And when we ran out of money, no problem! There was more where that came from. In one sense we couldn't spend money fast enough. As soon as it was gone, there was more suddenly available. So we just finance the house again, take out some equity (which always rises) and do one of two things - Pay off credit cards (so we can load more debt on them) or just spend the cash on things a home improvement (that is no longer reflected in the price of the home) or a vacation.

Remember how MasterCard taught us that those memories were priceless? Hope you got some good ones... because you "done bought something you can't eat," as one of my teachers used to say.

At a time when we are drowning in debt, we are also out of money.

When a debtor is out of money, he has no ability to repay. And when a creditor has borrowers who are out of money, the creditor has no income. No earnings. No power to make better loans.

So how are banks in America posting "profits"? How did Citigroup, Bank of America, AIG and Wells Fargo jump 400% in stock price? Are they worth 400% more? Are their earnings up 400%? And where in the world did all this money come from?

These companies were just bankrupt... yet found a way to get back above water. And not just above water - they are making moon-shots!

Their share price should be zero (or less, if possible!). How are they worth so much more now?

As I have written before, mark-to-market accounting rules were repealed in favor of a fictitious slight of hand. Banks no longer have to list their distressed assets at the fire sale price they should be worth. Instead they get to record their value as the price they bought them, or what they believe they will be worth in the future.

In other words, it's like me refinancing my house, but doing my own appraisal and assigning it whatever value suits me. I want cash out? Just pad the value of the house. I can't afford a higher payment? No worries, I just pad my reported income. Two years down the road I can't afford my payments anymore? Easy, just follow the same refinancing procedure all over again.

But my family and I would only have one toxic asset to deal with. The banks have them coming out the wazoo!

They are still in possession of the faulty loans and derivatives that caused this entire mess in the first place. Nothing has changed - except the accounting!

The banks always counted on that. This time, however, they are the ones left holding the bag. What are they going to do with all this JUNK? How can they unload it without attracting suspicion? How can they clean up their books without the short sellers making a profit off their downfall? They can't. It's a Catch-22.

But the real problem is that the US banking system would come crashing down in a minute if this were known and understood by the general public. The banks know it. The Fed knows it. I suspect that there are some congress people who know it.

But here's where the rubber meets the road. Government engineered a bailout. They wanted the banks to lend to Joe Consumer. But the banks didn't. And frankly, Joe Consumer didn't want it. He was too busy trying to figure out how he was going to repay all the money he had already borrowed against his house. Especially with the boss breathing down his neck, threatening job terminations if he wasn't more productive than some cheap labor in India.

So the banks were sitting on a good deal of the money from the Fed in order to protect them from future losses. Some of them have even paid it back. But the truth is, from an accounting standpoint, they don't need it anymore. From an accounting standpoint, their mortgages and derivatives are all valued at a big fat surplus. Why keep federal money? Why incur interest charges when "all is well"?

If they can show a profit from an accounting standpoint... and if they can repay their bailout money (plus interest)... and if they can still service the customer at the drive-in window or the teller counter, what's the big deal? What am I crying about?

It's all because those toxicities still exist. And they all have to be accounted for, whether the government says so or not.

We should have learned, or have been reminded of, one of the greatest lessons in the world from convicted felon Bernie Madoff: "Be sure your sin will find you out."

Even the greatest engineered schemes on the planet come undone at some point. No Ponzi scheme can continue forever. But if you are very bright (as Madoff was), you can keep the game going for a long, long time.

But what if you're not brilliant? After all, I doubt the government is as smart as Billionaire Bernie. Luckily, if that's the right word, the government has another way to keep the game going, using one thing it has that Madoff didn't.

Cash.

Gobs and gobs of it.

The government's massive wad of cash is what keeps the game going. And foreign investors lending us money. And millions of pensioners happy as long as they receive their check on the first of the month. And the multitudes of purchased votes that are blissfully sitting on the dole.

But it's not just the United States. Every country in the world is in the same pickle - because every developed nation believed they could successfully manipulate the game. The problem now is that the governments are running out of money. The United States has been broke for a long time, of course, but it could still trade on the value of its good name... and it did. Other nations are not so lucky.

The United States still possesses the reserve currency status; other nations aren't so lucky. We still boast the largest GDP; other nations are not so lucky. I'm pretty sure we still have higher tax receipts, and more room to raise taxes than other nations. But somehow, I can't bring myself to call that lucky...

But as it is an "option," I have to think that whatever smarts our government does have, someone will eventually realize it. Good Lord, deliver us.

I do not honestly think that anyone can seriously contest us in the role of reserve currency, no matter how many times China rattles the saber.

