In the United States, points out Bill, we look at countries like Zimbabwe and shake our heads in disbelief. It seems almost like slapstick comedy to us.

As Milton Friedman once said, "If you let the government run the Sahara Desert, soon there will be a shortage of sand." And in the U.S., we have Fannie and Freddie, who represent a huge nationalisation event in the United States.

"This is a remarkable thing for the supposedly most 'free market' country in the world," continues Bill. "Nationalising their biggest industry, the mortgage industry. Johnson trying to pretty up the nation's account, so he took Fannie and turned it into a private business."

This added a whole new innovation to the history of nationalisations. The United States created a company where the profits were private, but the losses were to be funded by the government.

"Nationalisation is a great milestone in our economic lives," Bill said to the 1,000 attendees. "Adjusted for the price of gasoline, no one has made money in stocks for 40 years. When you adjust American wages for inflation, you'll see that they've gone nowhere for the past 40 years, either. No one has been getting rich. How is this possible? you have to ask this to find out what's going on, where it leads and what we'll do about it.

"We take for granted that economics matter. We have only been thinking of this for the last 25 years. This idea of capitalism brought to us in the 80s was fatally flawed. People got the idea that to be rich you need a free market and free trade. But really, you don't get rich because of those things - those are just the circumstances that allow you to get rich... if you do the right thing. If you do the wrong thing, it will allow you to go broke. You can't get rich on consumption, as Dr. Richebächer used to say. You need capital formation. Save your money and invest it in productive enterprises."

Kate Incontrera
for The Daily Reckoning Australia

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For the Irish, the Lisbon Treaty vote was a little like James Joyce's Ulysses. Almost no one had read it. Those that had read it didn't understand it. But they were proud of it anyway.

This is what we like about Europe. It is a collection of member states that speak different languages, have different cultures, drive on different sides of the road, and can't even get together on their fundamental documents. It is as if the American states now had to ratify the Constitution...and Rhode Island voted it down. America would be a better place for it, in our opinion. Because nothing leads to trouble like a strong central government.

Erin go bragh...whatever that means.

*** The big news today: Zimbabwe's opposition party decided that voting wasn't worth dying for. A wise decision, in our opinion.

Meanwhile, the British press is making fun of Pillsbury, North Dakota. The reason for the ridicule is simple enough. The town held a municipal election and not a single voter turned up at the polling station – not even the candidates themselves. The town has only 11 people in it, so we can presume there was not much tax honey worth fighting over. If there was influence being peddled, in other words, the price was so low that even the current mayor said he was too busy on the farm to cast a ballot.

That's the sort of politician we'd like to have running the whole country, one with better things to do than to meddle in other peoples' business.

Democracy is greatly overrated. No more entertaining form of government has ever been invented. But it is only entertaining if you don't take it seriously. When you begin to be earnest about it, the whole thing dissolves into a dark puddle of it humbug, claptrap and bunkum.

The founders of the United States of America distrusted democracy so much they designed a whole government to prevent it. Not once does the word 'democracy' appear in the Declaration of Independence, the Constitution, or the Bill of Rights. The Constitution is basically an elaborate restriction on what the voters can do. There are different branches of the federal government, expected to offset each other's power. And there's the Bill of Rights itself, limiting the power of the central government – no matter how many people vote.

Of course, all that has been swept away by a long series of subterfuges and scams. Now, the country not only suffers the full plague of democracy itself, it spends hundreds of billions trying to inflict it on the rest of the world.

Bill Bonner
The Daily Reckoning Australia

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"Pity poor Zimbabwe...." writes Byron King, referring to a story in the Times of London :

According to the paper, "South African dockers are refusing to unload a Chinese cargo ship carrying 77 tonnes of small arms destined for Zimbabwe."

"The arms, including three million rounds of ammunition suitable for AK47s and 1,500 rocket-propelled grenades, were ordered by the Zimbabwean military at the time of the March 29 election - which Britain and other Western powers have accused Robert Mugabe of trying to rig.

