- Percy L. Greaves Jr., Mises Made Easier

Occasionally I hear the odd guest on CNBC or Bloomberg Radio who lays blame for the crisis in exactly the right place - the Federal Reserve System in the U.S....or central banking more broadly.

These extremely influential institutions ostensibly exist to regulate prices, employment and interest rates by way of control over the money supply. They do this by inflating bank reserve credit, on which the banks can pyramid, thus essentially abrogating the role of interest rate determination by the market.

That is, the central bank tries to determine interest rates as far as it can. The rationale for this policy is to attain full employment and price stability, and to otherwise manage economic affairs.

Any economist whose lenses aren't blurred by the fatal errors of the neo-classical doctrines is immediately capable of spotting the problem with that policy foundation. Unemployment could scarcely exist on a free market, where the government did not interfere with the price of labor. Just like shortages of goods cannot really exist in a market where their price is free to adjust to the reality of existing conditions, there can be no excess labor unless the government intervenes to artificially boost its price. It's the same principle. It is a simple economic fact - free of political considerations. Labor is an economic good primarily because it is scarce.

Moreover, whether we are talking about labor legislation or the central bank trying to manage growth, prices and interest rates, it amounts to economic management, even planning.

The apparent effect of the policy is to bring about a boom in investment and consumption... the building up of bubble companies and uneconomic enterprises relying on the continued increases in the selling prices of the goods they deal in - be it widgets, homes or securities.

These price increases are afforded by regular money debasement, which is one of the economic consequences of an increase in the supply of money in particular. So it is illusory.

In reality, as Rothbard points out, the boom "is actually a period of wasteful misinvestment. It is the time when errors are made, due to bank credit's tampering with the free market".

So this policy, and the booms it engenders, crowds out real savings (by pushing rates below market), and investment comes to rely on the continued "stimulus" of money creation or from borrowing overseas.

Ultimately, it further lays the seeds of its own demise because the process invariably arrives at a point at which the central bank must desist if it does not want to prompt a run of confidence in its notes, leading to hyperinflation.

This is why we say the policy is "unsustainable."

Thus it tries to withdraw the stimulus or "tighten" money and credit - explaining that the overheated economy might produce inflation. The error in its thinking is that it is managing a delicate balance between price stability and growth...that it checks market failures, and can know the unknowable (the future).

In fact, almost all economists would agree, it cannot produce growth. It's like the analogy of pushing on a string.

The Fed's policy can only increase employment by decreasing the relative cost of labor through inflation (the expansion of money supply relative to demand). And as one of the largest of interventions conducted by government policy, it only produces more instability - i.e. the boom-bust cycle as well as interest rate and foreign exchange volatility eventually.

Technically, tampering with the rate of interest produces disequilibrium as a mismatch between consumer preferences and producers' investment plans - during the boom phases. Effectively, it taxes long run growth, and is but a massive redistribution of wealth from savers to borrowers and speculators.

The bust, which often begins with the onset of a financial crisis, brings much pain, and threatens job losses on a wide-scale. But this is because the artificially low rate of interest produced by the previous policy, which could not be sustained, produced waste, a "cluster of error" as Rothbard called it. This "malinvestment" or uneconomic activity is essentially exposed as the subsidy is withdrawn.

In his book, America's Great Depression, Rothbard posits the error in Marx's reasoning,

"In the purely free and unhampered market, there will be no cluster of errors, since trained entrepreneurs will not all make errors at the same time."

What you see then is basically the widespread failure of parasitic enterprises that could not survive on their own - without the handouts and support of the central bank. This is the empirical evidence that should indict any inflation policy. But, the bust still merely represents a return to natural market ratios.

"The 'depression' is actually the process by which the economy adjusts to the wastes and errors of the boom, and reestablishes efficient service of consumer desires. The adjustment process consists in rapid liquidation of the wasteful investments" (Rothbard)

It follows then, that "Attempts to interfere with free and flexible prices, wage and interest rates prevent recovery and prolong the depression period" (Mises Made Easier )

Efforts to stabilize the bust with even more inflation effectively prevent the liquidation of uneconomic enterprises necessary to return the economy to equilibrium, where markets reflect actual conditions.

Now, I'm not a policy maker. I don't want to suggest the best way to fix the world or argue why these theories are true. My chief concern is the future. And the evidence that most people would side with Marx on this (over Mises et al) is all I need to predict more inflation, war and higher gold prices.

Joe Public can't for the life of him figure out why it matters if interest rates are 1.5% or 1%.

He cannot connect the escalating price at the pump to the process of money creation required to bring about such a modest change in the interest rate. The tech bust was the fault of irrational speculators, and greedy investment bankers. The housing bust is blamed on Wall Street's larceny, his mortgage and real estate brokers, or the thrust toward deregulation. The painful increase in commodity prices is caused by too much growth. The growing trade deficit is caused by new competition from foreign countries. And so on.

For, Joe takes his cue not from Mises, but from the media and political classes under heavy influence by the progressive institutions.

Political leaders in Europe, meanwhile, are taking full advantage of Joe to wage a new war on capitalism from the left on grounds that American style capitalism is in dire need of more regulation.

This is the great evil of the inflation policy.

It is insidious. The great economists have all recognized this truth. It only produces the opposite of what it claims to accomplish. It also funds the growth of government and anti-capitalist sentiment, and other confused ideas that may lead, ultimately, to the general disintegration in the division of labor, the fabric of society. It promotes moral degradation and corruption, conflict, and finances wars. It is 80% of what's wrong with the world.

But for the most part, the voices of reason that point to this cause are trampled over by the rhetoric of the larger political class, which fear mongers people into clamoring for more money and credit.

