspapers and proclaimed by its stock markets - you'd expect a rising increase in demand...leading to higher prices...leading to a higher gold price.

Yesterday's news brought word of greater retail spending than anticipated. This was greeted as more evidence that a recovery is actually underway. But upon examination, we discover that the evidence comes almost all from auto sales. We also find that the number crunchers contributed to the lift by revising figures for September. These are month to month movement numbers. So you can raise October's number simply by lowering the number for September.

What's more, while sales went up...auto prices actually went down - in paper dollar terms. This doesn't sound inflationary to us.

Meanwhile, news reports said that fewer people are defaulting on credit card debt. The reports also tell us that delinquencies on credit card debt are up. So, we'd have to call that a draw.

And then there's the news from GM. The giant, government-owned auto company says it will repay its loans from the feds earlier than expected. But wait...we also find that the company continues to lose money. How then will it repay debt? Perhaps by refinancing!

Other reports are similarly confusing and inconclusive. Profits are up on Wall Street. But wait...sales are down. You can increase profits by cutting expenses (getting rid of employees, mainly). But you can't increase sales. And as long as sales are falling you have to expect lower profits in the future. (Stock market buyers...take note.)

Our colleagues over at The 5-Min. Forecast sent through this chart, illustrating the "recovery that wasn't."

"With the majority of publicly traded companies done reporting third quarter earnings," writes 5 editor, Ian Mathias, "the trend is clear: Profits were way better than expected, revenue was flat at best.

"Of what little we recall from freshman year, Finance 101 insists that profit equals revenue minus costs. Thus there really can't be any questions left as to how the market pulled off this quarter...companies are simply trimming the fat at an incredible clip. Not exactly a long- term plan for growth."

The New York Times reports that job losses continue to be "deep and enduring." Mortgage applications are running lower than they were 9 years ago. "More households report food shortages," says a Wall Street Journal headline. And insiders are still selling their own companies.

So, it still looks to us as if we are in a depression...one that will take many years to sort out. It is unlikely that the bull market in gold will reach its final blow-off top while the depression continues. But stranger things have happened. Eventually, gold will reach the apogee of its bull market. And when it does, we want to be ready for it. We will celebrate with champagne and sparklers.

Still, we wouldn't get out the party hats...not just yet.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Gold is in a Bull Market
• We are Confident the Bull Market in Gold is Not Over
• Investors to Drive Next Leg of Bull Market in Gold
• What Happens to Gold When High Inflation, Excess Cash, and Falling Dollar Jolts Economy?
• A Gold Standard, Without Gold

As for inflation, the lowest inflation rate among the world's larger economies is in - you guess it - Japan. After 20 years of on-again, off-again deflation, it's on again in Japan...with inflation at NEGATIVE 2.2%. But inflation is negative in the US too - at minus 1.3%.

Both Japan and the US claim positive GDP growth, compared to Europe, which is still in recession. But throughout the world - except perhaps for the BRIC nations - growth is weak and hesitant.

The US and the UK are both consumption economies. No consumption; no growth. But how do you get people who've consumed too much to consume even more? They know they can't afford to keep spending. And they know that going further into debt just makes the situation worse. What can you do?

You bribe them!

You give them more money, say, in unemployment assistance. Or, you give them a tax credit when they buy a new house. Or, you give companies a big tax break. In the most recent stimulus bill, for example, the feds do all three - including giving Pulte Homes a $450 million tax refund.

Here at The Daily Reckoning we never met a tax cut we didn't like. But with the deficit at 13% of GDP, we might make an exception. One way or another, someone's going to have to pay for the feds' big spending stimulus efforts. Taxpayers. Bondholders. Dollar holders. All of the above.

President Obama told the crowd in Singapore this weekend that he would make sure Ben Bernanke stayed away from his helicopters. The Chinese are the biggest holder of US bonds in the world. The Japanese are next. Between the two of them they fund a big part of America's current spending. Naturally, America's president is eager to keep the cash coming his way. So he has had to reassure the nation's largest creditor that their loans to the US will be repaid in good order...and good currency.

