Try a year, or two. Jobless claims in the U.S. came in at their highest level in sixteen years. U.S. home prices probably have another 15% to fall (nationwide, although they are already down 40% or more in some places). If you believe the retailers, who are tugging at their collars and mopping their sweaty brows, there may be a huge collapse in household consumer spending.

There are several threads to untangle from this observation. The first is economic. A year ago, there were many observers that believed emerging markets and resources would survive an American recession and keep on keeping on. Your editor was one of them. We were wrong.

The tightness in credit markets that originated with bad subprime loans has gone global and moved across the whole portfolio of credit-related securities. Corporate bonds...commercial real estate...margin loans...leverage loans...student loans...auto loans...commodity futures. The whole universe of assets that was created in the big financial bang era of 1% nominal interest rates in 2003 is now contracting back on itself.

Thus, Australia didn't suffer hugely from subprime flu (although the banks and some councils faced losses). But we found little galaxies and planetary systems full of exotic credit-related products that cannot survive the black hole of liquidity disappearing from our financial universe. Allco, ABC Learning, Babcock and Brown, they're all disappearing in the liquidity black whole.

Ashes to ashes. Dust to dust. Energy to matter and back again, except in this case, the capital is simply destroyed rather than becoming energy. That is the real cost of credit bubble. Capital becomes scarce. Good projects can't get money. The government sucks up the world's remaining savings to borrow for its inefficient stimulations.

It is a world in 3D-deleveraging, deflation, and depression. Financial markets witnessed the first loss of liquidity which led to deleveraging. That gives you U.S. stocks at five year lows and the main Australian indices breaking through technical resistance at 3,500. What makes it so unpredictable now is that in a balance sheet recession, what causes a given firm or trader to reduce his assets by selling them is nothing predictable.

Insurance companies, pension funds, college endowment, super funds...they all have their own private balance sheet catastrophes. What they have in common is that every one of them is going to pick up the phone at some point and say "sell." This is why you see historic volatility on the indices.

The deflation is taking us back to mid 1990s levels on stock markets. It connects to the real economy when firms have to cut costs to try and shore up the balance sheet. Reduce expenses. Fire people. Reduce inventories. Thus falling consumer and producer prices.

But sacked employees are consumers. And not only will they roll back consumption when they leave the work force, but the entire process of deleveraging and downsizing has a psychological effect on everyone else left in the work force. Seized with fear, consumers go on strike. They save. The economise. Private demand collapses. Depression ensues. The world in 3D.

What can you do in this situation? For the last week, construction crews have been drilling, excavating, and digging in one of the flats next to Old Hat Factory. The din is persistent annoying. We wondered what must be going on. Then it hit us. They are building a financial panic room.

What is a financial panic room and what goes in it? Well, it's a room in which you could put all your assets to ride out the duration of the bear and the depression. They would be safe and some secure from further damage. You would also have water, tinned food, and some good books (The Law by Bastiat, Human Action by Mises, What Has the Government Done to Our Money by Rothbard, and Twenty Thousand Leagues Under the Sea, by Jules Verne).

Building a safe panic room is easier said than done. It depends on what kind of assets you have to begin with. At this point, you'd want to get into a discussion with your spouse, partner, financial planner or accountant on the right mix of assets. More cash, a lot fewer shares, some inflation protected bonds, a portfolio of premium stocks with cash and little debt, and of course, gold shares, gold coins, gold bullion, and gold jewellery. Also silver.

Your asset allocation is a highly individual subject though, and it's not something we can advise you on. We would simply suggest it should be a matter of conversation (if you haven't already made these decisions.) What about property, by the way?

RBA Governor Glenn Stevens tackled the issue during a Q&A session last night, according to www.news.com.au. He said the main difference between Australia in the U.S. is that the U.S. had a housing supply boom, which then led to collapsing prices when mortgage financing dried up with the credit crunch. Too many houses. Too few buyers. Cliff diving ensued.

"We didn't build too many [houses]," Stevens said. "We're probably not really building enough. That's what most of the experts say. We certainly shouldn't assume there is going to be a crash but some combination of a general decline in prices and gradual growth of income (was expected)."

He was referring to the large gap between average annual incomes and median house prices in Australia. The ratio between what Australians earn and what it costs them to get into the housing market is historically very high. You can bridge the gap with rising incomes or falling prices, or some combination of the both, which is what Stevens expects.

Our guess is that the fall in Aussie house prices is the next shoe to drop. Deleveraging has impacted commodity prices and shares. Stocks are cheap but could stay that way for a year or two. And that's if they don't retest the 2003 lows, which is entirely possible in a true global depression.

But you can't have rising unemployment and falling household net worth and expect property to remain immune. We're already hearing stories of high-end luxury property being battered. When the waves of the global recession start to get larger, we reckon they'll erode Australian property prices faster than the 'experts' expect.

Finally, it looks like it won't be until mid-2009 that inflation starts to show a heartbeat again. Things happen fast these days so it could come sooner. But it will take awhile before renewed fiscal stimulus starts coursing through the veins of the economy. The expansion of central bank lending and the growth in the Fed's assets haven't yet led to inflation because the money and credit created have gone to patch up corporate balance sheets, and not lent out back into the real economy.

To bypass this cash-hoarding preference of the banks, we expect to see more explicit government lending and spending in the next year. In the meantime, investors are rushing into U.S. bonds and notes and out of the equity market. Bond tracker funds and cash are popular.

If you were taking a contrarian punt this week, you'd go long the S&P 500 (or buy calls) and short bonds (where yields on 10-year U.S. notes are well below the rate of inflation). But you might also be crazy to do so. The ten-years are popular. They give the illusion of safety in numbers. But no real yield or capital gain.

Until next week...

Dan Denning
for The Daily Reckoning Australia

• Hiding Level Three Assets Won’t Solve the Problem
• U.S. Stocks Hammered to Dust
• Consumer Price Inflation has Spooked Investors Everywhere
• Mainstream Financial Press is Finally Catching on to Hedge Funds
• The Battle Between the Forces of Inflation and Deflation Wages On

But where will they take them? The future is a place you arrive at whether you like it or not. All you really have control over is how prepared you are to engage with it. These days, however, there's a lot of nostalgia for the past, namely, how did we get out of the last big global economic catastrophe in the 1930s. More on that shortly.

First, the share markets are punishing the lumbering dinosaurs of the American economy. GM fell 18% in New York trading. Ford was down 24%. Citibank fell 17% to a 13-year low. The Dow closed under 8,000 while the Nasdaq fell over 6.5%. There are now serious doubts about whether GM and Citigroup will survive without major government intervention.

Even then, it's going to be touch and go. But investors seem to have rendered their verdict this week. It also looks like U.S. stocks will re-test the 2003 lows shortly. Where they go if they break through on the downside is anyone's guess.

The CEOs of the Big Three automakers flew by private plane to Washington to ask for a piece of the TARP. "Without immediate bridge financing support, Chrysler's liquidity could fall below the level necessary to sustain operations in the ordinary course," said Chrysler CEO Robert Nardelli. GM's Rick Wagoner said that if Congress allows the automakers to go under, "the societal costs would be catastrophic."

But Treasury Secretary Henry Paulson fronted Congress earlier the week and seemed less than willing to redirect TARP money away from Wall Street and to Detroit. "I don't see this [an automaker bailout] as the purpose of the TARP...Congress passed legislation that dealt with the financial system's stability."

But back to the issue of 'societal costs.' We would argue that we are just now finally beginning to pay the societal costs of a sustained economic policy that favoured finance and consumption over production and savings. That policy saw the formation of a Wall Street-Treasury Department Axis.

