Then on Tuesday the market snapped up $25 billion in ten-year notes and yields fell. Sovereign debt? Big whoop! Whether it's the end of the year and investors feel safer in Treasuries, or some other reason, Tuesday's auction showed no signs of an impending "bond fire of the vanities." The bond bubble keeps getting bigger.

Today, though, the market gagged. In an effort to lock-in low rates for longer terms, the Treasury served up $16 billion in 30-year bonds. The market turned sour. Reuter's reports that demand for the 30-year was the weakest since May and that yields moved up as the weak auction triggered selling.

And then everyone seemed to lose their nerve. Stocks fell across the board. Gold set a new high at $1,123.40 in New York trading, before retreating. The weak 30-year auction has people thinking...what happens when Treasury supply overwhelms demand?

What will happen to bond prices then? To inflation? What should I do?

The rest of today's Daily Reckoning will be devoted to some constructive apocalysm. We may have left the impression yesterday that there was nothing but pain and heartache ahead for investors. But that doesn't have to be the case. But you have to start with the big picture. And that begins with the end of the bull market in bonds.

Check out the chart below from Ron Greiss at the www.thechartstore.com. Ron's chart shows long-term U.S. bond yields since 1941. Mostly this reflects the yield on 30-year bonds, although there were periods where 30-year issuance was discontinued. Either way, it shows a great cycle...which appears to be bottoming out.

What story does this chart tell? We reckon it shows you why the U.S. government (and so many banks and borrowers) are eager to sell as much debt now as possible. Rates are near historic lows. If and when they go up, it's going to make borrowing and servicing new debt even more expensive. Bond prices will fall and yields will rise again.

Now you could say that, according to the chart, there is room for another decade of low yields. The Fed, for example, could move to set rates further out on the yield-curve. It only sets rates right now for short-term debt. But the quantitative easing program has moved the Fed out to ten-year yields. It's done this to try and keep mortgage rates low, as mortgage-rates are keyed to U.S. ten-year yields.

But we reckon not even the Fed can keep yields low forever by supporting prices. It will have to wind down its programs eventually. For example, the U.S. government ran its largest October deficit ever last month, at $176 billion. Between demographics and existing debt, the Fed may not have the resources to support bond prices too.

Besides, you'd think markets would begin to tire of U.S. debt, given the lousy fiscal position of the American government. At least that's what we'd think. And if we were trading it, we'd look for put options on ETFs that track bond prices, or call options on ETFs that track bond yields. That would be the cheap trade.

The investment decision is to find assets that out run inflation as bond yields move up. Granted, this assumes there is going to be inflation, which is a whole other argument. But if you'll grant us the assumption, we'll continue with the strategy...of finding assets that beat inflation.

You don't have to look far. Gold...oil...iron ore...tangible assets are what you're after. Does this conflict a bit with our analysis yesterday that China's resource demand is more fragile than reported? Yes, it does. But it still pays to focus on those resources that will be in demand no matter how bad the global economy gets again. What do nation states really want to own? What can they not do without?

You know they can't do without oil. And you know more and more of them prefer to own at least some gold rather than rapidly devaluing foreign currencies. That leaves us where we began, buying oil and gold and selling U.S. sovereign debt. Production of the first two is hard to increase. Supply of the last one is growing.

"There is a strong case to be made that we are already at 'peak gold'," Barrick's Aaron Regent told London's The Daily Telegraph today. Regent was speaking at RBC's annual gold conference in London. "Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore."

Gold exploration budgets are up. But with the exception of China, gold production from traditional stalwarts like South Africa and Australia has trended down. Alex Cowie at Diggers and Drillers recently wrote a report suggesting that the best Aussie gold stories are listed here in Australia but digging for gold in Africa, where they incur production costs in U.S. dollars and where there are more greenfield projects than recycled brownfield projects.

Frankly, we have no idea if gold production has peaked. Mine supply could grow this year for all we know. But finding and mining gold is not easy and it's not cheap. And even if the gold supply does grow, we'd take it to the bank that the global gold supply will not grow faster than global money supply.

And oil? Any scenario in which an economic collapse leads to falling GDP ought to mean lower demand for oil and lower oil prices. But the case for oil is not really about the demand side. You reckon that's bound to grow over time anyway, unless someone comes up with table top cold fusion. The real oil bull story is on the supply side.

Earlier this week the U.K.'s Guardian reported that, "The world is much closer to running out of oil than official estimates admit, according to a whistleblower at the International Energy Agency who claims it has been deliberately underplaying a looming shortage for fear of triggering panic buying."

" 'The IEA in 2005 was predicting oil supplies could rise as high as 120m barrels a day by 2030 although it was forced to reduce this gradually to 116m and then 105m last year,' said the IEA source, who was unwilling to be identified for fear of reprisals inside the industry. 'The 120m figure always was nonsense but even today's number is much higher than can be justified and the IEA knows this.'"

We remember writing about the IEA figure a few years ago. And we remember pointing out that producing 120 million barrels of oil per day would be a 44% increase on producing 83 million barrels per day. And you'd have to find that oil first. You'd have to explore, drill, and produce it. And you'd have to maintain existing production levels at the world's big elephant fields like Cantarell and Ghawar.

In point of fact, production at Cantarell has fallen by 25% since 2004. Energy expert Matthew Simmons says Mexico's days as an oil exporter will end in 18 to 36 months. This makes Mexico's government-which derives 40% of its revenues from oil sales-the most likely candidate for "next failed state."

By the way, if you think illegal immigration is problem in America now (and it is), imagine what would happen if the finances of the Mexican state imploded with a production catastrophe at Cantarell. The Obama administration would face another crisis, but this one right on its massive southern border.

Not everyone believes in Peak Oil. But it's not really a matter of faith. Either oil production is declining or it is not. It does not mean there isn't any oil left. In fact, technology has lengthened the life of productive fields. And technology has also made it possible to find and produce oil in increasingly hostile environments (deep water drilling, the Arctic, etc.)

Even rank and file petroleum geologists are mostly in agreement (and sometimes in disagreement with their corporate overlords) that Peak Oil is real and it's here now. But we make this point not to say that all is lost. It isn't. It's just the great changes in the world are afoot.

You have a secular bond bull that's long in the tooth. The post-war monetary system that supported the expansion of the fiscal welfare state through perpetual debt is failing. Energy, which has been getting cheaper and cheaper for years as we found more and more of it, may start becoming more expensive and harder to find.