China alone has $2.3 trillion in reserves...most of it in dollars. Of course, the Chinese want to diversify out of greenbacks. But they're caught in a trap of their own making. If they turn away from the dollar, they undermine its value...and the value of their own reserves. What's more, America is still China's number one customer. They need to sell to America. And for that they need to keep their own currency from rising too much against the greenback. A higher yuan makes their products relatively more expensive compared to other exporters.

So, the infernal system continues...America creates dollars. The foreigners take them as though they had value. And they will have value...as long as they take them.

In the '90s and '00s the newspapers were full of stories about what a great place America was. Its economy was so dynamic...its entrepreneurs were so clever...its financial system was so highly evolved and flexible. What could go wrong?

Everything!

And now we're going to read a lot of claptrap about what an awful place it is.

"The American dream needs repair," is forerunner of the genre. In today's Financial Times, it focuses on the rigidities of the US system. The time was when a young American could start at the bottom and work his way up. Luck and pluck was all that it took. But now, according to scholars at the Brookings Institution, people stay put. If you're born poor in America you're more likely to stay poor than if you had been born poor in Britain, Denmark, Sweden or dozens of other countries.

What happened? The authors do not say. So we will. Success breeds failure. As a society becomes rich, more and more people find ways to game the system. The elite get tax credits, tariffs, and protective regulations. Every layer of bureaucracy makes it harder for new competitors to get ahead. And every new tax on income makes it harder for upstarts to join the ranks of the rich. The poor get their parasitic benefits too. Welfare, unemployment compensation, child tax credits, medicare, food stamps, social security - all of these programs give the poor an incentive to stay poor.

Bill Bonner
for The Daily Reckoning Australia

• US Economists Think China Should Raise the Value of Yuan
• Obama Plans to Do Away With Ireland’s Tax Advantage
• U.S. Government Hiding True Unemployment Rate in Statistics
• Harding the Last American President to Deal Honestly With a Major Financial Crisis
• Baby Boomers Face Early Retirement With No Money Saved

What we've been thinking is that the dollar is dead meat in the long run. But in the short run, it might have enough life in it to bite investors on the derriere.

The US stock market rose 73 points on Friday, to bring the Dow just 30 points south of the 10,300 mark. Why is this level important? It's not really. But it reminds us that this is still just in "bounce range." Big drops in stock prices are followed by bounces - always. A bounce of 50% of what was lost is not unusual. That's what happened after the Crash of '29, for example. So, there's nothing exceptional about what we're seeing on Wall Street.

Our comrades over at The 5-Minute Forecast provided this sobering chart:

But here at The Daily Reckoning we're not smart enough or fast enough to play the countertrends. We want investment positions that we can ignore for years... We want to be able to go on a long trip...say, down the Inca Road or over the Hindu Kush. And when we come back, we want to find that we have at least as much money as when we left.

If stock market buyers - in the US - have more money a year from now than they have now, we'll be surprised. The private sector is still more than 2/3rds of the economy. And the private sector has begun de- leveraging. Nothing that has happened in the last 8 months makes us think that that trend is going to reverse any time soon. There are 70 million baby boomers who need money for retirement. They've got to save. That means cutting back on spending. And that means less income for business. Are stock prices really going to go up when business income is going down? No.

We leave our "Crash Alert" flag flying, here at the worldwide headquarters. We don't know when...or IF...stock prices will crash. But the downside risk is not worth the possible upside. Daily Reckoning readers should be out of all US stocks, except those they wouldn't mind holding through a 50% correction.

The other thing we mistrust - aside from politicians, stock promoters and tap water - is the dollar. But here the story is more complicated. Because the next downswing in stocks could push the dollar up! Everyone is betting against the dollar. And most think it is a one-way gamble. But it's not like Mr. Market to grant investors a one-way bet. He's got something up his sleeve.

Last week, The Financial Times reported that a group of IMF economists had made a "Plea to reduce demand for dollar reserves."

That is another way of saying: find something else to put in your vaults rather than dollars!

Why? Because a world money system that uses dollars as a reserve currency is fragile and vulnerable. It makes the whole world hostage to America's financial problems.