Twenty years ago, China couldn't even feed its own people or keep them employed. Now it is boasting a 7% annual growth rate. Despite the massaging that may be done to the numbers before they are released, we can already see that a country growing solely on stimulus cannot grow very long. The weaknesses in China's underbelly are already becoming apparent. She is an export economy. And people are not buying.

She cannot save the world, whatever her strength might be.

There is another round of destruction coming. The banks will have to come clean. If you thought the residential crunch was stunning, wait till you see what's coming on the commercial front. It will be a tsunami of epic proportions. Banks are not lending now, and the chances of business expansion are lower than at any time in recent history. No one will be buying excess of anything except maybe food and precious metals, so businesses will not continue to post profits. Without profits you can't service the loans you have, and rolling them over will be out of the question. The day is coming... don't let it catch you by surprise.

But until that day arrives, we must deal with what we have.

Regards,

Bill Jenkins
for The Daily Reckoning Australia

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And the truth is, when adjusted for inflation, the market didn't break even again until 1960. (If you're a "buy-and-hold" investor, you MUST account for inflation. It is the single biggest "invisible" tax in our wonderful Fed managed economy.)

But before people could get too happy with making money again, along came President Johnson and the "Great Society." I don't know who it was so great for - the market began crashing again in '66. Once again, adjusted for inflation, it didn't get back to breakeven for another 30 years.

So, 30 years from the Great Depression to the Great Society. Then 30 years from the Great Society to the Great Depression II. Each of the peaks resulted in 10-15 years of declines. Of course, they didn't fall straight down. That's the "trick" of the whole deal.

Each rally draws in a few more people, a little more money, until there are no suckers left. Then when the bottom hits, it has takes 15-20 years to "recover."

It will take a very long time to recover from what we've been hit with: Exxon/Mobil lost two-thirds of its profits... that's 66%! The "World's Company," GE, saw a 47% collapse in profits. Toyota, the recession- impervious carmaker, posted its largest yearly loss EVER and is looking at losses this year, too. Insurers have been hit. Computer giants have taken a whacking. Even Disney is down over 25% in the third quarter.

These are not "bumps in the road." They are "driving off a cliff." By some estimates, inflation-adjusted earnings are down 90% in the last 20 months.

We are now in just the second year of this disaster. We are witnessing an almost perfect copy of the first Great Depression. And there are more nasty little secrets in the economy, waiting like ticking time bombs to explode. We will see more businesses in trouble, more banks failing, more foreclosures and more commercial real estate losses.

At the end of June alone, there were over 5,300 commercial properties in the United States in default. That's more than double the number from the end of 2008 - and there are still six months to count. Still think American companies are recovering? What will a 300% rise in commercial defaults do for jobs? Profits? Banks?

So don't let the recovery pundits fool you, even though they're out in force.

No doubt you've heard the optimists: "The Recession is over." "The Recovery has begun." "Better get in on the ground floor now if you hope to recover all that retirement money you lost last year."

Just look at the evidence, they say:

• Markets up 50%. In the greatest bull run since the Great Depression, stock indices are forging higher. The numbers are swelling. Ride the wave!
• Housing numbers are turning north - Over the past six months, there have been some the fall in some housing numbers are slowing, and some have turned up. Building permits. Existing home sales. New home sales. New housing starts. Pending home sales. Hmmm... nice!
• Manufacturing looks like it's exploding. Earlier this week, the Institute for Supply Management manufacturing index posted a stronger- than-expected rise at 52.9. Well above expectations, and well into the 50+ territory that signals expansion. Looking better and stronger than it has in 2 years. It would be a mistake to bet against it!

But you probably know what I'm going to say right now: Don't believe a word of it!

No market goes up forever. Isn't that one of the first lessons we learn when chasing a bull market?

This one is no different. Could it go higher? Sure. But just how far can you stretch a rubber band? Eventually, it is going to snap back.

And, as it happens, we're heading right into "snapback" season.

Historically, the month of September is the worst month for stocks. Hands down. Indices fall more in this month on average than in any other month of the year.

In fact, the S&P has declined in 11 of the past 20 Septembers. You may be inclined to say, "That's not so impressive." But an average decline of 10 points is something worth noting. Additionally, 40% of those falls consisted of declines that were 75-125 points. That's huge. No other month has such an anomaly. And it seems to me that this September may be ripe for the picking.

In fact, the first day of September was a real whopper. And Monday (although technically an August day) was not so august for US equities. Thus, as the calendar turns over, we have two days in the down column.

But as bad as September is, October has the reputation for being a real bloodbath. It certainly possesses a number of the largest down and crash days. But in order for a crash of monumental proportions to take place, there has to be some lofty level from which to fall.

