Readers may know Mikhail Gorbachev as a fellow who advertises Louis Vuitton luggage. But before he made it big as a mannequin, he was the top man in the Soviet Union. It was not an easy job. The empire was falling apart. So, in a rare act for a public official, Gorbachev told the Soviet people the truth: "We can't go on like this," he said in 1986. Three years later, on November 9th, 1989, the test was over.

What they were going on with was a system of compulsory economics - in which bureaucrats made the key decisions. They decided how much capital to allocate to what sector...how many people to employ...how much to charge for the output, and so forth. Of course, in order to make these decisions, Soviet economists had already discovered that they needed to make a lot of other decisions too - such as where people would live, how much they would earn, what they would do, and which of them would be starved to death. So, it was a very controlled experiment. Conditions were so miserable in the East that the government needed a vast network of spies and gulags to keep the malcontents from ruining the test. Still, 5,000 people fled to the West. 136 were killed trying to get over the wall that separated West Berlin from the East.

The results were obvious even before the test began. Ordinary people, looking out for themselves, always make better decisions than economists working for the government. Taxi drivers are better at getting people from place to place. Automobile manufacturers are better at making cars. Bakers bake better bread. Consumers buy what they really want. And capitalists make better investments. But just because a thing is absurd doesn't mean it is unpopular. There are people who get upset when they discover that there is H2O in their drinking water. There are also people who want aparatchiks to make their decisions for them. And recently, there are more of them. Many Germans in the East long for good old days when things were under control. They call it 'ostalgie.'

After a bit of food and a roof over his head, a man becomes more concerned with status than with survival. It is not how rich he is that matters; it's how rich he is compared to those around him. Status brings reproductive advantages, say the socio-biologists. But it brings disappointments too. And envy. So wicked and destructive is the urge to envy that the Catholic Church banned it as a cardinal sin. Societies suppress envy in a variety of ways. Some tax the rich. Some force everyone to wear the same dreary clothes. Most level the population by sticking everyone into the same education, retirement and healthcare systems.

Capitalism doesn't make anyone rich. It only allows people to compete for wealth on more or less equal terms. Naturally, some are better at it than others. Most people prefer alcohol, television or jobs on Wall Street to the rough and tumble of real enterprise. And almost everyone is prey to bubble delusions, hoping to get something for nothing from the latest fad investment. And then, when capitalism corrects their mistakes, they turn ostalgic, longing for the state to intervene and rig the game in their favor.

"After the wall fell: capitalism is a disappointment" says a headline in yesterday's Montevideo paper, La Republic. A poll showed that of people asked in 27 countries only 11% thought capitalism was working properly now. We're surprised that anyone thought so. With so much finagling by the feds, it's a wonder that it works at all.

But even among the complainers, few suggest a return to the policies that wrecked East Germany between 1949 and 1989. Instead, what they want is a kinder, gentler form of capitalism with the state as a benevolent partner. Full employment, with Audis. Guaranteed health and retirement benefits, with wifi and cappuccinos. Unlimited government bailouts, but without state bankruptcy.

Alas, the lumpen are worse at rigging the game than they are at playing it. The elites are better; that's why they're the elite. They use corrections the way a general uses a cease fire - to strengthen their positions. They connive with the government for more regulations to keep out competitors, bailouts to protect them from their mistakes, and handouts to enhance their status. That's why, scarcely a year after they were all on the edge of insolvency, the world's big financial firms are paying the biggest bonuses ever.

Does rigging the system like this make people better off? Many thanks to those teuton guinea pigs again! They conducted another test. After the wall came down, the Federal Republic in Bonn decided to intervene in the Eastern states in order to lift the ossies out of poverty and put them on a level playing field with the West. Beginning in 1991, the West transferred an amount equal to 4% of GDP each year to the East. Public works. Public health. Public education. Welfare! Handouts! Bailouts!

Unwittingly, which is the only way to do this sort of thing, they were merely adding to the test data. For next door was the Czech Republic, which also suffered under the Soviet boot, also engaged in absurd and counterproductive policies, and also flew the coop as soon as the Soviets dropped their guard. The Czechs had no rich relatives. They had no source of free money. They had no booming economy that they could join. No money. No port. Not even a language anyone else could speak.

Well, guess who won that race? The Czechs, of course. GDP growth rates in the Czech Republic pulled ahead of those in East Germany in the early '90s; since then, they've been pulling farther and farther ahead each year.

Regards,

Bill Bonner,
for The Daily Reckoning Australia

• The Government Bureaucrats of East Germany Exist in the United States of America Today
• HOORAH FOR CAPITALISM!
• Capitalism is Inherently Unstable
• Britain, the Empire Which Had Paramount Global Power
• Rich Blamed for Financial Debacle of Last Few Years

Of course it was misery for many of the test subjects. People were so eager to get out of the East German control group, they risked their lives jumping over the barbed wire. Then, when the wall was down, the population of East Germany collapsed...more than one out of every ten people moved to the West!

But it was a great experiment for economists. Too bad they didn't learn anything.

What they should have learned is that when it comes to making people materially better off, government spending is a poor way to do it. It's great for the few favored firms who help Washington raise and spend its trillions. It's great for Goldman, in other words.