That's going to make the world a slightly less friendly place. But for investors, there are heaps of opportunities. For example, right now Alex is looking at what the fallout from next month's Copenhagen summit is. It has opened the door to a great entry point for energy investments, but not necessarily oil. Fear not! Or fear a little. But prepare.

Dan Denning
for The Daily Reckoning Australia

• Attack of the Bond Yields
• Central Bankers Encourage Debt Booms That Become Debt Bombs
• U.S. Bond Prices Rose and Yields Fell
• Higher Oil Prices, the New Normal
• Choking on Debt in the Unfolding Anglo-Saxon Bond Crisis

But along came two very important bits of information.

First, we got word that the crisis was officially over. GDP grew last quarter. Thanks to all the Cash for Clunkers, Cash for Bankers, Cash for Houses, Cash for Trash, and cash for every other blessed thing under heaven, the number crunchers were able to report positive economic growth for the third quarter.

Let's not get too excited. Stocks bounce. Bonds bounce. An economy bounces. Even dead economists bounce. And if we're following the Japanese experience, with a long, slow on-again/off-again period of depression, we can expect some quarters of growth, followed by quarters of non-growth. It's going to be a painful adjustment to the 'new normal,' whatever that is.

The other important bit of news was that the Fed - faced with undeniable evidence of growth and prosperity - decided to err on the side of caution. It will keep monetary policy loose from here until kingdom come, if necessary, in order to avoid a Japan-style slump.

But so far, a Japan-style slump is just what we seem to have...and our public officials are fighting it, Japan-style.

Unemployment is headed up. The U6 figure - a more accurate picture of how many people are out of work - is up to 17%. There are 1.5 million homeless children in the US now, including 300,000 in the state of California alone. One out of 10 Americans will not bite the hand of government - for it is the hand that gives him his food stamps.

Foreign direct investment has dropped 30%. International trade is down 10%.

Do you call this a recovery? We don't.

As David Rosenberg puts it, the man on the street is perhaps "less enthused by the fact that a lower rate of inventory de-stocking is arithmetically underpinning GDP growth at this time."

In other words, it's 'growth' that only an economist could love...and then, only an economist who was an idiot. Rosenberg:

"Put simply, a Wall Street Journal/NBC News poll just found that 58% of the public believe the economic recession still has a ways to go - and that is up from 52% in September and means that the private investor, unlike the hedge fund manager, is not interested in adding risk to the portfolio even after a 60% surge in the equity market.

"Only 29% of those polled believe the economy has hit bottom - imagine having that psychology with nearly zero interest rates, a bloated Fed balance sheet and unprecedented fiscal deficits (poll was taken from October 23-25). Nearly two in three (64%) said the rally in the stock market (still a bear market rally - not the onset of a new bull market) has not swayed their view (or ours for that matter). There is going to be some very tough slogging ahead as far as the economy is concerned."

Growth is largely illusional. It is the result of delusional policy- making at the Fed.

So, we'll just keep our Crash Alert flag flying.

Bill Bonner
for The Daily Reckoning Australia

• Markets Rise While the Economy Sinks
• Take Away Stimulus Spending and You’ve Got an Economy Entering Depression
• Bear Market Bounce a Sure Thing
• AIG to Receive $85 Billion Loan from Fed
• Feds Have Used the Correction to Increase Their Power and Add to Their Wealth

- Edward Gibbon

Warren Buffett famously says that people do not make money by betting against the US economy. But two years ago we decided to take a chance.

"We are short the United States of America," we announced from the comfort and safety of our headquarters in London. "Sell its stocks. Sell its bonds. Sell its money. Sell its real estate. Sell the equity. Sell the debt. Sell everything."

What we saw was an over-stretched empire getting ready to snap. But we were also allowing ourselves to be lazy. Rather than deconstruct the capital structure of the world's largest economy, we decided to sell the whole damned thing.

All Hell broke loose in September 2008. Since then, US stocks have gone down about a third. Real estate too. Unemployment has doubled. Consumer prices are going down at the fastest rate since the '50s. And the economy is in the worse recession since WWII.

Meanwhile, Americans' per capita wealth has fallen from $172,000 in September from $212,000 two years earlier. And the UN reports that the quality of life in America has gone down too...from #5 on its list in 2000, it fell to #13 in 2007. No doubt it is below #20 now.

Buffett has lost billions betting on the US economy while our gold positions are handily up; gold was the most profitable major asset over the last ten years.

So you see, we were right; America was a sell two years ago.

And now it is the dollar that is falling. It's gone down 12% in the last six months - a huge move for a major currency.

"Asia tries to slow dollar fall," is the lead story in today's Financial Times.

Today, a buck and forty-seven cents will buy you only 1 euro. Ten years ago, you could have gotten a euro for less than a single dollar. A falling dollar makes imports more expensive, say analysts...raising the cost of living in the homeland. But you wouldn't know it from walking around on the streets of Miami or Las Vegas. You can get a house at 50% off its price three years ago. As for the breakfast special - for less than 3 euros you can get enough food to kill a Pakistani.

By European standards, America is cheap.

"Europeans again interested in Florida houses," says a headline in The New York Times.

House prices are down 30% to 50%. The dollar is down about a third too. That makes the United States a bargain.

But is the United States of America about to become even cheaper?

One thing we were wrong about when we issued our 'sell America' call two years ago was US debt. Treasury bonds have resisted the general downward trend of things with the stars and stripes on them. Bonds have not gone down; they've gone up.

Private households are buying them for their retirements. Banks are buying them for risk-free profits. Speculators are buying them in anticipation of deflation.

David Rosenberg:

"The big story yesterday was the further massive $12 billion decline in outstanding consumer debt in August - the consensus was looking for an $8 billion contraction. This was the seventh month of debt retrenchment in a row. In other words, the tidal wave of the credit collapse continues unabated, and this is the primary reason why bond yields are still in a fundamental downtrend.

"Over the past year, consumers have run down their debt by a record $113 billion (and this does not include mortgages). This is an absolutely epic shift in household attitudes towards credit and discretionary spending."

Americans are saving. And they're buying US Treasury bonds. (More below...) But how safe is their money? Is it a good idea to buy US debt now?

On Wednesday, Latvia tried to raise a trivial amount of money. It offered $17 million worth of 6-month bonds. How likely is it that Latvia will default before Easter? We don't know, but investors judged it not worth the risk. Not only did the bond auction failed, it failed with no bids.