That Axis advocated running a capital account surplus. It was partly to offset the rising current account deficit. But in some ways, the surplus in the capital account came about because of policies that encouraged debt and consumption, the very things that led to the current account deficit. The result was a boom in American financial services-while American manufacturing was shipped offshore.

The costs of THAT policy are not going to be absorbed by TARP or any other bailout planned by Congress. The costs, by the way, are higher unemployment, fewer skilled workers, greater consumer debt, more government borrowing from foreign creditors, and the disappearance of a healthy industrial base. Maybe that's why the Chinese are actually talking about buying GM now.

Maybe they should put Holden on their list too. How can Australia's car industry survive if America's can't? Which do you think is more likely to happen: the government sells key parts of the industry to foreign buyers, or the government nationalises the industry via deficit spending?

Reserve Bank President Glenn Stevens gave a speech yesterday in which he gave the government the economic cover it needs to run a deficit. He said, "If governments are able to so order their affairs as to continue supporting worthwhile - and I emphasise worthwhile - public investment (even if that involves some prudent borrowing), then Australia will come through the present period."

Of course Australia will "come through it." But in what kind of shape? We wish we had seen all this coming and warned more accurately ahead of time. But now that what we're here, what is to be done? Part of the task is to figure out how bad it will be for Australia.

It will probably be worse than most of the media currently believes. If housing starts in the States are at an all time low, if China is reducing demand for coal and iron ore, and if all three of the world's largest economies are in recession, do Australian policy makers really believe they're going to sail through the crisis with no major collateral damage in the property market or in the employment figures?

If the RBA and the Rudd government begin reading from the global Keynesian playbook, you should be prepared for a huge deficit. We heard an economist on television a few weeks ago that the Government ought to run a $50 billion deficit as it amps up spending to combat the global slow-down. That's about 5% of Aussie GDP.

Europe is considering a stimulus package of 130 billion Euros (A$255 billion). In the U.S., there's no telling where the stimulating will end (although we continue to believe the government will eventually bypass the banks and issue debit/stimulus/ration cards directly to Americans.

"Iran blocks access to over five million websites," reports the AFP. Substitute "Australia" for "Iran" and you have a pretty good idea of what your browsing future looks like under Communications Minister (Ayatollah) Stephen Conroy's plan. The era of command and control advances.

Dan Denning
for The Daily Reckoning Australia

• After the Bailout of Wall Street, Everybody Wants Cash
• Keynesians Believe Governments Have to Manage Economy in Macro-Economic Way
• 1 Out of 10 American Mortgages Are Owned by Other Countries
• Lying Heads of the United States Congressional Budget Office
• Bailout on Wall Street Has Left the Door Open for Other Industries

Remember this is nothing fancy. Bill is preparing for world depression by ruthlessly cutting back on discretionary expenses. As far as we know, he is still letting people buy him drinks. We're also trying to scrounge up a few copies of I.O.U.S.A. from our mates in the States to raffle off.

As for the rest of the affair, canapés will be on offer. But you're on your own to fill up your stomach after that. Filling up your mind will come from the scintillating conversation to be had with other DR readers. If you haven't already RSVPd, please do so by sending us a note at dr@dailyreckoning.com.au.

And now to a world full of stuff no one wants. Selling stuff you bought with borrowed money is a process that's mostly been confined to the financial markets in 2008. But now we see the behaviour migrating into the economy. At the household level, a collective sense of thrift is beginning to set in. People are selling what they don't need to raise cash.

But let's start with the financial news first. Macquarie Group (ASX:MQG) told investors yesterday that its profit fell by 43%, thanks to write downs in assets. It was the first time since going public twelve years ago the "Millionaire Factory" has reported an earnings decline. Still, the $604 million profit number was higher than what analysts were expecting ($594 million) and the stock finished up over 16.5% on the day.

In the revenue results and write downs you can see how the decline and fall of the investment banking model has hit Australian shores. MQG reported a 13% decline in fee and commission income (to a paltry $2.2 billion). Trading income fell by 14% to $722 million. The big one was the 43% decline in income from asset and equity investments.

There were some strange assets in the back rooms of the Factory. The company took over a billion dollars in write downs on its Italian mortgages and fund management assets. It did not, however, take any write downs on Macquarie Airports or Macquarie Infrastructure Group. Hmmn.

Picture the good ship Macquarie Group as something like a Noah's Ark/Pirate Ship full of a menagerie of debt-financed assets. Under Captain Allan Moss as CEO, Australia's version of Goldman Sachs sailed the high-seas of global finance, buying assets with borrowed money, bundling them into funds, and then charging retail investors fees to invest in the funds. It's the sort of business those Somali pirates who hijack oil tankers should look into. Far more lucrative.

Twelve years of collective booty and swag gave the Factory quite a collection of eccentric and fee-generating assets. Some of those assets are not ageing so well. But you'll note the company chose not to mark down the value of its infrastructure or airport funds, the two big ones.

It claims the current market value of those assets isn't what they are really worth. The book value is more accurate. In the meantime, it is throwing other less attractive assets overboard. Deck chairs...Italian mortgages...extra chickens...everything must go!

There's no doubt that asset values are likely to fall more next year and that revenues will continue to fall too. Still, the company says it will sell $15 billion in assets and then set sail, on the lookout for more acquisitions again. Garn!

It's looking to sell its margin lending book. And new CEO Nick Moore said it will securitise its motor vehicle loan book, move it off the balance sheet, and sell it off. Thus the liquidation continues in the financial world. Loss-making assets are written down or thrown overboard at...er...fire sale prices.

What's really happening, mixed metaphors aside, is that the Millionaire Factory model is giving way to deleveraging reality. In a world with falling asset values and tighter bank credit, it's harder (and much less profitable) to build a cleverly constructed portfolio of assets and generate fee income from operating them.

In the post-credit crunch world (or post-Deluvian, if you accept the nautical metaphor), you have to focus on cash, not debt. One example would be Cash Converters, a sort of Main Street Macquarie, without the debt, and substituting Italian loafers for Italian mortgages. Cash Converters buys low and sells high. It's the perfect business for the first world depression.

Cash Converters helps people turn lazy assets (guitars, mobiles, stereos, old harmonicas) into cash. And what is that but the liquidation of the consumer spending boom? Of course, most stuff isn't worth as much people think it is. When you own something, you tend to think it's worth more than everyone else.

Then you try and auction it on eBay or take it to a pawn shop or Cash Converters. There, you find that it's worth a lot less than you believed in your heart. Such is life, as Ben Cousins and Ned Kelly might say. Kris Sayce at the Australian Small Cap Investigator (whom we often call the Ned Kelly of the Old Hat Factory) has been looking at Cash Converters as an example of what he calls "Main Street Stocks."

We'll let you know what he's up to...but we think it has something to do with companies that actually do more business in a recession and increase both revenues and earnings-without relying on debt. If you have your own suggestions for "Main Street Stocks," let us know at dr@dailyreckoning.com.au

Dan Denning
for the Daily Reckoning Australia

• Is the Macquarie Model Dead?
• Commonwealth Bank (ASX: CBA) Nearly Doubles Bad Debts Over Last Year
• Credit Markets Threaten Retail Banking, Bank Runs Next?
• The Inflation Rate in India is Running About 12%
• Warren Buffett is Buying Four Percent of Goldman Sachs

The world's largest economy, as you already know, is in recession too. In the U.S., financial capitalism is imploding. Citigroup's CEO Vikram Pandit told analysts the company would lay off over 50,000 workers. He cited rising loan losses and an economy slowing much faster than the company previously expected.

Gulp.

As over-sold as we believe Australian stocks are at the moment, we'd be foolish to ignore the warning signs flashed yesterday all over the globe. Bill had better take down the crash alert flag and run up the depression alert flat.

