"House prices here in Ireland are still too high," judged our man on the scene. Chris is our main man at the family office - where our own family money is managed.

"Everything is still much too expensive to buy. The prices don't really make sense when you compare them to the rents. I found a beautiful cottage, with direct access to the beach. It's lovely. It has whitewashed stone on the outside with a real thatched roof. On the inside, it has been completely renovated and modernized, but in very good style. Three bedrooms. Idyllic setting. Just what I was looking for.

"If that house were put on the market, the asking price would probably be about 400,000 euros. But I can rent the place for only 700 a month. It's crazy. Prices probably have a lot further to fall."

Until next time,

Bill Bonner
for The Daily Reckoning Australia

• A Nice House With No Mortgage
• The Kitchen is the Place to Be
• Obama Plans to Do Away With Ireland’s Tax Advantage
• The Bonner Family Are Taking a Month Off to Paint Window Shutters
• A Great Place for a House in Southern Maryland

Indeed, Prime Minister Winston Churchill who had led his nation into an impressive military victory in World War II, confident that the defeat of Nazi Germany would help save the British Empire, failed to recognize that the enormous military and economic costs of the war had actually created the conditions for the liquidation of the empire, starting with the withdrawal from Palestine and the "loss" of India after the war.

But while the sun was setting on the British Empire, members of its political elite continued to live under the illusion that their nation had remained a paramount global power. If you traveled in a time machine to London 1949 and attended a debate in the British Parliament, browsed through the pages of the Times or listened to a BBC news program you would come across numerous references to Britain as a Great or "superpower,"; a term that was applied to the United States and the Soviet Union after World War II. And if you encountered diplomats in His and (after 1953) Her Majesty's Diplomatic Service and bankers in the City of London, you wouldn't be surprised if they continued to behave as though the world was still their domain to rule.

It was the humiliating abandonment of the Anglo-French invasion of Suez in collusion with Israel in 1956 that proved to be the turning point in Britain's retreat from empire and ensured that London would never again attempt global military action without first securing the acquiescence of Washington. The time lag between the effective end of the British Empire and the recognition that indeed it was all over, proved to be quite lengthy.

The concept of "recognition lag" is familiar to economists. It refers to the time lag between when an actual economic shock, such as a sudden boom or bust, occurs and when it is recognized by economists, central bankers and the government, like when officials signal a recession in the economy several months after it has actually begun.

And just like changes in economic conditions, changes in the global status and power of nations, are not always immediately apparent, especially to the politicians and the generals who yield that power and to the journalists who cover them. That the elites continue to share such misconceptions about their nation's ability to exert global influence has less to do with the power of inertia and more with the vested interests they have in maintaining the status-quo that could be threatened by challenges at home and abroad.

While no one is comparing the global political, economic and military status of the United States to that of Great Britain after World War II, there is an eerie resemblance between the resistance of officials, lawmakers and pundits in London 1949 and that of their contemporary counterparts in Washington 2009 to adjust their nation's foreign policies to the changing global balance of power. That may explain why so many members of the US foreign policy establishment seem to be so depressed in face of the Obama Administration's current difficulties in dictating global developments, ranging from the military quagmires in Iraq and Afghanistan, Iran's nuclear aspirations and the deadlocked Israel/Palestine peace process to the stalled negotiations on global trade liberalization (the Doha Round), the efforts to reach an international agreement on climate change and the global financial imbalances between the US and China. Where is US leadership on this or that global policy issue? Why can't the Obama Administration "do something" to resolve this or that international crisis?

As expected, neoconservative critics depict President Barack Obama as an idealistic peacenik, if not a 1930's-style appeaser. They blame the perceived erosion in US' ability to call the shots around the world on Obama's alleged failure to stand-up to Russia (by abandoning the missile shield program in Eastern Europe), to Iran (by trying to engage it), to Venezuela (by shaking hands with Hugo Chavez) and to Al Qaeda (by overturning torture practices), and on his supposed betrayal of allies (Israel, Georgia, Poland, the Czech Republic). Not to mention Obama's refusal to launch new crusades against Islamofascism, to promote the Freedom Agenda in the Greater Middle East and to annoy the commies in Beijing on a regular basis.