That's what happens when lenders lose faith in a government. They refuse to lend it money - except at high rates of interest. But the high rates of interest work like a noose on the neck of a cattle rustler. They block the vital flow of oxygen - not to mention breaking his neck.

Note that the US federal government is still functioning like an empire at the peak of its power. The Pentagon is still rustling up trouble all over the world - at a cost of trillions. US government employees are growing more numerous and richer - with twice the annual incomes of the private sector. And the Obama Administration - apparently unaware that the total unfunded debts and obligations of the federal government have soared to nearly $120 trillion - is considering new ways to get rid of cash.

Remarkably, investors still lend the US government money - asking only 4% annual yield on a 30-year loan. As for 91-day money, they practically give that to the feds for free; it sports only a yield of 0.066%.

This will surely be a point of puzzlement for the financial historian of the next century. It is certainly a point of puzzlement for us.

Yesterday, gold hit a new record at $1057. Doesn't gold go up when inflation rates rise? And don't bonds go down when inflation goes up?

So why are people buying bonds with such puny yields?

There is a lot of whispering in this market. Gold is trying to tell us something. Bonds are trying to tell us something. The dollar seems to have something on its mind too. Stocks are just babbling.

If gold is trying to signal that inflation is coming, the bond market is not paying attention. Bonds seem to be saying that it is deflation we should be worried about; but the stock market doesn't seem to hear.

And there's the dollar. The greenback is in the same choir with stocks and gold, as near as we can tell. They all seem to be chanting about inflation coming back.

But what if they're all wrong?

Just look at what is going on in Washington, if you can bear it.

The feds have a budget that anticipates inflation and growth. Spending is supposed to remain flat until 2013. Tax receipts, which are no higher today than they were 10 years ago, are supposed to rise, gradually filling in the Grand Canyon of deficits. The number crunchers think we're headed back to the Reagan years - when the tough-love policies of the Volcker Fed squeezed out inflation and created a real boom. Then, tax revenues rose 9% per year between 1984 and 1989.

How likely is that today? Not very. Instead, what is likely to unfold is a deflation story. Instead of staying flat, federal expenses are likely to rise as one failed stimulus gives way to another failed stimulus. Then, instead of going up, tax revenues will go down...digging an even grander canyon between out-go and income.

Then, or long before, there will be a panic out of bonds, the dollar, stocks - practically everything. Everything goes down!

At this point, the US will be in about the same situation as the Roman Empire as it approached retirement. Expenses kept rising. Rome had to pay the Blackwater-type military contractors of the era...in addition to keeping Roman mobs supplied with food stamps and unemployment benefits...while its tax base fell. Gradually, the empire lost the ability to defend itself.

When Edward Gibbon began his history of Rome's decline and fall, Roman real estate had probably been in a bear market for at least 1300 years. Rome's population fell from over a million to under 20,000. Politically, Italy had broken apart more than 1,000 years before Gibbon was born, and it wouldn't be put back together again until nearly 100 years after he was dead.

It's far too early to write the story of America's decline and fall. That job will fall to some future historian, perhaps seated on the ruins of the Lincoln Memorial, wondering how people made such a mess of things.

Our guess is that he will come to the same conclusion we have: Stocks? Bonds? The dollar? Investors should have sold them all!

Bill Bonner
for The Daily Reckoning Australia

• America’s Decline as a Great Empire
• Warren Buffett Says American Economy is a Shambles
• Mistakes Made By America Are the Same Mistakes That Empires Make
• Deleveraging Will Give Us a Bout of ’30s-Style Deflation
• Biggest Problem With US Economy is Too Much Debt

But first, what the stock market and the economy are doing...

In the past two days, the price of gold has shot up more than $40. It's now near $1,000 an ounce.

Why? We don't know. Rumors, talk, noise...there's plenty of that. But as for why investors are suddenly putting so much money into gold, we'll have to wait to find out.

But should you buy gold now? The answer is simple: yes and no.

The Trade of the Decade is still buy gold/sell stocks. And the decade isn't over. If you have US stocks, this is a good time to sell. The Dow went up 63 points yesterday - a weak bounce after several days of losses.

This is no time to hold stocks - for the reasons we outlined yesterday.

But gold? Should you buy gold and hope to get rich when gold shoots up to $3,000 an ounce? A bad idea, in our opinion. You should buy gold to protect your assets. The risk is in the paper money...because they can create as much of it as they please. And they're under pressure now to create a lot. You buy gold as insurance against inflation, a dollar bust, a bear market in stocks and bonds, or a financial crisis. Gold is nature's money. It is better than manmade money. Because, with gold, what you have it what you've got. They can't artificially depreciate it or easily increase the quantity of it. That's why the feds don't like it. It won't support their cause du jour - whether it is a war, a bailout, stimulus, health care, or whatever. Gold doesn't cooperate with the financial engineers. That's why it's a good thing to hold when you think the financial engineers are making a mistake.

But our view at The Daily Reckoning headquarters is that while the engineers are making a mistake, they not very good at it even when they're making a mistake they're good at. Typically, they're pretty good at causing inflation. But now the credit bubble is deflating, not inflating. It will take them a few years before they become reckless enough to move prices up again. And then, they'll probably overshoot their objectives considerably.

In the meantime, there's no inflation to speak of...no dollar crisis...no bond bust. So we wouldn't expect the price of gold to soar...not just yet. That's the big surprise - that this period of deflation will last longer than expected. Then, when it begins to seem permanent, inflation will suddenly come roaring back.

By then, most investors will have given up on gold...especially those who were speculating on it going to $3,000. It will go to $3,000, but only after speculators have dropped their positions.

So far, everything is happening just as we expected. After more than half a century of boom, we are now in a bust. People need to downsize...cut back...and live a little less large than they had in the boom years. That means...well...just what you'd expect.

Wasn't it just yesterday that we reported that Florida was losing population? People just aren't retiring like used to. Here's comes the evidence:

From The New York Times comes this headline: "Older US Workers Put Retirement on Hold."

The Times tells us that older people are continuing to work because they don't have a choice. They can't afford to retire. So they hold onto jobs, which is another reason it's so hard for the unemployed to find a job. Those who have them aren't giving them up. A Bloomberg report today, for example, tells us that more people are applying for job benefits than expected. Another tells us that millions of people are running out of benefits before they find a job.