"The US, at the center of the system, was under pressure to run large current account deficits in order to supply the world with the dollar assets it wants, they said, while there was no effective discipline on either the US or countries such as China that have big external surpluses to adjust their policies."

This move by IMF economists is only the most recent effort to reduce the world's reliance on the dollar. Everyone can see the dollar is weak. And everyone with any sense wants to protect himself from it.

On Friday, the price of gold moved up to $1,116. Gold is the obvious choice for those who wish to protect themselves from the dollar. But readers are cautioned: that doesn't mean the price of gold is going up.

Over the long run, sure. All paper currencies eventually go to their intrinsic value, which is zero. And gold always goes to its traditional value too - at a level where a man can take an ounce of it and get himself a suit of clothes, about 30 bottles of good whisky...one horse...or a trip across the Atlantic in economy class.

But things that ought to happen do not always happen when you think they should. It could take many years - of long, drawn-out recession...a la Japan - before the Bernanke Fed gets its helicopters revved up. In the meantime, all those hot shots who borrowed dollars from the Fed in order to bet against the greenback are going to be in trouble. They'll have to unwind their carry trade positions at a loss...and pay back more expensive dollars. The process could take years.

Bill Bonner
for The Daily Reckoning Australia

• Big Difference Between Stark News in Job Market and Behaviour of Stock Market
• Household Debt Represents Spending Taken From the Future
• Stranded on a Crusoe’s Island With One Stock
• Shanghai Index Still Falling As Other Markets Rise
• The Interest Only Mortgage Option

Readers may know Mikhail Gorbachev as a fellow who advertises Louis Vuitton luggage. But before he made it big as a mannequin, he was the top man in the Soviet Union. It was not an easy job. The empire was falling apart. So, in a rare act for a public official, Gorbachev told the Soviet people the truth: "We can't go on like this," he said in 1986. Three years later, on November 9th, 1989, the test was over.

What they were going on with was a system of compulsory economics - in which bureaucrats made the key decisions. They decided how much capital to allocate to what sector...how many people to employ...how much to charge for the output, and so forth. Of course, in order to make these decisions, Soviet economists had already discovered that they needed to make a lot of other decisions too - such as where people would live, how much they would earn, what they would do, and which of them would be starved to death. So, it was a very controlled experiment. Conditions were so miserable in the East that the government needed a vast network of spies and gulags to keep the malcontents from ruining the test. Still, 5,000 people fled to the West. 136 were killed trying to get over the wall that separated West Berlin from the East.

The results were obvious even before the test began. Ordinary people, looking out for themselves, always make better decisions than economists working for the government. Taxi drivers are better at getting people from place to place. Automobile manufacturers are better at making cars. Bakers bake better bread. Consumers buy what they really want. And capitalists make better investments. But just because a thing is absurd doesn't mean it is unpopular. There are people who get upset when they discover that there is H2O in their drinking water. There are also people who want aparatchiks to make their decisions for them. And recently, there are more of them. Many Germans in the East long for good old days when things were under control. They call it 'ostalgie.'

After a bit of food and a roof over his head, a man becomes more concerned with status than with survival. It is not how rich he is that matters; it's how rich he is compared to those around him. Status brings reproductive advantages, say the socio-biologists. But it brings disappointments too. And envy. So wicked and destructive is the urge to envy that the Catholic Church banned it as a cardinal sin. Societies suppress envy in a variety of ways. Some tax the rich. Some force everyone to wear the same dreary clothes. Most level the population by sticking everyone into the same education, retirement and healthcare systems.

Capitalism doesn't make anyone rich. It only allows people to compete for wealth on more or less equal terms. Naturally, some are better at it than others. Most people prefer alcohol, television or jobs on Wall Street to the rough and tumble of real enterprise. And almost everyone is prey to bubble delusions, hoping to get something for nothing from the latest fad investment. And then, when capitalism corrects their mistakes, they turn ostalgic, longing for the state to intervene and rig the game in their favor.

"After the wall fell: capitalism is a disappointment" says a headline in yesterday's Montevideo paper, La Republic. A poll showed that of people asked in 27 countries only 11% thought capitalism was working properly now. We're surprised that anyone thought so. With so much finagling by the feds, it's a wonder that it works at all.