That's rich coming from the guys at the Weekly Standard and the American Enterprise Institute (AEI). After all, it was the mess that the Bush administration, guided by these neoconservatives, had made in the Greater Middle East - where US military power was overstretched to the maximum, and where American policies helped strengthen Iran and its surrogates in Iraq, Lebanon and Palestine - coupled with the dramatic loss of American financial resources, that has produced a long-term transformation in the balance of power in the Middle East and worldwide, and has significantly eroded Washington's geo-strategic and geo-economic clout. In fact, the increasing wariness of the American public regarding new US military interventions, as a consequence of the wars in Iraq and Afghanistan, and the expanding US deficits would have made it difficult even for a President John McCain to promote an aggressive US policy in the Middle East and elsewhere.

That Obama finds it so difficult to press Israel's Benjamin Netanyahu, Iran's Mahmoud Ahmadinejad and Afghanistan's Hamid Karzai to change their policies may have to do with the fact that unlike many of the elites in Washington, the above and other foreign leaders have succeeded in deconstructing the current geo-strategic reality and recognized that the global balance of power has been shifting and that US ability to exert its diplomatic and military leverage over them has been constrained. Let's hope that these changes will also be recognized in Washington as soon as possible, and that unlike the leaders of the British Empire, those in charge of Pax Americana will have enough time to readjust to the new global reality.

Regards,

Leon T. Hadar
for The Daily Reckoning Australia

• Global Warming and the Children of Israel
• America’s Decline as a Great Empire
• Barack Obama is a Strong Favourite to Win the Presidency
• 1 Out of 10 American Mortgages Are Owned by Other Countries
• The Crime of Central Banking

..how does it all work? We're doing some serious thinking this week. What is it that actually causes a depression? A stock market collapse? Or too much debt? How come government can appear to cure the problem sometimes - 2001-2007 - but not other times? How come the Japanese were not able to increase consumer prices? Even now...Japan's inflation rate is negative. And why is it, despite the most massive effort at monetary inflation ever undertaken, the US bond market still forecasts an inflation rate of less than 2%?

An interview with Richard Koo, author of The Balance Sheet Recession, and a new book by Ken Rogoff and Carmen Reinhart are helping us understand what it going on. More to come...

In the meantime, the Dow went down 42 points on Friday. Gold dropped $7. Still no sign of the Chinese coming to the rescue in the gold market.

"Global rally shows signs of running out of steam," says The Financial Times.

Reuters says the job data will "test the rally." The New York Times says the ratio between job seekers and jobs available has never been worse.

The Wall Street Journal, on the other hand, tells us that greater than expected profits will support the rally. So far, the increase in stock prices has not come from increased earnings. It's come from increased P/Es...based on the hope of higher earnings. In terms of forecast earnings, the Dow is selling at a P/E ratio of 27. But in terms of actual, reported earnings...the ratio if 180.

A friend made the mistake of asking us what to expect from the economy. We said it would go do down.

"You mean, you expect a W-shaped recovery," he said... "A double-dip recession?"

"No...we expect no recovery at all. It's a 'W' without the last stroke..."

Of course, we were exaggerating. But not much. We do not think that the economy of the Bubble Era can ever be revived. It will never recover...because it is dead.

But that's doesn't mean we will march backward forever. The economy may lose 10% of GDP...maybe 20%. But we do not expect to be slithering in the mud of the Middle Ages, with each man is planting his own wheat and brewing his own beer. No, not at all. It only means that the depression must continue until it comes to an end.

"But when will it come to an end?" you ask.

"When it is over."

A depression ends when it has done its work. It must correct mistakes. It must punish errors. It must destroy the bubble economy...and the mindset of the Bubble Era. Only then can new real, sustainable growth begin again.

So far, in 2009, 95 banks have gone broke. How many more need to go broke before the depression is over? We don't know. This is where is gets complicated. Because the feds are determined to keep us from finding out!

Here's how it works. The Fed lends the bankers money. Then, the bankers turn around and lend it back to the feds. The banks are happy; they're making money on a risk-free trade. The regulators are happy; what could be safer in a bank's vault than US Treasury bonds? Investors are happy; it looks like the financial sector is making money again. And the feds are happy; they're able to finance their deficits.

Who's not happy? So far, so good. But hold on...

"This is not a sustainable recovery," says fund manager Crispin Odey in The Financial Times.

What a spoilsport! You mean you can't build a lasting recovery on debt and shell-game finance?

Nope. Apparently not. Just look at what has happened to the auto industry. The feds borrowed money to help Americans pimp their rides. And this Thursday, when September sales figures come out, we find out how sustainable that boost was. Many Americans got new wheels. But now they don't need new wheels. And now the feds are out of the auto- incentive business. So now we get to see what happens next.

Stay tuned...

