There's so much bad news about in the land that stocks moving up in such a climate is noteworthy. It means everyone's talking about how bad things are, but there aren't any sellers left. So are there any sellers left?

Well, over in New York there are. The Dow Jones made a new bear-market low at 7,465. It's a six-year low for the index, in fact.

Here in Australia things are more range bound. Kris Sayce produced the following chart in his weekly e-mail update to subscribers of the Australian Small Cap Investigator. The market is clearly trading in a range. You might even call it a range within a range.

As Swarm Trader Gabriel Andre says, these sorts of patterns don't last forever. Range-bound indices break out. But in which direction? If it's up, this is good news for the small-caps Kris tracks. Many of them have been absolutely battered in the last year. But if it's down...it means lower highs and lower lows. It is possible.

Take this for the complete psychological speculation that it is, but this "feels" a little like the moment last year when the oil price peaked. On June 27th of last year, when oil traded at $139.69, we wrote: "Our intuition is that you could see oil put a top in sometime in the next week, if it hasn't already happened."

That call was a few weeks early. But the idea at the time is one you should consider today. "Not that you want to step in front of a moving truck," we wrote." Markets can remain irrational longer that you can remain solvent, the old saying goes. We're not suggesting you bet against oil. But we are suggesting you take note of the sentiment. The bears have almost totally capitulated. The bulls are being whipped into froth. When any little thing drives the price higher, you have a very dangerous market."

Feelings are not very scientific. But maybe a sense of crisis-fatigue has set in and sellers are exhausted. That might make room for some profit-taking in gold and rebound/relief rally. Might. We'll see. But if we had to compare the market's selling exhaustion to a YouTube video, it would be this one.

If you wander over to YouTube, you might want to check out this video from CSPAN over in America. On the video , U.S. Congressman Paul Kanjorski explains what Ben Bernanke and Henry Paulson told Congress behind closed doors on September 15th, 2008, the day Lehman Brothers died.

Pay special attention to what he says between 2:14 and 3:44 of the clip. For those of you who can't watch it, Kanjorski says that the by 11 am that day, over US$500 billion had been liquidated from money market accounts. He describes it as, "an electronic run on the banks." He says the Fed told Congress that if action wasn't taken immediately, over $5 trillion would disappear from the markets by 2pm.

That's pretty precise forecasting isn't it? Whether the Fed was exaggerating, guessing, or in total panic mode isn't the point though. Kanjorski says the whole day threatened, "The end of our economic and political system as we know it."

You can't make this stuff up.

But then, Australia's own Central Banker has told Australian politicians that September 15th is a day that will forever live in financial infamy. He didn't use those words exactly. But in prepared remarks to be delivered to Australia's House of Representatives today, Glenn Stevens fingers the 15th as the day the world changed.

Shortly after the Committee last met" he begins, "the global financial system took a serious turn for the worse. On 15 September 2008, the American firm Lehman Brothers filed for bankruptcy. It was the biggest actual failure of a major American financial institution for many years. While it had been widely known that Lehmans was under immense pressure, when it came the event was still a shock. It triggered a massive re-appraisal of risk, and ushered in a period of the most intense financial turmoil seen in decades.

"The worst of the turmoil was actually fairly short-lived - a matter of weeks. But in that time a number of events occurred that have had a significant bearing on the outlook for the global economy. These included the incipient failure and/or public support of a number of major financial institutions in the United States, the United Kingdom and continental Europe, effective closure of many important capital markets and a worldwide decline in equity values of a quarter, leaving them around 50 per cent lower than their peak."

We'll leave any further discussion of September 15th's significance until next week. There are two other dates, though, that are critical to the story you now find yourself a part of. The first is February 4th, 1965.

That's the day French President Charles De Gaulle gave a press conference. It was a press conference that would begin undermining the post-war Bretton Woods international currency system. Why? It's what DeGaulle said about gold.

"The time has come," he said, "to establish the international monetary system on an unquestionable basis that does not bear the stamp of any country in particular. On what basis? Truly, it is hard to imagine that it could be any standard other than gold. Yes, gold whose nature does not alter, which may be formed equally well into ingots, bars or coins; which has no nationality and which has, eternally and universally, been regarded as the unalterable currency par excellence."