But what if you don't have an inside track with the government? Well, you're out of luck. You get to stand in line to buy inferior goods and services - produced by government-owned industries and protected monopolies. That was what the East Germans did. And, of course, you get government bureaucrats telling you what to do...and preventing you from improving the quality of your life.

That's what they did in East Germany. And that's what they're doing, now, in the United States of America - in a less obvious, less heavy- handed fashion. Who owns the biggest auto company in the US? Who provides the finance for the finance industry? Who controls the health care and education industries? Who's the biggest employer? Who finances our houses? Who runs our banks?

Well...you know the answer.

But here's another question: who's headed for bankruptcy? Same answer.

What can you do about it? All you can do is to anticipate where this is heading...and position yourself to profit. Or, at least position yourself to protect your assets.

In that regard, you may want to replace the FED with the GLD, if you know what we mean. The Fed is derelict in its duty to protect your paper dollars. GLD - an ETF for gold - is a very simple way of doing your own central banking.

But should you buy GLD now? Ah...they don't make it easy, do they?

So, should you buy gold now?

A quick answer: it depends.

If you're buying gold for quick profits, you will probably be disappointed if you buy it now. The price has been going up for weeks. It's probably ready for a rest.

Also, gold moves up with stock prices - both anticipating an inflationary recovery. We think this will turn out to be a mistake. There is no real recovery underway. And no inflation either.

If and when stocks collapse, gold will go down too. At least for a while.

But if you are buying gold as the Chinese and the Indians are buying it - as a monetary reserve, not a speculation - there is no time like the present. Sometime in the future, we wish we could tell you when, gold at $1,100 will seem like a giveaway.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Gorbachev and the Most Complete Test in Economic History
• Gold is in a Bull Market
• The Codependent Relationship Between China and the United States
• U.S. Government Takes Over the Economy
• Housing and Unemployment Are Weaknesses in the U.S. Economy

Our views are different, but not extra-terrestrial. Once upon a time, not so long ago, they were even respectable. The gist of our message two weeks ago was that debt is dangerous. It feels good at first. But give a society too much debt - either in its private sector or the public sphere - and someone's going to get killed. That's why the present situation is such a delight to serious economists; it offers more data points. We get to see how much straw the feds can add before the poor camel's back breaks.

What's the best way to get through a debt crisis? Straight through was our advice last week. For at least a thousand years, the business cycle went round and round without help from central bankers or economists. It is only since these geniuses have been on the case that really serious problems have arisen. The Panic of 1920 - in which the US government did nothing but cut taxes and spending - was quickly forgotten. The Panic of 1929, on the other hand, was followed by massive rigging and jiving by the authorities. It took 20 years and a world war to overcome; today it is still remembered today as the Great Depression.

Martin Wolf, speaking, gravely, for the world's intelligentsia in The Financial Times last week, proclaimed that: "the only thing worse than rescuing the system would have been not rescuing it." But he is wrong; of all the many blessings economists may bestow upon a grateful people, improving the economy is not one of them. An economy is a natural thing. It can be improved by the striving of entrepreneurs, the prudence of bankers, and the sweating of field hands. But when it comes to the macro-economic policy, forbearance is the quality that pays. Any initiative on the feds' part inevitably makes things worse.

The Bubble Era, like the Great Depression, was largely -but not completely - the result of government initiative. Artificially low interest rates - intended to counter the modest downturn of 2001 - sent the wrong message. Consumers - notably those in Britain and America - bought things they couldn't afford. Producers - notably those in Asia - made things for which there was no real market. Debt piled up. Mountains of it.

As consumers bought more and producers made more the economy grew. But much of the economic "growth" of the 2001-2007 period was fraudulent. It was based on debt spending, not on genuine increases in purchasing power. Debt pretends to be real money. It looks like the real thing, but it is not. It stimulates the economy like counterfeit money. It causes production and consumption, but of the wrong sort. Former Reagan era Office of Management and Budget director David Stockman estimates the level of "counterfeit GDP" at $4 trillion in the US alone.

The fraud was discovered, though misunderstood, when sub-prime debt began to implode. The economy had been kissed hard; millions of houses had been built, bought and sold. Now, owners couldn't pay for them. All of sudden, the counterfeit money began to shrivel up. Lenders, investors, and householders all began to de-leverage; paying down the debts as fast as they could, defaulting on those they couldn't.

Rather than come to the obvious conclusion, that they should never have meddled with the economy in the first place, the feds began rescue operations on a breathtaking scale. The British government increased spending to 140% of revenues. America now runs a stimulus program nearly equivalent, in economic impact, to WWII. Not since 1945 have the two pages of its ledgers - debits and credits - told such different stories, with almost $2 of spending for ever $1 in tax receipts. Britain will add almost 50% to its government debt in the next three years. David Stockman expects the publicly held US national debt to almost double in the next five years.

Even at those levels, many economists think the government should do more. Nobel Prize winner, Paul Krugman is one. Richard Koo is another. They've warned that the US (and by extension much of the rest of the world) could suffer a Lost Decade, like Japan, if the government slacks off before consumers have finished de-leveraging. At least they understand what is going on. Too bad they missed the point of it. The problem is too much debt, not too little spending. Leveraging up the public sector doesn't help. Even government debts must be paid - if not by the borrower, then by the lender. The feds are smooching more ardently than any debt lover in history; next, we get to see who dies...or at least who defaults.