Bill Bonner
for The Daily Reckoning Australia

• Krugman Warns That the Run-up in Stocks Can’t Be Justified By the Fundamentals
• No Evidence of Recovery as Unemployment Getting Worse
• We Don’t Expect to See Australian Banks Suddenly Keen to Expand their Loan Books
• Where, Exactly, is this Economy Headed?
• Feds Can’t Cause a Genuine Recovery Simply by Throwing Money into Economy

We're still working on our short summary of how three-life leases led to a huge generational transfer of wealth and capital in 17th and 18th century England. Landholders who were content with steady, predictable returns in the form of money and livestock from their land holdings didn't think twice about leasing their most productive assets to those who worked the land.

Bill tells us that in France, this arrangement was designed to look out for the interests of farmers so they would not be at the mercy of unscrupulous land holders. It also recognised that farms were long term capital investments, and it was better for everyone to remove them from the volatility of shorter-term leases. Losing the productivity of farmers meant less food, and there was not as much surplus to go around before the advent of fiat money and cheap credit.

But what the English landholders did not anticipate was a large, one in a three-generation inflation in land prices during the term of the leases they had granted. Land prices in Europe surged, partially because the money supply surged with the opening of gold and silver mines in the new world. Meanwhile, the land owners were receiving fixed rental payments, just as the three-life lease holders were fully benefiting from an historic appreciation in land prices.

Getting into an asset class at the right time is the single best thing you can do to increase you investment returns. It's really the most important factor - more important than stock selection or individual security analysis. The lease holders got historically lucky, and their good fortune literally generated much of the capital that would finance the industrial revolution.

We're only belabouring the point because we think a similar opportunity exists today. The world's productive assets are changing hands. Debtors are losing out to creditor. And for investors, avoiding the assets that will lose the most from debt deflation is job one. Finding the assets that will benefit the most from inflation is task number two. More on that tomorrow.

Also, we spent dinner tonight talking with a Graham and Dodd style investor from India. More on what we learned tomorrow. Until then...

Dan Denning
for The Daily Reckoning Australia

• The Dollar Left Behind
• Farmers Feel Consumers Blame Them for High Food Costs
• Aquaculture: Soybeans and Corn Under Water
• Topsoil Crisis: The Race to Secure Fertile Farmland
• Life After the Credit Depression

Your editor scratched his chin over this question while thumbing through a copy of the Financial Times over the weekend in the shadow of the le Grand Arche de la Defense west of Paris. You know the one. It's a modern, shiny, gleaming version of the Arch de la Triomphe.

Just why we chose to stay in the business district of Paris rather than down in the middle of the city...well it had to be a cost saving decision. It certainly wasn't aesthetic. This is Paris without the charm, pretty trees, and rich smelling coffee. In fact, with all the glass buildings and paved pathways, it could be any city anywhere during any credit boom. It's just another example of finance dominating the global economy.

And that returns us to the big question as we open the week. The financial markets have clearly rallied. If it's true that markets lead economies, markets are telling us that things are going to get much better. The FTSE index of emerging markets is up 99% from its March lows. The S&P 500 is up nearly 60%. And gold itself is up 25%, with much of that move coming in the last few weeks. This is what happened in 2003, all asset classes went up simultaneously, riding the global money tide.

David Rosenberg, who used to work at Merrill Lynch but is now the chief economist and strategist at Gluskin Sheff, says that something is fishy about this rally. It's come, at least in the U.S., as the economy lost another 2.5 million jobs. "Typically, by the time we are up 60%, the economy is well into the third year of recovery; we are not usually engaged in a debate as to what month the recession ended."

Fine, you may be thinking. Employment is a lagging indicator. It will be the last thing that picks up. But it will pick up. In the meantime, how can you ignore what the markets are saying?

One answer might be that the markets are rigged. Or, if that is too indelicate, you could say that the surge of liquidity provided by central banks has allowed banks to load up on assets again, producing paper gains which boosted earnings and justified-in the minds of some insane people-higher valuations for stocks. The bull is back baby! The economy should quite being such a party pooper and get with the program.

For example, during the same time that the U.S. economy has shrunk by about $400 billion in terms of GDP, the balance sheet of the Federal Reserve has grown by over $1 trillion. Japan has the same problem, a shrinking real economy and an expanding central bank balance sheet. GDP has fallen by £16 billion in the UK, but according the FT's Lex Column, the Bank of England has injected ten times that amount into the economy.

What does it all add up to? Why isn't an increase in credit leading to growth in the real economy? All that new money is not leading to a lending boom with renewed business investment that creates jobs and a recovery. Instead, it's leading to forced speculation in the stock market which is driving asset prices higher. This is the famous problem Alan Greenspan had with low interest rates. You can turn the credit spigot on, but you just never know where the money is going to flow.

