The move we refer to is the forced breakup of Telstra's retail and wholesale businesses. It will separate Telstra's physical network from the services side of its business. The Minister announced legislation to achieve the split yesterday - and he did not make it in the form of a request.

We suppose Telstra doesn't have too much room to complain. If you profit because the government gives you monopoly status, you can't very well go and complain when the government (your former benefactor) changes its mind. This is why doing business with the government is so dangerous. It can change its mind...and the law...leaving you with no recourse.

But if Telstra the company feels hard done by, imagine how investors feel who paid as much as $7.40 for shares in the company when the Howard government sold off the government's stake in parts. The shares closed yesterday at $3.11.

And before we forget, do you remember that the Future Fund sold 684.4 million shares of Telstra at $3.47 per share on August 20th? It netted the fund $2.37 billion. The shares were sold via a placement to institutional holders. Hmm. So what to make of this?

Well, one way of looking at is that the Future Fund has profited while private investors haven not. Remember, the Future Fund was been set up to manage the pension liability of public sector employees. By our reckoning, the Future Fund would have made at least $250 million less selling its Telstra stake if it sold it at yesterday's closing price - after the government plan took a wrecking ball to the shares.

Mind you, no one forced anyone to buy Telstra shares when it was sold off to the public. You might be in for a spot of bad luck if you belong to superannuation fund that bought the Future Fund's Telstra shares last month. But then, we're not suggesting the private funds would have known ahead of time they were going to lose money on the shares. That would have been a bad deal, even for them.

But it's hard to see that the interests of government employees seem to have been looked after in the last month quite well, while private investors who got into Telstra years ago continue to take a pounding. It makes you wonder...what did the Future Fund know and when did it know it?

And also, is this more evidence that we don't live in a capitalist world or a socialist world but in an oligarchy? Are we moving to a world where the most job security and financial favour comes from being on the government payroll? What a world that will be...

By the way, the breakup should be better for consumers. The only real argument for a telecommunications monopoly in the first place is that Australia was never a big enough market to support multiple telecom companies capable of making the capital intensive investments to build nationwide networks. So the government picked the winner and backed it.

Even though it's an island, there are now lots of foreign firms and capitalists willing to compete with local entrepreneurs. The argument for preserving Telstra's legally mandated near monopoly evaporates. Consumers ought to get more and better services at lower prices. Here's hoping it works that way.

And while we're on the subject of government and absurdities, make some time to read Dr. Steve Kates' article in the Australian earlier this week about GDP and recession. His article points out how handy a classical economist can be in a debate and how ridiculous is the government's claim that the Aussie economy is better off because of the stimulus.

The first thing you try to do when you win an argument is control the definitions. Words and ideas are the "battle space" of public policy. If you control the definitions, you control the high ground of the engagement. That's why names have consequences. It's also why it's interesting that the naming of things is one of the first things Adam does.

The government wants to equate avoiding a technical recession with doing something good for the economy. But as Dr. Kates points out, GDP measures the level of economic activity, but not necessarily the quality. He shows that there are three components of GDP measurement; spending, production, and the distribution of business receipts (through wages and investment).

By two of those three measures, Australia did have a recession. It only avoided a technical recession because the government stimulus spending - borrowed money that adds to the fiscal deficit - created the illusion that a dollar of public money spent creates a dollar of real economic growth. Although Dr. Kates doesn't say it, we will: that's bogus.

Spending borrowed money does not make an economy more productive or create new assets. To say it does is like saying that running in place can get you from point A to point B. Your arms are pumping. Your legs are driving. You're literally going through the motions. But you're literally going nowhere. It's all heat and no motion.

Dr. Kates puts it this way, "While the stimulus package appears to have been able to distort one of the three sets of national accounting measures we use, beneath it all the Australian economy, in keeping with the rest of the developed world, has gone through a recessionary phase from which it is only now beginning to emerge."

As you can see, there is still heaps of deliberate misinformation or just plain stupidity about the wisdom of fiscal policy. But along with bankers who had access to nearly infinite leverage, its these free spending politicians their interest rate fixers at central banks who created this financial albatross that hangs around the neck of the real economy. Do we really expect them to tell us how bad it is, or how much worse it could get?