Just what you'd expect, in other words. Here are some of the other things we expected:

1. Unemployment is still rising.

"Investors discouraged by US jobs report," says a headline at the International Herald Tribune. To make a long story short, August was a disappointment. More jobs were lost than expected.

We don't know how many jobs we should expect to lose. But we're in the downhill part of the credit cycle; we're bound to lose a lot of them.

2. Sales are falling.

That's another thing we would expect. People have to cut back. So...they do cut back. Sales go down. That means fewer sales and fewer jobs. No point in making things, shipping them and retailing them if no one is buying them, right?

3. What else would you expect? Lower house prices? Check. Higher savings rates? Check. More bankruptcies? Check. Falling prices? Check.

Isn't it nice when things work out "as they should?' Check.

Bill Bonner
for The Daily Reckoning Australia

• Should You Buy Stocks Now to Take Advantage of Bull Market?
• Economy Has to Grow at 1% to Stay Even With Population Growth
• The Bailout is Approve So Now It’s Time to Buy Gold
• We Expect No Recovery from the Economy
• Last Decade: Buy Gold, This Decade: Buy Energy

"You can forget about getting anything done in the month of August," said colleague Simone Wapler. "The French are busy with serious things...real things...like painting shutters and picking green beans...fixing curtains and making strawberry jam. They don't want to hear about economics or markets..."

France begins its summer vacation today. We've come to join them...

But we will keep an eye on the money anyways...because it's just getting interesting...

Two interesting things are happening. First, the feds are facing a showdown with the vigilantes...you know, the people with money - $2 trillion worth of reserves, $1.5 trillion of it in U.S. Treasury paper. They've got to convince them that they'll protect their investment. If they fail, the vigilantes sell their bonds...cause the dollar to collapse...and force up U.S. interest rates - which will come down like Round-Up on those green shoots of recovery.

Meanwhile, stocks are not only anticipating a recovery, they're counting on it. And for that, they depend on stimulus from the feds. But what Bernanke gives in stimulus, the vigilantes are likely to take away...

More on that in a minute...

The other big thing that is going on is the rally in the worlds' stock markets. On Wall Street, for example, the Dow rose 96 points yesterday. How far will this rally go? Should you try to take advantage of it?

As a rough rule of thumb, a bounce can be expected to recover half of the losses from the crash. The Dow went down 7600 points below its pre- crash high. So, we can expect a rebound of about 3800 points - which would put the index back around 10,300. By that measure, this rally could still have a lot of life in it - enough to convince practically everyone that the depression will soon be over. Don't believe it. This depression is going to last at least a few years...and the bear market isn't over. The Dow will eventually close below 5,000. At least...that's our story and we're sticking with it.

But let's go back to poor Ben Bernanke. And poor Tim Geithner. The poor fellows don't seem to know what they are doing. But why should they? Ben Bernanke spent his career as a professor of economics. Modern economics is fundamentally an intelligence-destroying trade. The longer you spend in economics, the less you know about how the economic world functions. Many years ago, the profession got the wrong idea of what it was up to. Ever since, it's been barking up the wrong tree. (More below...)

As for Geithner, he is a smart young man...destined for hackdom almost from the day he was born. Ivy league university...consulting firms...government - a protégée of Robert "Nobody Saw the Crisis Coming" Rubin - you can't blame Geithner either; he hasn't had time to think about how an economy really works.

But at least their mission is clear: to convince the world of two things at the same time...both impossible and mutually exclusive! The Chinese vigilantes must believe that the feds won't undermine the dollar...and the rest of the world must believe that they will! Inflation is necessary for recovery and growth in the United States...or so everyone believes.

It was French economist Jacques Rueff who revealed the scam more than half a century ago. The whole idea of Keynesian stimulus, he explained, was to cause inflation...which would reduce the real price of labor. In a modern democracy, politics prevents wages from falling. But in a correction, if wages don't fall people don't get jobs. Keynes' didn't mention it, but the only reason his stimulus works is because it pulls the wool over the eyes of the working classes - reducing their wages by inflation so employers can afford to hire them again. Ergo, no inflation...no recovery in the job market. No recovery in the job market...no recovery in the economy.

But inflation will cost the Chinese plenty. And they've let it be known they won't sit still for it. Keep reading...

"China seeks assurances that US will cut its deficit," says a New York Times report:

"China sought and received assurances from the Obama administration that the United States would reduce its budget deficit once an economic recovery was under way, a senior Chinese official said Tuesday at the end of two days of high-level talks between the countries.

"Attention should be given to the fiscal deficit," said Xie Xuren, the Chinese finance minister. He said Treasury Secretary Timothy F. Geithner had assured the Chinese that once the economy rebounded, the deficit would gradually come down from its current record levels.

"Mr. Geithner confirmed that, saying, 'As we put in place conditions for a durable recovery led by private demand, we will bring our fiscal position down to a more sustainable level over time.'"

Did you notice, dear reader? Geithner promised a "durable recovery led by private demand." In other words, it won't be government spending that pulls the United States out of its slump, he told the Chinese.

He must have had his fingers crossed behind his back. At this stage, what other kind of demand is there? Are factories being built? Are they hiring? Are consumers borrowing and spending more? As we pointed out yesterday, private demand has collapsed ...and it's likely to collapse even more.

But let's stick with our vigilantes for a while. Inflation would cause them to lose money. More importantly, it would cause them to lose face. American officials have told them not to worry; the Chinese seem satisfied. But woe to the debtor who lies to his creditor; he gets cut off.

Meanwhile, a report from the IMF names Britain and the United States as the world's two biggest spendthrifts...and sees no end coming soon.

A global recovery is "not yet under way" and likely to occur at different times around the world, so pulling back public spending and investment may be "premature," the IMF staff said.

Additional discretionary spending may be needed in 2010, the report said.

The staff report also said inflation expectations are picking up, posing a risk to a rebound in economic growth.

"Preserving investor confidence in government solvency is key to avoiding an increase in interest rates, thereby not only preventing snowballing debt dynamics, but also ensuring that the fiscal stimulus is effective," the report said.

The IMF noticed the fix U.S. officials are in.

"On the one hand, a too hasty withdrawal of fiscal stimulus would risk nipping a recovery in the bud," the report said. "On the other hand, with a delayed withdrawal investor concerns about sustainability may increase, leading to higher interest rates on government paper, undermining the recovery and increasing risks of a snowballing of debt."

The IMF staff urged countries to develop medium-term strategies to rein in rising debt levels. Some countries already have begun to do so, the report said.