Right now, it's flowing into stocks. Lex says that since Lehman collapsed, "US banks have increased their assets by 10 percent to $14.2 trillion." Rather than shrinking their balance sheets, the banks seem to have escaped the push for regulatory reform and actually loaded up again on free money for a credit-fuelled bender. Leverage is in vogue again, as are risk assets.

But we have no reason to believe this is going to end any differently than the last leveraged boom. We know how those end. We've seen bubbles popping steadily since 2000. First it was Internet and telecom stocks. Then emerging markets. Then common stocks. Then the commodities sector got pounded. And don't even get us started on how bad an investment sovereign government bonds issued by debtor countries are going to be.

All of that might sound unnecessarily grim for an Australian-based investor wandering the streets of Paris in late September. Can't we manage to say anything positive? Well....yes, we can! For example, last night's dinner of simple farm-style chicken in the shadow of the Sorbonne was...well it was excellent.

But what about investing? If you're going to have a plan for the next five years that takes into account this attempt to reflate the financial economy, there are a few things worth keeping in mind. First, it's going to fail, and probably spectacularly so. That failure will be accompanied by an even greater expansion of government debt.

For example, the Times of London is reporting that Britain's net debt is growing at a rate of nearly six thousand pounds per second. Tax receipts are plunging. And politicians, jack asses that they are, are actually making even more promises to deliver things they can't begin to pay for now.

We think they key idea in all of this is that you're going to witness a transfer of ownership in the underlying capital assets of the global economy. The big question is will you profit from it or be victimised by it? We reckon that if we're right-and if you can anticipate the general progression of events-you can stay one step ahead of the curve.

Easier said than done, right? So for the remainder of the week, we're going to go back and review our proposal for a "Permanent Portfolio." It will be based on a forecast of more debt deflation...and then rapid inflation.

Yes, it sounds tricky. But this isn't the first time this sort of thing has happened. Tomorrow, we'll take you back to one of the first "Great Inflations" Europe experienced and show you how it literally capitalised a new entrepreneurial class for the next three hundred years. Until then!

Dan Denning
for The Daily Reckoning Australia

• If Unemployment Numbers Get Better So Will the Economy
• The More Money in a Financial System the Less Each Unit is Worth
• Financial World Has Every Reason to Encourage Government Stimulus
• A Recovery of Some Kind in Global Trade
• Possible Second Round of Panic Hitting Financial Markets

"Reason #1: Inflation is falling, which generally means no forecast for a rise in rates. No rising rates means no attraction for investors. Inflation has been falling since October '08: 5.2%, 4.5%, 4.1%, 3.1%, 3.0%, 3.2%, 2.9%, 2.3%, 2.2%, 1.8%.

"Reason #2: U.K. exports have hit the skids for the period going back to November. Check out these numbers year-over-year: November: $36,260 billion; December: $35,190 billion; January: $34,412 billion; February: $33,046 billion, March: $32,765 billion; April: $32,264 billion; May: $32,239 billion; June: $31,888 billion; July: $32,208 billion. In spite of the flattening out over the last couple reporting periods, there is no recovery here.

"Reason #3: Industrial production in the United Kingdom has maintained double-digit losses since January: -12.1%; February: -12.7%; March: - 12.6%; April: -12.4%; May: -11.9%; June: -11.1%. Without production, nothing sells. No sales.. no income. No income... no jobs.

"Reason #4: Thus the unemployment rate has been rising every month since January: 6.3%, 6.5%, 6.7%, 7.1%, 7.2%, 7.6% and 7.8%. Unemployment is still on the rise. Nearly one in five households are living on government benefits, with nearly 2 million children living in homes where no adult is working.

"Finally, in the oddity column...

"Reason #5: Business confidence and consumer confidence have been on the rise (although I am not sure why). I have mentioned to you before that sentiment figures are not really fundamental indicators. However, you can view them in a contrarian light when the real numbers are falling and the sentiment numbers are rising. Everybody wants things to be better but, as St. Paul writes, 'He that deceiveth himself is not wise.' And when we do ignore the 'facts,' they always come back to bite us!

"This is the foundation of a sucker's rally. People are drawn out of the woods and back into the mainstream, only to be blindsided by another whack from the recession paddle."

"Forget properties or shares," writes a dear reader. Here's how to make real money:

From the Bristol Evening Post:

"Outside Bristol Zoo is the car park, with spaces for 150 cars and 8 coaches. It has been manned 6 days a week for 23 years by the same charming and very polite car park attendant with the ticket machine. The charges are £1. per car and £5. per coach.