This truth is evident in the Fed's actions. It has abandoned any remnants of conservatism, as have the other central banks worldwide. The helicopter blades are in full swing. So any enthusiasm about the world having reached this place where it is ready to turn a new leaf must be tempered by this fact.

The voices of reason, though on the beltway, are still only voices in the wilderness.

This alone suggests we are going to continue to see more inflation, taxes and government. The scary part is that this process is accelerating.

The next bubble may well be in gold.

Good trading,

Ed Bugos
for The Daily Reckoning Australia

• Central Banks are Free to Create as Much Inflation as They Want
• What Inflation Means to Central Bankers, Investors and the Consumer
• Bank’s Inflation Projections Will Not Return to the 2 Per Cent Target Figure Until Early 2010
• Central Bank Has Lost Control of Credit Crisis
• The Price of Oil is in a Bubble

All around us is virgin territory. No one has ever been here before. But watch out, these virgins are vicious amazons. In this wild place, you can forget living it up. Don't even think about getting rich. Riches? If you've got 'em...hide 'em. Luxury? Who needs it anyway? The best you'll be able to do is survive. And then, maybe, years from now, we can put our financial lives back together again...and get on with things...

Never before have seen so much wealth disappear in such a short time. The latest report from MSCI shows the planet's losses from the sell-off of equities has now reached more than $30 trillion - or more than twice the GDP of the U.S.A.!

And this is just stocks. Reported write-downs, write-offs and credit losses have reached almost a trillion. And losses of housing prices in the United States alone - the only country for which we have reliable figures - has reached about $5 trillion.

Nor have we ever seen such a rapid reaction. In the space of a few months, people have gone from believing that nothing could go wrong to thinking that there's nothing that won't go wrong. Where once they thought that free-market capitalism would make them rich...they now believe that the government can save them from getting poor. And where only a year ago they thought the world's globalized economy would always give them everything they needed "just in time," they now believe they better keep a few sheckels on hand "just in case."

And just look at the bonds! A few months ago, investors stretched for yields. Now, it's safety they reach for. They dump corporate bonds for fear they may be "toxic," and grab U.S. Treasury debt with both hands. Investors now seem to have an unqualified trust in the full faith and credit of the world's largest debtor. Yields on 91-day T-bills have fallen to 0.11% - scarcely a tenth of one percent!

Yes, dear reader, the "Great Unwind"...the "Big Bust"...the "Great De-leveraging" - call it what you want; we've never seen anything like it.

The Dow rose 151 points yesterday - a limp and pathetic little attempt buck the downward trend. Gold lost $6.80...leaving it at $735.

China's stock market had managed an 18% rebound...following the announcement of its half-trillion dollar bailout plan. But yesterday, Chinese stocks were collapsing again.

The latest news from America tells us that housing prices are still going down in 4 out of 5 cities. Homebuilders' wives are hiding the shotguns and pouring out the whiskey; their husbands' confidence has never been lower, according to this morning's news report.

Big towns...little towns...in the sophisticated cities and out in bumpkin country, the story is the same. The Wall Street Journal tells us that the "fall in crop prices" is putting an end to the boom in the boonies.

U.S. producer prices fell 2.8% in October - the most they've ever fallen. And the Big Three automakers say that if they don't get some help soon, the results will be "catastrophic."

Meanwhile, over on the sunny California coast, the whole state is going up in smoke...it's not only going broke, it's burning up.

"I have to dust the ash off my car every morning," reports daughter Maria, recently arrived in LA and hoping to make it big in the motion pictures. "It's eerie...there's always a little smoke and soot in the air..."

Not only is the bust unlike anything we've ever seen before...so is the planet-wide effort to stop it. All over the globe, the feds are going 'into the wild' with extraordinary measures. They're mobilizing troops to fight the crisis in the boardrooms. They'll fight it in the stock markets. They'll fight it at home - with house-to-house combat to stop foreclosures and defaults. They'll fight it abroad - the U.S. government is even loaning money to foreign governments! They'll fight it with loans and giveaways. They'll fight it with fiscal policy. They'll fight it with monetary policy. They'll fight it with every weapon available to them - including the printing press.

And they will lose.

*** To give you an idea of the wild measures undertaken by the feds, we look at what is happening at the world's leading bank - the U.S. Federal Reserve.

The short form of how the Fed operates is this: it holds a certain amount of securities in its vault; this is the cornerstone capital - or monetary base - of the whole banking structure. How does it get this capital? It buys it, creating the money to pay for it as necessary. Naturally, the Fed doesn't want to create too much money or the inflation rate would get out of control and economists would point their fingers accusingly. But now, people fear dandruff more than inflation. So, the Fed has gone wild.

From the day of its founding in 1913 to September 24, 2008 the Fed's assets - the aforementioned cornerstone capital for the US financial system - grew to $1 trillion. By November 14, 2008 the amount had grown to over $2 trillion. And in a speech in Texas, the head of the Dallas branch of the Fed said he expected the total to reach $3 trillion by year-end.

For the moment, this explosion of monetary inflation is hardly noticed. Asset deflation has the headlines. People worry about having too few dollars, not about having too many.

Comes the news this morning that U.S. business chiefs are asking the up-coming Obama administration for another $500 billion 'stimulus' program. They'll get it. And much more. Trillions worth.

Trying to stimulate the economy with easier credit in the early 2000s, Alan Greenspan overdid it. He gave the world the credit it wanted, and created the biggest bubble in human history.