The economists at the IMF see this as a problem of "balancing risks." Here at The Daily Reckoning, we see it differently. To us, it is lies colliding with each other. Stimulus will not produce genuine prosperity. You can't cure a credit-caused crisis by offering more credit; it just won't work. But rather than let the system correct itself, the feds are determined to 'do something!' What can they do? They can only destroy the dollar - or try to - thereby destroying the value of China's $1.5 trillion treasure.

Now, more on why private demand is going to weaken, not increase.

As the boom of the post-war period continued, consumer spending played a larger and larger role in the economy. It averaged 64% of the GDP during most of the period, but increased to 70% in 2007. Likewise, debt service as a percentage of disposable personal income rose too - from less than 5% in the '50s and '60s to over 14% now.

If, as we suspect, the trend towards more and more consumer debt has finally peaked out; consumption should have peaked out too. We should now see the percentage of the economy devoted to consumption go down...year after year...until it reaches the 'normal' level. Private debt too should go down, until it is at a more 'normal' level.

We calculated that during the last 7 years of the Bubble Epoque consumers added $1.4 trillion in debt per year. That was the spending that made the old mare go. But now what? They are now adding no debt - zero. In fact, they are paying off debt. This alone removed $1.4 trillion in private demand from the economy.

The savings rate is up dramatically too - from zero to 7%. This is another way of measuring the same phenomenon: the decline in consumer spending.

The only thing that would cause consumer spending to go would be a substantial increase in real wages. This would allow Americans to buy more - while simultaneously paying down debt. But with 16% unemployment (Rosenberg's estimate) it will be a long time before real wages increase at all...let alone substantially.

Regards,

Bill Bonner
for The Daily Reckoning Australia

• Investors Are Betting On Recovery
• Roubini Says United States Will Climb Out of Recession Towards End of Year
• Why Weren’t Economists On Top of This Thing?
• Geithner’s Trip to China Was, At Best, a Draw
• The More Money in a Financial System the Less Each Unit is Worth

It is my contention that we will get neither hyperinflation nor deflation.

What is more likely is that over the coming months, we will get another deflationary scare. Any sell-off in the markets later this year will be met by an even larger stimulus from the policymakers and this will ultimately result in high inflation.

So, I maintain my view that due to the unprecedented policy responses around the globe, the world's economy will face high inflation over the medium to long-term. And the general price level will double over the
coming decade.

In the near-term however, we will probably get another period when the market will (once again) become concerned about the prospects of a lengthy economic contraction. It is conceivable that the 'green shoots' hype currently doing the rounds will soon be replaced by more economic worries as a second wave of foreclosures hits America later this year. So, it is possible that before year-end, we will witness large corrections in stocks and commodities. Conversely, we are likely to see big rallies in U.S.
government bonds, U.S. Dollar and Japanese Yen.

This near-term vulnerability in the markets is the reason why I have recently liquidated my 'long' positions in resources and emerging markets and gained a heavy exposure to long dated U.S. Treasuries. In my view, a
defensive investment stance is prudent at this juncture, as it will protect our capital and allow profit from the expected contraction. Once the pullback in the markets is complete, I will liquidate my positions in U.S. Treasuries and re-invest our capital in our preferred holdings in energy, materials, mining
and emerging Asia.

Look. In the business of investing, the tape never lies and it is worth remembering that Wall Street is littered with the graves of those who got married to one particular outcome and then held on to their ill-conceived
notions. At this point, when private-sector debt contraction in America is locking horns with central bank inflation, I prefer to have an open mind. Therefore, I am maintaining a defensive near-term investment position. If the market corrects over the following weeks, I will be in a position to profit from such a decline. On the other hand, if the major indices simply consolidate here and break above the recovery highs recorded last month, then I will have no hesitation in changing my defensive investment position. Put simply, I am currently watching and waiting patiently for the market to reveal its hand.

Coming back to the subject of this essay, the reason that I don't foresee immediate hyperinflation is because the velocity of money is currently weak. In other words, at least for the moment, the private sector in America isn't participating in Mr. Bernanke's inflation agenda. Despite the fact that Mr. Bernanke has injected a massive amount of reserves in the banking sector, this money is currently sitting as excess reserves within the American banking system. The fact that this money isn't being lent out rules out immediate hyperinflation. However, once the American economy stabilizes and the velocity of money picks up, these excess reserves will trigger a massive inflationary wave.

As far as deflation is concerned, I am of the view that the policy responses and our fiat-money system will ensure that the purchasing power of cash will continue to diminish over the medium to long-term. In fact, I am willing to bet that cash will probably be the worst performing 'asset' over the coming decade. Remember, in today's monetary system, central banks and governments the world over are free to create money out of thin air and this will prevent outright deflation in the global economy.

It is worth noting that in the past six months alone, China's commercial bank credit has expanded by a whopping US$1 trillion! Figure 1 highlights the surge in Chinese bank lending. Furthermore, credit is also expanding frantically in other Asian nations. So, contrary to the West, monetary policy is still alive and well in the developing nations and this factor also rules out outright deflation in the global economy.

In my opinion, rather than hyperinflation or outright deflation, we will witness elevated inflation after the American economy has stabilized. In the interim however, investors should be prepared for another deflationary scare and the associated market panic.

Regards,

Puru Saxena

for The Daily Reckoning Australia

• Inflation or Deflation?
• Hyperinflation and the Dollar’s Monetary Destiny
• Why Inflation Or Hyperinflation Lies in Wait for the U.S.
• Inflation is Our Future
• Hyper-Deflation on the Streets of Paris

Today we're going to have more to say about common stocks. Some are up. Some are down. Commentators are talking about new highs on the major indexes. And over in America, the S&P 500 made a seven-month high and closed at its highest level since November 5th of last year.

Nice work S&P. Take a bow.

The catalyst for yesterday's rally may have been that $11 billion 30-year Treasury bond auction the market has been dreading all week. It went better than expected, apparently, meaning the auction didn't fail. That said, the 4.72% yield at the auction was the highest at a 30-year auction in two years.

Investors are demanding higher yields to loan for ten and thirty and years to debtor governments. But we think the bond vigilantes must be going soft. Someone hand them a crow bar. According to data from Merrill Lynch, 30-year U.S. bonds are down 28% this year. Ten-year notes are down 11%. And even the two-year notes-widely thought of as a near-cash bastion of government-guaranteed safety-are down 0.4%.

Losing your capital and getting killed by inflation isn't really that "safe" is it?