"On Monday 1 June, he did not turn up for work. Bristol Zoo management phoned Bristol City Council to ask them to send a replacement parking attendant.

"The Council said, 'That car park is your responsibility.' The Zoo said, 'The attendant was employed by the City Council...wasn't he?' The Council said, 'What attendant?'

"Gone missing from his home is a man who has been taking daily the car park fees amounting to about £400. per day for the last 23 years...!

"Total sum just short £2.9 million."

Bill Bonner
for The Daily Reckoning Australia

• Understanding What is Behind the Price Movements
• Consumer Confidence is at its Lowest Point Since 1980
• Profiting From the Copper Indecision
• Trouble In Tokyo
• Housing and Unemployment Are Weaknesses in the U.S. Economy

Here at The Daily Reckoning, we always take the part of the humble...the despised...the oppressed...and the misbegotten.

Today, that means the rich...

Yes, dear reader, the rich are getting beaten up. Maligned. Mistreated.

Their governments all have in it for them...taxes on 'the rich' are rising. The Democrats are talking about financing the entire nation's health care system on the backs of the super-rich.

And prosecutors and politicians are targeting their salaries. No more million-dollar paydays...not with the feds looking over their shoulders. Oh...and their investment earnings are down too. The dividend yield on the stock market is scarcely 3% - try living on that, you rentiers! As for the 10-year T-note, the yield is only 3.5%.

And capital gains? Fugetaboutit. Stocks have been rallying (bouncing) since March 9th. The bounce has helped investors recover about 45% of what they lost. But, overall, there have been no gains in the stock market for more than 10 years. None. Factor in the effect of inflation and the story is worse; investors have lost about 25% to 30% of their money.

But everyone is pointing a finger at the rich - as if they were to blame for the financial debacle of the last few years. Some economists even blame the "growing inequality of incomes" as a cause of the crisis.

This is completely unfair. The rich didn't cause the problem - they merely took advantage of it as best they could. It was a time when 'financialization' was on the rise...when money made money, at least in theory. Speculation and lending paid off. Obviously, you have to have money if you're going to lend or speculate. Some of 'the rich' - those in the financial industry - cleaned up.

But come the revolution of '07-'08 and the rich lost their heads. Who lost $50 trillion in stock and real estate? It wasn't the poor. Whose derivative positions went belly up? Whose stocks went down? Whose mega McMansions got re-priced as cracker shacks?

On this last point, we have new information. The housing crisis may have begun in the subprime trailer part of town. But now it's in the older suburbs - it's the prime and super-prime homeowner whose back is to the garden wall. A third of foreclosures in the 2nd quarter were of houses financed by prime, fixed-rate mortgages. Of prime borrowers, 41% are expected to be underwater by 2011, says a forecast from Deutsche Bank - nearly three times as many as at the beginning of 2009.

And now nearly half of all jumbo mortgages are underwater. Yikes, the rich...and bourgeois classes...are up to their necks.

And now this sad report from The New York Times:

"Last year, the number of Americans with a net worth of at least $30 million dropped 24 percent, according to CapGemini and Merrill Lynch Wealth Management. Monthly income from stock dividends, which is concentrated among the affluent, has fallen more than 20 percent since last summer, the biggest such decline since the government began keeping records in 1959.

"Some of the clearest signs of the reversal of fortunes can be found in data on spending by the wealthy. An index that tracks the price of art, the Mei Moses index, has dropped 32 percent in the last six months. The New York Yankees failed to sell many of the most expensive tickets in their new stadium and had to drop the price . In one ZIP code in Vail, Colo., only five homes sold for more than $2 million in the first half of this year, down from 34 in the first half of 2007, according to MDA Dataquick. In Bronxville, an affluent New York suburb, the decline was to two, from 17, according to Coldwell Banker Residential Brokerage."

And so, we pause to wonder. What does it mean? Where does it lead? Who gives a flying fig?

At a certain level, all of this concern about who earns what...and who has what...is just so much envious claptrap. For most of us - who have enough to eat and a roof over our heads - money is just sport. We aim to win, just as we would try to win a croquet match. But what difference does it make?

We don't know. So we turn back to the game. How can we get more wealth than our neighbors?

And here...a bit of perspective...

When the Great Khans road across the heartland of Eurasia in the 13th and 14th centuries, nothing could stop them...or so it seemed. Their soldiers were practically born in the saddle. From childhood they learned how to ride, and fight...and little else. Europe's population, meanwhile, was more settled...and more soft.