"The arms arrived at Durban, South Africa, on Wednesday aboard the Chinese-owned An Yue Jiang and must be taken by road to landlocked Zimbabwe, where the Government has been accused of arming rural militias before a possible run-off vote for the presidency. The opposition Movement for Democratic Change (MDC) has even accused Mr Mugabe's Zanu (PF) of preparing for a 'war' against the people."

"Poor Zimbabwe," Byron continues. "So far from God. So near to Robert Mugabe."

The Times continues: "January Masilela, the South African Defence Secretary, said yesterday that the shipment had been approved this week by the National Conventional Arms Control Committee (NCACC), which he chairs. 'This is a normal transaction between two sovereign states and we don't have to interfere,' he said.

"But opposition parties slammed the decision to grant the transit permit and the country's main transport union said that its members would refuse to unload the cargo."

As if Marxian governance, brute thuggery, farm-sector collapse, massive inflation and economic calamity is not enough...

"Now their friends the Chinese are arming the militia with millions of rounds of AK-47 ammo," says Byron.

"Mugabe won't go without a fight. The only good news is that he's 84 years old.

"Do you wish what I wish?"

Bill Bonner
The Daily Reckoning Australia

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How bad is inflation in Zimbabwe? "The price of the Sunday Times has gone up 65,000% since this time last year, when it cost Z$4,000." It's not just newspapers either.

"A Johannesburg businessman, Chris Mugari, who visited Zimbabwe three weeks ago, paid between Z$2 and $2.5 million for a loaf of bread. A pint of beer cost him Z$5 million in a liquor store and anything between Z$12.5 million and Z$20 million in a reasonably attractive bar or in a good restaurant."

Some of the South Africans we've spoken to in the last six days worry that this country is headed in the direction of Zimbabwe. We didn't see any signs of it yesterday, though. We had two huge draft beers and a burger for lunch at a nearby café and paid 102 rand (with chips too). That seemed like a bargain.

The cost of living is cheap here. But it's going up, just like it is everywhere else. The government announced on Friday that the retail price of petrol and diesel would go up. Petrol is going up 61 cents to R8.25 litre. That's an increase of 7.98%. Consumer price inflation in South Africa is running at about 8%. Curiously, the Friday release of producer price inflation has been delayed "indefinitely," according to Statistics SA.

If you had to guess, you'd say producer prices-especially energy and raw materials-are going up. More inflationary fuel for the fire.

On the same page of the paper with the petrol story, you'll find a graph showing, "What wheat is worth." According to the graph, it's about US$12 per bushel. Wheat, gold, oil, corn... what is going on here?

There's a whiff of panic in the commodity markets, isn't there? Bullish buying has turned into investment hoarding. What comes after that? If this were a normal commodity cycle, high prices would signal producers to crank up production. Supply would increase to meet demand, and prices would fall.

This is probably not a normal cycle. Soft commodity prices are distorted by government subsidies, for example. This is true in developing and developed economies. In the developing world, government subsidies of food and petrol have kept official inflation low. Those subdivides have also prevented higher prices from discouraging demand.

The trouble today for governments that subsidise food and petrol is that it's getting really expensive. With oil over $100 and grain prices soaring, paying wholesale rates on the global market is going to be a drain on local currency reserves. Sooner or later these governments will have to allow prices to rise. As we've seen in Burma, China, and even Italy and other places, suddenly soaring food prices are not a political winner.

Demand will have to fall. But prices will probably fall too. It's hard to say how much investment demand is responsible for rising commodity prices. But judging by the action in global stock markets, investors are a lot happier buying gold, corn, and soybean futures than they are buying stocks. New York fell by 3% on Friday on more weak data from the U.S.

Stocks of commodity producers continue to rise as well. This is a bit surprising considering the higher energy and borrowing costs eating into profit margins for commodity producers. But higher metals and resource prices are dragging up the resource stocks with them.