If you're looking for an explanation (and a prediction) of where we really at, mark Wednesday, October 14th in your calendar. At 6:30 pm that night Professor's Michael Hudson and Steven Keen are going to "Lift the Lid on the GFC" at an event at the Melbourne Town Hall. It's free, but you'll have to RSVP to reserve a spot.

We haven't met Professor Hudson in person yet. But along with Steve Keen, he's one of the straight shooters on what got us into this mess. They've both written quite a bit over the last few years, and in clear terms that challenge the conventional wisdom.

And if you're not in Melbourne there's good news. It looks like similar talks are on the calendar for Brisbane, Sydney, and Canberra. You can find details on the events here.

Your editor is on his way to Paris today for a meeting of international financial publishers to discuss the state of the industry. We'll be in the air for the better part of the next day, but will check in with you when we get to France on Thursday morning. Until then...

Dan Denning
for The Daily Reckoning Australia

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Of course, these new capitalists were not real capitalists. Instead, the little guys were mostly pigeons for Wall Street. Instead of really understanding and CONTROLLING the companies they owed, they bought shares in mutual funds...or owned their shares through insurance or pension funds. These collective investments left the little guys dependent on Wall Street managers - who paid themselves enormous fees and bonuses.

Of course, as long as stocks went up, the new capitalists didn't mind or notice that the financial industry took advantage of them. They completely misunderstood what they had gotten into. In their minds, capitalists made people rich...and Wall Street helped them get in on the deal.

When Francois Mitterand, socialist president of France during the '80s, realized how it worked, he was outraged; 'they make money in their sleep,' he remarked of capitalists. But that was just what most people wanted to do. So, they began to imitate the capitalists. "Buy stocks," thundered Wall Street.

And so...the little guys piled in....and stocks soared.

"Buy and Hold," the pros told them. "Stocks for the Long Run," wrote professors of finance.

Of course, some people wanted to make money faster. So 'day trading' became popular in the late '90s. The newspapers were full of stories of people who quit their jobs in order to trade stocks.

In the '80s and '90s, too, people began to believe that you could motivate workers by giving them "a piece of the upside." And the workers, too, believed they might get rich if they had a stake in their employer's company. Especially in the financial sector, 'results-based compensation' caught on. Soon, almost everyone had a piece of the upside.

The trouble was, especially in the financial sector, the upside was remarkably short-sighted. In the near-term, business managers had a huge incentive to push the upside up farther than it ought to go. Take risks? Why not! If they could increase the quarterly results they would get a bigger bonus. If, over the long term, the business were weakened...well, that would be the owners problem, wouldn't it? Managers sometimes had such a big piece of the upside there was scarcely anything left for the owners.

Everybody wanted a piece of the upside. Owners - including the new capitalists - wanted the business to prosper so their stocks would go up in price. Managers wanted high quarterly profits - so they could exercise their stock options and pay themselves big bonuses. They were all 'capitalists' - but ersatz capitalists. None had much of an interest in the long-term health of the capitalist institution itself.

A real capitalist is eager to cut his labor costs. If hourly wages rose too high...he'd want to move to a lower-cost production center. And if the managers asked for too much - he'd fire them and get new ones.

But neither the working stiffs nor the suits shared the owners' interest in cutting labor costs and preparing for the future. While European automakers shifted much of their production to lower-cost countries...GM continued to make cars in the United States of America. Its unionized, stock-owning, voting employees wouldn't allow it to move. And when it needed to invest in new tools and equipment in order to make autos for the 21st century - suppressing earnings in the short term in order to make the company stronger later on - its bonus- seeking, option-driven managers wouldn't permit it.

Lesson: Let the managers manage. Let the workers work. Let the capitalists grub for money. And let the politicians lie and steal. Each to his own métier.

If you're wondering what that means in today's world, you're not alone. We're wondering too.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Obama Has Business Plan for the Car Industry
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• A Country of Madoffs

Poor Warren. He's down to his last $25 billion. And Bill Gates can barely hold his head up; his pile has shrunk to barely $18 billion.

And do a Google search of "AIG outrage" and you will get 621,000 hits.

Alas, being rich isn't as easy or as much fun as it used to be.

The rally paused yesterday. The Dow lost 7 points. It could be over. More likely, it will run for a few months. Gradually, people will come to think that this is the real thing. They'll begin to imagine that it is 2003 all over again. Of course, it's not...this market has nothing in common with the Great Rebound of 2003-2007. (More below...)