Speaking of losing capital, what is Federal Treasurer Ken Henry getting on about? Has he formed a raiding party destined for your super annuation assets? Today's Australian reports that Henry, "has established a departmental review to examine ways in which the superannuation savings pool can be directed to seed new markets and target specific areas, such as corporate debt and infrastructure."

What does this have to do with losing capital? The government is always after your money. Everyone knows that. But if the Aussie government manages to persuade/sucker/coerce the superfund industry to invest in the government's priorities, it will be an evolution in the kind of government-managed capital market we seem to be heading towards anyway. We'd suggest it is not a good sign for the safety of your retirement assets.

Super funds represent a pool of capital the government doesn't have to borrow on the international bond market. Of course, technically the super money is your money. But if Henry is up to what we think he's up to, your money could soon be financing government-backed infrastructure projects or participating in corporate bond auctions.

You can imagine the super industry would do these things anyway, if they seemed like good investments. But this latest development highlights a problem for both the industry AND the government. It's also a problem for Australian investors if money expected for retirement is invested in boondoggles or bad corporate bonds.

For the superannuation industry, the bigger problem is that the generational bull market in stocks is over. There are still sectors and industries that will do quite well and that fund managers can profit from. But finding them and managing to get capital into them at attractive prices is going to be a lot harder. People might actually have to work for a living and even think, rather than just clipping tickets and surfing a bull market higher.

For the government, the money in superannuation funds must be irresistible. There's just so much of it. And gee, it's not really doing anything productive is it? If there were only a way to commandeer it legally that didn't look like, you know, theft. Stay tuned. We've asked resident super analyst and over-all guru Kris Sayce to comment. More from him Monday.

This brings us to another of those long-term trends that you are probably already aware of, but which we'll point it out anyway. People in the Western world are getting poorer. It might not look like that, with high standards of living and per capita incomes (which are not, by the way, the same as a high quality of life). But there's no doubt that globalisation has led to wage deflation for most Western workers, especially in manufacturing but increasingly, also in services and white collar jobs.

Yep. It's just a much more competitive world out there. And during the credit-backed boom years (really beginning in the post-World War Two years), it meant consumers were spoiled for choice with products imported from around the globe and available at relatively cheap prices.

But remember, the one factor that's left out of all economic calculations is what's unseen. Lower prices for consumer and manufactured goods was a tangible benefit everyone could enjoy. What was unseen was the ultimate cost of shifting production off-shore and reorienting the economy to the financial industry and residential housing. It is now being "seen" in the way a fist to the face is seen...and felt.

The ultimate cost is that most people in Western industrialised economies are getting poorer. The deindustrialisation and off-shoring orgy of the last twenty years shifted productive real assets to the developing world. It lowered real wages (adjusted for inflation) as the structure of the job market shifted towards retail, housing, and consumption and away from manufacturing and production. It also lowered savings rates as people mistook easy credit and asset price appreciation for permanent prosperity.

This cost was not apparent in the last ten years of the boom when asset prices went to the stratosphere. People appeared to be getting richer with rising home values and stock portfolios. They may have been income poor, but they were asset rich.

On the downside of the credit cycle, people are now finding out how phony the boom was. Most of the gain in U.S. home prices over the last ten years was simply inflation-funny money financing a mortgage boom that led to a price bubble. Now, asset values are falling. Net worth is falling too.

According to data published yesterday by the U.S. Federal Reserve, total household net worth fell by $1.3 trillion in the first quarter of this year, from $51.7 trillion to $50.4 trillion. The scary thing is that the first quarter drop was actually an improvement on the fourth quarter number, in which net worth fell by $4.9 trillion as the stock market crashed.

For the record, we have no idea how the Fed manages to conjure these numbers, or whether they are anything close to realistic. But let's pretend for a moment they are legitimate and examine them in just a bit greater detail. Even though these are American numbers, we think they illustrate the same basic point for most Western countries: the credit cycle has left us asset poor and debt rich.

Let's take 2002 as a starting point. It's a bit arbitrary. But it was just after the long-term peak in stock markets and just the beginning of the commodity bull market.

Interest rates had been lowered globally in response to 9/11. And the debt boom that led to, among other things, the American mortgage boom, was on. The U.S. mortgage boom was, of course, the origin of all the securitised and collateralised assets that have brought the global financial system to its knees.

In 2002, total U.S. household debt was "just" $8.5 trillion. Six trillion of that was mortgage debt and $2 trillion of it was credit card debt. Over each of the next four years, U.S. households grew their debt at double-digit rates. By 2007, total household debt had grown to $12.9 trillion , $10.5 trillion of which was mortgage debt and $2.4 trillion in credit card debt.

So if you're scoring at home, mortgage debt grew by 75% in that five-year period and credit card debt grew by 20%. Overall, household debt grew by 51% in five years, from $8.5 trillion to $12.9 trillion. And what did the economy have to show for all that debt?

Well, probably not as much as people expected. But in 2007, it looked like a good deal. The 51% increase in debt was exceeded by a 54% increase in household net worth (from $40.4 trillion in 2002 to $62.5 trillion in 2007). That doesn't seem a lot of bang for your borrowed buck. But can you really put a price on confidence and the feeling of being better off?

Since the peak in 2007, and since the onset of the Credit Depression, household net worth has fallen by $12.2 trillion, or 20%. Over half that fall has come from falling equity prices, where household equity holdings fell from a peak value of $16.7 trillion to their current value of $9.3 trillion. The bad news is that a second wave of foreclosures on alt-A and Option ARM mortgages probably means even lower U.S. house prices and a bigger fall in net worth.

We're not reciting this litany of depressing news to be depressing. But it's simply not a point made often enough in the financial media or by professional politicians: this economic model of stacking on the debt to buy assets doesn't make people richer. The assets inevitably fall in value when the credit stops flowing, while the debt remains.

That's where we are today. And that's why we think the case is getting stronger that inflation is on the horizon. It's the most likely way out of the debt, aside from actually paying it off and increasing savings. Economist Arthur Laffer agrees.

Laffer warned that the huge growth in the U.S. adjusted monetary base is bad news for investors everywhere. It is an American policy with global repercussions. Writing in the Wall Street Journal, Laffer says that, "The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10. It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless...

He says that, "It's difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed's actions because, frankly, we haven't ever seen anything like this in the U.S. To date what's happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5%."