World GDP is around $54 trillion. The U.S., Japan, and Europe combined have a GDP of $33 trillion (according to 2007 IMF figures). When 60% of the world's economy is in recession (and the majority of the developed world) it cannot be a good sign for anyone...including manufactures of finished goods and producers of raw materials (China and Australia).

If you operate on the premise that share markets lead stock markets, then there's the chance that this synchronised global recession is already factored into share prices. We know the small Aussie juniors are down 50%, 60%, or more from their highs. And as the chart below shows, the All Ordinaries has matched the S&P 500's historic decline from the October 2007 highs.

If there's any good news, it's that Aussie stocks have underperformed the S&P for most of the third quarter. The S&P has lately caught up. But now we must seriously reckon with the possibility that the current world recession could turn into the first word depression. If that is indeed the case, then the argument for buying any shares at all gets that much harder to make.

Enter stage right Jim Lennon, resource analyst at Macquarie Group. Lennon published a research note last night in which he and his team forecast a 60% decline in 2009 coal prices, a 20% decline in iron ore prices, and a 40% decline across the board in base metals. It wasn't quite metals Armageddon, but you could hear some of the seals popping with each forecast.

Keep in mind coal and iron ore are coming off big years in 2008, where thermal and coking coal were up triple digits and iron ore an average of 85%. In other words, the declines are coming off a big increase. But let's not sugar coat it. These are sobering forecasts for resource demand and for resource producers.

Comm Sec analyst Savanth Sebastian says, "If it [Lennon's forecast] was the case, you'd see a lot of marginal mining projects go under and as a result you'd see a lot of processing plants close up shop," he said. Unemployment will rise - maybe as high as 10 per cent - spending will be cut back, property prices will fall, wealth levels will fall. It suggests that overall things will be very grim and very dire."

We wish we could tell you with conviction whether the worst of a global recession is already priced into shares are not. But no one can know. All we can say for sure is that if we are on the edge of Japan-like 15-year global debt/deflation recession/depression, then stocks will be a horrible place to be.

If you're going to be in the market though, then you want to want to keep looking for those businesses and sectors that throw off cash, don't have a lot of debt, don't require huge infusions of capital to generate new income, and are located in the few industries in the global economy where good things are still happening.

Speaking of which, Diggers and Drillers editor Al Robinson just published his newest research today for paid up readers. As we've said, we realise a lot of readers are looking at the market and deciding to forgo it altogether. But our analyst team is still on the case, looking for the best ideas. You'd be surprised what you can buy on the cheap these days. This month, Al took a close look at the uranium industry in Australia...and found something he really liked.

It may be good timing. Western Australia's Liberal government has fulfilled its campaign promise and officially lifted its ban on new uranium mines. The action affects some 1,475 mining leases in WA.

Premier Colin Barnett told the press that WA, "Is now open to the mining industry in this state, if they so wish, to proceed with plans to develop the uranium industry...We are the world's leading mining economy and it's always struck me as odd that we would have a ban on uranium mining when that is one of the areas of growth into the future," he's quoted as saying in today's Australian.

What's do you get when you mix recession and depression? Repression.

"So did you guys hear we put a colony on Mars? The Lochness Monster did an interview on Oprah. It speaks."

Thus writes one of your editor's older brothers from Colorado. He read about Australia's plans for internet censorship and wanted to catch us up with what was really going on the world, in case the big news had somehow already been blocked. We're pretty sure he was joking. But in a world where the government has total control of the information you see (or don't see), would you really be able to tell?

And more reader mail on the armed defence of constitutional liberties.

Dear Sir,

I contest to you that most other countries get on fine without a Bill of Rights. I would contest that what the United States could have used, during the rolling decades of crowing about freedom and equality, might have been a Bill of Rights to reduce the roll of business and money in the process of government. Essentially to implement, as other countries have, essential checks and balances to curtail excessive influence by well organised, well funded lobby groups.

Then again perhaps you're right. Perhaps the solution is for the entire citizenry to be armed. After all, when you're looking for some basic health care or adequate emergency response in the United States, it strikes me that for many wielding the gun is more productive than wielding the vote.

Regulations on the role of business and money in politics don't have any place in a Bill of Rights. A Bill of Rights exists to strictly define the limits of government power, as we said last week, and to protect minority rights from even duly elected popular majorities. If you want to regulate the role of corporate money in politics, you have to do it in the legislature. Good luck with that, though. Most politicians are bought and paid for by someone...the unions...the lobbyists...the corporations...or the special interest groups.

We certainly have no problem with the entire citizenry being armed. Most citizens in Israel and Switzerland keep (or are required to keep) arms in their homes. It hasn't destroyed the social fabric in those places. It's probably knitted in more strongly together.

Better universal gun ownership than universal suffrage, we say. Giving everybody the vote is more dangerous than giving everybody a gun (and teaching them how to use it). A vote allows you to directly and indirectly exercise power over other people's lives without their consent and with the full protection of the law. And you can do it without making any sacrifice of your own on behalf of the society of which you're a member. Voting is a real weapon of mob destruction.

Bring back the poll tax! Or making voting a privilege, not a right. To earn the right to vote, you should have to serve the public in some form for two years, either in the armed services, or in the public service, or in some other capacity. Not that we're a fan of compulsory anything.

But if you grant "rights" to people who have no sense of civic responsibility, you get the mess we currently have. If you're going to have a government with elected officials, they should be elected by people who know have demonstrated a willingness to put the nation's needs ahead of their own. This was Robert Heinlein's idea in Starship Troopers. If you didn't want to serve, that was fine. You just didn't get to vote. Seems fair. You might even get better government.

• Energy Debate in Australia Needs to Get Serious
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• CBA Sees More Bad Loans
• Statistically One Vote Doesn’t Make Any Difference

Let's assume that all those pension funds and college endowments and local councils that rushed into funds because they were hip and cool now rush out. Okay. Not all. Let's say half. You'd have about $800 leaving the fund industry (with all the de-leveraging and equity selling that implies) and looking for a new home.

While hedge fund assets are shrinking, the Fed's balance sheet in the U.S. is growing. The Fed started 2008 with about $890 billion in mostly squeaky clean U.S. Treasuries on its balance sheet. It now has nearly $2 trillion, much of which is "collateral" from banks, prime brokers, and other financial firms who traded assets they could not sell for Treasuries from the Fed.

It's the incredible growing balance sheet. Speaking about the so-called assets on the Fed balance sheet, Dallas Fed President Richard Fisher said, "I would not be surprised to see them aggregate to $3 trillion...by the time we get to the new year." That's 20% of U.S. GDP.

Now we can't guarantee that the Fed will finance its collateral laundering program with new cash from the U.S. Treasury. But one way or the other, the U.S. government is going to have to sell more bonds to finance its portfolio of bailouts. The big question is whether all these hedge fund investors who've redeemed what's left of their capital will stay in cash or switch to short-term bonds (which are admittedly paying below the rate of inflation).

If they move to bonds, it's probably bad news for equities to finish the year. It's also madness. But hey, when you have a lot of cash (other people's money) it has to go somewhere. And the U.S. bond market is as liquid a place as any.

"Landmark Finance Summit Sets New World Order," reports Deutsche Welle. "Summit of lies," countered Italy's La Repubblica. The beauty of integrated global financial regulation is in the eye of he who gets to make the rules, apparently. The G20 summit in Washington on the global crisis has come and gone. What did it leave behind?

More tax cuts. More government spending. Lower interest rates. That seemed to be the gist of things. The group will meet again in London on April 30th to make more rules and to-do lists.

You'd think cutting taxes AND spending more at the same time, would, you know, increase government deficits. But the political imperative across the world is not to balance a nation's books or for a nation to live within its means, but to keep voters employed. Employed voters don't rebel. But you can't have employment without more growth. Thus the stimulating trifecta of tax cuts, lower rates, and more government spending.