Now that bubble is collapsing and his successor - Ben Bernanke - is confronted with a new problem. Now it is cash that people want - income to pay their debts! Bernanke will give them what they want. And, most likely, he will overdo it too.

*** At a recent hearing on Treasury Department use of government assistance funds, Ron Paul, who is well-known for often calling out the Federal Reserve chairman on their liberal use of the printing press, took on Big Ben. Here is the transcript of their interaction, in case you missed the C-SPAN coverage:

Ron Paul: The Austrian free market economists had predicted all these problems would come, and they were certainly correct in everything that they said. Of course they're not very satisfied including myself with the so-called solutions, because it looks like we're spending a lot of energy and a lot of money trying to patch a system together that is unworkable.

So we have Congress spending a lot of money, we have Treasury very much involved in trying to pick and choose which worthless asset that we're going to buy, and of course the Federal Reserve is involved in injecting trillions of dollars that nobody seems to be keeping track of.

But what we're failing to do I think is to recognize that the system no longer works, but I can understand why we do this because if Congress couldn't do this and if the Fed couldn't do this and Treasury couldn't do this, it would make us all irrelevant. And instead of looking at the causes of this, and then finding the solutions aren't going to be found here, we have to make ourselves feel pretty important.

But I think there's another reason we think we're pretty important, it's because in a way our interference in the market corrections that tried to come about since 1971 seem to work. I mean, the failure was established in 1971 with a system that had no way of automatically correcting the balance of payment and the current account deficits.

And that's where the problems have been, and economists - whether they were left or right or middle - over the last several decades have always said, this current account deficit is a big problem. And now it's totally out of hand. So here we are struggling with all these rules and shifting back and forth and really getting nowhere.

My question is directed toward, when we come to the full realization that the system is unworkable, what are we going to do, what have you thought about doing, and already we see talk in the newspapers. We see articles about a new international world reserve currency, and to me that's pretty important, because the fiat dollar reserve system is not going to work anymore, and that's the information that we have to accept and decide what we're going to do in the future.

Also, this is not new in history. Currencies have failed, financial systems have failed, and generally, to restore the confidence that everybody is talking about, they usually have to go back to a currency with integrity to it, rather than just fiat money.

And, you know, the stages is there. It's not impossible, already the central banks of the world still own 15% of all the gold that was ever mined in all of history. So they hold on to this gold for some reason, and therefore something has to give, or are we going to keep trying to waste more money and time patching this system together.

Just last week there was a report that Iran purchased 75 billion dollars worth of gold, took their reserves out of Europe, bought gold and put it in Asia. So is that a sign of the times, is that moving on?

My question is, in your meetings, and you had a meeting just recently with other central bankers, does this thought come up about a new international world reserve currency, and if so, does the subject of gold ever come up?

How do you restore the confidence? Have you recently had conversations with any central banker, and is there a move on to replace the dollar system, because the dollar system is essentially declared dead, because it's not working, but this indeed was predictable because of these tremendous imbalances that were never allowed to be corrected, and they were always patched up. We always came in. We'd spend, we'd inflate, we would run up deficits, and since '71 we've been able to correct these problems.

Could you tell me what kind of conversations you've had regarding a new reserve currency?

Ben Bernanke: Yes, Congressman. I don't think the dollar system is dead. I think the dollar remains the premier international currency. We've seen a good deal of appreciation in the dollar recently during the crisis precisely because there's been a lot of interest in the safe haven and the liquidity of dollar markets.

And the Federal Reserve has been engaged in swap agreements to make sure there's enough dollar liquidity in other countries because the need for dollars is so strong. So I think the dollar system remains quite strong.

I do agree with you very much on one point, which is about the current accounts. The current account imbalances have proved to a very serious problem. It was in fact the large capital inflows in those current accounts which created a lot of the financial imbalances we saw and have led to some of the problems we are seeing, and one of the silver linings in this huge grey cloud is that we're seeing some improvement and greater balance in our current account deficits.

Ron Paul: But does the subject of a new regime ever come up?

Ben Bernanke: No, it doesn't.

Ron Paul: And does the subject of gold ever come up in any of your conversations?

Ben Bernanke: Only in terms of the sales that the central banks are planning.

The I.O.U.S.A. team interviewed the Congressman for the documentary. If you didn't have a chance to see the film when it was in theaters, now's your chance. We are offering an exclusive package to long time DR sufferers: you can get the DVD (before it is released to the general public), the companion book and your own personal bailout package. Don't let this opportunity pass you by...quantities are limited, and are going fast.

*** GWB - you can't say we didn't warn you. A top British judge has just announced that he considers the Bush administration's attack on Iraq as a violation of international law. Years from now, George W. Bush is likely to be charged with war crimes and human rights violations. Normally, this would pose no problem. A former U.S. president could expect the protection of the U.S. government. But as Americans sink into depression they are not likely to feel kindly towards their ex-president. They will blame him for the decline of their incomes...and for the fall of their empire. They are likely to want to cooperate with the world's new institutions...and throw over their own former commander-in-chief.

Advice to GWB: Go back to Texas. Don't ever leave home again.

*** Colleague Patrick Cox, at Breakthrough Technology Alert offers some rare optimism into this otherwise downright gloomy market:

"Yes, we have been swindled by politicians who pushed the U.S. banking system into the shape it's in today. The people who tried to stop the meltdown have utterly failed to explain the root of the problem to the American people. We've officially entered recession now and policymakers will do little to address the real problems.

"Though the hit the economy has suffered recently pales in comparison with the drain on world resources associated with that war, our situation is similar. We are at a point of incredible opportunities.

