Why this three part thought experiment? Well, just because our analysts are in agreement that the cautious way forward is to surf the liquidity in the markets higher, your editor is, at heart, a massive worry wart. Plus, all these disaster movies about the end of the world must be affecting our state of mind, or amplifying its natural tendencies.

We're always worried about the worst-case scenario, always thinking of the things that could go wrong. This just seems like a prudent way to prepare. It will be better if these things don't happen. But let's just assume they will and work backward from there. And then let's figure out what you can do - if anything - to avoid getting wiped out again, and maybe even making a buck or two on it.

First cab off the rank is the total implosion of the Chinese economy. This might be bearish for Aussie resource stocks. But how likely is it to happen?

Well, not very likely if all you were looking at is the raft of official data released this week. Retail sales in China were up 16.2%. Industrial output was up 16.1%. And exports, even though they were down 13.8% in October, decreased at the lowest rate in ten months. Fixed asset investment for the year is up 33.1% over last year's pace.

You could take all of these as signs that China is leading the world to recovery and managing itself quite well. It should achieve 8% GDP growth. That's the growth rate that China's economic planners reckon the country must achieve to maintain high unemployment. And high employment rates promote political stability - valued above all else by a regime that makes free market gestures but still is run by old school communists.

What's more, if you take up the question we asked a few weeks ago - when is it in China's interests to allow its currency to strengthen - the answer is starting to emerge: when a stronger currency keeps inflation in check. China's currency managers are making noise about letting the Yuan strengthen against the dollar.

But it's not to please Barack Obama, who visits Beijing this month. A stronger Yuan, among other things, gives Chinese consumers more purchasing power. That might slowly reduce the contribution exports make to Chinese GDP (and to forex reserves which are then recycled into U.S. Treasuries.

Or it could all fall apart more quickly than anyone expected. Why?

China has massive over capacity in steel and cement. Granted, these two materials are quite literally the building blocks of industrial society. But according to Bill Powell in Fortune Magazine, China has enough spare production capacity in the cement industry to meet annual cement demand from India, Japan, and the U.S....combined!

This fact would be consistent with a country that's massively over-investing in fixed assets to achieve high rates of employment. And then there's steel. China's own National Development and Reform Commission says the country will have 250 million tonnes of excess steel production capacity by the end of next year.

Chinese steel production is approaching 600 million tonnes per year. But its current demand is around 350 million tonnes. That means it's either planning to put the rest of the world's steel makers out of business by dumping cheap steel on to global markets...or there is massive overcapacity and inefficiency in the steel sector.

Either way, it's probably a good idea to consider the possibility that China's investment binge is more fragile than it looks. In short, the bear case on China is that, "the Chinese have dangerously overheated their economy, building malls, luxury stores and infrastructure for which there is almost no demand, and that the entire system is teetering toward collapse."

Naturally this would be bad for Australia, whose economy is lately coupled with China's prosperity. It would argue for reducing your allocation to common stocks, raising your cash position, and not taking the China growth story at face value.

Next cab off the rank is global rush to refinance debt while interest rates low. Moody's reports that there is $10 trillion of bank debt maturing between now and the end of 2015. What's more, the average maturity of bank debt fell from 7.2 years to 4.7 years over the last five years.

This means bank debt (like sovereign debt, especially in the U.S.) is getting more interest rate sensitive. Not only do banks have to roll over a lot of debt in the coming years, they may have to do so at higher rates (assuming they can find takers for it.) Moody's is not confident.

In a research note published to clients, and also on the FT's Alphaville blog, Moody's analysts wrote that, "credit costs should continue to put banks' earnings and profitability under considerable pressure, which might cause investors to seek additional risk premia, as governments gradually exit from the direct support they have so far provided. In other words, we see weaknesses on both sides of the balance sheet, and we are concerned that the risks associated with both assets and liabilities may fuel each other, cause losses and undermine investor confidence."

Even if you concede that Moody's might be overly-dire now to make up for its non-existent warnings about the risk of sub-prime related debt, you have to take the warning seriously. In fact, in a report released last weekend, the IMF said banks were not out of the woods yet at all and remained at risk.

Its analysts wrote that, "Banking systems remain undercapitalized, suffering from impaired legacy assets and, increasingly, non-performing loans. Deleveraging pressures will likely remain a constraint on bank credit for some time. Activity in securitization markets remains dependent on public sector support. Moreover, large public interventions have transferred risk to sovereign balance sheets, raising market concerns that have abated somewhat recently."

We'll get to the sovereign balance sheets in a second. But in your financial disaster preparations, spare a thought for the banks. Serious problems remain. And if you're looking for where risk resides in the financial system today - the next AIG, or Mrs. O'Leary's cow if you prefer - you might not have to look any further than the banks.

But as the IMF noted, a great deal of private sector risk has been transferred to the public sector via bailouts, loan guarantees, and other schemes. This exposes sovereign borrowers like the U.S. and the UK to interest rate shocks (increased borrowing and debt service costs). But more importantly, these countries already faced fiscal dilemmas with ageing populations.

There is not much detail to add to this point. We've covered it before. But it's the best reason to own gold and tangible assets (your house, vodka, cigarettes). All the world's paper currencies are drowning under a sea of public sector debt that's becoming increasingly unsustainable. And this has happened at just the point where the Western welfare states will begin spending more money on caring for ageing populations.

Where will the money come from? Between a China meltdown, a bank implosion, and the rising risk of sovereign debt default, there are at least three known unknowns that worry us right now. And don't even get us started on the unknown unknowns.

Dan Denning
for The Daily Reckoning Australia

• Chinese Steel Price to Rise in Wake of Coal and Iron Price Hike
• Chinese Economy Seems to be Growing
• Australian Iron Ore Shares on China’s Menu
• Chinese Surge in Construction Explains Pickup in Base Metals Stocks
• China Performs a Kind of Financial Alchemy

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
• A Bailout Bill for the Fed Should be Interesting
• 49 Million People Went Hungry at Some Point in 2008
• Oil Prices Fall 77%

"Well, we are out of money now," Obama said. It's kind of shocking to hear a politician be so direct. Surely it must have been a slip up. But the man is right. America, along with Britain, is financing a hodge-podge of corporate welfare and classic handouts with deficit spending, otherwise known as borrowing.