Until next time,

Bill Bonner,
for The Daily Reckoning Australia

• Why Weren’t Economists On Top of This Thing?
• Where Do the Feds Get Any Money?
• Keynesians Believe Governments Have to Manage Economy in Macro-Economic Way
• US Economy Still on Runway as Recovery Won’t Fly
• Cash is Created When the Feds “Monetize the Debt” by Buying US Treasury Bonds

Keep in mind most of the earnings news is garbage. Earnings are whatever an accountant wants them to be. Compared to last year - which was a shocker - this year's earnings are bound to be better. And when analyst's expectations are subjective, are you surprised to learn that the people who sell you stocks think that earnings are "surprisingly" good?

That said, the official unemployment figures in Australia appear to be going down. Consumer confidence numbers are back near all-time highs. At least here in Australia, the stock market and the economy are reading from the same prayer book. Both are singing the praises of the recovery (second coming of the Goldilocks Economy).

Amen.

In the States, it's a little harder to figure out why stocks are singing such a different tune than the American economy. But it's not impossible. Take oil.

While the higher price is good for oil companies and investors, you know it's going to take money out of the pockets of consumers. Lower oil prices were a windfall for drivers all over the world in the last year, putting more discretionary income into the family budget. A higher oil price, as always, is a tax on consumer spending.

But we come here neither to praise nor bury the recovery. In fact, we come here to point out that the recovery is an imposter. It's a financially-fuelled bear-market rally dressed in respectable clothing. The underlying problems in the economy are still there, dishevelled, dirty, and unwelcome in polite company . And the main problem is simple: too much debt (public, household, and corporate).

Or as Michael Hudson said in a previous interview, "The economy has reached its debt limit and is entering its insolvency phase. We are not in a cycle but the end of an era. The old world of debt pyramiding to a fraudulent degree cannot be restored."

It cannot be restored, but the rate of its collapse can be arrested so that the members of the financial oligarchy can sell their stocks to a gullible public. And that's what you're seeing now. It makes for an incredibly tradable market. But it does make it harder to value corporate assets when balance sheets remain so badly skewed by a) bad assets b) unrealistic expectations of future consumer demand based on credit.

Advantage speculators. Disadvantage investors. And speaking of speculators...

Here's a prediction about the U.S. dollar. It will find a floor. But that floor could be much lower. The greenback's collapse is driving more countries to hold Euros, yen and gold in their foreign currency and monetary reserves. This could have a funny effect, though. It will put the spotlight on the fiscal conditions of Europe and Japan. And what do you think could happen then?

The Euro and the Yen may be better off, relatively speaking, than the dollar at the moment. But only relatively. In absolute terms, they are "deeply flawed" currencies as well, to use a Jim Rogers phrase. In the long run, most paper currencies fail. In the short run, there's going to be a lot of volatility until a new monetary regime replaces the old one.

All of this bodes well for precious metals investors...in the long run. But don't be surprised if governments get hostile to gold, at least for every day investors. Central banks will own it. But it might get harder for everyone else.

We began the week wondering about the cycles of history and markets. We wondered whether Australia is following the Anglo-American cycle into a long-winter...where people lose confidence in each other, in government, and in the institutions they relied on in the past for law and order, employment, and prosperity.

We're not much closer to answering that question, and there's only one day in the week left! Perhaps it will take more time. In the meantime, if you are interested in the idea of cycles and history, there's a great article by Nick Paumgarten in the October 12th edition of The New Yorker. There are a few quotes from it below.

"Cycle theory is a kind of Gnostic offshoot of technical analysis. The nothing that things generally happen in cycles goes back thousands of years - Joseph's seven-year-fat-lean cycle - but in the West the formal inquiry into economic cyclicality too hold in the mid-nineteenth century. The British economist William Stanley Jevons correlated economic cycles to the sun, proposing the fluctuations in sunspot activity might affect crop outputs.

"Around the same time, a Frenchman named Clement Juglar identified an economic cycle of seven to eleven years. In the nineteen-twenties, Nikolai Kondratiev, a Soviet economist, concluded that capitalism was inclined to half-century cycles of boom and bust and boom again, rather than, as Marx believed, a single inexorable collapse..."

"It was the Austrian economist Joseph Schumpeter, he of 'creative destruction,' who called these cycles Kondratiev waves and popularised them in the West. In the Kondratiev waves and other commonly cited cycles - the Kitchin (three to five years), the Kuznets (fifteen to twenty-five years)-the time span is flexible.

"They are suggestions, not rules. Hardcore cyclists, on the other hand, often seek and find instances of periodicity as rigid and fixed as the laws of physics, which is why hardcore cyclists are often dismissed as mystics and freaks.

"It is easy to scoff at cycle theory. Its whiff of predestination chafes the scientific mind. Our culture's fundamental belief in causation and consequence, to say nothing of free will, does not easily accept the suggestion of helplessness, or of some kind of as yet unidentified exogenous force. God may decide the outcome of football games and debilitating illnesses, but he does not intervene in matters of investing and finance.

"And yet patterns exist, and we slowly discover them. Seasons, migrations, moons: the template is there. Consciously or unconsciously, most people accept certain components of cycle theory. We seek and see patterns in things. It is the way our minds work, presumably, for the purpose of survival."