Oil traded at $47 yesterday; it is slipping toward the $50 level. And the dollar is slipping around too - it is losing ground against the euro, now trading at $1.29/$. But it is mostly steady against gold, which seems to like the $900-$950 range...for now. We have a feeling it's going to go much, much higher before all this is over.

AIG is today's main story. Everyone is appalled, outraged...or apoplectic about it. First, we under-reported the amount in bonuses paid out. The real amount is $450 million, says the Wall Street Journal...and one member of Congress charges that many bonuses were disguised as other things...and that the real total is more like $1 billion.

The average lumpenvoter has no idea how bailouts work. He was willing to believe that giving Wall Street hundreds of billions in taxpayer money would somehow make his house go up in price, but now that he sees how it really operates, he is ticked off about it. He may not understand macroeconomics, but he knows chicanery when he sees it.

Under pressure, AIG revealed what it did with the bailout money. It came as no shock to us to discover Goldman Sachs at the top of the list of recipients. Goldman's main man was in the room with the feds - the only representative of Wall Street - when the decision was made to rescue AIG. What's more, the feds' main man at the time - Hank Paulson - also used to be the top honcho at Goldman. So the fix was in. The government gave money to AIG and AIG gave it to a long list of speculators - including Goldman.

This seems perfectly natural to us. If we'd been in on the fix we would have steered some of the loot our way. But the politicians are feigning shock and horror. Senator Grassley even said AIG management should "resign or commit suicide." He later calmed down and said he didn't mean it.

But we would have simply edited his remarks, giving the schmucks at AIG a last chance to exit with honor: "Resign AND commit suicide, in that order."

Barney Frank added that "maybe it's time to fire some people." Why not? The feds own 80% of the insurance giant now. Go ahead; fire all the people you want. That's about the only pleasure a real capitalist has left to him. Reach out...and fire someone today!

Elsewhere in the news, the economy continues to deteriorate. Industrial production fell 1.4% in February. And credit card defaults are at a 20- year high.

Misters Smoot and Hawley seem to still be on the federal payroll. The news this morning is that they began a trade war with Mexico and the Mexicans have already retaliated. That's all we know about it...

But back to the tribulations of the rich...

First, Mr. Market is downsizing fortunes - fast. In the last 12 months, the average rich person has probably lost half his wealth. Not only did he own millions worth of stocks and real estate...he was also among the privileged few to get into good deals on derivatives, SIVs, hedge funds and private equity. Many of those complicated and conflicted assets have been wiped out completely. Or, maybe he was unlucky enough to count Bernie Madoff as a friend.

Second, what Mr. Market doesn't take, Mr. Politician is looking at. All over the world, plans are afoot to increase his taxes...and close down his tax havens. President Obama has already revealed his plans to soak the rich. Every other group will come out even...or better...from Obama's tax proposals. But the rich are going to be saturated...marinated...soaked to the bone.

And third, the poor rich guy has become a pariah. He doesn't get invited to charity events anymore - or even to join the guys after work for a beer. Europeans have always distrusted rich people. But in America, a rich man used to be respected - just because he was rich. People asked his opinion on politics...on fashion...on art. He was presumed to be an authority on all things and was generally treated with respect...even deference.

But now rich are seen as chumps, losers, incompetents and malefactors. Even Americans look at rich people and think they must be either stupid or corrupt.

"Le secret des grandes fortunes sans cause apparente est un crime oubli , parce qu' il a t proprement fait." said Balzac. Which has been paraphrased to "Behind every great fortune lies a great crime." Of course, he was referring to France, where it is has probably always been true. Money is dirty in France. But in America, money was supposed to be clean...innocent...honest and forthright. The richest man in town always sat in the front pew in church and stood for election to local office.

But come the depression and even the rich suffer. And unlike the starving urchins, unlucky widows and innocent orphans, no one cries a tear for the rich. Here at The Daily Reckoning we always take the side of the underdog...and always support the lost cause. So when we think of the rich...those darling people with their Italian suits...German cars...and Swiss bank accounts...our cheek gets a little moist. For we - and we alone - still admire and respect the rich. Of course, the rich are human beings too - just like the rest of us. And yes, dear reader...we still despise them as much as anyone else. When it comes to intelligence or moral rectitude, they are probably no better than the lower classes, though probably no worse. But we still admire and respect their money. Their money is no better either - but they have more of it.