If they can't borrow the money-which is getting more and more expensive as interest rates rise and investors fret about sovereign credit quality-they will print it. What happens when "quantitative easing" is expanded on a greater scale is anyone's guess. We'll have more on that tomorrow.

Dan Denning
for The Daily Reckoning Australia

• The Country is Going into a Recession with its Finances in the Worst Shape Ever
• Inflation is Evident If You Just Follow the Money
• Where Do the Feds Get Any Money?
• Look out! It’s The Bond Vigilantes!
• Now is the Time to Find Out About Gold as Money

Does it mean that American "consumers" (so-called) are awaited momentarily in the flat-screen TV sales parlors with their credit cards fanned-out like poker hands, ready for "action?" Not too likely with massive non-performance out in cardholder-land, and half the nation's electronics inventory wending its way onto Craig's List. Are we expecting more asteroid belts of new suburbs carved in the loamy outlands of Dallas and Minneapolis, complete with new highway strips of Big Box shopping and Chuck E. Cheeses? Go to banking's intensive care unit and inquire (if you can) among the flat-lining production home- builders and the real estate investment trusts on life support when they expect to rev up the heavy equipment.

The idea that we're about to resume the insane behavior that induced the current epochal malaise of economy is so absurd it will only be heard in the faculty dining halls of the Ivy League. And if America is not picking up where it left off eighteen months ago - the orgy of spending future claims on wealth unlikely to accrue - then what is our destiny? Based on what's out there in the organs of public thinking, it seems that we don't want to think about it.

So many forces are arrayed against a return to the previous "normal" that we will be lucky, in another eighteen months, to still find ourselves speaking English and celebrating Christmas. What's "out there" is a panorama of mutually reinforcing critical problems pertaining to how we live on this continent. Like the obesity, heart disease, and diabetes that plague the public, these problems are disorders of lifestyle habits and the only possible "cure" is a comprehensive revision of lifestyle. With the onset of spring weather and the cheez doodles and monster truck rallies and NASCAR tailgate barbeques and the drive-in beer emporiums all beckoning, can the public shift its attention from these infantile preoccupations to saving its own ass?

So far, the most striking piece of the economic fiasco is the absence of any galvanizing spirit among the millions getting crushed in the tragic unwind of our relations with money. It will be interesting to see, for instance, if there is any uproar over the evolving story of Goldman Sachs' latest raid on the U.S. Treasury, after booking billions in taxpayer-funded payouts funneled through AIG, based on double-hedged credit default swaps. Such magic tricks are understandably hard to follow, but a dozen-or-so federal attorneys with a middling background in differential calculus might suss out the trail that leads from Ben Bernanke's work station to Lloyd Blankfein's cappuccino machine. Something similar may be said in regard to revelations last week of White House economic advisor Larry Summers' connection with a number of hedge funds shoveling millions into his deep pockets for showing up once a week to cheerlead their "innovations" - not to mention his shadowy visits to the Goldman Sachs gravy train even after he signed onto the Obama campaign. As long as the stock markets seem to rally - no matter what else is really going on in America - nobody will pay much attention to these disgusting irregularities.

Since it is that time of year, and I am haunting the gardening shop, one can't fail to notice the many styles of pitchforks for sale. My guess is that the current mood of public paralysis will dissolve in a blur of blood and spittle sometime between Memorial Day and July Fourth, even with NASCAR in full swing, and the mushrooming ranks of the unemployed lost in raptures of engine noise and fried cornmeal. It doesn't take too many determined, pissed-off people to create a lot of mischief in a complex society.

On the agenda in the second quarter of '09 are ominous rumblings in the oil and food sectors. Half a year of cratered oil prices have decimated the oil industry and we're driving at 100-miles-an-hour straight off a cliff into a new kind of supply crisis - even if industrial production and global exports remain moribund. So many drilling rigs are being decommissioned that the oil industry itself looks like it's preparing for its own death, investment in exploration and discovery has withered with the credit markets, and the world may never recover from the year long hiccup in oil industry activity - translation: peak oil is biting back now with a vengeance. Its peakness will look peakier and the yawning arc of depletion beyond will look steeper and pose a threat to every globalized and continental-scale enterprise in the known world.

So many dire elements are ranging around our food production system (i.e. farming), from widespread drought and water table depletion to "input" shortages (especially fertilizers) to sickness in credit availability, that we're all one bad harvest away from something that will make Pieter Bruegel-the-elder's "Triumph of Death" look like Vanity Fair's annual Oscar Party in comparison.

Barack Obama, charming as he is, had better drop his pretensions about kick-starting the old consumer economy, fire the Wall Street clowns and parasites who are running that futile exercise, and start preparing a US Lifeboat Economy aimed at reducing the scale and scope of our outlays so we can survive the coming siege of austerity. Meanwhile, I'm glad that he finally got a dog for the White House, because the President knows full well where to turn in Washington if you want some genuine love and affection.

Regards,

James Howard Kunstler
for The Daily Reckoning Australia

• Rising in Defense of Goldman Sachs
• Higher Oil Prices, the New Normal
• Meredith Whitney and the Buy Recommendation on Goldman Sachs
• Economy Free to Recover?
• It Wouldn’t be a Real Bear Market Rally if it Didn’t Test Your Confidence in Your Position

In 2009, the focus will broaden to include a range of calamities that will leave no sector unscathed. Next in line is retail, which accounts for some 70 percent of consumer spending, 26 percent of which is holiday sales.

After the numbers are tallied to reveal a dismal retail Christmas, more big chain bankruptcies will follow. Besides leaving masses unemployed, defunct retailers will leave behind thousands of empty stores. Who will rent them? Nobody!

Add to these empties commercial space vacated by defunct financial firms and an array of troubled businesses, from restaurants to architectural firms, to high tech operations, to offset printers, etc., etc. The inescapable result (that we predicted over a year ago and is only now being discussed in the business media) is a commercial real estate bust that will be costlier, wreak greater havoc and prove more intractable than the residential market decline.