Dan Denning
for The Daily Reckoning Australia

• Business Cycle Theory Explained by Joseph Schumpeter
• There Are Two Ways of Studying Economic Theory
• Krugman Warns That the Run-up in Stocks Can’t Be Justified By the Fundamentals
• Economic Crisis Discussions in the House of Lords
• Modern Economic Theory

Interesting huh? Consumer credit has fallen off a cliff.

What does that mean exactly? It means Americans aren't borrowing...and they aren't buying either.

This weekend, The New York Times noticed:

"Americans stop buying; trade deficit declines" begins the headline.

This is the story we've been telling here at The Daily Reckoning for two years. Americans have to cut back. They are out of time and out of money. Ten years closer to retirement than they were in before the tech stock crash, Baby Boomers are not a penny richer. Now, they're facing a funky economy where housing prices are in decline, jobs are hard to find and lenders are reticent to lend them more money. Daddy has finally taken the T-bird away.

But wait...if the Baby Boomers stop spending won't it have, like, repercussions?

The NYT continues:

"For the first eight months of the year, the United States trade deficit with China is down by about 14 percent or $20 billion, compared with one year ago. The nation's trade deficit with Japan has shrunk by almost 20 percent, and its deficits with Mexico, Canada and the European Union are down more than 40 percent.

"The huge shift stems mainly from the staggering collapse in trade. With credit markets frozen and Americans facing the highest unemployment in more than 30 years, the United States suddenly stopped shopping overseas at anywhere near the volumes that had become normal."

Americans were the world's champion consumers. Just lend them money; they'd spend it. But when they stop spending it brings a hush to the entire planet. The malls go quiet...trucks slow down...ships are idled...and finally factories are shut down. Clerks, drivers, stevedores and assembly line workers all go home. That is what a depression is all about.

The feds are trying to get consumers to spend again. They've given them tax rebates, incentives, loans, and bribes. They've run a federal deficit three times higher than the previous record. They promise $1 trillion deficits "as far as the eye can see." And they put at risk a sum of money equal almost to the entire US GDP.

Still those hardheaded consumers won't consume like they're supposed to.

Suddenly, it's the 'Age of Thrift.'

But if it's really the age of thrift, the stock market doesn't seem to have gotten the message. The Dow rose 78 points on Friday, to a new post-crash high. Oil held at over $72. And gold lost $7 to close at $1,049.

What are stock market investors thinking? Are they thinking at all?

If the consumer credit party is over...and the Baby Boomers are on the wagon...is it really possible for US businesses to grow...and prosper?

Yes, it is. America has great businesses with great brands. As the dollar falls it should be able for them to gain global market share in some sectors. But 70% of the economy is consumer spending. Until that changes, the US economy is hostage to US consumer spending. When consumers stop consuming, the US economy's wheels stop turning.

Okay, so you're thinking: "Well...maybe Americans have to cut back, but there are plenty of other people in the world. Let them do the buying for a while!"

And you are right. America has less than 5% of the world's population. But it consumes more than 20% of the total world's output - as measured by GDP. Clearly, Americans have been doing more than their fair share. It's time to let the foreigners belly up to the bar. Heck, they're skinny. They could use a good drink.

In time, foreigners will spend more. We don't doubt it. But rebalancing the world's economies won't happen overnight. Nor even in a couple years. It will take a long, long time. And a lot of investment in new tools, new training, and new techniques. Until that happens, when US consumers stop buying it slows wheels all over the world.

Every time finance ministers and heads of state get together they talk about "rebalancing" the world economy. They promise to take steps to make it happen. But so far, the market is doing all the rebalancing work on its own.

And instead of letting nature take her course...allowing the invisible hand of capitalism to direct capital to where it is actually needed...the heavy hand of government blocks the process of correction.

Credit is still contracting. And Reuters reports that "small US firms face credit squeeze."

In theory, a genuine recovery in the United States could be led by exports. A cheaper dollar...and a cheaper workforce (in global terms)...would make the United States a better competitor.

But even a cheaper dollar is not guaranteed. Consumers may have stopped borrowing, but the US government borrows more than ever. This borrowing - in dollars - increases demand for greenbacks and may actually sustain the dollar at a higher level than it should be. The feds' appetite for borrowing could also force up interest rates - further restricting small businesses' access to easy credit.

There is a big difference between selling a few more Harley Davidsons overseas and real export-led economic growth for the US economy. The latter would require hundreds...thousands...of Harley Davidson enterprises, selling billions worth of goods and services to foreigners. And right now, those enterprises don't exist. They have no lobbyists trying to get TARP funds. They have no pet Congressmen slipping tax breaks for them into defense bills. They have no unions backing them. How could they; they haven't even gotten off the ground yet. And they may never get off the ground if they can't get financing.

The boomers are saving. They put their money into the safest possible place - US bonds! That is, they lend it to the government. They're the feds' biggest single source of financing - even bigger than the Chinese.

Meanwhile, the feds pump billions into the banking system. They supply the banks with capital for expansion and consumption. But instead of making loans to the private sector, the banks take the feds' money and lend it right back to them. They can borrow at a negligible rate...and then use the money to buy long-dated T-bonds yielding over 4%. Result: banks make money; the private sector has no money to create new businesses.