Naturally, this is horrible news. But what should investors do? Avoid bonds. Fixed-income investments get hammered with inflation. Take a look at investments that rise with inflation, like oil for example. Crude futures went over $73 in NYMEX trading on Thursday. And did you see what British Petroleum reported in its 2009 Statistical Review of World Energy?

BP reported that for the first time in ten years, global proven oil reserves have fallen. Naturally, you don't find what you're not looking for. But this little number confirms the idea we presented in our "Long Aftershock" report. Namely, the capital spending collapse in the oil industry in 2008 is going to lead to a supply shortage in the coming years. When this fact collides with recovery in demand growth, you will see much higher oil prices.

Alexei Miller, chairman of the Russian's energy behemoth Gazprom, said he's standing by his company's estimate that oil will soon reach $250 a barrel. "This forecast has not become reality yet," Miller told the Guardian, "given that the [credit] crisis gained momentum and exerted a powerful impact on the global energy market. But does this mean that our forecast was unrealistic? Not at all."

The decline in proven reserves doesn't mean the world is going to run out of oil next year. But investors would want to factor it in to their stock selection in the energy sector. Companies that haven't slashed exploration budgets are more likely to find oil because...well...because they are still looking for it and growing their reserves. Companies not adding to reserves are going to sell current production at today's prices and forego higher prices from future projects.

There are other variables, of course. You have to control costs. There's political risk, too. There's probably plenty of oil to be found in Africa. But doing business there will be another matter. And of course, what about demand? Can you really have another wave of global asset deflation without an impact on global trade and economic growth? Won't oil demand stagnate if the world is swept into more deflation?

No one knows. That's the unsatisfying truth. We did read yesterday that Chinese fixed asset investment was up nearly 33% in the first five months of the year compared to last year. The data from China's National Bureau of Statistics gives analysts hope that China's resource-driven investment agenda is enough to pull the globe out of its doldrums, or at least keep Australia out of recession.

It's impossible that China alone could save the world. But then, that's the reality no one wants to discuss, isn't it? What if there is no saving a generation's worth of bad investment in residential and commercial property? What if households, banks, and institutions that own trillions worth of debt-backed securities simply have to take losses? What happens then? What should investors do?

For stocks, the next ten years are hazy. The world's balance of economic power is shifting. We already know who the big losers are. Ahem. And the winners? More on them-or more specifically, how to be one of them-next week. Until then...

Dan Denning
for The Daily Reckoning Australia

• Superannuation Raiding Party Being Formed II
• Reserve Bank’s Financial Stability Review Shows Bear Market in Credit
• What is the Oil Price Telling Us?
• Hoarders and Destroyers
• Australian Banks Must Increase Fees or Expand Loans to Remain Profitable

Someone seems to think there is a whiff of inflation in the air.

Sniff...sniff....

We're not so sure. It seems too early to us.

But we're not even going to think about it. Today, we've got to make tracks. We're traveling.

In light of our voyage we're turning today's essay over to guest host Ian Mathias, of Agora Financial's 5 Min. Forecast. He'll take over from here...

Your family's share of the government debt is now over half a million dollars. A record $546,668, to be exact.

That cheery Monday stat comes courtesy of a USA Today study, which claims that each American family's share rose 12% in 2008. That's $55,000 in new government debt last year for every US household - thousands more than the median household annual income. Here's how it breaks down:

Last year's spike is the biggest since the Medicare prescription drug benefit was added in 2003. According to the rag, the government garnered $6.8 trillion in "new obligations" in 2008, bringing the total US tab to $63.8 trillion. Given our spending record so far in 2009, it's safe to say your family's burden is already much, much larger.

And you ain't seen nothin' yet... the Social Security program will grow by 1-2 million beneficiaries every year until 2032 as baby boomers retire. Medicare will add just as many each year starting in 2011, when that same demographic starts turning 65.

Unless the US becomes a net saver, "another global financial crisis triggered by a dollar crisis could be inevitable," forecast former Chinese central banker Yu Yongding over the weekend. (Oy... Beijing is 7,000 miles from Washington, and even they can see this coming.)

Yu's comments were purposefully timed - US Treasury Secretary Geithner embarked on a sudden PR tour of China this weekend. His mission? Keep the cash flowing from America's No. 1 creditor.

"No one is going to be more concerned about future deficits than we are," said Geithner, whose government's budget deficit will exceed $1.75 trillion this year. "As we recover from this unprecedented crisis, we will cut our fiscal deficit [and] we will eliminate the extraordinary government support that we have put in place to overcome the crisis."

In the meantime, Geithner assured students at Peking University that China's investments in US paper are "very safe."

"I doubt the Chinese believed him," says friend and currency expert Chuck Butler. "Of course, I'm not a Chinese official, so I don't really know what they are thinking. But I've watched them smile and tell former US Treasury Secretary Paulson that they were going to allow greater currency flexibility, and after he would board his plane, it would be business as usual... Same thing for Graham and Schumer, who thought their prestigious status as lawmakers would get them someplace with the Chinese.

"It all comes down to the fact that the US needs China more than the other way around."

Bill Bonner and Ian Mathias
for The Daily Reckoning Australia

• Eurozone Drops GDP Bombs
• Chinese Laughter the Sound of US Stupidity
• What Happens to Gold When High Inflation, Excess Cash, and Falling Dollar Jolts Economy?
• The Chinese and the Fed Both Buying U.S. Treasury Bonds
• Apparently More Debt is Now Acceptable in Australia

The FT says China is buying more U.S. bonds than ever. It must...according to the news report...because it has too many. Unless it supports the dollar, it risks a big collapse in the value of its foreign exchange holdings (mostly in dollars).

China has its finger in the dike. But it may need a bigger finger. This morning it is trading at $1.40 per euro - a new low for the year. Measured against gold, it now takes 958 dollars to buy a single ounce of gold.

"We have a huge amount of money in the United States," said Wen Jiabao, premier of the People's Republic of China, back in March. "I request the U.S. to maintain its good credit, to honor its promise and to guarantee the safety of China's assets."

In response to this request, U.S. Secretary of the Treasury, Timothy Geithner, answered in the positive. Whether he had his fingers crossed behind his back, or not, we do not know. But for the moment, the United States is honoring its promises in the short run...but doing so in such a way that dooms the Chinese in the long run.