I get physically sick when people tell me how they are moving (what's left of their money) back into equities. I try to reason with them; I try to warn them. It breaks my heart to see pensioners barely getting by. You remember all the drama from recent years, how we were told that the elderly were forced to choose between food and medicine? Do you remember the seniors who were reportedly sharing their cat's food so they could buy their prescriptions?

And that was during the go-go boom years. I cringe when I think of what lies ahead for them.

Will it start this fall? Has the band stretched far enough? Has Wall Street suckered in all the money that will venture out into the street? That's all they're after. Draw everyone out of the woods. Get all those who believe that it's time to buy and hold into the game again. A 50% rally? Child's play! This time the Dow is headed for 18,000!

Better tread carefully. This is without question the area of thinnest ice. One misstep by the government, a foolish line slip or a negative surprise, and the entire "recovery" falls like a house of cards.

Keep your money, and your exits, close... and don't be afraid to take profit.

Regards,

Bill Jenkins
for The Daily Reckoning Australia

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US equities have just come off their best July since 1989. Overall, the market is up over 8% for the year.

But if we look backward (after all, hindsight is 20/20), March 1989 also saw a huge run up. It was followed by an even stronger rally in July, during which volume dried up. It appears the same is happening now. What came next in 1989 was a big sell-off in September, followed by an even greater one in October.

Don't look now, but history tends to repeat itself.

Also, consider the fundamental picture. We have rallied 48% from the March lows on the back of what? Good earnings? Good employment figures? Good spending figures? Expanding GDP? No.

We have rallied based on one of the largest and most concerted propaganda campaigns ever waged, supported by government stimulus. But no government can stimulate forever. The bottom line is this, if Americans do not return to work, THERE IS NO RECOVERY. Memorize this line. Post it on your refrigerator, your mirror, your dashboard - wherever!

So maybe now you're asking yourself, "Aren't the unemployment numbers getting better?"

Well, let's see...

Verizon - 8,000 jobs cut
Motorola - 7,000
Microsoft - 5,000
Untied Technologies - 8,000
HSBC - 6,100
Anglo American - 19,000
Avon - 2,500
Goodyear Tire - 5,000
GM - 10,000
Nissan Motors - 20,000
Panasonic - 15,000
PNC Bank - 5,800

Many of these will be released in the third and fourth quarters. No doubt there are plenty more we haven't heard from yet. Frankly, I couldn't list the thousands of companies and millions of jobs lost in this write-up. That's just a sampling. But let's get to some hard and fast figures.

According to Seeking Alpha, 13 million Americans will lose their benefits by years' end. So if unemployment claims are falling, people must be getting back to work. Right?

WRONG!

They are exhausting their benefits. There are 30 million people in the United States on food stamps. There are only 200 million working-age Americans (age 15-64). Is there any wonder why the Administration is NOW saying they will have to raise taxes on the middle class to fund their programs?

Unemployment has been estimated by many good economists as being around 20%. Unfortunately for these people, their nanny-government lifeboats are slowly running out of air.

Those 3 million people who lost their jobs in the second half of last year? Once you factor in their dependants, that equals 10 million people who have no income and no savings.

And how about the other 4 million others who lost their jobs in the first half of this year? They will be next. The numbers get so depressing, I hate to even count them up.

As I have said before, unemployed people don't spend money. They don't buy technologies, or durables, or even pay their mortgage. Bankruptcies are up 600% in this recent downturn. And that includes the time after Congress affected new rules to make bankruptcy harder.

So who is going to pay for anything when they are struggling to buy groceries?

If the equity averages are already rallying on the back of these horrible stats, there is nowhere to go but down when the real truth sets in.

And we have seen this corollary frequently in recent months. When stocks and risk assets fall, so do the currencies, and the dollar rises. We are a long way from being out of the woods on this retracement.

So why do I cite all this doom and gloom about the United States? Believe me, there's plenty more to go around. Because the fact of the matter is this: When these chickens do come home to roost, we will see another gut-wrenching breathtaking sell-off in equities, which will be followed by currencies. We have not seen the end of this yet.

While some are talking of a recovery, others are talking about a possible double-dip recession - and I'm reasonably sure we are in for a "multi-dip." It is hard to be bullish on the dollar for any reason, but if the market drops again, which I believe it will, funds will rush right back to the dollar (and the yen).

So far, we have seen range-bound trading in the recent months as currencies search for direction. This week the big news was the US GDP. Risk currencies rallied on the back of it, but for 24 hours they have remained flat as there were no buyers to move it higher.