But even among the complainers, few suggest a return to the policies that wrecked East Germany between 1949 and 1989. Instead, what they want is a kinder, gentler form of capitalism with the state as a benevolent partner. Full employment, with Audis. Guaranteed health and retirement benefits, with wifi and cappuccinos. Unlimited government bailouts, but without state bankruptcy.

Alas, the lumpen are worse at rigging the game than they are at playing it. The elites are better; that's why they're the elite. They use corrections the way a general uses a cease fire - to strengthen their positions. They connive with the government for more regulations to keep out competitors, bailouts to protect them from their mistakes, and handouts to enhance their status. That's why, scarcely a year after they were all on the edge of insolvency, the world's big financial firms are paying the biggest bonuses ever.

Does rigging the system like this make people better off? Many thanks to those teuton guinea pigs again! They conducted another test. After the wall came down, the Federal Republic in Bonn decided to intervene in the Eastern states in order to lift the ossies out of poverty and put them on a level playing field with the West. Beginning in 1991, the West transferred an amount equal to 4% of GDP each year to the East. Public works. Public health. Public education. Welfare! Handouts! Bailouts!

Unwittingly, which is the only way to do this sort of thing, they were merely adding to the test data. For next door was the Czech Republic, which also suffered under the Soviet boot, also engaged in absurd and counterproductive policies, and also flew the coop as soon as the Soviets dropped their guard. The Czechs had no rich relatives. They had no source of free money. They had no booming economy that they could join. No money. No port. Not even a language anyone else could speak.

Well, guess who won that race? The Czechs, of course. GDP growth rates in the Czech Republic pulled ahead of those in East Germany in the early '90s; since then, they've been pulling farther and farther ahead each year.

Regards,

Bill Bonner,
for The Daily Reckoning Australia

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"Much of the world is going through a downswing of the credit cycle. Argentina doesn't have and didn't have much credit. So it will be spared the big problems. But it sells farm produce to the rest of the world. It has to expect a period of sluggish sales and soft prices.

"I don't know if I would advise foreigners to bring their money to Argentina. But I would advise everyone to diversify beyond their home country - especially if they are American or British. Generally speaking, it appears that the go-go finance-based economies of the Anglo-Saxon world have peaked out. They lived on credit. Now, they die on credit. And they will find it very hard to shift their economies from credit-fueled consumption to investment-driven production and export. The competition is too stiff. America is a high cost producer. It can't compete easily with the developing and emerging economies. So, it will just have to get used to a lower standard of living. That means lower asset prices too. Which is why an investor - broadly speaking - can anticipate a higher rate of return from his investments in India, Brazil and even Argentina, over the next 20 years, than he can from the US."

But isn't Argentina full of crooks, booty-shaking tango dancers, escaped Nazis and Norteamericanos on the lam?

A friend of ours thought so. She was having lunch at a nice restaurant in La Recoleta, one of the nicest parts of town, when someone stole her purse. Poor thing, we were afraid her trip was ruined. But then, she got this email:

"Hi good afternoon, my name is Emiliano, is that i work doing maintenance of parks and squares in the area of palermo, and in one of the trash bins encontre a series of documentation to its name and among other things i could detect this mail.

"That is why i warn that i have the papers mentioned, licenses, passports, credit cards, etc. without more and in anticipation of any response on their side and wishing you are with their belongings, i leave my mobile Phone in order to combine a meeting so that you can restore their belongings, but more, i dismissal of you carefully."

She writes: "This 'Santo Emiliano' is now and always will be the patron saint of Buenos Aires. He has restored my faith in humanity by going beyond his job tidying up the beautiful local parks and helping a total stranger to once again see the real beauty of his city. He explained that he enlisted the help of many friends to compose the email above. I get teary-eyed thinking about it. I can't wait to meet him and try to explain to him in my broken 'castellano' that he is working in the wrong municipal department and should be promoted to the head of the department of tourism!

"Ah, the world is once again a nice place to live."

And lastly...

"I must say," Elizabeth began, after hanging up the phone. "Being married into your family is an enriching experience."