Here in Johannesburg, the platinum mining index was up 4.97% on Friday. The gold mining index rallied by 3%. AngloGold Ashanti finished 6.16% higher on the day. Impala Platinum was up 5.83% and Kumbla Iron Ore rose 5.35%.

Could resource stocks be the new cash?

Last year we reckoned the bear market would make most stocks a loser in 2008. On Friday, UBS (of subprime infamy) put out the word that credit market losses related to America's housing decline would top US$600 billion-or about $450 billion higher than losses so far.

With financials facing more losses and the U.S. central bank likely to lower rates, there's more inflation in commodities as far as the eye can see. For starters, investors will eventually quit their bargain hunting in financials and get on board the resource express.

But with inflation becoming a real problem all over the world, the total return on cash-even with higher interest rates-begins to look sluggish compared to resource shares. Cash is safer. But who wants to be locked up in fixed income investments for any length of time with inflation threatening to rocket up? A show of hands?

Well, we won't count hands. Instead, we'll watch resource shares. There is a limited supply of publicly listed resource stocks. There is a huge amount of cash on the sidelines that may want to put itself back to work in shares. But not just any shares. You do the maths. A big bubbly move in resource shares may be just around the corner.

We'll have more to say when we're back in Melbourne Tuesday. And South Africa? Well, it is not nearly as gloomy as we expected. We even drove past an outdoor concert venue where a giant screen showed a picture of Celine Dion wailing away on one of her songs.

Is Celine Dion the new Elvis? We know it's not a financial subject. But she is so popular everywhere. What explains it? One answer: energy. Some entertainers consistently put out a huge amount of energy. Crowds appreciate this, even if the entertainer is a bit weird. We're all a bit weird.

We've really enjoyed our brief stay in South Africa. Granted, you don't get a really full picture of a place when you're out in the suburbs, travelling by taxi between one gated business park and another. But the parts we've seen are not nearly so dismal and dire as what we've heard about. No massive potholes, although the traffic is quite heavy.

As far as the power crisis goes, yes, the power blinks out several times a day. That's annoying. It shows you how much we take electricity for granted. Eskom, the state run power company, has awarded contracts for two new coal-fired boilers to be built. But that won't happen until 2012. And French President Nicholas Sarkozy was in town last week, agreeing to supply French engineering talent to help get the ship righted.

The people we've met seem to take the crime and the power situation in good stride. You can probably get used to living inside walled compounds with electrified fences. You seem them everywhere. Of course they are useless when the power is out. But it is amazing how the passage of time can make what seems extraordinary rather ordinary.

One day you're used to flipping the light switch on and getting light, the next you're ready for random 15 minute intervals throughout your day where the lights go out. People adapt.

But you wouldn't call it progress, would you? A world where you travel in cars with tracking devices between one guard post and another isn't exactly a free and open place. Yet what's happening here is probably a preview of the security arrangements you will have to get used to in some parts of the world in the next five years.

It is not just the energy problem. That alone would be difficult for government's to meet, especially those that haven't planned for it (and how many have?). What you're seeing here in South Africa is the inability of large central governments to meet the basic security needs of their citizens.

Government's can't guarantee law and order any longer, at least not everywhere. Certain hubs and nodes can be protected by "hardening" them, putting up fences, guardhouses, and controlling who gets in. But in between those nodes, it is less safe. And whole densely populated areas are completely outside the security network.

For example, we were told that no one goes down to downtown Johannesburg any longer. Business has moved to the suburbs, in little modern fortresses of commerce. These new protected business parks occupy what used to be farmland. They also can take hours to get to, if you're travelling from your own residential enclave.

In a world of rising energy and food prices, you have to wonder how sustainable this commercial model is too. It is not that different from America's suburban economy. That economy is, "a living arrangement with no future," according to our friend Jim Kunstler. He is probably right.