"The reason is, in a word, science. The accelerating pace of breakthrough discoveries will deliver economic benefits that few fathom today. While the entire world will gain from these discoveries, investors who understand what we are going through now will profit most and earliest. Even better, the return on these stocks will be so great that even relatively modest investments will produce fortunes.

"Let me give you a few hints about the shape of things to come. Just in the last few weeks, two groups of scientists announced the discovery of microorganisms that produce biodiesel naturally. Professor Gary Strobel from Montana State University discovered a fungus deep in the Patagonian rain forests of Argentina. This organism naturally produces the long chain hydrocarbons needed to create fuels.

"Even bigger news is coming on the medical front. I predict that real stem cell therapies will be offered offshore within the year. Currently, there is a billion-dollar industry offering stem cell snake oil, but real lifesaving and life-extending therapies are already available in the laboratory. These therapies are relatively inexpensive to produce and will revolutionize medicine. Even the FDA will come around when wealthy early adopters begin reporting true rejuvenation results. By the end of Obama's first term, we will see SC and other therapies that will radically cut the cost of treating horrendously expensive illnesses."

Patrick has been alerting us to a breakthrough that could change the way we view modern medicine. And when news breaks - which is rumored to happen tonight - those who have gotten in on this revolutionary idea stand to make some pretty major gains.

*** We got a letter from Her Majesty's government.

"Winter Fuel Payments...don't miss out!"

Yes, dear reader, this is how societies collapse. People invent problems. Then, they find solutions to the problems. Then, the solutions cause more problems. And finally the cost of all the solutions brings the whole system falling down.

A news report out today tells us that the weekend will be cold. An "arctic blast" is said to be on its way.

Of course, some parts of the city already feel as though they were in a nuclear winter. London's main industry is finance. And finance has iced up. A headline in yesterday's paper told us that London is expected to lose 370,000 jobs over the next two years.

But thank God for the world improvers:

"Our records show that you may become eligible for a payment this winter," begins the letter.

Why? Because your editor is enrolled in the Britain's national health service (a requirement for employment). NHS records must have revealed to the authorities that your editor turned 60 in September. Accordingly, he is eligible for 125 pounds to help him with his heating costs this winter.

Imagine the miserable bureaucrats administering this program. They have computers to program...letters to write...records to keep...internal procedures to devise, administer and respect. They have to hire people...and then support them for the rest of their lives, paying for pensions and holiday, just like any other business. Then, they have to work out internal disputes...make sure the coffee maker is working properly...and organize an annual Christmas party. It probably costs more than 125 pounds to send out each check!

And why should someone over 60 get money and not someone under 30? The older person has had 30 more years to stuff newspaper in the cracks, firewood in his garage and money in his bank account. If he's cold this winter...it's his own damn fault.

But if you're going to give him money to help him keep warm, why not some extra money to help him with his eating needs? He has to eat, doesn't he? And why doesn't HM Government just send him a bottle of Chateau Margaux? Maybe 1985. To help him with his drinking needs.

Until tomorrow,

Bill Bonner
The Daily Reckoning Australia

• Oil Prices Decline but Consumers Aren’t Out of the Woods Yet
• Dealing with Future Economic Problems Today
• Housing Market Drops Housing Prices by 16%
• The Feds Are Counting on Fannie and Freddie to End the Nation’s Housing Misery
• The Deficit is Expected to Reach Beyond $500 Billion

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

Just over the horizon, things are about to become dicey. This week, the International Energy Agency (IEA) will release a new report on the future of world energy. In its World Energy Outlook, the IEA will state categorically that "Current global trends in energy supply and consumption are patently unsustainable."

There's not much wiggle room in that statement. According to the IEA, despite the recent fall in oil prices, the medium- and long-term outlooks for energy supply are grim. Conventional oil output is destined to decline. Demand will still grow, however, especially in the developing world. And the twain shall only meet by prices rising to clear the market. "It is," as our Arab friends like to say, "written."

The IEA performed a comprehensive study of 800 of the world's largest oil fields. And it concluded that depletion in conventional oil fields is occurring at a rate in excess of 9% per year. (That's an average. We see depletion rates in excess of 15% in Mexico's Cantarell field, for example.) This means that absent large amounts of new drilling, new investment in enhanced recovery and new discoveries, the current worldwide oil output will decline by over 9% per year. And if it keeps going along this trend (there's no reason why it won't), the base of world oil output could conceivably dry up within seven-10 years.

Don't get me wrong. The world won't run out of oil in seven-10 years. That's not how it works. It's just that volumes of conventional oil are declining. The takeaway point is that the energy markets will tighten up, like a hangman's noose around the collective neck of the oil-consuming world. We might not quite realize it, but when it comes to oil, we are all walking that long green mile.

The investment angle for OI is that the companies that own oil reserves in the ground, and the oil service companies that extract oil and natural gas, should profit in the future. Yes, the portfolio is down. It has been a hard hit to everyone (me too) who bought into the market up until midsummer. We've all lived through a midsummer's nightmare on this one.

So how long will we have to wait for this "future" to show up? Well, how long will the current worldwide recession last? I don't know. But I do know that many energy companies in the OI portfolio are at long-term lows in share price. If you can afford to be patient with your funds, these firms should eventually stage a comeback as oil prices rise again. As I said above, "It is written."

Says who, you ask? Written by whom? Well, how about the IEA? According to the IEA, even with massive levels of investment in the oil patch, the best estimate is that the global oil industry can reduce the rate of depletion to perhaps the 6% range. So the world energy industry will have to run faster just to keep from falling too far behind the demand curves.

Again, you need to keep in mind that current energy prices are just too low to support the level of energy investment that the world needs going forward. (Meanwhile, the U.S. government is spending trillions of dollars forward just to bail out the banks and bankers, not one of whom runs pump jacks.)