Because most people don't live and shop on Wall Street, the "Panic of '08" was viewed by Main Street as if from afar - even though many were losing money. But when commercial real estate crashes it will hit much closer to home. The depressive atmosphere of thinly shopped, half- vacant malls will strike emotional chords and all the senses.

In office buildings, vacant floors and empty cubicles will dampen the workday spirit of the still-employed; ever present reminders of laid- off friends and colleagues and of the fragility of employment.

Abandoned, untended business and industrial parks will highlight the already mournful scene. In cities studded with soaring towers and new construction predicated on eternal economic growth, streets lined with "For Rent/For Sale" signs will complement stilled cranes and uncompleted buildings.

As retail and commercial real estate collapse, the credit card sector and all its interrelated processing and back office support businesses will suffer and be forced to scale back. Hordes of consumers who have been living off credit cards and racking up debt to the limit will lack the funds to service their debt... much less pay it off, and they will be forced to default. Given the nearly $3 trillion in consumer debt at risk (excluding auto and mortgage) an inevitable default snowball will add momentum to the in-progress Collapse of '09.

While we alone predicted the "Panic of '08" (and even took out the domain name "Panicof08.com" on 7 November 2007), we are not alone in predicting a Depression.

The "D" word is being uttered - in some cases by those who have the most to lose and whose best interests are not served by spreading gloom and doom. "The world and country are in a depression," said celebrity tycoon Donald Trump. He then later softened the blow, downgrading it to a "virtual depression."

"Virtual" to the few who will never have to worry where the next dollar will come from, it will be painfully real and hardly virtual to the multitudes who are and will be worrying. The virally proliferating Greatest Depression is the Trend of Trends for 2009.

Even so, beware! Over the course of free-falling 2009, the word from most official sources will be "recession," and from the few mainstream trophy pessimists, "deep recession."

For example, the oft-quoted naysayer, Nouriel Roubini, New York University professor of economics, forecasts a two year recession ... not Depression. On the sunnier side of Wall Street, the Federal Reserve predicts the US economy will contract only through the middle of 2009 and pledged, "In any event, the Committee agreed to take whatever steps were necessary to support the recovery."

What "steps?" The Bernanke Two-Step? Adjust interest rates or print more money? Neither stopped the credit crisis from worsening, the real estate market from tanking or the stock markets from crashing.

It was Fed finagling, Washington deregulation and Wall Street's compulsive gambling that created the crisis. To trust or to seriously consider pronouncements, analyses and predictions made by any of these sources is an exercise in willful self-deception. Yet, with pensions, IRAs, 401ks, stocks and mutual funds evaporating, many of those most affected deny reality and take hope that forecasts made by proven incompetents will miraculously restore their losses.

Throughout the many years leading up to what we term the "Greatest Depression," The Trends Research Institute provided copious data and Globalnomic analysis to support our forecasts of economic upheaval. In the past year alone, we have provided so much hard evidence (housings starts, home sales, foreclosures, bankruptcies, bank failures, unemployment figures, stock indices, leading economic indicators, retail sales, etc.) that further elaboration should be superfluous.

Those waiting to hear the "D" word from economic experts, talking heads and TV anchors before taking action will most certainly regret their indecisiveness.

Absent from the economic scenarios ranging from second quarter recovery, deep recession and "virtual" depression are the multiplicity of social, environmental, health, political, emotional/psychological and geopolitical factors that point beyond just Depression. They point to The Decline and Fall of Empire America.

Well before Inauguration Day, Barack Obama was cast as the next Franklin Delano Roosevelt. If he follows in FDR's footsteps he could freeze deposits by declaring a "holiday" to stop a run on the banks. While FDIC insurance may cover deposits, even after banks reopen, withdrawal amounts may be restricted. (As the Argentine government did in 2001-2002.)

Author's Note: Suspicious of the soundness of the banking system, I requested to withdraw a substantial sum from our Key Bank account, leaving funds sufficient to cover ongoing business operations. First they tried to dissuade me, then they stonewalled me, and finally they turned openly hostile.

I was forced to sign a series of documents, including one acknowledging that since I was carrying a large sum I could be the target of a robbery. To enhance that possibility, the teller slammed down the bag of cash on the counter and publicly announced the sum.

Despite repeated requests in the days preceding my withdrawal to get the cash in hundreds, they gave it to me in twenties, making for a bag five times the size and more robber-friendly. When I complained to the bank manager who had processed the request, the response amounted to "take it or leave it."

This will not be an isolated event. If you attempt to withdraw a large chunk of money from your account, negotiate the details in advance and anticipate possible hassle and obstruction.

We've heard similar accounts from clients and Trends Journal subscribers who, over the past several months, tried to close out mutual funds, 401ks and assorted sinking equities. They were dissuaded, cajoled, belittled and arm-twisted by brokers desperate to keep their accounts. Many caved in under the pressure, didn't close them and lost most of what they had.

So, we leave you with a Greatest Depression consideration: How safe is your money? How sound is your bank? At the end of November, Citigroup, once America's largest bank, was on the rocks. Fifty-two thousand employees were laid off. In just three days its stock lost more than half its value. Rumors swirled that Citi was so desperate they were looking to sell or split up the company.

Is your money deposited in a local bank whose reputation you can bank on? Are you with a teetering giant or a poorly-managed regional? If either of the latter, it would be in your best interest to assess the risks.

Take some out if you think there is risk; take it all out if you think there's high risk. You may consider spreading it around and even banking abroad...after all, this is the Global Age.

Regards,

Gerald Celente
for The Daily Reckoning Australia

• The Collapse of the U.S. Housing Market and Mortgage Bubble
• The Retail Collapse Continues
• The Collapse of Complex Asset Values
• “Going for Broke” to Avoid a “Financial Collapse”
• Stock Market Collapse Can Be Explained By Panicked Forced Selling

Here in Australia, local shares will probably follow New York's lead and head down. Stocks on Wall Street finished up four days in a row, but couldn't make it five. There was no earth-shattering earnings news. That left plenty of room for grandstanding and other chicanery.