This weekend, we had a conversation with an English carpenter.

"It's rough. I remember just a couple of years ago, I could get work anywhere. Now it's off and on. I still find work, but I have a lot of free time too.

"It's not easy. Not with four children. We don't have any choice. We don't get any public benefits, you know...because I'm working. But I'm not working as much as I used to. And I'm not getting paid as much. So what can we do? We have to tighten our belts. We get by. But we're definitely not spending money they way we used to. In fact, I wish we hadn't spent so much back then. I'd like to have some of that money now."

A report in the Telegraph predicts British property prices - which have been in an upward trend for several months - are headed down again...with a 17% decline expected.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Is Gold at $1000 a Bargain…Or a Trap?
• Until This Debt is Reduced, Americans Will Be Reluctant to Borrow or Spend
• Baby Boomers Face Early Retirement With No Money Saved
• Americans Have No Money to Spend Because They Already Spent It!
• The Country is Going into a Recession with its Finances in the Worst Shape Ever

"[Michael] Moore takes us into the homes of ordinary people whose lives
have been turned upside down; and he goes looking for explanations in
Washington, DC and elsewhere. What he finds are the all-too-familiar
symptoms of a love affair gone astray: lies, abuse, betrayal and 14,000
jobs being lost every day. Capitalism: A Love Story...is Michael
Moore's ultimate quest to answer the question he's posed throughout his
illustrious filmmaking career: Who are we and why do we behave the way
that we do?"

Considering Moore was going to be there for a Q&A after (moderated by
Arianna Huffington), I quickly signed on. Now before painting a picture
of Moore's new film let me be honest: my belief set is essentially
libertarian ('Government out of my bedroom and my pocketbook'). Not
only do government solutions not excite me, they scare the living blank
out of me. Remember when George Bush declared, "I've abandoned free-
market principles to save the free-market system...to make sure the
economy doesn't collapse"? He might as well of said, "Hide your money,
kids - 'cause I'm coming to take it!"

Oh sure, in theory I would like to see everyone with their own
homestead, money in their pocket for regular shopping frenzies and no
health worries despite eating at Burger King 24/7, but arriving at
those goals is not exactly doable unless government robs Peter to pay
Paul and or starts up the printing press.

And that view of course puts me in opposition to Moore since he has no
problem with government as his and our father figure. That is his
utopia. He truly believes warehouses of Washington, DC-based federal
workers remotely running our lives is the optimal plan. He is an
unapologetic socialist who really doesn't care why the poor are poor or
the rich are rich, he just wants it fixed. So not surprisingly, and
with some generalization as I proffer this, Democrats like Moore and
Republicans don't.

However, I was excited to see a 'mainstream' film that was backed by
big Hollywood bucks conclude capitalism as 'evil.' Arguably the most
successful documentarian ever, a man who has made untold millions of
dollars, was going to legitimately make the case that there was an
alternative to capitalism. I sat down in a packed Mann's Bruin Theater
in Westwood, CA eager to see how his vision could possibly flesh out.

Moore is a rather simple guy. He is likable. He sees the world as good
guys (people with no money) and bad guys (people with money). His
Flint, Michigan union worker upbringing is his worldview. If you did
not have that upbringing or if your life started less severe than his
you are an evil capitalist. If on the other hand you were a laid off
factory worker with a sixth grade education you are the true hero. I
don't care one way or the other that he has that view and I am not
knocking union workers, but Moore sees the world through a class
warfare lens resulting in a certain agenda: force wealth to be spread
amongst everyone regardless of effort. Within minutes it was clear
where Capitalism: A Love Story was headed. The 'highlights' included:

• We listen to heartbreaking stories of foreclosed families across
  America, but we don't learn why the foreclosures happened. Did these
  people treat their homes as piggy banks? Were there refis on top of
  refis just to keep buying mall trinkets and other goodies with no
  respect to risk or logic? We don't find out.

• We meet one family who was just foreclosed on so desperate for money
  that they were willing to accept $1,000 for cleaning out the house that
  they were just evicted from. Was it sad? Yes. But, should we end
  capitalism due to this one family in Peoria, IL?

• We are introduced to a guy whose company is called 'Condo Vultures'
  buying and selling foreclosed properties. Since he acted like a used
  car salesman, the implication was that he was an evil capitalist.
  However, Moore doesn't tell us if his buyers were 'working class'
  people making smart buying decisions after prices had dropped.

• We listen to Catholic priests who denounce capitalism as an evil to
  be eradicated. What they would put in its place and how would the new
  system work? The priests don't tell us.

• We learn that Wal-Mart bought life insurance policies on many
  workers. We are then told to feel outrage when Wal-Mart receives a
  large payout from an employee death while the families still struggle
  with bills. I saw where Moore was heading here, but this was a reason
  to end capitalism?

• We hear a story from a commercial pilot so low on money that he has
  to use food stamps. Moore points out that many pilots are making less
  than Taco Bell managers and then attributes a recent plane crash in
  Buffalo to underpaid pilots. This one crash is extrapolated out as yet
  another reason to end capitalism.
• I was pleasantly surprised at Moore's attempt at balance. For example,
  he included:

• A carpenter, while ply-wooding up a foreclosed home, says, "If people
  pay their bills, they don't get thrown out."