The statement the G20 released after its summit is the sort of thing only an accountant (or, perhaps, Kevin Rudd) could love. But G20 statements, like all of God's creatures, need love, too. It made some good points about taking a look at how credit ratings agencies operate (and are regulated), the transparency of the credit default swap market, and accounting standards.

Another worthy point was made about executive compensation, although not in the populist way you'll find in the papers. The real issue isn't how much money executives make. That's up to shareholders and boards of directors, and if they've gone along with it until now, it's their own fault. Executives should make exactly as much as compensation committees and shareholders permit.

The real issue is whether the interests of executives are aligned with the interest of shareholders, or, as the case seems to be in the last few years, directly opposed to them. If executives, or whole entire financial firms, benefit by putting shareholder capital at elevated risk to boost earnings which trigger options compensation targets, then the interest of the executives is not aligned the interest of the firm or its shareholders.

This is true, of course, across the financial services industry. It's a question you should always ask yourself about anyone you choose to do business with. Are their interests aligned with mine? The simplest way to do this is to ask: how do they make money? If they make money through fees and charges that are not related to performance, then there's a pretty good chance their interests are not aligned (and are often opposed) to yours.

Of course it's not realistic to expect that everyone is always going to be on your side. That's not how it works. But what most investors have now realised is that in a bull market, you can get by without having your broker or your fund manager looking out for you. The market takes care of you both. But in a bear market, you find exactly who's been making a living at your expense, without adding anything of value.

If one lasting change comes from the Financial Panic of 2008 (or World Depression One), it's that a business has to be run for the long-term benefit of its customers. If a business takes care of customers, shareholders benefit. But the idea that the shareholders or executives can extract maximum value out of a corporation's balance sheet or earnings in the short-term violates the very legal idea of the concept of the corporation.

The corporation is designed to be a going-concern, a legal entity that survives the comings and goings of those who work inside it. But it can only do this if those who run it operate it to serve the interests of customers. If they operate it to serve their own interests, they'll kill it. Hence, the rising number of corporate casualties.

Back to the G20 quickly. If you had to pick just three points to focus on from the report that could affect investors, they would probably be accounting, the IMF, and pro-cyclicality. You can detect an almost panicked plea by G20 leaders for accounts to figure out a way to value the "toxic collateral" that's poisoning the global financial system.

But guess what? Whether it's fair-value or mark-to-market, accounts already DO have a good way of knowing what it's worth...and either way you add it up, it comes to less than what banks would like to value it at. Still, rather than realising losses, expect more bailouts and capital infusions for a large list of increasingly non-financial firms. We are all Socialists now.

The bit about pro-cyclicality is central bank and economist speak for the fact that financial markets are actually accelerating volatility in the real economy (as if the financial markets were not actually part of real economy.) The idea that somehow cyclicality can be removed from the economy by reforming the financial markets is a central planner's opium dream. It shows you how naive the expectations are for global harmonisation of regulatory, tax, and accounting standards.

What about the IMF? Now that should be interesting. The IMF may emerge as the first powerful institution in the New World Order, whatever that Order ends up looking like. It's worth keeping an eye on.

The emerging market nations (Brazil, India, China, Russia) and the developing world would like more say in how the IMF makes its loans and sets its conditions to the rest of the world. But for years, the IMF has been the tool of dollar hegemony. You get bailout money in exchange for opening your markets to U.S. and European trade.

Today, though, the IMF needs more money to bailout bankrupt governments. Though it is quintessentially an American institution, the IMF has to be funded by people who have money. Americans and Europeans can't fund it at the moment. But others could. Currently, those "others" are Japan, China and Saudi Arabia (the world's savers, traders, and oil exporters, respectively.)

Now ask yourself why these countries would fund the IMF but not get a say in how its loans are made or what rules are used to make them. It's a kind of financial blackmail. "Give us your money or the world's financial system gets it," seems to be the tone of the message coming from Gordon Brown and Henry Paulson. "It's your money or the world's economic life!"

Something to watch for? Rubin's Bane. The growing role of the IMF might come back to haunt the very people and countries who pushed so hard for the expansion of that role.

Under Robert Rubin and the Wall Street-U.S. Treasury alliance, the IMF has been pushing for capital account convertibility for years. While trade barriers in goods and service have come down over the last twenty years, the IMF wants to open up the world's capital markets by removing barriers.

Here's a prediction, though. Capital account convertibility leads to greater capital flows AND increases the likelihood of financial panics and crashes. For example, right now, huge global capital flows are making their way into the U.S. Treasury market. This finances the bailouts in America.

But should these capital flows reverse-as they could under the IMF's push for more liberal capital rules-then they have the ability to generate a tremendous crisis in the American economy. It would be a vast exodus from America's bond market into the global financial wilderness. More on this tomorrow.

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• $4.1 Billion in Investor Funds Have Been Frozen Overnight
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• ETFs Are Now Available in Australia

Wal-Mart's current marketing slogan, by the way, is "Save Money. Live better."

It was an island of good news in an ocean of panic. Large retailers in American are feeling the sting and going numb. Some are going out of business, like consumer electronics retailer Circuit City. But for a day, the Wal-Mart led-rally took stocks from nearly 300 points down in early trading to over 500 points up by the end of the day.

Will it carry over to Australia? Probably. It's either rally, or, according to SWARM Trader editor Gabriel Andre, re-test 3,500 as the long-term support for the ASX/200. Also, the sort of news coming out of American retailers this week would be pretty ominous for Aussie retailers, you would think. If the full array of credit-crunch related side effects begins slamming into the Aussie economy (and it already is in the banking sector), consumers are going to save more and spend less.

ASIC announced the ban on short-selling of non-financial stocks will be lifted on November 19th, while the government has introduced a bill to ban naked short-selling. The ban on covered short-selling of financial stocks has been extended by ASIC to January 27th of 2009.

Have you noticed that since ASIC banned short selling over the weekend in late September, the All Ordinaries is down by nearly 24%? Take a look at the chart. We're not making it up.

This isn't to suggest that the ban on short-selling is solely responsible for falling Aussie stocks. There are plenty of reasons for that. But is this a case of it being necessary to crash the market in order to "save it" from unscrupulous short sellers?

Granted, naked short selling by speculators was probably a good riddance. But let's not disparage the valuable role professional short-sellers play. Many of them analyse a company balance sheet to see what's wrong with it. Then, they go short, based on their conclusion that the business (Enron, GM, Fannie Mae) is in big trouble.

Shorts also provide a kind of floor for the stock market. When shorts cover, they're the only ones who step back into the market to buy at the bottom. Often times, they may decide that it really is time to buy a stock at a much lower price. But even if they aren't buying as value investors, they ARE buying. And a short-covering rally can be just the thing to lead to a capitulation in sentiment and a reversal of the primary bearish trend.

Of course none of that will happen if you can't short stocks. You reckon, though, that by extending the ban on financial stocks (including property trusts), ASIC is trying to prevent a wipe out in shareholder equity while asset values continue to fall. This would be the dreaded problem we mentioned yesterday, where short-sellers see a badly over-levered balance sheet and take the appropriate position short the stock.

The ban on short selling doesn't improve an impaired balance sheet. But it does delay the market mechanism by which the share is accurately valued. It also gives insiders and existing shareholders the chance to bail out of their shares before common shareholders are wiped out in a real collapse. So it's got that going for it.

A quick addendum to our observation about Robert Rubin's gambit to build up a surplus in the capital account while running a current account deficit. You could argue, in Rubin's defence, that he was accepting the facts of economic life, that Americans were going to binge, and that the only way to offset this without crashing the dollar was to create a capital account surplus.