But Europe was hardly the brightest bauble on the tree. The Mongols had their pick. West - to conquer Europe. South - to conquer India. Or East - to conquer China.

They attacked Europe, but only half-heartedly. Instead, they devoted most of their efforts to India and China. Why? India and China were richer! There was more stuff to steal.

It's hard to make comparisons. But, at the time, the East was at least as rich as the West. But then, along came the Industrial Revolution and the East was left behind. People in the West learned to save...and to invest their savings in capital improvements - machines, factories, canals, railroads, mines, ships and all the other things that allow people to be more productive. This extra production made them rich. Not to put too fine a point on it, but they could make more stuff!

Then, with the ability to produce more and better stuff came the ability to produce the kind of stuff that you can kill people with. So, pretty soon, they were making machine guns. And pretty soon, the horse- mounted warrior of the steppes was as archaic and irrelevant as the Roman legions. He could still charge with great élan. He could still raise his saber and his bow...providing a rich subject for artists and poets. And he could die so well! All you had to do was to open up with your new, factory-made 50-caliber machine gun and down he went.

But what goes around comes around. Who's saving now? The Chinese save 25% of their earnings. In America, the rate is rising...from zero to five percent!

Who's building factories? Who's harnessing the industrial revolution? Who's getting rich? Who's innovating? Who's building cities?

Who's the world's biggest creditor? Who's got the biggest pile of money?

Oh, dear reader...you already know the answer...

"West will languish; Asia will lead..." says a headline in Barron's this week.

And what's this?

"China commercial property sales higher than US," says a headline at Bloomberg.

Yes, dear reader...it is the way of the world... Losers become winners. Winners become losers. Day yields to night; summer gives way to winter. Life goes on...always as it always was...but never the same.

And we leave you with that philosophical reflection...and go back to the financial world...

Bill Bonner
for The Daily Reckoning Australia

• The Swiss and the Rich
• The Rich are Still Getting Richer
• Nervous Investors ‘Short’ the Market By Buying Commodities
• Housing Mistakes Embarrass the Rich
• The Planet’s First Worldwide Bailout

IT'S NOT OFTEN that Sweden gets to lead the world. Saab mimicked BMW. Ericsson improved on Motorola. Abba took The Carpenters and added a hi-hat.

In monetary matters, however, Sweden remains an occasional trail-blazer. The world's first central bank, beating even the Bank of England by 26 years, the Riksbank then copied the Old Lady by when it abandoned the Gold Standard in September 1931. But the Swedes chose to mimic Great Britain before anyone else, quitting the metal within two weeks of London's monetary bomb-blast.

That's why, according to academic consensus, Sweden recovered from the Great Depression before anyone else. (A more likely cause, we guess here at BullionVault, was the resulting 30% drop in the Krona, but economists hate publicly backing competitive devaluation today.) And Sweden really did break new ground in the Thirties by making an explicit rate of inflation its target - six decades before New Zealand, the UK, Eurozone and US caught up.

Inflation targeting wasn't the first or last time the Riksbank got ahead of its colleagues. But it did prove the least disastrous to date.

"A charge was drawn up against Goertz, who was accused of speculation, of having ruined public credit by imaginary money, of having formed a design to destroy the king..."

Thus relates a 19th century history of the first central banker ever to lose his head to an axe, rather than merely losing his head to some new tom-fool theory. Baron George Heinrich de Goertz, a successful minister in the early 18th century, was dumped into the Riksbank to fix more than 100 years of monetary madness.

Sadly for Goertz, his madness served to cap the whole show.

"He minted a representative currency in copper, validated with the king's head and a legal tender face value of a Daler," wrote Paul Tustain, director of BullionVault, on his popular Galmarley gold site back in 2004. "Goertz did not limit the issue, nor ensure the quality of the coins, which were beneath the technical capabilities of the day. Moreover, he attempted this exercise on behalf of an administration which had lost virtually all financial credit with its population, and compounded the error by allowing to develop a widely-held belief that at some unspecified time in the future, collectors would refuse the coins as legal tender payment of taxes.

"In other words he broke every rule in the central banker's book. The coins were detested, and sloshed around the Swedish economy depreciating rapidly"

Poor Goertz! His scheme collapsed with the death of his King and protector, Charles XII, in 1718. The new monarch - Charles' sister, Ulrica Elenora - abolished Goertz' paper money, and had his copper coins re-minted at something approaching their true commodity-price value. Forced to a show trial and denied counsel in court, he tried but failed to defend himself against execution, beheaded in front of a cheering crowd on 3rd March, 1719.