Also, the market got awfully jittery on the release of the consumer spending news yesterday. The manufacturing euphoria expended itself, and now we find out that personal income has dropped 1.4%, the biggest fall in four years. Inflation-adjusted spending fell 0.1%. The real dark spots in the economy have started showing back up. The stimulus has worked its way and done its best, but its effects are now negligible. Even though there are signs of a "recovery," it isn't going to be one without the consumer. If he's exhausted his means of spending, or is just afraid to put out any money, the recovery trade will be doomed. And that means dollar strength once again.

But for now, we will have to trade with what we have. It is hard to argue with the markets, even with the most compelling of reasons. A person may as well try to stop an ocean wave from breaking onshore.

And as we look ahead, we must always be mindful of what may be. As numerous talking heads were saying on Tuesday of this week, "We have turned the corner... things are going to get better - if they don't get worse!"

Regards,

Bill Jenkins
for The Daily Reckoning Australia

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When this rot began to be exposed, I often reported that things had been turned on their head in the currency world. Bad news for the U.S. economy became good news for the currency. Why?

Basically, risk aversion settled over the market. People and governments were fearful. And since currencies tend to be considered risky investments, investors avoided them. In short, the worse the news for the U.S. dollar was, the more money flowed into the it.

But you cannot, under any circumstances, run contrary to the law of supply and demand forever. It's just impossible. Therefore, at some point, a return to fundamentals reverses the current perverted trends.

And as of last week, fundamentals have showed back up on the stage. For the first time in a long time, investors are treating bad news for the dollar as bad news for the dollar. So let's take a peek here and see what we have.

Initial jobless claims rose again last week. This time to 637,000, which was higher than forecast, and the previous week's number was revised upward. In addition, continuing claims for unemployment came in higher as well - 16 straight weeks of increases.

The Federal Open Market Committee also hung the markets out to dry. You see, the Fed heads discussed the weakened condition of the economy at their meeting. They also revised their economic projections for 2009 and 2010 lower.

Here was the key. They DID NOT PURCHASE as many Treasuries as the markets believed they would - part of the infamous quantitative easing. Now, at first blush, we would be happy about that. But once we lift the Feds' curtain on this act, things are not what they seem. The market's reaction assumed that a less-than-stellar bond purchase number portends that the Fed will have to purchase more later on.

At this point all factions are feeling the squeeze.

The Feds know they cannot continue to inflate as they have indicated. While runaway inflation remains a threat, the bigger problem is whether or not traders and investors (including the sovereign states who buy our debt and support our spending addiction) will pull the plug on the dollar.

If such massive selling occurs, that only leaves them the option of perpetually inflating the currency, since borrowing becomes out of the question.

Nobody wants to be the last one out the door once that begins. As of now, the Fed still has a little opportunity to actually control the hyper inflation scourge, but if they tip the scale just a bit too much and the selling begins full force, control will be out of their hands entirely.

Interestingly, the whole tenor of the minutes from the Fed meeting indicates that the worst is still ahead. Yet Ben Bernanke and company are still telling the public about "green shoots" - small signs that things are improving.

Bill Bonner shares a headline from Politico last week: "Obama Would Regulate New 'Bubbles.'"

Oh, the sheer absurdity of it all! We have a government that doesn't even seem to know where bubbles come from. They don't know how they work. They don't know why they keep inflating. They don't understand why you can't deflate them slowly. In short, an administration with a rudimentary understanding of economics is confident it can regulate the next bubble - whatever it might be.

But I suppose that is the plan of all governmental types. Whatever doesn't work needs more regulation.

What we need is to be left alone. The market has been, and remains, the most efficient system for regulating itself. Is it perfect? Not in a moral or theological sense. Not even in a fairness sense. The market will make some men rich while impoverishing others. Many people do not consider that "fair." But it doesn't matter. The market does what it does, because it is the most efficient way to do things. Regulation be hanged, the market will undo regulation and tyranny, because free markets create free men. And on its way to undo the foolishness of men, it will cause great inequalities. Why? Because of the foolish restraints that governmental do-gooders have foisted upon it in the name of "fairness."

The ironic thing is, bubbles are created by regulation. You can't undo them with more of the same.

Since the government has had such a great track record with spending and credit, now they want to get their greedy little paws into the credit card business, too. Apparently, it's not enough for them to control the major banks, or the once monstrous auto industry. The heady days of markets free from governmental interference are going the way of the dinosaur.

Our Senate, by an overwhelming majority, passed a new bill that would dramatically impinge on the credit card company's policies to alter rates and fees.

Now, I am not going to bat for the credit card companies. Frankly, they have abused people for years. As a younger man, I, too, enjoyed the pleasures of free money being offered by these benevolent giants. Every time my wife and I got a new card, we treated it like a raise.