But that would be a generous argument. As one reader suggested, Rubin helped build a system where the U.S. financial industry was global ticket clipper. It was a dollar-based hegemony in financial services, in which Wall Street generated huge fee and transaction income by the recycling of global trade surpluses and savings via U.S. stock and bond markets. Everyone had to pay a toll to stay in the game.

There's also a philosophical problem that we think our old mentor Dr. Kurt Richebacher would have identified. Rubin's preference for a capital account surplus seems like it's based on the assumption that you can get wealthy collecting fees on financial transactions. But that is bad national strategy for wealth building. In fact, it is a strategy for national wealth destruction.

As Dr. Richebacher soften pointed out in his work, real economic value begins with production. If you don't produce anything, you can't sell anything. And if you can't sell anything, you can't buy anything. Consumption is also indispensable to a growing economy. But real value creation begins with production, and the Rubin model rejects that in favour of debt-based consumption.

The net result has been a disaster for Western consumers (whose whole identity, in fact, is based on consuming...we don't call them producers). Their real wages have fallen as labour markets (especially manufacturing) have been globalised. Asset prices that were goosed up with funny money are now falling. And all that debt they took on to make up the difference between falling wages and a rising cost of living must now be repaid. In order to save (enslave) the consumer from debt (to debt), it was first necessary to destroy him.

Here's a question. Does Henry Paulson's ever-changing TARP now exclude the government buying distressed assets because the Treasury can't figure out what they're really worth? Let's see. The banks don't know what they're worth. Investors don't know what they're worth. And now the government doesn't know. It's a clean sweep!

Or maybe they all know what these securities are really worth. And that's why none of them are selling.

If you stop hearing from us here at the Old Hat Factory, it will be because we've made the government's new blacklist of banned internet sites. Of course, you wouldn't know we're on that list (and neither would we) because no one is allowed to see what's actually on the list. But it's not for lack of trying.

We rang up the Australian Communications and Media Authority (ACMA) to ask which websites are currently on its blacklist.

"We can't really say."

"Well how does something get the list right now? Is it done manually or by some sort of automated process?"

"It's manual right now. Someone submits a complaint about a site. We investigate it. And then if it's deemed to be illegal, it goes on the list."

"Who does the deeming?"

"We do."

"Can I see the list?"

"No."

"Why not?"

"Because it's full of illegal content. We wouldn't want to share that so you could go have a look, now would we?"

"Under what legal authority can you prevent the public from know what's on the blacklist?"

"I don't really know. You'd have to ask our lawyers."

The story of Australia's plan to filter/censor the internet even made it to the front page of the Drudge Report this week. The key word was, "unwanted." Communications Minister Steven Conroy said earlier this week that, "The pilot will test filtering specifically against the ACMA blacklist of internet prohibited content, which is mostly child pornography, as well as filtering of other unwanted content."

So what is "unwanted content?" The government may know. But it's not telling you. And apparently, it doesn't have to.

What should you do if you're opposed to the internet filter? Well first, there are plenty of ways around it. We can't say what they are, because for all we know, saying so would be a crime. But a little Googling should get you there easily enough.

There are also a few websites spring up on Facebook and other places where you can voice your displeasure. Another place to start is here: http://nocleanfeed.com.

The Yanks will shut up today about Australia's legal system and a Bill of Rights and guns. Here' s some reader mail from the last few days:

Dear Dan Denning,

So we barbarians should adopt a Bill of Rights like the non-barbarian USA. What a wonderful example it sets to the world!!

Perhaps we should so we can load ourselves up with guns and shoot at all sorts of enemies whether real or imagined - just like Denny Crane in Boston Legal! (a great show!!) But then perhaps not - we haven't done too badly without one. As citizens are we less secure and frightened than those of the USA? Do we have less freedom? Is our legal system more corrupt? I can't see that it is.

I would prefer Australia to be a republic. But I suspect, like most Australians, I would fear the adoption of the USA system and the possibility of ending up with a president who is contemptuous of civil rights, invades other countries on false pretexts, claims the right to conduct illegal acts in other countries and bankrupts the nation in the interests of his cronies.

I am not anti- USA. Indeed I had long admired it. It's just that it is getting harder to do so these days.

I think we are better off with continuing to evolve our Westminster based system of government - no need for guns! I don't like inherited monarchies but the rule of Queen Liz isn't too onerous compared to a George B and probably less costly. Now there is a thought!! Why not return to the Crown? Give up the rule of the gun and learn to make a decent cup of tea instead. A good cup of tea ( and perhaps a Bex and a good lie down ) would probably have a more calming effect than a gun in most situations. ( I enjoyed my trips to the USA but I couldn't get a decent cup of tea.)

Thanks for the interesting work on finding good companies to consider for investment - as well as a good laugh!!

Regards

Walter

G'day, Dan

Your few paragraphs on Bills of Rights said more than the words. James Madison would be proud. Much appreciated.
Best regards,

Joseph

"Yankee go home!"

• Short Selling Ban May Kick Off Market Liquidation
• CBA Sees More Bad Loans
• Where is J.P. Morgan When We Need Him?
• Gold ETFs Aren’t Looking as Good as They Used to Be
• Exodus In Waiting

Before we forget, drinks are confirmed for Tuesday, December 9th at the BLVD Bar, located at 6 Queensbridge Square on Southbank in Melbourne, from 6:30pm until (perhaps) midnight. Finger food will provided, and the first drink is on the DR. But after that, you're on your own for food and beverages. Quite a few readers are eager to toast in the New Year, or say goodbye to the old one. Either way, see you then!

On to the markets. Australia's biggest mortgage lender says its bad doubts could double this year. Commonwealth Bank said loans it made to now-defunct firms Lehman Brothers and Allco. Bad debts at CBA were nearly A$930 million in 2008, compared to $496 million the year before. Ouch.

The bad loans are still a small percentage of the total loan portfolio. You can see, though, that Aussie banks are trying to beef up their core capital to provide for future loan losses. NAB's $3 billion institutional raise endeared it to investors. CBA may have to raise new capital as well, if only so its Tier 1 capital ratio matches that of its peers.

Huh?

Tier 1 capital is a bank's core capital-the amount of equity it has to withstand losses. It's actually a ratio of core capital to risk-weighted assets. You might be surprised that, according to the Australian Prudential Regulatory Authority (APRA, or the agency that regulates Aussie banks), the minimum capital adequacy ratio for Aussie banks is just 4%.

They prefer it to be much higher, though, around 8%. And you can see why. Unusually large and unplanned losses in a bank's asset portfolio could wipe it out if it didn't have sufficient high quality capital on the balance sheet. This, by the way, is the reason the Paulson TARP plan in the U.S. morphed from a plan to buy bad mortgage assets on bank balance sheets into a direct inject of capital. It was meant to bolster the core capital positions of banks with troubled assets (cross fingers, hope asset quality improves.

Australian banks-at least the big four-do not appear to require any of the major capital injections taking place in Europe in the U.S. The banks appear to have parked a lot of their residential mortgage backed securities with the RBA, though (for safekeeping of course). It goes to show you, though, that banking is an inherently risky business.

Meanwhile, on Wall Street, the Dow fell by nearly five percent and the Nasdaq broke its 2003 low. It's likely that stocks all over the world are going to test the 2003 lows again, and probably crash right through them. But we honestly thought that wouldn't come until the first or second quarter of next year, and would be preceded by a significantly rally in shares.

That's still possible. But the drumbeat of hideous economic news is pulverising investor sentiment. What's so alarming about this market is that the popping of the credit bubble is not just forcing all asset classes much lower. It's bringing the government into play as the key economic actor of the next five years (or much longer, perhaps). It's like a giant global Red Dawn. Yikes.