Before we get to the chicanery, what's shaking in the local market? The banks were up. Australia's banks never had the chance to gorge themselves on the stuff that's choking their counterparts in Europe and North America. They were stuck, instead, with large portfolios of residential mortgages. Plus, you can't short sell them anyway. So how low could they go?

The big two miners delivered mixed news. One of Rio Tinto's large investors, Australian Foundation Investors (AFI) says it's worried about the Chinalco deal. Rio's shares fell. BHP shares were up, although that might change today as the company has announced the expansion of mining at Olympic Dam in Australia might be delayed by two years.

All that aside, markets are still in a kind of suspended animation, waiting to see if there is any coherent, intelligent, effective response by the financial players or their regulators to...you know...solve the problems. It could be a long wait.

All hole and no donut. That about sums up the response of the economists and officials trying to un-freeze credit markets and get the economy going. Why on earth is the President of the United States taking time to sort out how much people at AIG get paid? Probably because he wants to distract attention away from how much money he plans to spend, and spend ineffectively.

Look, there's Elvis! Hey king!

That's what distractions are, attempts to change the subject or divert focus.

Distract from what? Huge inflation. Yes. Yes. We know. There is no huge inflation now. In fact, industrial production in the United States fell for the fourth month in a row. It hasn't been this low since 2002. But then, why would output grow when demand is falling and credit remains tight?

Money supply is not falling. Yet the good people who write the Bank of England's Quarterly Bulletin are still warning of a "debt deflation trap." You'll find all the good stuff beginning on page 39. The Bank warns that the cost of debts is rising relative to everything else, making it harder for heavily indebted Britons to pay off debts. Britons are, by the way, heavily indebted.

But are falling prices really so inherently evil? Really...whoever complained about a cheaper cheeseburger? When was the last time you bellyached about the ever-declining price of a pint of beer?

The Bank study resurrects the last period of sustained deflation and connects it with the economic misery of the times, in the 1930s. Then, too, output collapsed. The world's productive capacity far exceeded its demand. And money supply, for a time, briefly shrank as banks (who create most of the money in the fiat system) went out of business.

But all of this talk about the evil of falling prices is just a ruse. Excess capacity exists because the preceding inflationary bubble helped build factories to produce goods sold to people who bought them with credit. The demand was illusory. Unfortunately, the factories were real...it took real labour, real energy, and real raw materials to build them. They remained idle and unproductive unstill something else came along (World War Two) to reignite demand the and the need for war time production.

Falling prices aren't inherently evil. If prices fall low enough, low cost producers of a given good service are driven out of business. Supply tightens. Prices rise.

No...what the BoE and the Fed are doing is evoking the nightmare of the Depression to justify the coming inflation. The fiat money system can't function without just a little inflation. The gradual erosion of purchasing power is what makes it unnoticeable and thus tolerable to private citizens. They don't really notice it 2-3% at a time.

The trouble for the global system now is the tower of debts looming over the public and private sector in many economies. It's all well and good if the general price level falls. But it's no good if, while asset values like stocks and homes fall, debts remain fixed. An increase in the preference for cash makes debts a lot harder to pay off.

Of course, as you know by now, the preferred government answer is to inflate. This is what made the Chinese nervous last week as they reviewed Obama's budget. But the BoE and the Fed have been quite clear about their intentions. They will inflate as much as they need to in order to get nominal asset prices stable.

There are some investors who buy the Fed's bogus line that it can withdraw liquidity and sterilize its money printing before it leads to inflation in the economy. Believing this is a serious mistake that could cost you a lot of money.

The hedge against these inflationary policies (including here in Australia) is to invest in assets priced in dollars which cannot be created by a printing press. That includes oil, precious metals, and other energy commodities. The nominal price of these assets should rise as the money supply rises.

More on that tomorrow.

Dan Denning
for The Daily Reckoning Australia

• From the Gold Pan… Inflation, Deflation and Precious Metals
• Commonwealth Bank (ASX: CBA) Nearly Doubles Bad Debts Over Last Year
• Marshalling the Armies of Inflation
• Obama faces huge challenges
• Inflation or Deflation?

By the end of 2008, $30-$40 trillion had been lost, in stocks, housing and derivatives. Investors breathed a sigh of relief when December 31 finally came. But then came 2009! World markets have fallen 18% so far this year...2009 is on track to lose far more than even 2008, which was the worst year in stock market history.

What has gone wrong?

Today, we're going to retrace our steps. In order to understand where we're going, we have to spend a minute remembering where we've come from.

First, the biggest bubble in history sprang a major leak in the summer of '07. Then came the autumn of 2008, and it was losing air from every seam. The biggest bubble in history might be expected to lead to the biggest bust in history. And so it has...

"Let it burn itself out," was our advice. Instead, the feds sounded the alarm, slid down the pole, and rushed to put the fire out. But the more money and credit they pumped on the flames, the worse the fire seemed to get.

The Federal Reserve, under the leadership of Ben Bernanke, called out all the fire trucks and opened up all the hoses. Rates were cut to zero...and the Fed expanded its balance sheet - increasing the amount of credit available to the banking system - by nearly $1 trillion.

And the Federal government - under the leadership of George W. Bush - rushed out a tax rebate...and then a rescue bill. Together, they cost a bit more than $1 trillion.

None of this rescuing has done any good. Every bank and business that has gotten help has deteriorated, as near as we can tell. The feds let Lehman go bust and we were done with it. But they saved insurance giant, AIG. Now, AIG is in trouble again. And today's paper tells us that the feds have stepped in...this time to put in a further $30 billion and "take a controlling stake in two of the stricken insurer's largest divisions."

Hey...so now the feds are in the insurance business too.

And here comes the new administration with another $825 billion bailout and the kind of budget that takes our breath away.

If Mr. Obama gets his way, he will soak the rich and squeeze the military; everyone else will be showered with benefits. There's a health care initiative, for example, that will cost more than $600 billion. And there's even a plan to provide higher education for everyone.