Now, the Fed is buying U.S. Treasury bonds. So are the Chinese. Supporting each other, they are also supporting prices of bonds - which happen to be the largest single source of financing for the U.S. government and the largest single liquid asset of the Chinese government. Despite the support of the biggest investors in the world, the price of bonds and the price of the dollar both sank last week. Which makes us wonder: what happens when both the United States and China turn into sellers?

That may not happen soon. But it will happen.

For now, the United States has to sell trillions more in bonds to finance its imperial ambitions, bailouts and boondoggles. The Fed will have to buy them...along with the Chinese. If stocks fall - as we expect - they are likely to be joined by many other buyers too - all seeking safe haven in the world's leading credit.

But at some point, as always, what must happen will happen. Not forever can the United States spend $2 for every dollar it receives in tax revenues. Not forever can the Chinese support the value of a bad investment, in which they are already too heavily invested, by buying more of it. Not forever can the dollar hold its value when the Fed is busy creating hundreds of billions more of them. And not forever can the Fed continue to inflate the currency when the dollar is falling.

Since the Fed inflates by buying bonds, when consumer price inflation begins to menace the bond market, it must deflate by selling them. When that moment approaches, even if it is months or years ahead, Daily Reckoning readers are warned: that will be a bad time to be visiting China...and a bad time to be holding U.S. Treasury bonds...and a bad time to be standing behind the dike.

Meanwhile, the International Herald Tribune says that Latvia is being crushed under a huge government deficit. Formerly middle-class citizens are out of food, says the paper. Further down on the socio-economic ladder are scenes of "Dickensian misery."

What provoked this horror, according the IHT, is a current budget deficit equal to 12% of GDP.

Wait! The US budget deficit is 13% of GDP. Sooner or later, that deficit will crush Americans too...

Bill Bonner
for The Daily Reckoning Australia

• China Stepping Up Purchases of U.S. Treasury Debt
• Federal Reserve to Buy $300 Billion In U.S. Treasury Bonds
• U.S. Treasury bonds Still Rising
• Every Member of Congress Gets a Copy of I.O.U.S.A.
• Fed Willing to Print Money to Buy More Bonds to Keep U.S. Interest Low

Like snow at high altitudes, the central banks' new money is piling up. As reported last week, all the world's major central banks have turned on their snow machines. The US Federal Reserve has been authorized to "print" $1.75 trillion worth of new money in order to buy Treasury bonds. The Bank of England has its own program - worth 75 billion pounds, so far. Even Switzerland has been printing money - so much that its money supply, as measured by M2, is growing at 30% per year. And two weeks ago, the European Central Bank announced that it too would begin creating money in order to buy corporate bonds.

"Quantitative Easing" it is called. As a refresher for readers with real lives and better things to do, QE is how central banks describe what is essentially an act of counterfeiting. They buy bonds with money created - electronically - specifically for that purpose. Abracadabra - "money" comes into being.

The feds aim to provide liquidity for the cities and farms. But so far, only a trickle is coming down. Instead, chilly weather in the upper reaches of the financial sector holds it frozen in place. Hundreds of billions comes down from central banks, but there it stays...waiting for spring.

Today, here on the back page, we ask ourselves a simple question: what will happen to it?

The feds' counterfeit money does such a good imitation of the real thing, you can't tell them apart. But the problem with all money is that it is as fickle and unreliable as a bad girlfriend. One minute she goes along with the flow. The next minute she turns silly and bubbly. And then, she gives you the cold shoulder.

According to theory, an increase in the supply of something leads directly to a decrease in the price of it... That is, if other things remain constant. Despite the credit crunch, the banking freeze-up, and the economic recession, the money supply in the US as measured by M1 is actually rising at 14% per year. Yet consumer prices are not keeping pace. The latest report shows them actually going down slightly over the last 60 days.

Turns out, causing inflation is not as easy as it looked; controlling it probably will be even harder. It's not enough to manage the quantity of money; you also need to be able to control its behavior. Money can be a solid, a liquid, or a gas depending upon the temperature of the economy. At normal temperatures, money runs freely, watering the economy. And when things really get hot, it vaporizes, creating gaseous bubbles such as those of the late Bubble Period. But when the temperature falls, money shivers in wallets and bank accounts - reluctant to go out into the cold. Economists refer to the 'velocity of money" to describe the magnifying effects of motion. When the same dollar bill appears in three different places in the same day, it is as if the money supply had been multiplied three-fold. In a freeze, on the other hand, it comes to a dead stop.

When the thaw will come, we don't know. But the authorities are ready for it. When consumer prices begin to rise, they'll stop adding to the money supply. Then, they'll withdraw liquidity, as need be, to keep it under control.

They know that runaway inflation would cause problems - the collapse of the dollar...and the US Treasury bond market, for example. So, at the first signs of inflation, they will move quickly to remove excess liquidity from the system. How? Their emergency plan is simple enough. Now, they are buying bonds. When their inflation targets are met, they will begin selling them.

We thought the Bubble Epoch was the peak in claptrap and illusions. But we were only in the foothills. The feds now pretend to bail out the economy by giving money to companies that pretend to be concerned, run by people who pretend to know what they are doing. And when they run short of money, they create more of it, pretend it is real...and pretend they can tell it what to do.

What is likely is that money will have a mind of its own. First, the markets will react...and the authorities will not. They will remember their own critiques of Japanese and Roosevelt-era monetary policy. In both cases, they believe central banks removed the punch bowl too early - before the party really got rolling. In both cases, the recovery was cut off.

Then, while they are hesitating, money will turn on them. Inflation rates will rise further. The velocity of money will pick up. And investors - including foreign governments - will become eager sellers of government debt. Suddenly, it will be too late. In order to remove the monetary inflation they previously added, central banks will have to sell bonds instead of buying them, trying to re-absorb money from the economy. The extra cash would then disappear back into the central banks. But in order to bring inflation under control, the biggest bond buyers in the world must turn into the world's biggest sellers. Bond prices, already falling as investors feared the worst, will collapse immediately. An avalanche of dollars will fall upon the world markets - as dollar holders all over the world become desperate to get rid of them.

We don't know what day it will happen. But we have a good idea as to what time of day central bankers will realize that they are doomed. About 4 AM is our guess. That is the moment when Ben Bernanke and other central bankers begin to feel like members of the Donner Party. That is, like imbeciles.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

• What Inflation Means to Central Bankers, Investors and the Consumer
• Obama’s New Stimulus Program
• The French are Feeling Pretty Smug
• Inflation is Evident If You Just Follow the Money
• The More Money in a Financial System the Less Each Unit is Worth