Yesterday we promised to talk more about Aussie resource juniors. We're running out of space today, so we'll save it tomorrow. However, picture a world in which your great grandchildren have no idea what a petrol station is...because there aren't any. It's a world where petroleum is a construction material, not a fuel for internal combustion engines. And it's a world where the most valuable resource isn't paper capital...but energy.

Some reader mail?

Dear Dan,

As always, a well-written and thought-provoking article. But no Bill of Rights for me thanks . The problem with such a Bill is that unelected Judges can have an absolute birthday... at our expense. I do not want Activist Judges to dictate my life. While parliaments can be composed of a bunch of boofheads... at least we can vote the bastards out. Activist Judges are far more frightening than an absence of a Bill of Rights. Besides, we appear to have got along pretty well without a Bill of Rights.

Regards

Bob M.

Ahh yes. What to do with the boofheads? Vote them out!

From what we can gather, the worry about a Bill of Rights is that it becomes a specific list of things which you as a citizen may not do. Or worse, it becomes a laundry list of so-called rights the government extends to special interest groups. It becomes a list of particular laws rather than general principles.

That doesn't sound like a Bill of Rights we'd want either. But then, as we understand it, a Bill of Rights is a very general list of negative rights. Negative rights specify what the government is NOT permitted to do. Positive rights, like the ones a lot of readers seem to hear, specify what YOU are permitted to do.

You'd want a Bill of Rights that negates the government's power to make laws to tell you what you can and can't do. The whole point is to remove critical freedoms like freedom of speech and freedom of the press from courtrooms and legislatures and put them, in a constitutional sense, above judicial or legislative deliberation. The government can't touch them because they are off legal limits.

Of course other countries have had Bills of Rights that didn't succeed at all in guaranteeing liberty. Weimar Germany is a great example. But if you'll forgive us for being a barbaric American, we'd suggest that one reason these Bills of Rights didn't help in the practical defence of liberty is that they did not include the right of the people to keep and bear arms.

The founders realised that having rights-freedom of speech, of the press, or religion-was no good if you didn't also have the right to defend yourself from people who would deprive you of those right unjustly, including the government. What good is it having rights that can't be taken away if you aren't able to defend yourself from people who want to take them away?

Of course in a civilised and free society, a man wouldn't generally have to worry about the State's monopoly on violence infringing on his rights. None of us spend much time defending our rights to worship and speak freely because we enjoy them without challenge. For now.

Keep in mind the second amendment to the U.S. constitution-which clarifies that a man has the natural right to defend himself with arms-has its origin in British common law and not the violence of the American frontier, as is often suggested by people opposed to self-defence.

The 1689 English Declaration of Rights recognised the right of British people (although only Protestants) to bear arms in their own defence. A similar right to bear arms was introduced to the U.S. House of Representatives by James Madison with two big changes. One, it applied to everyone, not just Protestants. And two, it was not an Act of Parliament but an amendment to the Constitution.

That means it was not a right that could simply be taken away by a future Act of Parliament. To modify or eliminate a Constitutional right requires a specific and fairly difficult process. But remember, we're not talking about "rights" like health care, education, or other socially desirable outcomes.

Parliaments of elected men and women are free to pursue those policies inasmuch as they represent what people want their government to do with their tax dollars. That's consensual government, after all. But a clearly defined bill of negative rights simply tells the government what it cannot do with respect to individual liberty. That seems pretty handy.

• Australian Banks Must Increase Fees or Expand Loans to Remain Profitable
• Commonwealth Bank (ASX: CBA) Nearly Doubles Bad Debts Over Last Year
• Reserve Bank’s Financial Stability Review Shows Bear Market in Credit
• Rumours Swirl Over Chinese Equity Stake in BHP Billiton
• The Two Pillars of the U.S. Mortgage Market, Fannie Mae and Freddie Mac, Wobbled Again Yesterday

Here's a warning. Today's Daily Reckoning is largely about the growing tension between individual liberty and the coercive power of governments. If that's not your cup of tea, you may want to duck out and have a coffee and join us tomorrow.

But we believe politics and government are fair game for a financial newsletter. How you get and keep money depends on the kind of government you have and how much legal protection you have from government power. So that's our beat today.

First, though, there is the purely financial bad news. In the States, Fannie Mae reported a US$29 billion third quarter loss. But the more notable bad news came from insurance giant AIG. AIG reported a $24 billion third quarter loss. And then the U.S. government announced a new US$150 billion bailout plan.

Another week, another bailout plan at AIG. Just how bad is the credit default swap problem at AIG? Pretty bad, apparently. Remember, AIG collected premia by writing credit default insurance policies against all sorts of securities, but mostly residential mortgage backed securities. It is now engaged in a mad rush to post collateral as its balance sheet falls apart.

It's the U.S. taxpayer who's paying off AIG's credit default swap policies. And the bill just keeps getting bigger. But that doesn't seem to bother anyone.

After all, the Federal Reserve has loaned out over US$2 trillion through its various new lending facilities. It's refusing to tell Bloomberg who got how much money and for how long. This doesn't appear to bother anyone, except Bloomberg, which has filed a Freedom of Information Act request to force the Fed to be more transparent.

Good on ya Bloomberg.

Without more transparency, no one knows what collateral these borrowers have posted to borrow from the Fed. And we don't know what price the Fed has slapped on that collateral, or how it even came up with a price for illiquid assets used as collateral.

None of it would matter too much if the Fed wasn't, you know, taking on obligations on behalf of the U.S. taxpayer and his money. The Fed has increased its lending by 140% since September 14th, from $1.17 trillion to over $2 trillion now. The Fed has eleven separate lending programs (helicopters) set up to hose money into the financial system. Eight of them are new in the last 15 months alone.

Shills for the non-transparency in Congress and the media say that if the Fed published who was borrowing what, it would lead to lack of confidence in vulnerable financial institutions, bank runs, and short selling-all of which would nullify the purpose of the programs to begin with.

That's right...you're better off not knowing who you're money has been given to. If you did know, you'd probably vomit...or want to break something. As if your own government was actually accountable to you. Ha.

Are Gordon Brown and Barrack Obama reading from the same hymnal? Obama and his team are advocating a 'big bang' approach to their first 100 days in office. This approach uses the epic financial crisis as an excuse for the broadest expansion of government involvement in the economy and private life since LBJ's Great Society and Roosevelt's New Deal.

What's with Obama? You mean it's not enough for him to be a secular Messiah? A kind of second coming of JFK? Apparently not. Not content with being the second coming on Earth, Obama wants to be the author of the entire Universe and become the Prime Mover in a Statist "Big Bang."

Gordon Brown has more terrestrial ambitions. Brown is preparing to steal some of Obama's messianic thunder by laying out his vision for a Great and Just Global Society built from the ashes of the financial crisis. Speaking in London, Brow said, "The alliance between Britain and the U.S. and more broadly between Europe and the U.S. can and must provide leadership, not in order to make the rules ourselves, but to lead the global effort to build a stronger and more just international order."

But wait, there's more.

" Uniquely in this global age," he continued, "it is now in our power to come together so that 2008 is remembered not just for the failure of a financial crash that engulfed the world but for the resilience and optimism with which we faced the storm, endured it and prevailed."

Delusional. But let's hear him out.

"If we learn from our experience of turning unity of purpose into unity of action, we can together seize this moment of change in our world to create a truly global society... My message is that we must be: internationalist not protectionist; interventionist not neutral; progressive not reactive; and forward looking not frozen by events. We can seize the moment and in doing so build a truly global society."

What is a truly global society? Does this mean we can have cocktails with Posh and Becks down at the George Public Bar on Fitzroy Street in St. Kilda? Is Putin coming over for tea? Will the U.S. soccer team win the World Cup?