Republicans are gearing up for a fight. They owe many of their careers to military contractors and are looking forward to cushy jobs with defense businesses should the voters ever catch on and boot them out of office. They'll fight to keep the U.S. spending money as if we were at war. The Republicans don't appreciate it much either when people on their high-dollar-donor lists are hit with higher taxes.

Democrats are readying for a dust-up too. They've dreamed of moments like this - it is as if the police and the alarm companies had all gone on strike at the same time. They're planning to rob every bank in town - and expect to get thanked for it. It is not often that they can divvy up trillions in boondoggles...and pretend it is in the national interest.

With this worldwide financial meltdown you can get away with anything. People have come to believe things so absurd you'd think even a Democrat would laugh at them. Most think you can give money to failing companies...and somehow they'll be healthy businesses again. Some believe that you can print up paper money - and that it will be as good as the real thing. Almost all of them think spending money on anything, no matter how stupid, actually helps the economy. If it were only that easy!

Obama says he's preparing for a fight too. Which is fine with us; we like a good fight. Even one that is rigged. And this one surely is. Just look a chart of government spending over the last 30 years. What you see is that there is nothing extraordinary about what Obama is doing. Every year, through Republican and Democratic administrations...from Ronald Reagan to Barack Obama...the Republicans and Democrats pretended to fight about how much money the government spent. And every year the trend continued: higher spending, higher deficits. It didn't seem to matter who was president, or what was going on. Each year, spending rose...and so did the real deficits. That too is a feature of the post-war consumer economy. And that, too, is probably coming to an end.

*** After all this fire fighting...you might think that the blaze would be under control by now. Not at all.

On Friday, the Dow lost a further 119 points. It's clearly ready for a rally...but there is none in sight - yet.

Oil is at $44. Gold lost ground too...it's down to $942.

We recall that last December, as stock prices were collapsing, Warren Buffett stepped up and put his money and his mouth in the same place. He was buying stocks, he said.

But buying stocks proved a bad place for both his money and his mouth. Stocks continued falling. And so did the economy that is supposed to support them. Economic output in the United States is falling at a 6.5% rate - the fastest drop in 26 years. And now Buffett says the economy will be a "shambles" this year. His own company, Berkshire Hathaway, reported profits down 96% from the year before...and is trading at only about half its peak. In other words, Berkshire shareholders have lost half their money.

And here's a good question for you, dear reader: If the smartest investor in the world can't make money in this market, how do you expect to?

If we were you, we wouldn't even try. You see, this is not a recession...and it's not a buying opportunity. It's a depression. And at this stage in a depression, the best thing to do is to sell stocks, not buy them. Because they have further to fall...and because they could take a long, long time to recover.

We've explained the difference between a recession and a depression before. But we'll do it again. A recession is a pause in an otherwise healthy, growing economy. A depression is when the economy drops dead. And when it drops dead, the assets that people owned - stocks, bonds, houses, derivatives, debt - are called into question. What are they worth, now that the economy that created them no longer exists? That's the big question. The U.S. economy has been expanding for the last 60 years - largely by increasing consumer spending and debt. Now, neither consumer spending nor debt is increasing. In the last 6 months, consumers have suddenly reversed their free-spending ways. Borrowers and lenders have repented too. But if it is no longer an economy that grows by increasing consumption and debt...how does it grow at all? And what about all those businesses that are set up to provide products and services to the consumer economy? A nd what about all the debts and obligations that the consumer economy produced; what are they worth?

That's what everyone wants to know. So the markets have entered into a period of vigorous price discovery. Some things are still valuable, of course. A house, for example. But many things aren't as valuable as they used to be. The house won't be worth as much if people can't borrow to buy it...or if potential buyers can't get a job. And the mortgage debt that the house carried...which was recycled into a leveraged debt instrument...is bound to be worth a lot less than people once thought.

But it takes time to sort out the good assets from the bad ones. How much does the business owe? To whom? Who owes it money? Will the debtor be able to pay? And what about those strange piece of paper - CDOs, MBOs, SIVs - in the company vault? What are they worth?

For a while, people are so afraid of making the wrong move that markets freeze up. No one wants to lend when he doesn't know if he's going to get his money back. That's called a 'credit crunch.' And no one wants to buy when he has no idea what things are worth. That's when markets go "no bid."

But eventually - unless the feds stop the process - things sort themselves out. Businesses go broke. Homeowners are defenestrated. Automobiles go back to the dealers' lots. Prices sink to a level where people are able to buy. And the whole process starts over again.

This can take a long, long time...especially when government is trying to stop it.

*** "We must kill zombie banks or face a lost American decade," says James Baker, U.S. Treasury Secretary under Ronald Reagan and U.S. Secretary of State under George Bush I. Japan is still trying to adjust to the realities of its post-bubble world...after the initial crash 19 years ago. It propped up banks instead of fixing them, he says. The banks were kept alive...but not performing their function. Result: a lost decade. Maybe two.

In the United States, in the '30s, on the other hand, the zombie banks were allowed to die. More than 1,000 banks were buried. Still, the economy didn't really recover until after WWII - some 2 decades after the crash of '29.

Maybe killing the zombie banks isn't enough. Zombie companies must be allowed to fail, too. And zombie homeowners. And all the zombie investments made in the preceding bubble years.

Of course, that is what is needed. A period of creative destruction. But in this period of discovery, we don't know who's a zombie and who's not. Not yet. It will take time to find out. A new economic model must take shape. Then, the markets must tell us what things are still valuable...and what they are worth.

An example: a mall. Shopping malls were designed for an economy in which consumption increased at a more-or-less predictable rate. As consumption increased, mall owners could project how much retail space they could let out...and what yield it would produce. Based on those figures, banks could lend against the value of the mall...and investors could put their money to work building new malls.

But that economy is missing and presumed dead. Consumption is no longer increasing, it's declining. And the biggest consuming group - the baby boomers - seem to be changing their habits forever. From here on out, they are likely to be saving money for their retirements...not spending.

What is that mall worth now? What do the projections show? The commercial property loans used to build the mall were based on projections made years ago; what are those loans worth now?

We're all waiting to find out. A new economy needs to arise, step over the corpse of the dead one, and get moving. What kind of economy? We don't know... When will it happen? We don't know that either. What companies will prosper...which ones will fail?