The IEA estimates that the oil industry will have to invest over $350 billion per year to counter the steep rates of decline in output. And even that will not be sufficient to maintain levels of output for traditional forms of crude oil. Thus, much of the future investment will have to go toward extracting other kinds of hydrocarbon substances.

What do I mean by "other kinds" of hydrocarbon substances? Fortunately, there are many different kinds of hydrocarbon molecules out there. The total worldwide carbon base actually adds up to a very big number, and that is NOT including the carbon that is part of the current living biology of the planet. For now I'm just discussing the fossilized carbon like oil, natural gas, bitumen in tar sands, oil shale and coal.

The big problem for the nonoil forms of carbon is affordability. That is, are people willing to pay? It takes a lot of steel and technology to transform some kinds of carbon into something we want to use. We see that, for example, in the Canadian tar sands projects. Lots of steel, concrete, labor, machinery, water and energy input - all to extract this thick, gunky crud that has to be upgraded to something that looks like diesel fuel. And the whole thing emits lots of carbon dioxide (CO2) in the process, as well.

The other big problem is whether or not there is the political will to "do carbon." Will the governments of the world allow - let alone promote - industry to invest in the industrial base that will be required to transform the varying kinds of carbon into something that the world can use? Because the other side of this coin is ever-increasing CO2 emissions, global warming and climate change. The more carbon that gets burned, the more CO2 that goes up the flue and into the atmosphere. In essence, within about two centuries, mankind is undoing the geological work of tens of millions of years.

This is not a "global warming" article. But most nations of the developed world have governments that are more and buying into the global warming thesis more. The political gun sights are on carbon. But if we collectively decarbonize the economy, the energy supply will dry up and we'll wish for the "good old days" when we had to worry only about Wall Street crashing. And besides, try telling the developing world not to develop. People have fought wars over lesser issues.

Do you want some numbers on hydrocarbon resources? Here are estimates of the total hydrocarbon resources in the world and the relative costs to convert them. This is my summary, based on several different government and academic compilations:

These are big numbers, right? And they can supply a lot of energy over a long time, but only if the world collectively decides to utilize the resources. If not? Well, you had better own some gold too.

The stark assessment from the IEA described above comes just as much of the world's banking and finance system lies in ruins. Many forms of lending have dried up, and much of the former system of world commerce is just not functioning.

So the politicians, bankers and investors of the world - including us - have their work cut out.

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USA Today says, "Americans are digging to save money." They're digging into their budgets... exhuming every expense they can. And they're digging into their attics too - selling "stuff" they no longer need.

Most people say they are cutting back on restaurants, travel, and luxuries, the paper reports. Instead, they're staying at home and renting movies for entertainment.

Here in London, we went out to a restaurant last night and found it almost empty. "Where are the customers?" we asked the waiter, thinking we were too early. "Oh... it's this financial mess... nobody wants to come out to a restaurant any more."

eBay says the average family has about $3,200 worth of stuff it doesn't need. People are getting it out... cleaning it up... and shipping it off. In return, they get what they need - cash.

Readers with a weakness for economics will see in both of these examples a dismal herald. They announce a collapse of consumer demand. Not only are people spending less... but even when they do shop, they're buying more second hand stuff... stuff that comes from closets and attics - not from China.

So what? Well... if they're not buying new stuff there's no need to make new stuff... or sell new stuff...

"Fewer spots on the sales floor," this Christmas season, announced one headline. Fewer spots on the assembly line too. And fewer paying spots anywhere.

And if nobody wants to buy new stuff, the companies that make and sell new stuff are going to be in a world of hurt. Which is why the stock market is collapsing. The Dow fell another 223 points yesterday.

Oil fell yesterday too - down below $55. If you're not making stuff, you don't need so much energy to make it and ship it... And if you're not buying stuff, you don't need so much gasoline to get to the mall.

Oh! Bama! Where is thy bounce! We're getting tired of waiting.

But hold on... settle down... relax. Breathe deeply. Take it easy.

After demand collapses, supply collapses. Yes, dear reader, it's all part of Nature's plan. In the beginning, there is The Bubble. Then, the bubble pops. Then, people look around and take fright. They realize they've got to stop spending. So, demand collapses. Then, stocks collapse too. And asset prices fall too - especially for speculative assets. As orders and asset prices tumble... merchants and manufacturers cut back too. Jobs are lost. And then, with less income... demand collapses some more.

But then, eventually, the bubble is completely flattened. Weak companies have gone out of business. Good companies are holding on, but producing less. Many retail shops have closed. Many malls have gone out of business. Supplies of goods and services have fallen as far as they're going to fall. Then, with supplies tight, prices begin to rise again.

The whole process takes time. There are millions of mistakes in need of correction. Each one has to be marked down, written off, worked out, and forgotten. We still have to see the show trials. And the perp walks. And the kvetching... the complaining... the whining... the wimpering. The bailouts and the payoffs... The bottles of whiskey and the loaded revolvers. It's all still ahead!

Dow 5,000...

10% - 15% unemployment...

Another 20% off house prices...

There's a lot of ruin left to go...

*** Sunday afternoon, we sat down in the large leather chair in front of the fire. Its arms were shiny and worn... much lighter in color than the rest of the brown chair.

Immediately, we felt wiser. Then, a blindingly bright flash of insight seem to come out of nowhere. Suddenly, we saw into the dark heart of the beast itself - and peered into its soul. And then, we watched in horror. In our mind's eye we saw images of recession... depression... despair... desperation... and finally upheaval... in which the whole system... the world's dollar-based money system... came crashing down.