No tipping point has been reached yet, though. People here are like people everywhere. They work. They try and get their kids into the right schools. They complain about taxes, rising prices, and bad government. The only difference is that in South Africa, there are visible signs of the government's inability to provide for the basic needs of its people. We think we know where this leads... but will leave that for another day. Until then...

Dan Denning
The Daily Reckoning Australia

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Is it really as bad in South Africa as our correspondent wrote yesterday? We have no idea, but promise to report back first-hand if we end up going later this month.

One reader says we didn't tell the whole story.

Dear Dan

Kind regards
Geoffrey H.

Fair enough. There is opportunity in any crisis. It takes capital, though. And right now, the global infrastructure business is running full tilt. The waiting list is long. That's good for firms like Worley Parsons (ASX:WOR), though.

Dan Denning
The Daily Reckoning Australia

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"South Africa has been flung full tilt into a Premature Long Emergency," Jim Kunstler's correspondent writes.

"In the up market suburbs, not least to say generally all over the urban landscape, there is not a 1km (1/2 mile) strip of tarred road that is not full of potholes (huge gapping holes, across which vehicles cannot drive), the roadside curbs are disintegrating, the road maintenance programmes over the last 10 years have failed to maintain the roads in a serviceable and passable state.

"The nation is gripped in a crisis of rolling power outages caused by the incompetence of highly paid government ministers and their charges. The news of the weekend is that the nation is in dire straits with the supply of clean, drinkable water to households and business alike. We are faced with unusual weather patterns, floods at the moment, high rain fall for the Summer, the expectation of an early, long cold Winter.

"The rolling power outages are resulting in about a 25% national power outage per month. The ramifications of this can be related directly to an income loss of the same amount, retail supplies are being interrupted and from a security point of view it is dangerous to shop in malls. The Electricity Supply Commission - ESKOM are indicating a forced reduction on power usage by 10%, further, the mines have been told not to work on Fridays.

"There are revenue and cost implications here that extend beyond the obvious monthly figures. What of the power saving measures that may in turn lead to greater problems, the mines are unable to pump excess ground water from the shafts, the maintenance programmes are due to suffer. And what of the safety indications, miners are protesting the possibility of being caught under ground or in lift shafts as the random power cuts hit the service grids.

"It is not only that ESKOM have not maintained or expanded their operations in the last 15 years, but the next big whammy is that there is no coal to keep the power stations running...at most times, there is a couple of months supply of coal onsite for electricity operations, today there is hardly a few days supply. Incidentally the reason given for this catastrophe is that the trucks delivering the coal have been unable to get to the power stations as the road infrastructure has deteriorated- potholes again. In the Afrikaans language: 'slaggate' - a direct translation to 'slaughter holes'. As this is written, we wait for the next couple of days to see the effect of the 'coal emergency'.

"At some point the effect of the power emergency on water and sanitation supply should be considered and this would be part of the roll out of unexpected events resultant of the collapse of the power supply, but the water board have usurped the power supply with homegrown problems of their own...

"So here we have it, 43% of the dams have safety problems and are in danger of collapsing. Further to this, the ground water in Gauteng, the province of Johannesburg, has radioactive contamination from mining operations.

"Now, as a matter of interest, Johannesburg is one of the few cities in the world that is built on a hill and water has to be pumped up into the city!!!

"And what of the people's reaction? Complacency does not even come close, the nation is either brain dead or ignorant, or just plain 'frog in a pot' of water with the temperature rising.

"The first reaction to the power emergency took the form of a rush for candles, refilling of gas bottles and the purchasing of generators (if you could get them). Then the complacency set it, business learnt to sit through power outages, retail shops were forced to close their doors for a few hours a day. There was and is a shortage of food supplies, food went bad in the fridges and had to been thrown away. It was kind of charming in a strange kind of way, to eat dinner by candle light and forgo the 'soapies' on TV. Traffic lights were out over a large number of suburbs and delays in getting to business meetings became the norm.