We wish we could tell you.

In the meantime, all we have is guesses... Stay tuned for more...tomorrow.

Regards,

Bill Bonner
for The Daily Reckoning Australia

• Fight Fire with Fire!
• A Dispatch from the Zombie Wars
• Broad Money Supply Declines by $50B in US, Fire Up the Printing Presses
• Ford Chief Doubts a Return to Old Times
• Feds’ Plan is to Reflate the Economy

Meanwhile, there is not much we can tell you that you don't already know about the global rout in stocks. Wall Street is at twelve- year lows. The FTSE is at six-year lows. And here in Australia the market has opened lower than its five-year low, as you'd expect after such a wretched overnight performance on global markets.

On a side note, a large cloud of brown plane tree leaves has just blown down the street across the way. We're watching from our perch on the second floor of the Old Hat Factory. Gale force winds are blowing through Victoria today.

Back to the markets and the banks. Moody's has said that the AA1 ratings on the Commonwealth Bank, ANZ, and Westpac are no longer secure. Moody's analyst Patrick Winsbury said the Aussie banks could survive the global collapse better than most,, but that "The negative outlook reflects the potential for the deepening global economic downturn to have a protracted impact on the banks' asset quality and earnings."

If the Aussie banks are re-rated by investors (downgraded), it's exactly the sort of thing that will lead to taking out the 2003 lows in the 2,700 range. That may sound severe-wiping out all the gains of an epic resource bull market. But keep in mind the S&P barely closed above 700 overnight and dipped under that level for the first time since 1996. The Dow crashed under 7,000-a place it hasn't seen since 1997.

The chart below reminds you how vulnerable the Aussie indices are to the big four banks and the big two miners. You can see that Rio and Macquarie Group (which we included as an example of how discredited the investment banking model is now) lead the charge lower.

But over the last year, the big four and BHP have managed to fight earnings gravity. If that changes for whatever reason-like seven of Australia's top ten trading partners being in a recession-the lows will be taken out. And probably sooner rather than later.

Click to enlarge
Source: www.google.com/finance

Plain and simple: All the gains in equities since Alan Greenspan uttered his famous words about irrational exuberance have been wiped out. All that remains to know now is how irrational the downside would be. The good news is that you're seeing signs of capitulation. Investors are giving up on stocks for the long-term.

For example, we got a text message this morning from a long-time bull. He always finds reasons to disagree with our analysis. He texted early this morning after watching Wall Street's depressed closing.

"It's over."

That's not quite a buy signal. But it's not a bad sign either.

Across the world the trouble is with the banks. HSBC will slash its dividend and do a US$17.7 billion rights issue to shore up its capital. Will shareholders pony up? In the U.S., AIG reported a US$61.7 billion loss. The company guaranteed some $450 billion in credit default swaps. European banks are its big counter parties, with some $300 billion in exposure outstanding.

You can see why the U.S. government is flushing money down AIG as fast as it can. If AIG is downgraded , it triggers more losses for European banks, which already have problems on their Eastern front to begin with.

In fact, the more we think about it, the more we agree with John Robb that this is not just a stress test of financial firms. It's a stress test for national governments. Banks and governments have co-evolved to get to this point where we are today in the modern world (where interconnectedness and complexity threaten to crash the system).

The "Cash Nexus" as historian Niall Ferguson calls it is the murky relationship between fractional reserve banking, perpetual government debt, and the fiscal warfare/welfare state. That is, governments would never have the money to build powerful military machines without modern bank financing and the bond market (where banks buy and sell government debt, bridging the gap between private capital and government borrowing).

Similarly, banks could never have gotten as large without the regulatory and legal framework set up to favour them. And of course it would favour them.

A few things have changed in the last ten years. The main one is that leaders have become looters, be they political or corporate. On the political side, instead of conventional armed conflict, which had diminishing marginal returns (in addition to being really unpopular in a culture addicted to leisure) governments have gotten into all sorts of other wars, mostly against their own people (War on Poverty, War on Drugs, War on This, War on That, War on Everything, War on You.)

And for their part, the banks and even non-bank lenders figured out that if the government was going to encourage home ownership for political reasons by discouraging rigorous lending standards, then the best way to deal with the increased risk was to sell it!

Alan Greenspan called this "disaggregation" of risk. But obviously securitisation did not lower systemic risk. It heightened it. But for a little while anyway, the banks and bankers made a mint off of the government's desire to gear the entire national economy towards the goal of home ownership. This happened in Ireland, the U.K., the U.S., and Australia to name few English-speaking companies.

You'll forgive us if we don't quite have our head wrapped around the idea yet. It's a work in progress. But yes, we are suggesting that the co-evolution of the modern welfare/warfare state and the financial system has been impacted by a financial meteorite of sorts.

The co-dependency has always required a little inflation to keep it going. But lately, the last one hundred years or so, it's turned into a lot of inflation. The expansion of global money supply through fiat money and widespread credit has created an inherently unstable scale of modern living. We have a living arrangement that uses resources too quickly and too inefficiently. And now we have bumped into that fact in a rather abrupt way.

A re-localisation of the economy would be something to think about and even plan for. If the centralisation of money and power has reached its useful limits, then you'd think we'd be moving away from it. Yet in Washington, Canberra, Paris, London, Tokyo, and Berlin everyone wants government to get bigger and spend more and take a larger role in the economy.

The response to the crisis has become activist and interventionist. This, ironically, echoes the ideological response of the Bush Administration in Iraq. Meet the new boss everybody! Making the exact same strategic mistake as the old boss, only a different theatre! We'll see how that works out...

Some reader mail...

Hi Dan & all at DR,

Whilst I enjoy reading your daily ramblings, sometimes your analogies are left wanting. A case in point is your analogy of the 27th February, of the "death of a star". Whilst super nova's do indeed produce enormous explosions of galactic proportion, remnants of the stars will continue to survive, all be it, in less than bright condition.