Yes, dear reader. We are a proud heir to Dr. Kurt Richebächer. Not of his weighty intellectual career in economics. We are heir to his chair. After he died, his estate sold us his chair. We keep the Dr. Kurt Richebächer chair in our library. Sitting in it this weekend, we thought we saw the whole financial crisis more clearly.

"The only cure for a bubble is to prevent it from developing." said Kurt Richebächer.

In other words, you can't cure a bubble by cutting interest rates, easing bank lending requirements, running bigger government deficits, sending out 'rebate' checks, buying up Wall Street's stupid mistakes, or bailing out sinking businesses. You can't cure a bubble by reflating it. You can't cure a bubble at all. You have to let it pop... and then go about your business. Get it over with quickly; that's the best you can do.

Think that will happen? Where have you been, dear reader? Out of Blackberry range?

No, the feds are at work - with their patches, their rescues, their bamboozles and their swindles.

In our brief moment of clarity, induced by the Richebächer chair, we saw what was coming - the biggest financial bailout of history. It will be like WWII, without Betty Grable... like the New Deal without the wheelchair - and like nothing we've ever seen.

Saving America from free-market capitalism will become the Great National Project of the Obama years. Deficits will top $1 trillion... maybe $2 trillion. Brain dead businesses will be kept alive. Whole industries that should be allowed to go broke will be protected. Towns, states, and colleges that should go bust will be propped up. There will also be a huge building boom - in infrastructure. Bridges, trains, highways...

... it may be time to buy cement companies!

The bailouts are just money down the drain. As for the bridges, who knows whether they are worth the money? But this massive program will achieve its real purpose - distracting and diverting Americans from their loss of wealth.

*** If Olympic medals were given for consumer spending, Americans would have won the gold, silver and bronze every year for the last 20. But now, Americans may become champion savers. Savings could rise to maybe 10% of GDP.

What will happen to all this money? It will be lent to the government. (About which... we will have more to say tomorrow.)

So do you see, dear reader, how the new financial system will work? Instead of squandering their money - as Americans have done for the last 20 years - now, the government will squander it for them.

*** Here comes the Era of Conspicuous Thrift. Yes, you heard it here first.

"No more fancy pants," is a headline at the New York Times. The gist of the accompanying article is that even expensive restaurants are now trying to look cheap. People who still have money to spend don't want to spend it... and when they do spend it, they don't want to look like they are spending it. So restaurants are putting on de po' bo'... that is, they're acting poor. Gone are the sumptuous drapes... gone are the plush carpets and marble tables... gone are the fancy pant waiters.

"Luxury is a dirty word," said one of the designers.

Don't get us wrong. People always look for ways to feel superior to their fellows. In the bubble years, they did so by spending wildly... trying to outdo each other with the extravagance of their purchases and the sans soucis of their budgeting. Young Wall Street pros... or rap musicians... would go out to a fancy restaurant and order a big bottle of Cristal - just to show off.

But styles change. Now, people are showing off by NOT spending money. Sound unbelievable? Well, maybe. But our guess is that people are going to find more subtle... and less expensive... ways to wink at each other. Heavy spending is going the way of heavy drinking. It will be seen as vulgar.

*** And today, we add to our short list of the world's greatest inventions. So far, we have only three inventions that have been unequivocally great boons to mankind - crispy duck (as it is prepared here in London's China Town)... the beret... and the semi-colon. All three are such marvelous innovations that they seem to be almost divinely inspired.

Today, we add one more - the bicycle. Despite the skinned knees and broken necks, the bicycle has done more for mankind than any other transportation device. In fact, we feel we must apologize to the bicycle for not adding it to our list sooner. Millions and millions of people depend on the bicycle to get around. Millions more may soon take it up...

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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.

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Before we do, let's look at the headlines.

The Dow dropped another 338 points on Friday... and lost another 2 % early this morning. How much more of this can investors take? Berkshire Hathaway fell below $100,000. And GM appeared to be heading for the junkyard.

A GM bailout would cost $200 billion, say the papers. Uh oh... that's more than the feds have on hand. And right behind GM are cities, states, colleges... all with their hands out...

Yes, they are all of "vital national importance." We can't let them fail, can we?

Of course, it's all nonsense. Automakers... governments... they go broke from time to time; it's no big deal. And colleges... who needs them? You can get a much better education just keeping your eyes open. Right now, Mr. Market's Advanced Seminar on Economic Corrections is delivering one helluva lesson. Of course, the tuition is very expensive...

Stocks are down so much that dividend yields are beginning to look respectable again - averaging about 3.8%. For the first time in 50 years, you can get more yield from a stock than from a 10-year US Treasury bond. You remember, stocks were supposed to pay lower dividends because stockholders are supposed to earn capital gains as well as dividends. The combination of capital gains and dividends gives investors a total return greater than bonds; this is the "risk premium" that you get to compensate you for periods when stocks go down. What happened to the risk premium? Here it is!

When is the risk premium at its lowest? At the very moment when investors believe it is highest. That is, at the end of the '90s, investors came to believe that they couldn't go wrong with stocks. They were so sure that stocks were the way to go that they willingly bought stocks that paid little or nothing in dividends. They thought the price of the stock would go up; so they didn't need dividends.

But stocks have gone nowhere since the mid-'90s. Now, investors want dividends.

Meanwhile, to those who have been given the most Mr. Market takes the most back. No country got as much out of the credit expansion as Britain. Its leading industry - finance - was in high cotton for the last decade. Gone were the conservatives old bankers with their derby hats and pin striped suits. The new breed of go-go moneymen in the City wore fancy Italian suits and came up with plenty of fancy investments too.