• A dressing down of Senator Chris Dodd (D) by name. Moore calling out
  a top Democrat? He sure did. He nailed him.
• A lengthy dissertation on the evils of Goldman Sachs. He rips Robert
  Rubin and Hank Paulson big time and I agree with him. In fact, I said
  to myself, "Moore you should have done your whole film on Goldman
  Sachs!"

Throughout the various stories and interviews he also weaves a
conspiracy (all Moore films do this). The plot goes something like
this: America won World War II and quickly dominated due to no
competition (Germany and Japan were destroyed). We had great post-war
success where everyone lived in union-like equality. Jobs were
plentiful and families were happy. However, things start to go bad in
the 1970s, and Moore uses a snippet of President Carter preaching about
greed. This clip was predictably building to Moore's big reason for all
problems today: the Reagan revolution.

Moore sees Reagan entering the scene as a shill for corporate banking
interests. However, everyone is happy as the good times roll all the
way through into Clinton times. Moore does take subtle shots at
President Clinton, but nails his right hand economic man Larry Summers
directly as a primary reason for the banking collapse. So, while Moore
sees Japan and Germany today as socialistic winners where corporations
benefit workers more than shareholders, he sees America sinking fast.

So is that it? That was the proof that capitalism is an evil to
eliminate? Essentially, yes, that's Moore's proof. What is his
solution? Tugging on your idealistic heartstrings of course! Moore ends
his film with recently uncovered video of FDR talking to America on
January 11, 1944. Looking into the camera a weary FDR proposed what he
called a second Bill of Rights - an economic Bill of Rights for all
regardless of station, race, or creed that included:

The right to a useful and remunerative job in the industries or shops
or farms or mines of the nation.

The right to earn enough to provide adequate food and clothing and
recreation.

The right of every farmer to raise and sell his products at a return
which will give him and his family a decent living.

The right of every businessman, large and small, to trade in an
atmosphere of freedom from unfair competition and domination by
monopolies at home or abroad.

The right of every family to a decent home.

The right to adequate medical care and the opportunity to achieve and
enjoy good health.

The right to adequate protection from the economic fears of old age,
sickness, accident, and unemployment.

The right to a good education.

As FDR concluded and the film ended, I was shocked at the reaction. The
theater of 400+ stood and cheered wildly at FDR's 1944 proposal. The
questions running through my head were immediate: How does one
legislate words like "useful", "enough", "recreation", "adequate",
"decent", and "good"? Who decides all of this and to what degree? At
past points in history to voice an opposition opinion in the middle of
such a single-minded herd would have certainly been my physical demise!
Interestingly, during the Q&A Huffington and Moore discussed bank
failure fears during the fall of 2008. They asked for a show of hands
of how many people moved money around or attempted to protect against a
bank failure. I had the only hand that went up.

FDR's plan hauled out by Moore six decades after it was forgotten
reminded me of another interchange - this one from the 1970s. Then talk
show master, the Oprah of his day, Phil Donahue was interviewing free
market economist Milton Friedman and wanted to know if Friedman had
ever had a moment of doubt about "capitalism and whether greed's a good
idea to run on?"

Friedman was quick in response, "...is there some society you know that
doesn't run on greed? You think Russia doesn't run on greed? You think
China doesn't run on greed? The world runs on individuals pursuing
their separate interests. The great achievements of civilization have
not come from government bureaus. Einstein didn't construct his theory
under order from a bureaucrat. Henry Ford didn't revolutionize the
automobile industry that way. In the only cases in which the masses
have escaped from the kind of grinding poverty you're talking about,
the only cases in recorded history are where they have had capitalism
and largely free trade. If you want to know where the masses are worst
off, it's exactly in the kinds of societies that depart from that. So
that the record of history is absolutely crystal clear: that there is
no alternative way so far discovered of improving the lot of the
ordinary people that can hold a candle to the productive activities
that are unleashed by a free enterprise system."

Donahue (and the video of this on YouTube is classic) then countered
saying that capitalism rewards the ability to manipulate the system and
not virtue. Friedman was having none of it, "And what does reward
virtue? You think the communist commissar rewards virtue? ...Do you
think American presidents reward virtue? Do they choose their
appointees on the basis of the virtue of the people appointed or on the
basis of their political clout? Is it really true that political self-
interest is nobler somehow than economic self-interest? ...Just tell me
where in the world you find these angels who are going to organize
society for us?"

Friedman's logic was what I was remembering as a theater full of people
cheered wildly for a second Bill of Rights. How did this film crowd
actually think FDR's 1944 vision could be executed? Frankly, it was
clear to me at that moment capitalism was on shaky ground. Starting
with Bush 'abandoning' capitalism to bailouts for everyone to Obama
gifting away the future - we seriously might be past the point of no
return toward a socialization of America.

Figuring someone else must see the problems with this film, I started
poking around the net for other views. One critic declared that the
value of Capitalism: A Love Story was not in the moviemaking, but in
its message that hits you in the gut and makes you angry. This film did
not make me angry, but it did punch me in the gut. The people in that
theater with me were not bad people, including Moore. They just seem to
all have consumed a lethal dose of Kool-Aid! And at the end of his Q&A
Moore pushed the audience to understand that while they don't have the
money, they do have the vote. He implored them to use their vote to
take money from one group to give it another group. Did he really say
that openly with no ambiguity? Yes, sadly.