Further more, every element in the universe heavier than iron on the periodic table, and that includes gold which you seem to bang on about constantly (excuse the pun), owes its existence to past super nova explosions. Without these heavier elements, you, me and every living thing on the planet, (and perhaps elsewhere) would not get a chance at life and living it. So your analogy is perhaps, fatally flawed. Just thought I'd mention it. Keep up the polly bashing though, love it!!!

Kindest Regards

Simon A Blane

Undergraduate student, Edith Cowan University, Perth, Australia.

Sorry about that.

Hi Dan,

You really should be careful about what you wish for. In the modern Corporate Welfare State, the rich are the greatest beneficiaries of Welfare. The Rich pay almost no tax, and the taxes that are paid by the Poor are used to create an apparatus that protects the Rich from the very people paying the taxes. Without that apparatus your 'private goods' remain so only until someone takes them by force, which of course is feudalism.

So the extreme of capitalism is feudalism, and if that is the system you want for our society, then you better prepare yourself for everything that entails; bloodshed, disappearance of the middle class, culture death and endless warfare. I thought we as a society were over that phase, but apparently not. Sigh.

Ian

See above.

Dan Denning
for The Daily Reckoning Australia

• Latest Energy Bull Market Won’t Be Confined to Crude Oil
• Stress Testing the Banks
• The Glass-Steagall Act Kept Banks in Order Until 1990
• Banks or BHP?
• Looking at WPL and Oil Side by Side

Ah yes, the future. What does it hold? Well, apparently more lay-offs and CEO pay rises. Judging by Sol Trujillo's $20 million goodbye handshake and the actions of the board at Pacific Brands (giving themselves raises while sacking workers) it looks like there are some people out there doing their level best to run the good name of their corporation into the grounds.

Don't they know that's bad for business?

Kevin Rudd is headed over to America next month to speak with Barrack Obama about climate change, the global financial system, and others ways to save the world and improve on human nature. Perhaps he might ask him if America's US$1.75 trillion annual deficit for next year should cause global investors to worry about America's credit quality.

Again from Eric, "The cost of buying a five-year credit default swap (CDS) to insure against the possible default of U.S. Treasury bonds reached 100 basis points for the first time yesterday. In English, the price of insuring $10,000,000 worth of Treasury bonds for five years now costs $100,000 - up from just $5,000 one year ago."

We've said before it's nearly impossible to default on your debt when you can print the money to pay it back. But what this normally does is send interest rates up on new short-term borrowing, of which there is a lot lately in America.

Keep in mind, the Obama budget includes about US$3.5 trillion in Federal spending, much of it to be financed with short-term borrowing. In fact, this week the U.S. Treasury is selling $94 billion in debt. The Treasury is even bringing an old-friend back from the dead. The seven-year Treasury note (which had been discontinued in 1993) will be reissued beginning with an auction of $22 billion worth today.

Can you see how government borrowing needs begin to crowd out lending to the private sector? Can you see also how we are speeding into an era where more of national cash flows are redirected to central governments for redistribution and/or the service of interest payments to foreign lenders? Can you see how directing national cash flow toward wealth re-distribution does not lead to more capital formation and wealth generation?

Ron Paul is still the only man in Washington who can see all this. He made a great point the other day that no one wanted to listen to. Credit is not capital, he told Ben Bernanke. You can't recapitalise the banking system by printing new money or extending credit.

Credit comes from available savings. That's why a high savings rate is essential the formation of future capital. We're not making it up. It's even the first sentence of the Treasury White Paper on the Capital Assistance Program.

"The financial system plays the critical role of channelling funds from savers in the economy to the investors with the ideas and ability to turn those funds into productive economic resources," the paper begins. This is exactly how recessions prepare the way for the future boom. As households reduce consumption they increase savings.

Banks can become solvent again by retaining earnings (cutting dividends like ANZ did earlier this week) and increasing their depository base (and, of course, writing down bad investments and making more prudent loans). Or, the bad banks go belly up and the good banks are able to come in and scoop up the remaining assets.

Losers fail. Winners win. Or, as Rothbard puts it, an increase in savings reflects an increased desire for cash from consumers. This is actually good for banks in the long run. But we won't run on and on about it below, although we've provided a fuller quotation for you below.

Incidentally, as we expected last week, the gold price (in U.S. and Aussie dollars) has given up some of its ground after streaking ahead. But we wouldn't be too worried.

One last quote for the day from Eric Fry on the matter, "The credit crisis does not study technical charts or read investor sentiment indicators. It does what it does. And what the credit crisis does best is destroy credit-based enterprises...and reward the buyers of non- credit-based assets like gold."

Huzzah.

Still with us? Good! How about a quick revisit of the "baseline" and "more adverse" assumptions that are embedded in the CAP plan (son of TARP) released yesterday by the U.S. Treasury. The table listing the assumptions is below. But let's give you the analysis first: crrraaaaaazzzzy!

After reading it, you'll be more convinced than ever that falling stock and house prices this year are going to be followed by a blizzard of paper money that will send inflation soaring.

Government Assumptions That Guarantee Inflationary Disaster Ahead

Source: http://www.fdic.gov/news/news/press/2009/pr09025a.pdf

How about some analysis? First, the GDP assumptions are for-at worst-a 3.3% contraction this year and a recovery in 2010. It's probably more realistic to expect a GDP contraction of between 5 and 10% this year (based on the cliff diving GDPs of Asia and Europe) and a smaller contraction of 2-5% in 2010. Although either could be much worse, as the fourth quarter GDP figure in the U.S. was already a little fishy to begin with.

Second, the unemployment projections appear to have been generated on Planet Fantastic, where the laws of gravity and reality do not apply. Has anyone generating these U.S. statistics taken a look at the economy lately?

Or are these statistics pure propaganda and fabrication, designed to obscure from ordinary Americans (and Westerners) everywhere that real wages have been fallen for thirty years and will continue to do so as global production shifts to low-wage labour markets?

"Hello? Is this the Department of Economic Doublespeak? Oh, I'm sorry, I didn't realise I'd dialled the Ministry of Untruth. Double plus un-good. Goodbye!"

Finally, how is it no one in the media picked up on the fact that the Treasury's "baseline" forecast is for an 18% decline in house prices over the next two years (under rosy assumptions about GDP growth and unemployment)? Or that the "more adverse" forecast has house prices falling 29% in the next twenty four months?