But just as the bankers were fashion victims, so were their clients.

Poor RAB Capital, for example. The hedge fund manager is traded in London. It's seen its funds under management fall by 70%... and its share price is down 92%.

The pound is down 25% against the dollar over the last 90 days. Housing is down about as much as in the United States. "Help wanted," signs are disappearing from shop windows. And suddenly you can get a table at a good restaurant without a reservation.

But that's the trouble with a downturn. Just when other people can't afford to eat at fancy restaurants - neither can you!

"Everybody's got to cut back," we told the family again on Saturday. "This is a global financial crisis. We don't know how long it will last or how bad it will get. But we're saving every possible penny - just in case."

This is what economists call the "propensity to save." It's what happens in a serious downturn. But the propensity to save is not necessary shared by all the members of the family alike. Edward, 15, put his finger on what economists call the "paradox of saving:"

"Hey, Dad, but if we all stop spending... nobody will have any money, will they? Besides, you said you'd get me a new skateboard for my birthday."

Edward is more civic minded than his father.

High rates of saving causes a recession to turn exceptionally nasty. People cut back... and all of a sudden... the cutbacks are magnified by millions of little decisions all up and down the economic ladder. The rich cancel their restaurant reservations... the poor buy a little less meat. But one man's expense is another's revenue. Pretty soon, money is getting tight throughout the whole system. That said, the man whose financial advisor tells him to keep spending in order to help the economy has a fool for a counselor. The smart thing to do is to cut back; let someone else go broke.

*** We are so happy to see Thomas L. Friedman back in the pages of the International Herald Tribune... and back in form too!

The NY Times columnist is always entertaining... and helpful. Unwittingly, of course, the only way possible for Friedman. What makes him entertaining is that he is perpetually in a state of emergency... an irrepressible alarm... that causes him to run around wildly and crash into things.

Remember the terrorism scare of the early 2000s? Friedman was right at the front of it... howling at the mob to mobilize... urging them to panic. Otherwise, the terrorists were going to blow up every public building and underwear store in Christendom. More recently, there was his fright about rising oil prices. Once again, we had to "do something!" He called for a massive, nationwide campaign, "similar to the Manhattan project," in order to save America from the oil exporters.

Now, it's the financial crisis that has the man in a sweat. What a delight to have his views on the financial world! He is such a shallow thinker that his errors are always right on the surface. It is reassuring too; if Freidman agreed with our position, we'd have to rethink it.

"If you are going to fight a global financial panic like this, you have to go at it with overwhelming force," writes Freidman. How does he know that? How many of these things has he seen? Well, none. No one ever has... which he admits a few lines earlier.

But ignorance never stops Freidman. He may not know where the enemy is... but he gives the order anyway: "Charge!"

"This is no time for half-measures," he continues. How does he know what is a half-measure and what is a full measure? And what about no measure at all? Again, he doesn't explain. But this is no time for thinking - it's once again, into the breach! What we need now is "an overwhelming stimulus that gets people shopping again. And an over-whelming recapitalization of the banking system that gets it lending again."

"Go shopping," he summarizes.

Anyone with half a brain knows that it was too much shopping and too much lending that got the United States into this jamb. But that disqualifies Friedman right there. Not that he isn't a smart fellow; but he's determined not to let thinking get in his way. He's smart enough to know that once you start thinking about things, they always turn out to be more complicated and nuanced than you had hoped.

But if you concern yourself only with appearances, you don't have to worry about it. What do people in a healthy economy do? They go shopping. What do banks in a healthy economy do? They lend money. So, hey, this is easy. If banks would just lend and consumers would just buy things - we'd have a healthy economy, no?

Another charming feature of Friedman's pensée is his willingness to chuck principles, rules and dignity whenever they get in the way. Dismissing the question of why the taxpayer should pay for Wall Street's mistakes, he writes: "... fairness is not on the menu anymore... we need to throw everything we can at this problem... "

And now we turn our attention to the White House. George W. Bush is said to be not merely a lame duck president... but a dead duck too. He cost Republicans a victory, say pundits: he ruined the country... he destroyed the empire... he wrecked the economy. Today, you could accuse the man of sorcery or child molesting and half the nation would believe you.

Before we come to our revisionist look at the man, we repeat our advice. Just this weekend, Barack Obama pledged to put an end to Bush's disgraceful torture policy. Dubya should watch his back and avoid foreign travel; otherwise he's likely to arrested and slapped with a human rights violation. After all, most of the world would like to see him do the perp walk. Besides, he deserves it.

But here at The Daily Reckoning we always take the side of the underdog and the lost cause. Poor George is both. So, when we read the text of his speech last week in New York, we found it to our liking. Here is a man who has had some sort of brain operation or brain washing, we decided. They severed the connections, making it possible for him to think one thing and so something entirely different.

"History has shown that the great threat to economic prosperity is not too little government involvement in the market. It is too much government involvement in the market. ... And the surest path to... growth is free markets and free people.

"Capitalism is not perfect. But it is by far the most efficient and just way of structuring an economy. Capitalism offers people the freedom to choose where they work and what they do, the opportunity to buy or sell products they want and the dignity that comes form profiting from their talent and hard work...

"The record is unmistakable: if you seek economic growth, social justice and human dignity, the free market system is the way to go."

These insights are, to our mind, correct. But the U.S. government with George W. Bush at the controls hardly favored free-market capitalism. Instead, the Bush administration presided over a "mixed economy" - both "innocent fraud," as John K. Galbraith described the free-market's excesses, and the government's armed robbery.