Before long, the handwriting was evident on the wall, and I didn't like what it said. So we got out. Don't get me wrong, I still use my credit cards. But they no longer own me. Yet the number of my friends and relatives who are slaves to these things is atrocious. In sum, I have no love loss for these companies and how they try to enslave people.

But I will stand and declare their right to do it as a free market entity as long as people will keep applying. The fact is, if and when the credit card companies get "out of hand," the market will reign them in. We don't need the government to do it. They won't do it well anyway.

Meanwhile, the Federal Deposit Insurance Corporation (FDIC) suffered its biggest bank failure of 2009 last week. BankUnited FSB, Florida's biggest regional lender, performed its final curtain call. Having over $20 billion in assets and deposits, it's the biggest flop of the year, and the second biggest of the whole credit crunch (IndyMac still has that award).

BankUnited's failure will take a $4.9 billion chunk out of the FDIC's checkbook. It is the 34th bank to fail in the first five months of this year alone, compared to 25 for 12 months last year. A green shoot? Not hardly...

So on the edge of this knife, Big Ben and the Fed have to balance. That is, the Fed has to sell $3.25 trillion in Treasuries to fund this years' obligations between now and September.

If the markets can absorb the U.S. issuance over the next 90-120 days...and if it is done without driving up interest rates...and if the economy begins to show signs of positive growth... then the stage is set for a wonderful second act. (And Bernanke might win an Oscar!) The dollar will return to strength. The market will continue, or resume, a climb to the top - sensing that "everything is coming up roses." Refinancing will surge ahead. We may even see significant job creation into the end of the year.

At that point the Fed must begin to worry about inflation. Will the infantile recovery be strong enough to fight off a bout with interest rate increase flu?

I wouldn't bet the farm on that.

On the other hand, if Treasury rates continue to rise as they already are, and the Fed is forced into extensive quantitative easing to contain them, then it may very well be curtains for the dollar. And the critic's reviews won't be kind.

Earlier this month, the dollar index fell below its 200 DMA for the first time since July 2008, and has been falling ever since. Not long after, the euro and sterling popped above their 200 DMA.

Of course, there's probably a good reason why. The world is beginning to notice the U.S.'s monetary policies. Our rising deficits are eclipsing Mount Washington. Those deficits are going to need financing. And right now, the government doesn't care - it's still behaving recklessly because it thinks people will always be ready to buy its debt.

I wouldn't be so sure. Consider the credit rating of Great Britain. Standard & Poor's changed the outlook on the United Kingdom from stable to negative. Now, that's not the same thing as a rating cut. But it does betray that the rating agency sees the nation on the wrong path. Continue on that path, and the outcome is guaranteed.

It doesn't take an advanced degree in logic to apply the same principle to the United States. Indeed, I have wondered if all this was orchestrated for that purpose alone. It is far less damaging to downgrade a substantial nation like the United Kingdom than it is to downgrade the world's reserve currency economy... the very definition of value.

But if it can happen in the United Kingdom, the United States had better be prepared. To that end, we heard Bill Gross, from PIMCO, the world's largest and most influential bond trading firm, say that he believed the United States would eventually lose their AAA rating.

That's scary stuff - but not all that surprising. After all, the administration is predicting a $1.8 trillion budget deficit. Perhaps more.

And where is GDP going? How much will it grow this year for all that fuel being added to the fire? It's like adding a cast of thousands to a one-man show, just to try to give it a bigger billing. The expenses become monstrous, but no more people show up to pay the admission fee.

But the directors just want to keep adding more actors. At that point, the expenses of the show run absolutely in the opposite direction of the of the income. Until soon, the producers default on their lease, the curtain falls on the show and the affair is over.

When will the U.S. show be over?

Hard to say. But when your expenses are 650% of your income, it can't go on for long. Not only is the curtain falling, the whole theater is collapsing around us. Better make sure you have a clear shot at the exit.

In fact, some U.S. businesses already are.

My home county has a few decent sized towns, but for the most part is still rural. Our biggest claim to fame is a section of famous U.S. Route 1 - the first route to run from New York to Miami along the East Coast. On our section of Rt. 1 has an abundance of auto dealers. But recently, the largest one put out one of those fancy electronic message boards. The advertisement read:

"NOW TAKING GOLD AND SILVER FOR YOUR VEHICLE DOWN PAYMENT."

I'm pretty sure they'd be just as happy to take it for the entire payment as well. So who needs the U.S. dollar after all?

Regards,

Bill Jenkins
for The Daily Reckoning Australia

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