But first, we apologise for being away the last few days, although we can see our shoes have been ably filled by Money Morning editor Kris Sayce. Some sort of tonsil/throat virus has been making the rounds here at the Old Hat Factory. It's nothing a course of antibiotics can't wipe out...in addition to wiping out all the natural bacteria in your digestive tract.

However we feel cleansed. All the toxins in the system have been sent packing. From here, the road to recovery begins with yogurt. Maybe we'll send a note to Fed Chairman Ben Bernanke, who has been nominated for second four-year term by U.S. President Barack Obama.

Why is the biggest story of the day? Because Ben Bernanke is a well-intentioned arsonist. Bernanke inherited an American and global economy built on an upside down pyramid of debt, with a very small asset base. When the entire edifice began to collapse in 2007, the Fed Chairman was slow to react.

But by the end of 2008, the Fed had expanded its balance sheet to over $2 trillion. It accepted toxic collateral from banks in exchange for U.S. Treasury bonds and notes. It set up new liquidity and credit facilities to keep over-leveraged financial firms afloat. And it began monetising mortgage and Treasury debt by creating new Fed money to support the U.S. housing market and the criminally reckless spending policies of the U.S. government.

Everything else in the financial markets flows, in one way or another, from the Fed's actions. Commodities first inflated, then deflated, and are now slowly inflating again as the U.S. dollar is systematically weakened by the Fed's actions. Investors are forced to speculate as well.

If there's one good result from the Fed's campaign to save housing by destroying the dollar, it's that investors have begun to realistically evaluate their alternatives outside the greenback and dollar-denominated assets. Emerging markets? Maybe. Energy? Probably. Precious metals? Definitely.

What about commercial property or retail stocks? Probably not. Scratch that. Definitely not!

Property group and retailer Westfield announced a $708 million net loss for the first six months of the calendar year. The good news is that met expectations by analysts. The bad news is that it doesn't really matter what analysts expect: that's a $708 million net loss.

If Westfield were married to America, it would ask for a divorce. Nearly one third of its revenue comes from its 55 U.S. shopping malls. But the company said sales per square foot at its U.S. properties fell by 6.2% from the same time last year. Conversely, sales at its Aussie properties were up 5.1%.

The company also took a $2.9 billion write down on asset valuations. Par for the course. Many of the assets purchased with debt at the height of the credit boom are deflating. It could have been an even larger write down, but the company booked a $932 million gain on financial instruments. We'll investigate just what those were and get back to you on it.

Retail is a terrible business to be in during a recession. Australia, backed by $50 billion energy deals and a committed faith in property, sports a lot of consumer confidence. That backs retail sales. But don't forget the primary economic and social trend right now: people are reducing their debts. They are cutting back, becoming more frugal, and learning to live within their means.

Of course, we think this is happening. But it could be totally wrong. Maybe the credit cards are finding their second wind and consumers are gearing up for one last credit bender. But our suspicion is that you are in the middle of a generational/cyclical shift in the attitudes toward debt and that this is generally bad news for retail stocks.

By the way, a few readers wrote in claiming your editor had it all wrong about Costco. Costco treats its employees well, sells at a fixed mark-up to its wholesale price, and operates on much different principles than, say Wal-Mart. Enough people wrote in that we thought we should mention this.

Fair enough. Our point wasn't to disparage the Costco brand. The main point was that massive retail outlets with bulk goods are only possible in a world with cheap energy and cheap labour. Maybe it's sustainable. But we have some serious doubts. Still, it looked like an awful lot of people queued up last weekend.

That's it for today. Good luck Ben Bernanke. "There's a lot of ruin in a nation," Adam Smith once quipped. Four years is not much time in the scheme of things. But the Fed can ruin a lot. Watch it try.

Dan Denning
for The Daily Reckoning Australia

• Giant Costco Opens in Melbourne!
• Zombies at the Fed and the Treasury Department Try to Gnaw on Survivors’ Savings
• Congress Slams Ben Bernanke and Fed Reserve
• A Bailout Bill for the Fed Should be Interesting
• 49 Million People Went Hungry at Some Point in 2008

However, the classic theory broke down in the period between 1914 and 1933, in which period it failed to develop a satisfactory doctrine of war economics, failed to prevent the post war inflations in the defeated countries, particularly Germany, failed the foresee or prevent the Great Depression, and failed to maintain the Gold Standard. Before 1914, orthodoxy meant Ricardian theory and Ricardian finance. The Great Depression destroyed the Gold Standard and undermined the authority of the classic school.

That would not necessarily have surprised Ricardo himself. He had been a Government loan broker on a scale almost comparable to the Rothschild family, during the period of the Napoleonic War, and had raised millions of pounds for the British struggle against Napoleonic France. He had experienced the 1797 suspension of convertibility by the Bank of England. The 1797 panic was partly caused by the fear of a French invasion; it led to demand for gold from citizens who did not trust the banks and were afraid that the invasion might mean that bank notes could no longer be cashed in terms of gold.

Ricardo, in various writings, makes it quite clear that he thought that the banks could never have complete security against a panic of this kind. He argued, as it is again being argued today, that banks can never have enough cash in their balance sheets to provide for the cashing of all deposits. Banking depends upon lending more money than the banks will ever have in their vaults. To this point, Ricardian economics have remained current orthodoxy.

Nevertheless, the controversy in Britain seems again to be centred on the differences between Ricardo and Keynes. David Cameron, the leader of the Opposition, is not keen to be described as a Ricardian, presumably because Ricardo died nearly two hundred years ago, but his rejection of stimulus through Government debt would have seemed orthodox to 19th century Ricardians. An earlier Conservative leader, Ted Heath – the man who took Britain into Europe - dismissed Ricardo on the grounds that he died a hundred and fifty years ago. Politicians believe that even the logic of money becomes redundant with time.

The Labour Party have adopted Maynard Keynes as their champion in the battle of deceased economists, and use his powerful name as a cover for their policy of borrowing and spending in order to restart the British economy. Other interesting economists, either American like Irving Fisher or Austrian like Schumpeter, have become recruits to one side or the other, to inflation or stabilisation, to stimulus or sound finance. The international Central Banking community has also been split, with Germany, like the British Conservatives, supporting sound money, and France, like the British Labour Party, supporting stimulus. The United States, both Republicans and Democrats, are Keynesian, as are the Federal Reserve, Britain and France. The European Central Banks, Germany, the British Conservatives and China can be described as Ricardian.

It all depends on what one is trying to achieve. The left want – as who would not? – to reflate the world economy. The right – if one can call them the right – want to stabilise the world economy. Both sides nominally accept that their aim is to restore confidence. The left believe that large injections will restore confidence, by making money and credit plentiful. The right believe that confidence depends on a return to sound finance and sound national balance sheets. In the argument one can see the case for Keynes and the case for Ricardo. The Keynesian Budget produced by Gordon Brown and Alistair Darling cut VAT for 2009, but promised to restore it to its present level in 2010. That will provide a little extra cash for the market place in 2009, but lowers the expectation for 2010. That is not good Keynesianism. Maynard Keynes managed wartime finance in the Second World War by managing expectations. I fear that one cannot play around with Budget deficits in an arbitrary manner without rational expectations being damaged. One cannot have a surplus of debt by gratuitously cutting the Government’s revenue.

William Rees-Mogg
For The Daily Reckoning Australia

• Discussing the Scale of the Global Economic Crisis
• David Ricardo’s Economic Theory is Sound Doctrine
• What Caused the Economic Crisis
• Economic Crisis Discussions in the House of Lords
• Financial Crises in History