... 36% of GDP was spent by government... and more than half of all eligible voters depended for their livelihoods - in whole or part - on government checks

... federally-chartered mortgage lenders - Fannie and Freddie - helped stimulate a huge bubble in the housing market

... the US government's central bank - the Federal Reserve - led by Mr. Bush's appointee, Alan Greenspan, practically single-handedly caused a huge bubble in finance, credit, speculation and consumer spending

... when the bubble inevitably burst, Mr. Bush's own Treasury Secretary (recently one of the Wall Street bankers who had most benefited from the financial bubble) rushed in to use government money (aka taxpayers' money) to buy up Wall Street's mistakes...

... then, the feds partially nationalized the nations leading banks...

... and further lowered the cost of credit, in order to try to blow the bubble up again...

... and now, the United States, along with the world's other leading governments, is pledging to give the world what it least needs - more regulation!

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So I was doing a pretty good job of evading things, and I had finally relaxed enough to pry open one corner of my mouth in which a straw could be inserted so that I might at least drink something. Then, in what can only be described as careless, Karl Denninger's essay - posted at market-ticker.org - hit my eyes and my brain with, "to fund all this crap that Congress, Paulson and Bernanke have in the pipe (you know, the TARP, the newly-minted SIV that Ben announced this morning to buy commercial paper, etc.) the treasury issue requirements will be north of three trillion dollars in this fiscal year"!

While the tone of Mr. Denninger's sentence is well-suited to the subject matter, I regret that the concluding exclamation point of the sentence was added by me, as Mighty Mogambo Editor (MME), and I have issued a stern rebuke to Mr. Denninger about proper punctuation, such as this Freaking Screaming Horror (SFH) of $3 trillion dollars in fresh governmental borrowing in one year!! Which you will notice merits two freaking exclamation points just by itself! Jeez!

Well, to be fair, the AP news service reports - without exclamation points - that the Federal Reserve announced that it will "provide up to $540 billion in financing to bolster the money market mutual fund industry, its latest effort to get credit flowing more freely again." Gonggggg!

I include that "gonggggg" because that is the sound that I distinctly heard when I saw the figure "$540 billion", so you can see why I was distracted with this "gonggggg" thing, as the first thing that crossed my mind was that it sounded like a funeral gong or something equally as spooky.

But it got weird when I read, "The Fed's new program, called the Money Market Investor Funding Facility, will be used to support a private-sector initiative designed to provide liquidity, or cash, to money market investors."

So what in the hell is a "private-sector initiative" whereby people would loan money at less than 1%? I don't know, and the only thing that I know is that it will be the proverbial cold day in hell when I will loan money at squat interest rates!

But it is the sheer magnitude that is shocking! $540 billion! The last thing that I saw before I passed out on the floor from the shock is that while $540 billion seems like a lot, it IS a lot! In fact, it is 16% of the whole "$3.45 trillion held in money-market funds as of Friday"!

And speaking of money, from Reuters we read that the People's Daily - "the official newspaper of China's ruling Communist Party" - had "front-page commentary" that said, "The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place."

I have two objections to this crap, one being that the People's Daily is wrong; the United States did NOT "plunder" anybody; rather, the U.S. just took advantage of a bunch of ignorant rubes and hustled them out of their money! Hahaha! Ever heard of a guy name Ponzi? Well, look it up, morons! Hahahaha! Welcome to the big leagues!

The second objection is that if there is another currency that is NOT corrupted by over-creation - as is the U.S. dollar - I would love to hear about it, but the ugly fact is that all the world's currencies are fiat currencies now, all composed of nothing but paper and electronic promises in some computers somewhere, and all being created in incredible excess even as we speak, which means that all of the world's currencies are racing towards worthlessness.

Anyway, the article went on to say, "A meeting between Asian and European leaders, starting on Friday in Beijing, presented the perfect opportunity to begin building a new international financial order".

Of course, I sent them a telegram suggesting that they move their meeting to Disney World in Florida, near where I live, as I would love to tell them that they should swap their dollar reserves for the gold, and then I could send them a big whopping bill for my "consultation" services.

But they insist on holding their stupid meeting in China, and I am certainly not going to go all the way to China to give them my Priceless Mogambo Advice (PMA). So I change my tactics, and I send them my advice and bill them anyway! Hahaha!

I learned this technique from doctors who come by your hospital room and say, "Hi! I'm Doctor Blah Blah! I was walking by, so I looked at your chart, and now I can charge you $375 to tell you that and you should stop grinding your teeth in outrage at the unbelievable monetary excesses of the Federal Reserve and the corrupt compliance of Congress and the Supreme Court! Goodbye!"

I then discover, to my horror, that I may be waiting a long time for the Chinese to pay the bill for my terrific advice to get all the gold they can get their hands on, and I may be facing a protracted lawsuit because GATA.org already had the headline that "Economist Mundell says China should buy all IMF gold."

So even though Mr. Mundell's good advice to the Chinese to buy gold obviously preceded my own, that does not mean that my advice is valueless, just like Dr. Blah Blah who looked at my chart in the hospital, read the notes, came to the same conclusions, agreed with everything the attending physicians had done, had no new suggestions, and yet I still had to pay him $375.

But either way, gold is going higher in price, as it must, and now the tables are turned and it is me that is getting rich! Whee! This investing stuff is easy!

Until next time,

The Mogambo Guru

for The Daily Reckoning Australia

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• The U.S. Federal Reserve’s Inflationary Feast
• Everybody Wants Something for Free
• The Advice to Never Touch Your 401(k) is Not So Cut-and-Dried

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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