Now over to Baltimore, where Addison at The 5 Min. Forecast gives a St. Patty's Day look at the Emerald Isle:

"What's the difference between Iceland and Ireland? 'one letter and six months,' or so goes a joke making its way around the Internet," writes Addison.

"Aye, on this St. Patty's day the Emerald Isle is suffering the mother of all hangovers; the embodiment of a boom gone bust.

"With official unemployment now over 10%, GDP shrinking at a 6.5% clip, a proper housing crash and a 10% federal budget shortfall, Ireland has seen it's glory days crumble into one of the Eurozone's most beaten down economies.

"Ratings agencies are on the verge of downgrading Ireland's sovereign debt, which will assuredly make the whole matter even grimmer.

"The opening joke is so pointed," Addison continues, "Irish Finance Minister Brian Lenihan is now on a global PR tour to help rekindle the world's love of shamrocks and Guinness. Despite Lenihan's denials, many expect the IMF to swoop in and become Ireland's banker of last resort."

Addison writes every day for The 5 Min Forecast, an executive series e- letter that provides a quick and dirty analysis of daily economic and financial developments - in five minutes or less.

Back to Bill in Paris...

It's NOT 2003. Just in case you had any doubts.

You remember 2003? After a phony recession in '01-'02 came a phony boom in '03-'07. Stocks had driven into a ditch following the crash of the NASDAQ. The Dow had fallen down to about 7500. And then, when it looked like they were going nowhere for a long time...along came Alan Greenspan's friendly towing service. In a jiffy, he winched the economy back onto the road...and it was soon flying along at the fastest speeds every recorded. The Dow went all the way to 14,000 and beyond...before crashing into a stone wall.

And now the financial media is on "bottom watch." No, we're not talking about the kind of bottom watching you do on a Brazilian beach...we're talking about looking for the end of this bear market.

"Are stocks and oil bottoming," asks a headline at Seeking Alpha.

"How will we know..." when we hit the bottom? Asks the New York Times.

The answer: we will know when we no longer want to know.

For the moment, we believe we are beginning a classic rebound. The news seems to have turned positive...along with the weather. It's sunny and warm in Europe this morning. And investors are focusing on the positive.

"IMF poised to print billions in global quantitative easing," says a headline in London's Telegraph.

All over the world, the feds are working the pumps. And investors are watching their little boats begin to rock. If history is any guide, this rebound will recover 20% to 50% of what was lost. Then, the bottom - so recently spotted and revered - will fall out.

This is not 2003. In 2003, there was no collapse of the financial sector...banks didn't fail...major companies didn't face bankruptcy...consumer spending didn't fall...house prices didn't collapse...savings rates didn't go up...capitalism wasn't called into question...there were no tax rebates...there were no bailouts...not even a stimulus plan (though the feds did spend much more money...and the Fed did cut rates to 1%).

This time it's different. This is not a recession. Not even a phony recession. It's a very real Depression with a capital D...and all that goes with it - including whole industries that go broke, a credit crunch, a big drop in consumer spending, a huge political shift toward socialism, interest rates at zero, falling prices, and widespread bankruptcies - both of households and companies.

In 2003, a quick cut in interest rates - along with a boost in federal spending - produced a fast turnaround. Within months, prices were rising again. Consumers didn't even pause...they kept spending and borrowing all the time. This time, the world has never seen stimulus efforts of such huge magnitude - and still no real uptick. This time, consumers are running scared...they're losing their jobs and closing their wallets. This is the real thing. It won't end quickly...or easily.

Here's a calculation for you. The amount of excess debt in the United States is about $20 trillion. That's the difference between the usual level debt - about 150% of GDP - and today's level - about 350%. That $20 trillion in surplus debt probably has to disappear before a true growth cycle can begin again. The best way is simply to let nature take her course. Much of it would be written off in a few months. But the feds won't let that happen. They're doing all they can to prevent assets from getting marked down...and to prevent debt from getting written off. So far, they've committed $11.7 trillion to the fight against debt deflation.

So instead of writing it off, it will have to paid off...or ultimately, inflated off.

Currently savings rates have risen from zero to about 3% of GDP. That's about $420 billion per year put to paying down the debt. Let's see, at that rate, how long will it take to erase the $20 trillion in excess debt? Hmm....about 47 years!