And here's a question...how could house prices fall and unemployment continue to rise without having a further massively negative effect on bank loan books?

If TARP and CAP are designed to shore up bank capital by taking some a snapshot of how banks will perform under certain scenarios, then the plans are almost certain to fail if those scenarios fail to account for increased default and foreclosure rates in residential and commercial real estate that would come in the next two years (not to mention poor performance in securitised credit cards, student loans, and auto loans...all of which would deteriorate as unemployment rises.)

And how is simply raising taxes and transferring money to the newly unemployed going to solve this again?

All we can think of now is a supernova. In the rush to repair the broken financial system (which was broken by the explosion in credit and the enormous misallocations and distortions it caused) liberals and conservatives and professional politicians of every stripe (without brains or spines) are launching every conceivable spending plan they can think of. Their goal is to tag the culpable private sector for all the blame, shift the burden for losses on to the public balance sheet and future generations, and replace the private sector with the government as the prime mover of economic life in the modern world.

Or have we missed something?

A supernova, of course, is the death of a star. It unleashes a giant amount of light, heat, energy, and radiation in one brilliantly beautiful moment of destruction. But let's not forget it's a moment of death, as pretty as it might be.

Perhaps that's where we're headed. Instead of seeing a recession as the method of re-establishing the efficient allocation of an economy's resources and capital, the banksters and pollies are going to give us an even bigger global system of paper, as Ron Paul suggests.

With the dollar-standard in tatters, the only place left to go in the artificial evolution of paper money is a global fiat standard on top of the dollar standard. We have no idea what it would look like. But you can bet there are some other folks who've been thinking long and hard about it and are more than willing to use the current crisis as an excuse to inflict it upon you.

On a lighter note, what if we are neither human, nor dancer, but singer? We ran across a story about a whistling orang-utan. You don't see that every day, do you?

It's possible that the first organised sounds by human beings were not words but songs. Or, that we sang before we spoke. In which case, today's Daily Reckoning could be reduced to the following: Aiyeeeeeeee!

Finally, the last (and longish) word from Rothbard on why booms require busts.

"The 'boom,' then, is actually a period of wasteful mal-investment. It is the time when errors are made, due to bank credit's tampering with the free market. The 'crisis' arrives then the consumers come to re-establish their desired proportions.

"The 'depression' [ed. note, Rothbard uses the word 'depression' in place of 'recession'] is actually the process by which the economy adjusts to the wastes and errors of the boom, and re-establishes the efficient service of consumer desires.

"The adjustment process consists in rapid liquidation of the wasteful investments. Some of this will be abandoned altogether (like the Western ghost towns constructed in the boom of 1816-1818 and deserted during the panic of 1819); others will be shifted to other uses. Always the principle will be not to mourn past errors, but to make the most efficient use of the existing stock of capital.

"In sum, the free market tends to satisfy voluntarily-expressed consumer desires with maximum efficiency, and this includes the public's relative desires for present and future consumption. The inflationary boom hobbles this efficiency, and distorts the structure of production, which no longer serves consumers properly.

"The crisis signals the end of this inflationary distortion, and the depression is the process by which the economy returns to the efficient service of consumers. In short, and this is a highly important point to grasp, the depression is the 'recovery' process, and the end of the depression heralds the return to normal and optimum efficiency.

"The depression, then, far from being an evil scourge, is the necessary and beneficial return of the economy to normal after the distortions imposed by the boom. The boom then requires a bust."

Some people don't want a return to normal. Bankers don't want it because it means a lot of them would be out of business for good. Investors in credit-backed bonds don't want it because it means taking losses. And politicians certainly don't want it because the sense of continual crisis is the perfect mechanism for the relentless expansion of government power in private life.

The only who want things to be normal are normal people. And they are stuck right now living on Planet Death Star; a spaceship captained and crewed by a bunch of morons who will be the financial death of us all. Or are we just whistling a bizarre Dixie?

Dan Denning
for The Daily Reckoning Australia

• Obama Considers New Job Tax Credit
• GSEs Fannie Mae & Freddie Mac on Death Watch
• Reader Mail: Oil, Energy, Growth, Future of the Planet and More
• No Evidence of Recovery as Unemployment Getting Worse
• Reports of Inflation’s Death Were Exaggerated

*** "Danny Ortega is not really the person making the decisions down here," explained a Nicaraguan friend. "It's his wife. And she's a witch."

We thought she was expressing an opinion. Instead, she was merely stating a fact.

"No, she's a real witch. She even organized an international witch convention here in Nicaragua. Witches from all over the world came to participate. You should see her. She wears rings on all her fingers. Each one is supposed to be a talisman of some sort. You have to watch out, or she'll put a curse on you.

"Naturally, the whole country is a mess. These people have no idea what they are doing. But they are convinced that capitalism is bad. So they try to stop it. What that means in practice is that they make it very hard to invest in Nicaragua. Just look around. Do you see any new factories? Any new roads? Any new developments of any sort?

"Well, maybe out here at the beach, where rich foreigners are building houses. But the rest of the country has come to a standstill. Of course it has, because who wants to invest in a country run by a witch?"

*** "It's the same down here as everywhere else," explained a developer in Nicaragua. "During the boom, people were creating new developments everywhere. Most of them got to the advanced design stage. Lots were laid out and sold. But the infrastructure was never completed. Now, a lot of those places are just closing down. It's not a good time for us.

"But I just think it is a lull. Over the long haul, Americans will still want a nice place to retire. And Danny Ortega should be gone - I hope - in a few years. There's no prettier or nicer place in the Northern Hemisphere. The coast is beautiful. The beaches are nearly perfect. And the prices are still very low compared to other beach areas. When the economy picks up, this place will come back to life and people will begin building again. It's not like Detroit. That city will probably never come back to life."

• The Ox-carts Could Be With Us For Years
• HOORAH FOR CAPITALISM!
• The New Capitalists Were Not Real Capitalists
• The War On Capitalism Continues
• Latin America Has Suddenly Become Very Interesting