Over the next five years, French banks would begin redeeming American dollars for gold. The French could see America's war debt from Vietnam stacking up. Lyndon Johnson's Great Society program promised infinite butter along with a multitude of guns for the war in South East Asia. Government deficits soared.

Just over six years later, somewhere between August 13th and August 15th, Richard Nixon met with his economic Politburo at Camp David in Maryland outside Washington, DC. Against the advice of Federal Reserve Chairman Arthur Burns, Nixon decided to institute wage and price controls and, more importantly, close America's gold window.

We've been living with the world of free-floating fiat currencies and expansion of deficits and credit ever since. Lehman's collapse was one nail in the coffin of the modern financial system. De Gaulle built the casket in February of 1965. So what's the third date that changed the world? More on that next week...

Dan Denning
for The Daily Reckoning Australia

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Unfortunately, there was a flaw in this plan. Interest rate manipulation, as practiced by the Fed, was surging in popularity. It was hoped this currency tomfoolery would prevent another Great Depression, and every other little recession along the way. This "monetary policy" and currency manipulation was contrary to the simple, automatic currency board-like mechanisms by which gold standard systems should be operated. The result was that the fixed exchange rates and gold link came under constant pressure.

For a while, governments attempted to have it both ways. They imposed various capital controls to keep exchange rates fixed - while at the same time their central banks played games that caused exchange rates to diverge. The dollar/gold peg was not maintained by judicious supply adjustment, as a currency board would operate, but by heavy-handed intervention in the gold market in London.

Eventually, the conflict between manipulative central banks and the gold link became overwhelming. In January 1970, Richard Nixon installed his friend Arthur Burns as Chairman of the Federal Reserve. Burns immediately opened the monetary floodgates to help offset the recession of the time - following the day's conventional wisdom. In August 1971, the conflict between Burns' manipulation and the gold link became too great, and, rather than abandoning Burns' currency games, it was decided to abandon the gold link instead. The dollar had become a floating currency. By 1973, all the major currencies floated.

An economic catastrophe ensued, the inflation of the 1970s. Even in the 1980s and 1990s, as currencies were stabilized somewhat, economies never regained the health they showed in the 1950s and 1960s. Emerging markets, in particular, were beset by regular currency disasters.

The environment of monetary chaos that we have lived in for the past thirty-seven years has finally produced a political willingness to fix the problem. Governments sense that, if they do not take action now, a worldwide crisis may ensue. Just as in 1944, governments want to return to the monetary stability upon which capitalism was founded. On November 15, governments will gather to talk about a "New Bretton Woods." There is even some talk that gold will play a part. The creators of this New Bretton Woods, if they are able to agree on anything at all, would do well to recognize the successes and faixlures of the original Bretton Woods.

Bretton Woods was, overall, a great success. This was due to the link with gold, and the fixed exchange rates worldwide. Capitalism since the Industrial Revolution had been based on this monetary principle, and it worked again as it had in the past.

The reason that the Bretton Woods gold standard did not persist indefinitely was not government deficits, or insufficient gold bullion reserves, "current account imbalances" or any other such thing. The only reason that governments decided to abandon the gold link was that they preferred to play central bank games with their currencies. A New Bretton Woods must wholly and completely abandon such practices.

Without these guiding principles, this month's discussions are likely to devolve into an unworkable hodgepodge of currency baskets, CPI targets, promises likely to be broken, and rhetorical vagaries. Certainly no usable system would emerge, although an unusable system might.

A New Bretton Woods, of gold-linked currencies worldwide, would be very easy to create. It could be done in a weekend, and wouldn't cost a dime. It is merely a decision to manage currencies one way - a gold link - rather than another way. Unfortunately, I don't think today's generation of monetary bureaucrats in the U.S. and Europe have the talent, skills or understanding to accomplish this solution. They can't even identify it.

I place my hopes on Russia, China and the Middle East. Their monetary bureaucrats don't have the skills either, as far as I can tell, but they are willing to learn. As outsiders, they can see that the G7's conventional wisdom isn't working.

I wish the best for those governments willing to step up with a solution to the problems that have plagued the world since 1971. I just hope they get on with it before things get too out of hand.

Regards,

Nathan Lewis
for The Daily Reckoning Australia

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