Elizabeth comes from a good New York family. Her ancestors were ambassadors, officers in Washington's army, heiresses and socialites. She went to private schools and then to an Ivy League university. Poor thing. She had never had much contact with Irish riff-raff, tobacco road farmers, and lowlife financial publishers. She can thank your editor for introducing her.

She had just been talking with one of our cousins. Well, the wife of a cousin who died suddenly last week. He was only in his 50s and seemed like a nice enough fellow. But he was no Harvard-trained go-getter.

"I felt so sorry for her [the widow]," Elizabeth continued. "Your cousin hadn't worked in years. He was on disability. I'm not sure what that is. Some sort of welfare, I guess. He didn't look disabled when we met him two years ago. He was such a big, strong man.

"But when he died, he left his wife with no source of income at all. She's applying for disability too. She has no income at all. I don't think they have any savings either. And her disability status hasn't been approved yet. It hasn't come through. I wanted to tell her that we'd help her but I felt a little awkward. I've only met them a few times. You should do something...

"There is a whole world out there that I didn't know anything about...that lives and thinks in a much different way than we did. They're very nice. I like all your family. But they have very different attitudes and habits than what I'm used to. I wonder what caused it. Maybe they probably worked hard when the steel mills were operating. But then, when the mills shut down, maybe they got in the habit of getting paid not to work. I don't know...but it's very strange."

"What do you mean," was our reply. "Your family didn't work for generations. They inherited wealth and spent it. They spent money they didn't earn. My family did the same thing. They just spent wealth from other families...and didn't get as much of it."

Until next time,

Bill Bonner
for The Daily Reckoning Australia

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"Think about it. We haven't yet hit bottom on employment but that will happen at some point. Employment is not going to zero, of that we can assure you. But when we do start to see the economic clouds part in a more decisive fashion, what are employers likely to do first? Well, naturally they will begin to boost the workweek and just getting back to pre-recession levels would be the same as hiring more than two million people. Then there are the record number of people who got furloughed into part-time work and again, they total over nine million, and these folks are not counted as unemployed even if they are working considerably fewer days than they were before the credit crunch began.

"So the business sector has a vast pool of resources to draw from before they start tapping into the ranks of the unemployed or the typical 100,000-125,000 new entrants into the labour force when the economy turns the corner. Hence the unemployment rate is going to very likely be making new highs long after the recession is over - perhaps even years."

Like we keep saying...get ready for a long, Japan-like slump.

But here's a headline that offers hope for a brighter future:

"Unions prod Obama to fix ailing airline industry"

On the surface of it, the idea is absurd. What does Obama know about airplanes? Who would want to fly in an airplane with Obama in the pilot seat? But the headline reveals today's most popular delusion - that the government can fix everything.

In fact, there is no evidence that government can fix anything other than the problems it has caused itself. And then only in rare, accidental moments of lucidity.

But that doesn't stop people from hallucinating. They think Obama can fix the auto industry, by paying people to buy a new car. And they think he can fix the housing industry too - by extending the new buyer tax credit.

It doesn't occur to them that the problems in the housing industry are almost exclusively the fault of the federal government in the first place. The feds subsidized mortgages, encouraged mortgage lending to people who should have been renting, and lowered interest rates. These fixes created a bubble in the housing sector. No bubble expands forever. Eventually, they all blow up...which is what happened.

But let's go back to flying machines. The gist of the AP article is that unions want more regulation. The deregulation that began in the Carter Administration produced lower fares, they admit. But it also increased capacity. And now that the economy is in a slump, the extra capacity is a heavy burden to the entire industry.

"Airlines are offering the fewest seats to passengers, measured by available seats and distance traveled, in more than a decade. They have shed more than 158,000 full-time jobs since employment peaked in 2001 and lost an estimated $33 billion over the past decade. Thirteen airlines have filed for bankruptcy in the past two years."

Airlines are cutting back and laying off workers. Someone - O! Bama! - should put a stop to it!

Seems to us that the fly-boys are doing what they ought to do. Any interference by the feds will, once again, only make things worse.

Bill Bonner
for The Daily Reckoning Australia

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