We don't know what it means, dear reader. But it doesn't sound good to us. At all. It sounds, in fact, like the financial crisis is being used at the excuse for an enormous push toward more integration of government at the international level. One world government, you might say.

This is the most serious campaign against individual liberty in a long time. And it's just getting started. The Statists of the world (both Left and Right) will be dusting off all their favourite plans for more expansions of government power into commerce and private life. We feel compelled to mention in today because in their moral righteousness and fervour, the advocates of this huge expansion are not bothering to hide their real objectives, their motives, or their methods.

The objective? Bigger, more intrusive government. The motive? Moral righteousness that people smarter than you know better what you should do with your money and your life. The method? Coercion, both through taxation and suppression of individual action (thought, expression, movement).

Which brings us to Australia. A few readers have written to ask if we are aware of the internet censorship legislation being proposed by Communications Minister Stephen Conroy. Yes, we are.

The government wants to "filter out" content that is already illegal in Australia by forcing internet service providers to censor content which you can access from your computer. The original legislation would have filtered content for households and schools. The next version of it applied to all internet users, but would have allowed users to opt-out of the filter. The latest version is compulsory for everyone, everywhere, no questions asked.

What websites would be blacklisted? Well, we asked around at the Australian Communications and Media Authority (ACMA), the agency in charge of the list, and didn't receive an answer. Is the list maintained by a person? By an algorithm? By a modern day Joe McCarthy? No answers as of yet.

And does ISP-level filtering it even work? An in-house government trial of the filtering software showed that the filters don't prevent access to content deemed to be illegal, block content that is legal, and slow down network speeds dramatically. Based on that poor result, the government is proceeding with a live, voluntary trial conducted by real Aussie ISPs.

Like all campaigns that take away a measure of your freedom, you're being told this is done to protect "the children." For example, Conroy told a national radio Audience that, "Labor makes no apologies to those that argue that any regulation of the Internet is like going down the Chinese road...If people equate freedom of speech with watching child pornography, then the Rudd Labor government is going to disagree."

Right Minister (moron). Because so many people equate freedom of speech with child pornography. You could not possibly defend civil liberties and freedom of speech without being a pervert, a drug user, or a terrorist. Could you?

The trouble is, there is no protection of freedom of speech at the Commonwealth level in Australia; at least none that we're aware of. According to a June 2002 research note by the Parliamentary Library in Canberra, Australia is a signatory to the Universal Declaration of Human Rights (UDHR), passed by the U.N. in 1948.

Article 19th of the UDHR affirms that, "Everyone has the right to freedom of opinion and expression; this right includes freedom to hold opinions without interference and to seek, receive and impart information and ideas through any media and regardless of frontiers."

No specific Act of Parliament has been passed at the Commonwealth level to incorporate this article into Australian law and "no government has implemented the free speech provisions and therefore they are not enforceable by Australian courts." Why don't you get on that Malcolm Turnbull?

In early 2006, Victoria passed a kind of Bill of Rights called the Charter of Human Rights and Responsibilities which DOES include freedom of expression (see page 15). You should also note that Victoria's Act isn't like a Constitutional right to free expression. It says the right of free expression, "may be subject to lawful restrictions reasonably necessary," such as "for the protection of national security, public order, public health or public morality."

The Australian Capital Territory passed its own Bill of Rights in 2004. Its language does not suggest that freedom of expression is proscribed by any limits at all. On page 13 it states, "Everyone has the right to freedom of expression. This right includes the freedom to seek, receive and impart information and ideas of all kinds, regardless of borders, whether orally, in writing or in print, by way of art, or in another way chosen by him or her."

--Maybe it's time the Commonwealth of Australia had a Bill of Rights. From our early investigations, we see that the subject has been debated on and off throughout Australian history. Maybe it's time for a new debate.

The big advantage of having constitutional protection for freedom of expression is that it stands over and above common law. Public tastes and morality change with the times, and common law generally reflects these gradual changes in tastes. But certain rights ought not to be subject to the passing whims of legislators. There are very few such rights, but that's why they are enshrined and protected in a Bill of Rights.

Constitutions and Bills of Rights do not exist to spell out what the government allows you to do as a private individual. They are not lists of legal and illegal private behaviour. Just the opposite in fact.

The U.S. Constitution and Bill of Rights describe the precise limits of Federal power. They do not list what you and I can or cannot do. But they do specify acts which the government must almost always refrain from doing. They exist to define and limit government power, not to define and circumscribe individual liberty.

Most people forget that these days because they are used to being bossed around by the government at all levels. But Bills of Rights generally prevent the government from telling people how to worship, what they can or cannot say, and who they can or cannot assemble with in public. In the U.S., it also includes the right to bear arms.

To the extent that the Bill of Rights describes what the government can do, it's usually things the government HAS to do once it's already infringed on individual liberty. This includes a trial by jury, right to confront accusers, and the right to counsel. But these again are designed to guarantee the private individual's rights are respected by the government.

Why the long digression into liberties, rights, and law? It seems like a timely subject these days. So many things that are described as "rights" by legislators are not rights at all, in the strictly legal sense. They are morally and politically desirable outcomes. But the government has no legal responsibility or authority to guarantee those outcomes through coercion.

Would it be better if there was no child pornography on the Internet? Of course. Does the government have the right to try and guarantee that outcome by restricting and censoring internet access for all Australians? Maybe so.

But if there's any decent opposition party left in Australia, perhaps it should begin asking the question and treating Australians like adults and free people, instead of children who must protected from themselves and the world at large.

• None Found

“Correct.”

“Why utterly?” asked D&D editor Al Robinson.

“Well,”we replied, “they have the same bad bank problem as America. They have even more debt as a percentage of GDP. And the housing bubble there was worse. Plus, the weather is awful. We’re all doomed. But they’re utterly doomed. It rains all the time.”

“Oh.”

Here in Australia, ABC Learning Centres ran out of lifelines yesterday. The company owes creditors over $2.2 billion. People want their money back now (ANZ on the hook for $182 million, Westpac for $200 million). ABC Learning Centres don’t have it.

What happens now? Will all those kids in the day care centres be kicked to the curb? Thrown out with their stuffed animals, runny noses, and Matchbox cars? This first world depression (WDI, to use Bill’s shorthand) doesn’t discriminate on the basis of age, race, gender or the ability to tie ones shoes. It is an equal opportunity unemployer.

With state-subsidised child care in Australia, you’d think day care would be a good franchise to own. It’s government-guaranteed money. You just need to learn how to change a few nappies and deal with burp stains. But if no one rushes into the marketplace to take up ABC Learning Centre's work, we’re sure the uh...Nanny State...will come up with something.

All joking aside, perhaps we are moving toward a more corporatist phase in the uneasy relationship between markets and government regulators. Markets and governments exist alongside one another to allocate capital and resources in the economy. But it looks a backlash against markets is forming on the political Left.

The trouble is, the State struggles (sucks) at delivering even basic services these days. If you thought the government had trouble getting you your mail on time, wait until it gets into the mortgage business. But it probably WILL get into the mortgage business—and a lot of other businesses besides. Wait...wasn’t it already in the mortgage business with Fannie and Freddie? Oh yeah...

As investors, we’re going to have to be careful that the businesses we own aren’t blindsided by new government forays into the market. However in a corporatist world, the State acknowledges the limits of its own operational competence. It subcontracts key services out to capable, for-profit businesses. There may be opportunity in that.

Not got get too far off the beaten track, but it’s quite possible we’re totally wrong about the decline of the fiscal welfare/warfare State. If anything, the State seems to be getting more powerful. More people vote. And there’s a lot of staying power in an institution that can command its revenues (taxes) through coercion (guns, jail). What you can’t take you have to borrow (bonds), but there are guns for that sort of thing too (nuclear weapons).