Just like today (as we'll see in a moment), such monetary madness was hardly unique at the time. Destroying public credit with imaginary money was also ruining both England and France, where John Blunt's South Sea Bubble and John Law's Mississippi Bubble would explode in due course in 1720. But just like 2009, the Riksbank was only just ahead of the game. Because the success of its thinking still clearly impresses today.

"The UK should follow the Swedish model," said ex-Bank of England policy-maker Charles Goodhart at a forum last week, "so that for commercial banks reserves held at the central bank of above, say 2%, they are charged 0.5% to hold their balances.

"This would then encourage the banks to buy short-dated gilts or commercial paper, increasing liquidity."

Simple, right? It's now six weeks since Sweden's central-bank governor, Lars Svensson - a great pal of Ben Bernanke's at Princeton - "broke the zero bound" on monetary policy. Yet the world still turns on its axis, despite the Riksbank knocking the interest paid to its commercial-bank users down below nothing, into a brave new world of negative rates.

Cash-hoarding in London is also more weighty at £161 billion ($264bn) than Sweden's own stock - now down 19% from SEK 48 million ($6.7m) just before the fateful decision. And like the US Fed's hoard of commercial bank cash, which rose 40 times over in 2008, the consensus view is that unused bank money is "socially useless" to quote another former Old Lady, Willem Buiter of the Financial Times.

But there's way more at stake, we fear, if the US and UK choose to buck history and now follow the Swedes. Starting with the outright monetization of their government debt.

"There have been suggestions that the Bank of England could introduce negative interest rates on deposits to encourage the commercial banks to lend as the Swedes have done," says one London analyst, RBC Capital's Russell Jones.

"This could also encourage banks to buy more short-term gilts."

As it was at the start of this month, the latest Bank of England policy-vote shocked the currency and bond markets by unleashing a fresh £50 billion of imaginary money for use in its Quantitative Easing. Analysts, investors and savers already fear it's simply funding state debt, passing the new cash straight to the government and walking us all straight to hyper-inflation. Yet today's release of the policy-team's minutes, however, showed the governor - one-time inflation hawk Mervyn King - actually voting for a still-greater injection of money from nowhere, hiking the Bank's total money creation to £200 billion.

That would been equal to half the entire government gilt market, and greater than this year's entire UK state deficit - currently forecast at £175bn, precisely where the Bank of England capped its money creation for now. Still deflation looms, Dr.King said this week, and still the Pound rises...back above $1.65 to the Dollar today.

If this central banker's scheme works, and he keeps his head until, say, the end of this year, how might the US Fed or ECB answer? On both sides of the Atlantic, and all across Europe we guess, expect more "imaginary money" - with or without negative bank rates - often and soon.

Adrian Ash
for The Daily Reckoning Australia

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Alas, he did not fly. Nor even float. He fell "like a stone," the paper reported.

Immortality was achieved, but not the way he had hoped. His stunt was captured by the new motion picture technology of the time. That silent film inspired the very popular Jackass videos, which show people engaged in reckless acts of mischief and mortality.

But we do not have to go to Youtube to enjoy the Jackass genre. We have only to read the news. All over the world the authorities are strapping on their absurd parachutes...and climbing to very high places. In Europe, banks borrowed 442 billion euros last month from the European Central Bank. Much of it is lent back to European governments. In America, stimulus funds are used to fix public toilets, as well as to repair Wall Street's balance sheets. Trillions of dollars have been put at risk in these adventures - $23 trillion in the United States alone. And yet, despite the most daring experiment in stimulus ever, by the end of June, the British economy was 5.6% smaller than it had been a year before, paralleling the decline that followed the crash of '29. As for the United States...we await the figures...

On the evidence, stimulus programs aren't working. In fact, where they are tried the most they work the least. For proof, we go to Stimulation Nation itself. From America last week came news that new house sales had finally turned up. They were up 11% in June, according to the papers. That was the monthly figure. According to the annual numbers, they were down 21% from the year before - at the second lowest since they began counting in 1963. And since the population is much bigger than it was 52 years ago, this was relatively the worst June in history for new house sales. And now that the economy is in a slump, the rate of new household formation has been cut in half. Faced with lower incomes and worsening jobs prospects, people are less eager to set up new households - reducing the demand for new houses.