Michael Covel

for The Daily Reckoning Australia

• Maryland Film Festival This Weekend
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"US consumers are cutting back, and where they are not cutting back, they are scaling down. This new cycle is all about 'getting small' and it is deflationary. For yet another in the litany of signs pointing in the direction of social change towards thrift, have a look at what is transpiring at the upper echelons of the income strata - Now Even Millionaires See the Benefits of Budgeting on page B5 of the Saturday NYT is a must read.

"Not only are the rich trading down, but the article quotes a high net worth financial advisor who said 'many of our clients are very happy to be sitting on bond portfolios and cash reserves.' And see the article on page 2 of the Sunday NYT - Beauty Products Lose Some Appeal During Recession. According to the NPD Research Group, total sales of department store beauty products are down 7% from year-ago levels. Women are apparently opting for the 'natural look' - "some people are selectively replacing higher-priced items with cheaper products from drug stores and discount stores."

Right on, David!

And here's the CEO of Pepsico:

"The age of thrift is here."

Even in Japan, after 20 years of coughing and sneezing, people have caught "the thrift bug," says The New York Times.

What's a consumer economy need in order to keep growing?

Uh...it's needs consumer spending.

What do consumers need in order to boost spending?

Uh...they need more money!

Oh, there's where it all starts to come apart, doesn't it? Where do they get more money? They either earn it...or they borrow it. And right now, they can't earn it - not with 12% unemployment in California! Workers have no bargaining power. And they can't borrow it either. The banks won't lend - not with the value of their collateral still falling.

Word comes this morning that mortgage delinquencies have hit a new record. And here's a headline warning of worse to come:

"$30 billion home loan time bomb set for 2010."

Even solvent homeowners who aren't forced into foreclosure still find it beneficial to walk away from their houses. "Strategic defaults,' says The Los Angeles Times, are becoming a problem for mortgage lenders.

We didn't read the article. Instead, we began to think. What if we owned a house worth $200,000 with a $300,000 mortgage? What would be the smart thing to do? Easy...walk away from it. Then, buy it back at auction!

Desperate consumers do what they have to do. Canny consumers do what's smart. And now it's smart to walk away from any debt that you don't actually have to pay.

As for adding more debt, you can gage yourself from the comments above, consumers are not eager to borrow. They've seen what happens when they go too far into debt. They're older and wiser than they were in the bubble years. It's been 10 years since the tech bubble exploded. Since then, stock market investors have made nothing - zero. And now houses are falling too.

So, if a fellow needs money for his retirement, where is he going to get it? Not from his house. Not from a pay raise. And not from his stocks either. He needs savings. He needs real money.

Americans aren't so stupid after all. When they need to stop spending, they stop spending. When they need to save, they save. Too bad about the economy.

Yes, what is good for individuals seems to be bad for the economy. When people save instead of spend, the consumer economy stalls. And then economists think there is something wrong. They think an economy needs to expand constantly. And so, they try to find 'solutions' to the 'problem.'

Actually, there is no problem at all. It's just the way capitalism works. There are booms. And there are busts. Periods of growth...and periods when the mistakes made during the boom are corrected. There's a time for every purpose under heaven. That's the way it works. The economy breathes in and it breathes out.

And there's always some dumb economist trying to smother it with a pillow!

Bill Bonner
for The Daily Reckoning Australia

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"Since the global financial system started unraveling in dramatic fashion two years ago, distinguished economists have suffered a crisis of their own," starts the article. "Ivy League professors who had trumpeted the dawn of a new era of stability have scrambled to explain how, exactly, the worst financial crisis since the Great Depression had ambushed their entire profession.

"Amid the hand-wringing and the self-flagellation, a few more cerebral commentators started to speak about the arrival of a 'Minsky moment,' and a growing number of insiders began to warn of a coming 'Minsky meltdown.'

"'Minsky' was shorthand for Hyman Minsky, a hitherto obscure macroeconomist who died over a decade ago. Many economists had never heard of him when the crisis struck, and he remains a shadowy figure in the profession. But lately he has begun emerging as perhaps the most prescient big-picture thinker about what, exactly, we are going through.

"A contrarian amid the conformity of postwar America, an expert in the then-unfashionable subfields of finance and crisis, Minsky was one economist who saw what was coming. He predicted, decades ago, almost exactly the kind of meltdown that recently hammered the global economy."

Economists went off their heads in the last few decades. They thought capitalism would make us all rich. And they thought capitalism automatically tended toward beneficent equilibrium.

Here at The Daily Reckoning, intuitively, we guessed the contrary. The system produces a kind of orderly chaos...in which the rich are frequently impoverished, the proud are humbled...and the goofballs who think capitalism fails inevitably make things worse.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

• Nobody Appreciates Laissez-Faire Capitalism
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• Gold Price Should Continue Going Up as the Dollar Accelerates its Terminal Decline
• Nobama rally… Nobama bounce… Nobama bull market… Nobama nuthin’…
• Capitalism and Capitalists

The burden of today's Daily Reckoning, then, is to remind these nattering nabobs of negativism that gold is not anyone else's debt. It is not anyone else's liability. It cannot be created with a few keystrokes. And for thousands of years, millions of people from all walks of life have been happy to use it as money because of its unique features (divisibility, durability, scarcity, difficulty in counterfeiting).