"The schools are unable to teach a full day's lesson. The internet service providers and the mobile phone companies' frequently have service delays or are just plain 'off line'. The battery runs out on your laptop and that's the days productive work is over until the power is back on...Patients in ICU or undergoing operations, as the power grid went down, were at risk of and did, die.

"As we head into February, it will be interesting to see the economic figures; theoretically the revenue generation for the period should be down by at least 25% or something similar to the power outage percentages. Notwithstanding that the stock market took a bend downwards and followed the USA crash and the antics of the Societ� General rogue trader. (Well done on the foresight, James). The South African property market is following suit, as well.

"And just as we were wondering how the effect, implications and opinions of an emergency would pan out into daily life, what the tell tail signs would be... it happened, all of this is the short space of about 2-3 weeks, the realization dawns that it has begun, the country is experiencing and living through the beginning of the Long Emergency, rather unexpectedly and certainly too prematurely.

"I proffer that the events in South Africa, tragic as they are, as they play themselves out, will give a good indication of the events that the USA and other countries will realize in the years to come as The Long Emergency' comes to pass.

"[Ha! Just as I finish this, guess what... the power is out, the battery life in my laptop is about 5 mins, so at 11am, I cannot be productive for the rest of the day... the networks are down, so this cannot be mailed for the moment.]"

Dan Denning
The Daily Reckoning Australia

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I have expected for some years that the gold price would in fact rise to $1,000 an ounce, and I still regard that as a reasonable forecast. But even $1,000 an ounce no longer looks all that impressive. It is the equivalent of about $400 in real terms, if one takes 1980 as the base year. To reach a new high in real terms, gold would have to rise to about $2,500 an ounce, and that is still a long way off.

The latest gold price increase has been caused by anxieties about the power supply crisis in South Africa. The normal rule of investment would be that interruptions of the power supply are likely to be temporary. In terms of labour militancy, a power close down is like a strike, and the rule is “buy on a strike, sell on a settlement.” However, the electricity supply situation in South Africa is particularly worrying for the long term, not just the short term.

The South Africans have in the past supplied electricity to Zimbabwe, which has had to be cut off, accentuating the economic crisis of the Mugabe regime. The cause of the shortage is the failure of South Africa to build the new power stations which the South African economy requires. It takes a decade or so to develop a major electrical supply programme. There has also been inadequate maintenance. Local observers think that there will be a considerable delay before an adequate supply is available in the gold mines. There will not be a quick fix.

However, the price of gold is influenced by many factors, of which physical supply is only one. Gold is a unique commodity in that well over 90 per cent of all the gold even mined is thought still to be in existence. Obviously this is true of bullion, but it is also true of jewelery. There are, of course, industrial processes which effectively destroy the gold they use, but even then the metal is so valuable that it pays to recover and reuse it where possible.

Normal price schedules assume a relationship between production and consumption which does not determine the price of gold. The best way to understand the gold market is to regard gold as a kind of shadow currency, competing with national fiat currencies, and influenced by expectations of inflation and global movements of interest rates. However, this is pretty complex. For instance, the fear of recession, such as exists at the present time, normally produces expectations of lower interest rates, which will reduce the carrying cost of gold, and tend to raise the gold price. Yet the fear of a recession is, essentially a fear of deflation, and gold is regarded as a hedge against inflation. Historically the demand for gold is not determined by any single factor, except possibly for fear. Gold can be seen as a defence against a number of different threats.

At present, the weakness of other currencies, particularly of currencies normally used as reserves, is probably the strongest reason for gold’s long term rise in dollar terms in that the world has too many dollars. That situation seems unlikely to change in the near future. If confidence in the dollar is genuinely restored, that will be the day to sell gold. It is a day which still looks a long way off.

William Rees-Mogg
The Daily Reckoning Australia

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Johannesburg was more dynamic than we remembered from our visit last year. More shopping malls. More new restaurants. The place is booming.