Unemployment shows no sign of improving, either. The stimulus program was supposed to cap joblessness at 8%. Officially, the rate is now 9.5%. Economist David Rosenberg puts the real unemployment rate almost twice that high. And businesses are cutting jobs even faster than expected. Economist Arthur Okun suggested a rule of thumb for predicting unemployment levels in a downturn. But firms are not only laying off redundant workers; they are laying off workers who would normally be spared. What's more, those who are left are working the shortest weeks ever recorded.

In the past, workers were quick to move to where the jobs were. The Sun Belt traditionally bounced back first. But Florida, California, Arizona and Nevada have been flattened even more than the rest of the nation - by record foreclosures, government cutbacks and bankruptcies. Now, the jobless stay put...and stay unemployed.

Currently, the excess capacity in the United States is staggering - both in labor and capital. Capacity utilization is only 65%; in theory, output can increase 35% before any new capital investments are made.

Recovery? "Forget it," says Rosenberg.

Now that the facts are out of the way, we end our critique of stimulus...and turn to laugh at the stimulators. "Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back," wrote John Maynard Keynes. And now it is Keynes' voice they hear.

"We are all Keynesians now," said Richard Nixon as he strapped on a crash helmet.

Keynes probably got the idea of a counter-cyclical stimulus in Bible class. And a good idea it was. Simple...intuitively correct...practically demonstrated...and theoretically sound. But he and his followers still managed to screw it up.

First, Keynes' General Theory is no theory at all...at least not in the scientific sense. It can't be tested. The results aren't reproducible. Instead, it's merely an idea about how things should work, based on an Old Testament story.

Pharaoh had a dream. He dreamt he saw seven fat cows devoured by seven scrawny, misbegotten cows. He didn't know what the dream meant, so he called for a young Hebrew man who had interpreted dreams for his master. Joseph told Pharaoh that Egypt was to enjoy seven years of abundance followed by seven years of famine. He told him what he should do about it too. He should store all the grain he could from the fat years...so he could pass it out when the going got tough.

This is a story we all know. It is easy to tell and easy to understand. But modern economists twisted it as though it were an inflation statistic. They maintain that when the business cycle turns down, it's just like a drought. And they can counteract the effect of the drought by giving the economy stimulus - liquidity - from the public sector.

Trouble is, they missed the point completely. Do you recall any public official urging the public to stop spending so much in the bubble years? Do you remember any Treasury Secretary or Fed Chairman suggesting that the U.S. government run real budget surpluses in the fat years? Does any headline from any paper in the nation mention a storeroom in which grain or treasure was stored for the lean years? Not at all! Instead, the feds encouraged people to eat their grain! Governments ran deficits even during the bubble years, with the biggest deficit in history in 2008, just as the lean years began. Now they have no real grain to offer. So they turn to a reckless, disaster-defying stunt - passing out phony money, like sawdust muffins...

Future generations will watch the video and laugh until their stomachs hurt.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

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"You look at the governing structure of the New York [Federal Reserve], it was run by the very banks that got the money. This is a Ponzi scheme, an inside job. It is outrageous, it is time for Congress to say enough of this. And to give them more power now is crazy.

"The Fed needs to be examined carefully."

Poor Spitzer resigned as governor of New York in March 2008. At the time, he had been warning about sub-prime mortgage loans. Some think the feds found a way to silence him - by revealing that he had a bad habit...$1,000-an-hour hookers.

Investigative reporters maintain that federal enforcement officials had the option of leaving Spitzer out of the news. Instead, the Bush Administration Justice Department decided to out Spitzer.

The former NY Attorney General had this to say about regulatory reform:

"Regulatory agencies already had the power to do everything they needed to do," he said. "They just affirmatively chose not to do it."

Stimulus is a scam - on both sides of the Atlantic.

In Europe the banks have a good hustle going - almost as good as in the United States. They borrow money from the European central bank and then lend it back to the government.

The ECB loans money at low rates to the banks - hoping to encourage consumer and business lending. In June, for example, the banks borrowed 442 billion euros at a fixed interest rate of 1%. But lending to business and households is at its lowest level since record-keeping began - and slowing down, says James Saft in the International Herald Tribune.

In May, Europe's money supply grew at a 3.5% annual rate, he notes. But lending to the private sector in June slowed to 1.5% from 1.8% a month earlier. Loans to nonfinancial corporations actually fell in May, while lending to households grew at less than 1%.

If they didn't lend the money out...what did they do with it? Well, they did lend it - back to the people they borrowed it from. In June the banks bought $75 billion worth of government bonds and lent nearly $30 billion directly to European governments.

Of course, the banks are doing well. They earn money without taking the risk of lending to the real economy. But what good does it do? None.

Bill Bonner
for The Daily Reckoning Australia

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