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

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Finally, a nation with a little backbone...a little integrity...a little good sense. And guess what, it's that dreary socialist refrigerator - Sweden. Asked to bailout its GM-owned automaker, Saab, the country's Prime Minister just said 'no.' Good for him...

"Voters did not pick me to buy loss-making car factories," he explained.

But it's a time of contradictions, paradoxes and oxymorons. Up is down. Right is left. In is out. Good is bad.

The socialists are the only ones protecting the free market, now. Americans are scuttling it with every chance they get. The stocks of capitalist companies are going up in communist China...but in America, they're going down. Since November, the Shanghai index has outperformed the S&P by 75%.

And back in the United States, projects that were considered too marginal to justify spending money a year ago are now thought to be indispensable. And the IOUs of the biggest spendthrift on the planet are the hottest item on the market. Ten-year Treasury notes are now priced to yield only 2.99% - just as the Obama administration announces a $1.75 trillion budget deficit.

Even crooks and criminals are flummoxed. A guy walks into a big downtown bank. He points a gun at the teller and says: "Give me all your money."

The teller replies calmly: "You don't understand. This is a bank. We don't have any money."

The only people with money now are the people who never earned any...the people who print the stuff.

But back to China:

All the things that used to convince pundits that China was hopeless now persuade them that it's the hope of the entire world. "China's autocrats can announce a stimulus - and get on with it," writes John Authers, admiringly, in the Financial Times. They don't have to beg and bicker with the dunderheads in Congress. They can just do it.

And China's banks are more solid, too. "China's are in good health, with both loans and deposits rising. American counterparts are not."

But our irony cup runneth over when we read Auther's next comparison:

"Finally, there is confidence in officialdom." The markets have lost confidence in Tim Geithner and the rest of the feds, he says. "Meanwhile, hope...is pinned on the audacity of Chinese officialdom and is ability somehow to keep their economy on course."

Everything is so topsy-turvy, dear reader, we think we're going to throw up.

The whole world now turns its weary eyes...not to that bastion of free- market leadership, the United States of America, but to a country that has only had a quasi-free-market in goods and services for less than a quarter century...a country still run by Maoists. It is to them that we supposedly look to save the world economy!

What a great time to be alive! Practically every headline makes us want to reach for a drink. And we're finally getting to see something that we only read about in the history books...yes, we're going to find out what makes a depression so great.

Bankruptcy filings in the United States were up 37% in February, over the year before. House sales plunge, say the papers. Auto sales plunge, say the websites. Joblessness soars, says this morning's news. Corporate America laid off 158% more workers this February, as compared to a year ago. Since the beginning of the year, layoffs are running 191% ahead of the same period in 2008. Almost a half a million people have lost their jobs so far this year...and there are 10 months left to go.

The Dow gained 149 points yesterday. Our "Crash Alert" flag is still flying...but the Dow is probably going to rally for the next few days.

Gold, meanwhile, continues its correction. It fell to $906 yesterday. Goldbugs, don't despair. Have faith. The commies aren't going to pull the world economy out of its tailspin. The bailouts and boondoggles in the West aren't going to do it either. Buying gold is still the smartest long-term decision that you can make for your portfolio...and we suggest you take advantage of this correction. Buy some while the price is low - and even better, you can get the yellow metal for just a penny per ounce.

Remember, this is a depression, not a recession. Both America and Chinese economies have lived in a grand, symbiotic delusion for the last 10 years. America believed it could let the Chinese do all the sweating and saving. China believed it could make money by selling to people who couldn't afford to buy. Now, both economies need perestroika. Both need to be refocused. China will turn its economy towards domestic consumption...and military spending, no doubt. America will have to accept a lower standard of living with fewer imports.

These adjustments take time. The last time the world went through a depression was in the '30s. Every major economy - except Britain - fell backwards...all of them losing more than 20% of GDP. It took three years before they hit the bottom. Then, some bounced back quickly - Germany and Japan - thanks to military spending. Others - the United States and France - barely bounced at all.

*** More bubbles ready to burst. In the United States, public pension systems are under-funded by about $1 trillion. Firemen, teachers, policemen, municipal workers...state bureaucrats. Every one of them is looking to the feds for a bailout.

Oh...and AIG is getting its FOURTH go-round of rescue money. The fifth one will come around soon enough. And there's Detroit...California...student loans...commercial loans...the banks...the homeowners...the unemployed...the sick...the halt...the lame...the blind...the plain stupid.