“Yes it is very nice...very full of life,” says the pretty South African woman, now sitting to our left. “But crime hangs over your head all the time. You always have to be careful. That part of it is not so nice. I have never been a victim of it...but you are always reminded. You don’t walk down the street. You don’t leave the doors of your car unlocked. You always have security guards and electric fences.”

“Do you have a Plan B?” we wanted to know.

“Well, we’re leaving South Africa next year. I love the place. My family’s been there for hundreds of years. We’re Africaaners, not English...we feel we are part of the country. I had to learn English in school; almost no one spoke it in the town where I grew up. We feel it really is our country. And it’s beautiful. But my husband is a pilot. He’s 50 years old, so he was a pilot in the South African Air Force before the Blacks took over. So, they call him an ‘apartheid pilot’. They’re trying to get rid of the ‘apartheid pilots’ and replace them with Blacks. The trouble is, there aren’t many qualified Black pilots...so they’re training them in Australia. But it takes years.

“My husband and the other ‘apartheid pilots’ are probably the best in the country. But they’ve got to leave to find work elsewhere. We’re going to China. A new airline is hiring a lot of them. Jade Airlines, I think it is called. We’re going to live in Shenzhen, China. It’s going to be very exciting. But I will miss South Africa.”

Bill Bonner
The Daily Reckoning Australia

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“And there’s a lot of activity. People are starting new businesses. People are making money. In fact, there’s probably too much activity. Traffic is terrible in downtown Johannesburg. So many people are getting cars. And we don’t really have the infrastructure to keep up with them. What’s more, we’re running out of energy. They cut the power off a couple of hours at a time. There just isn’t enough capacity...and it takes a long time to add new generators. So, they try to apportion what power there is. We have to run a generator whenever the power goes out.

“Yes, there are a lot of problems here. But the story is basically good. People who never had any money before are entering the modern economy. South Africa is booming. And I think it will continue to boom until 2010. We have the World Cup coming. They’re going to spend a fortune on transportation and infrastructure to get ready for them...unless the money is stolen.

“Tomorrow, the central bank is expected to put up its key lending rate to 14.5%. But just look at the headline: ‘Consumer confidence on the rebound’. They’re putting up rates to stop inflation...but inflation isn’t that bad...just about 6%.”

Bill Bonner
The Daily Reckoning Australia

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“I lifted the receiver and heard from a man who said he was a new subscriber to my newsletter service. His voice was intense and emotional. He said he was worried about an investment he had made in a ‘no load’ offshore commodity fund that had ‘guaranteed’ 25% annualised returns...”

As the story developed, it turned out that the man had put all his savings...and his wife’s money too...into an ‘investment’ that was an obvious fraud. That is, obvious to anyone who spent two minutes thinking about it. The man was a doctor...a successful man...an educated man. Apparently, he was also a very busy man – he didn’t have two minutes!

Yes, he was wiped out.

Meanwhile, we learned from other friends that the Nigerians are still in business. “Apparently, there are people who fall for their scams. They send a letter or an email explaining that they have a huge amount of money that they need to transfer to the United States...all they need is the help of an ordinary person with a bank account.

“You wouldn’t think that any one would be so dumb as to fall for it. Especially now that everyone has heard about these scams. They’ve been around for decades...and almost always from Nigeria. But I understand that they are getting a lot cleverer and now using other addresses. Still, it’s said to be a significant part of the entire Nigerian economy. A big source of foreign earnings.

“The TV show ‘60 Minutes’ followed up on one of these come-ons. They answered the letters and kept playing along until they had set up a meeting with the scamsters...in Miami, I think. Anyway...the reporter was supposed to meet the Nigerians so that he could give them US$5,000. There was a hidden camera watching. And those guys meant business...they weren’t fooling around. They wanted the money and they were going to get it.”

Bill Bonner
The Daily Reckoning Australia

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