“Are the markets still crashing Dan?,” asked our friend Adam at the coffee shop.

“It looks like it. But it’s a slow-motion crash.”

“Nooooooooooooo!”

“Yep.”

“I read in the paper that they reckon unemployment is gonna hit nine percent. It’ll be like the last recession in 1992. Maybe worse.”

“You’re an Aussie. How’d that one go?”

“Sat on the couch a lot. Watched a lot of Donahue and Bert Newton on the telly. Got to the beach a fair bit.”

“That doesn’t sound so bad.”

“Wasn’t all bad. Life was a bit slower. Simpler. Didn’t pay very well though.”

Dan Denning
for The Daily Reckoning Australia

• None Found

“I have a cold. I don’t feel very well.”

“But about the election? About Obama?”

“Well, it’s great that a black man can be elected President in America. But it doesn’t exactly expiate the great national sin of slavery does it? Martin Luther King said he dreamt about an America where a man could be judged for the content of his character and not the colour of his skin. But it looks like most black people voted for Obama because he’s black, not because of what he believes. Not that it bothers me much. It’s probably a great thing that 12% of the American population woke up today and felt like they belonged to an America where anything really is possible. It may be the first time many of them felt that way. It’s great.”

“That doesn’t sound so optimistic.”

“It’s realistic. It is what it is. If people were proud of America for seeing past race, well then I reckon American could justifiably proud for surprising the world again. But from what I saw, people were more proud of Obama than they were for America.”

“So what?”

“So that’s the takeaway from this election. This election wasn’t about the deficit, global warming, or the neo-cons. It was about a vote people could make to feel better about themselves. Obama offered people that chance. The Republicans got exactly what they deserved for betraying small-government, fiscally-conservative, sound-money and non-interventionist foreign policy principles. But they also underestimated how badly people want to believe in something today. This election was all about pathos, not logos.”

“You make it sound like it was a Greek tragedy.”

“More like a comedy. It wasn’t a campaign at all. It was one long personal narrative, a two-year reality TV show with some world-class editing and producing. Barrack Obama convinced people that his story was America’s story. Once he was able to sell them that story, there was only one way it could end. Americans love a winner.”

“But isn’t he like a black Kennedy?”

“I have no idea what that even means. Race still matters in America just like religion still matters. The things that make us different aren’t always bad. Besides, that just sounds like a bunch of romance and nostalgia from people who have always wanted believe that a dynamic leader could take us toward better, more enlightened government. Don’t these people have romance and drama in their own lives? Why are they living vicariously through Obama’s life? I understand wanting to be a part of something greater than yourself. That’s why I work on the Daily Reckoning. But anytime people feel like that, they usually end up doing something stupid like burning books or drinking Kool-Aid.”

“Not always. The Civil Rights movement was about being part of something greater than yourself. That turned out okay.”

“Of course. But look, all I’m saying is that this wasn’t a transcendent election. It was a synthetic election. The power of America’s mass media and entertainment image-making machine was harnessed to a candidate for national office. Obama became a feel-good brand that would magically repair America’s damaged reputation in the world and her economy at home. But the Obama brand has all the depth and staying power of a catchy pop tune. It’s like Mountain Dew, all sugar rush, no nutritional value. You feel better but you’re not getting any healthier.”

“You sound bitter. Or drunk.”

“Not at all. Just a little alarmed. Modern politics is about the manipulation of people’s emotions (fear, hope, anger, envy, and sloth) through words and images and really compelling but hugely false promises. The Obama campaign was a masterpiece in manipulation, a triumph of style over content. McCain just couldn’t find a big enough lie to latch on to. The campaign also represents the triumph of the cult of personality in American politics. And anytime people have faith in a man over faith in ideas, it’s dangerous. We’re supposed to be a nation of laws, where our ideas—equality before the law, opportunity, freedom of speech—command our loyalty.”

“You’re just a sore loser.”

“Hardly. I lose all the time. I’m used to it. And you know I don’t even believe in voting. In fact, that’s what’s sad about voting. The high voter turnout was a disaster for people who love liberty.”

“How can you possibly say that? Isn’t voting an obligation in a democracy? I think it’s great so many Americans finally cared about who leads them.”

“I said I love liberty, not democracy. Do you think high voter turnout ensures that you get a better result or better government? Harrumph! When people turn out in such large numbers, it’s a triumph for State power. It means that people who believe the government should have a great role in your life have succeeded in politicising ever greater aspects of private life. Everything problem becomes political. And every solution requires a new law. Yesterday we learned that most Americans believe in big government power, they just disagree about whom it should be directed against.”

“That’s awfully cynical.”

“Ask yourself why people have so much secular faith in politics and in “transcendent” men like Obama. Why? It’s because for the last one-hundred years, people have lost their faith in the institutions which used to give their life meaning and purpose...things like family, community, the local school, or the local church. All those relationships have become lost because they’ve become Federalised, with Big Government as the mediator. I say lost, but I think that those kinds of voluntary associations have been deliberately undermined by people who believe in the pursuit of government power to enforce their moral outlook on the world. The entire world.”

“Now you sound like a freak.”

“What’s new? But hear me out. You could argue that it’s a biological imperative for us to believe our lives mean something. For some people, having children—the ultimate vote of confidence in the future—is one of way giving life purpose and meaning. But take someone like Viktor Frankl. He survived the Holocaust. He says that men can find meaning in their lives in three ways. First, through work that matters. Second, through relationships with other people. Third, through the attitude which we choose to have when we encounter the suffering life inevitably throws our way.”

“So?”

“Well, today people are largely alienated from their work. Not to sound like Marx too much. But we see work as something we must do to pay off the mortgage. We don’t see work as...the work we want to do with our lives. So most of us don’t find meaning in our work. It’s labour with sweat but no fruit.”

“What about family?”

“We all live alone in little cubes and sit in front of our fake campfires (televisions) while e-mailing and texting each other constantly. We’re completely free to pursue our individual goals and desires and selfish pursuits. And we have more ways than ever to communicate. Yet we find ourselves more alone and more medicated than ever.”

“You’re depressing me man. Do you want another beer?”

“Let me just finish this bit about suffering, then we’ll have some whiskey. We don’t suffer anymore, at least not most of us in the Western world. We were born into a world of plenty. Plenty of energy. Plenty of credit. Plenty of food. Plenty of surplus. Suffering, in the modern world, has no redeeming value. No value at all. To the extent we do it at all, we do it voluntarily in the gym, on the tread mill, or perhaps in the commute we are forced to endure to get to work. But those are just superficial kinds of suffering. They aren’t in the service of any worthwhile purpose which makes us feel like our lives have meaning.”

“What does any of this have to do with Obama?”

“He made people feel like their lives had meaning by voting for him. I don’t know how he pulled it off. But people used to find meaning in day-to-day relationships. Family, friends, neighbours. The cult of individual materialism and Nanny State paternalism has made the relationship between a man and his government the most important relationship in the modern world. I find that utterly depressing. I’m thinking about getting a dog to protest.”

“So what is your point?”

“People are going to be disappointed. Some of them will be devastated. Exalted political rhetoric can make you feel good for awhile, the way you might feel when your sports team wins a championship. But the sun comes up the next day and your life is still your life, with all its challenges, fears, and opportunities. Obama can’t live it for you. He can’t pay your mortgage, fuel up your car, make you feel better about your job, your love life, or your relationship with your parents and kids. Your life is still your own. Like my mom used to day, wherever you go, there you are.”

“I disagree with you on the mortgage part. But I see what you’re saying. You should stop drinking beer. Look what it does to your gut. Why don’t we go to the gym tomorrow forget this conversation ever happened?”

Dan Denning
for The Daily Reckoning Australia

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