Gold is a commodity. But its price is not driven exclusively by the Indian jewellery market or investment demand. As a tangible commodity, gold has some of the aforementioned qualities that make it a fantastic medium of exchange.

And for people who trot out the canard that you can't buy a Big Mac with gold coins, what do you think goldsmith's notes were? They were receipts that indicated gold ownership and your ability to pay a debt. You could exchange goldsmith's notes as payment for goods and services because the paper claim was backed by a real asset. Goldsmith's notes were the precursor to bank notes. Same type of system, but with real money.

Is this all just some nostalgia for a financial system that no longer exists? Does gold have a real role to play in the future financial system? Of course it does! Gold is a threat to the fiat money peddlers from the warfare/welfare State because it exacts a heavy price for deficit spending and money creation. The expansion of credit or deficit spending is always possible in a fiat money system and thus placates voters with false prosperity borrowed from the future.

The rise in the gold price is telling us that markets are increasingly suspicious of the government-backed money and its ultimate affect on the real economy. Or, as guest essayist Greg Canavan says, " Gold is saying that the crisis is not over, that it is in fact getting worse. We are seeing Gresham's Law in action, as bad money pushes out the good. Gold is being swept off the market by millions of individuals who know that without fail governments always ruin the value of their paper money."

The only real - albeit shallow - criticism of the gold story is that it's primarily a U.S. dollar story. For Aussie investors, a collapsing greenback doesn't equate to a higher Aussie-dollar gold price. We would say, though, that this is a short-sighted appreciation of what gold is saying about the modern money system.

The modern money system is built on credit, debt, and government money backed by nothing. To believe that does not mean you'd covert all your assets to bullion, or all your shares to gold stocks. But it IS to believe that the architects of this system are criminals who effectively steal your wealth through inflation and control of the money supply.

If you have confidence in that system, you're a sucker. And if you don't hedge against its collapse, you're unprepared. After the last two years, is it so farfetched to believe that the foundations of financial capitalism - based on unsound money as they are - are weak by design and will fail in a world of increasing complexity and interconnectedness?

If you don't think it could happen, you haven't been living on Planet Earth. Either that or you're in a business where you want everyone to go back to doing what they were doing pre-Lehman collapse because it's good for your business. If that's the case, it's fine. But it's foolish to ignore 5,000 years of monetary history.

Yesterday we wrote about what happens when a complex network of trade and commerce begins to shrink as credit is withdrawn from the global system. Another side effect of the Lehman collapse is a bear market in trust. Trade, once free flowing and robust, becomes politicised. Trading partners begin to bicker.

Take Barack Obama's decision to slap a large import tariff on tyres made in China. It will probably just drive up the cost of cheap tires of middle-income Americans. But it makes America's unions happy, and Obama needs them to push through his health care agenda. China has responded with warnings about possible tariffs on U.S. poultry and auto parts exports.

It's probably not in neither country's economic interests to get in a trade war. But it reflects the ambiguity and hypocrisy of trade practices by both countries. There is no such thing as free trade. China subsidises production with cheap labour and produces at below production cost for some goods and services. America is happy to lose those manufacturing jobs if American shoppers get lower prices and have access to credit to make up for falling real wages.

But that whole strange relationship that has driven global growth for the last ten years has reached its use-by date. We're not sure what's going to replace it. But both parties are guilty of being currency manipulators and subsidisers. Formerly, their interests were aligned. Now, it's not so clear.

And finally a note from JL in Queensland about networks, nodes, and certain monetary commodities.

"Just my two cents worth. The difference between a node in a computer network vs. a node in the financial/economic system is that the node in the network can be self sustaining (provided that it's plugged in to electricity), whereas, most of the nodes in the financial/economic system are NOT self sustaining.

"The ONLY financial/economic node that would be self-sustaining and immune from ALL shocks (i.e. Exhibit the financial equivalent of homeostasis) is one that is 100% backed by a financial asset which is no one's liability. I'll leave you to guess what THAT financial asset may be.

Dan Denning
for The Daily Reckoning Australia

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"Cash is for buffers, not for wallets," says the headline. Mr. Turner is making the point we have made many times. The US system of capitalism has become a system where the capitalists have no capital. The big banks have too little in savings...not enough 'buffers' to protect them from unexpected crises. They made a fortune during the boom years - loading consumers up with debt. But instead of holding onto the money to protect themselves against emergencies, they paid it out in bonuses and salaries. Then, when the crisis came - one they caused - they were without sufficient funds.

What do you do when you're a major bank and you are insolvent? Hey, you already know the answer. You turn to the government! Which is why Mr. Turner's comment is both very smart and very dumb at the same time. He's right; the banks should hold more capital. But the reason they don't is obvious: they know the government will bail them out. They figure they don't need much capital; the feds have plenty.

This is the problem economists call "moral hazard." If you protect people from their own excesses they will become even more excessive. On the other hand, if they have to pay for their errors, they'll be quicker to correct them.

Okay...well...maybe the banks still wouldn't save enough. But that would take care of itself. If the feds didn't intervene, the insolvent banks would go under; those left would - by definition or accident - be better run.

Bill Bonner
for The Daily Reckoning Australia

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