Where will the feds get the money?

They'll continue to borrow it. Then, when lenders get tired of lending, they'll print it. That's when gold will really fly...but that might not be for another few years.

For the moment, lenders like buying U.S. government IOUs. It's the only thing they feel they can trust. One way or another, they're sure Uncle Sam will make his payments.

But, as we've been saying, we live in an upside down world. If and when the fear subsides, investors are going to look elsewhere for yield. Prices will begin to rise again. So will yields. So, the U.S. government will have to pay more to borrow. Thus, as things get better for the economy...they will get worse for the U.S. Treasury. It will find itself with higher and higher interest costs...and no way to pay them.

What will they do? Throw up their hands and admit they can't make their payments? Or print money? We've already made our guess; they will do the wrong thing.

*** What is the right thing to do?

"Leave it to time to affect a permanent cure by the slow process of adapting the structure of production..." said Friedrich Hayek.

"Depressions are not simply evils, which we might attempt to suppress," added Schumpeter, "but forms of something which has to be done, namely, adjustment to change."

The economy needs to be restructured. The dead wood needs to be burnt off. But the feds are trying to stop the fire.

Alas, said Schumpeter, "most of what would be effective in remedying a depression would be equally effective in preventing this adjustment."

Bradford Delong explains:

"...certain investments should not have been made. The best that can be done in such circumstances is to shut down those production processes that turned out to have been based on assumptions about future demands that did not come to pass. The liquidation of such investments and businesses releases factors of production from unprofitable uses; they can then be redeployed in other sectors of the technologically dynamic economy. Without the initial liquidation the redeployment cannot take place. And, said Hayek, depressions are this process of liquidation and preparation for the redeployment of resources.

"As Schumpeter put it, policy does not allow a choice between depression and no depression, but between depression now and a worse depression later: 'inflation pushed far enough [would] undoubtedly turn depression into the sham prosperity so familiar from European postwar experience, [and]... would, in the end, lead to a collapse worse than the one it was called in to remedy.' For 'recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatening business with another [worse] crisis ahead.'

*** We got on the Paris metro this morning. In the car, there were two fellows...bums...in worn-out jackets...scuffed-out shoes, without socks. They didn't seem drunk or drugged, just very tired. One bent over with is his head on his knees. The other was bent over too but uncomfortable...swaying, as if he was about to be sick. Both had an eastern European ...or Turkish look. Maybe they were gypsies...dark complexions, but European features...rough, course...with thick hands and dirty fingernails. Occasionally, they exchanged words in a language we didn't understand. The older one seemed less well than the younger man, who was probably in his 40s. As they tried to sleep, the younger one fell off his seat. Catching himself...he put his head back on his knees...and then, a minute later, he fell off again...this time right onto his head. Then, he picked himself up and sat down...and dozed off again.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• The New Chinese Era
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• China Was the Maker and the United States Was the Taker
• The More Money in a Financial System the Less Each Unit is Worth
• China Reduces Holdings of Treasury Securities

How surreal. Less than ten weeks to go remain in the most entertaining presidential election campaign in recent decades. Yet right here in the United States of America, capitalism is reeling. It's under attack by a bunch of socialist bankers and the politicians whom they've purchased to represent their interests (and are themselves hoping for a nice up tick in the stock market before voters head to the polls in November).

By now you know that over the weekend the U.S. Treasury Department placed America's two largest housing lenders into conservatorship. Treasury will pump about $1 billion each into each company and get preferred equity in exchange. The government also gets warrants that would give it nearly 80% ownership of both firms. It will probably take at least another US$200 billion in new money to keep them solvent.

It's already clear, though, that U.S. taxpayers have 100% of the risk. Fannie and Freddie were too big to fail, apparently. The question now is whether this short-term nationalization will lead to the failure of any other large U.S. institutions (like the dollar or U.S. Treasury bonds). More on that in a moment.

For its part, the stock market (the global one) absolutely loved the deal. After half a trillion dollars in losses by global lenders, markets love the idea that the worst might be over. Most financials rallied. Even the U.S. dollar is stronger, which seems a bit strange considering that the U.S. government just added US$5.3 trillion in liabilities to its balance sheet.

But here is the theme resounding on the pages of today's papers: the U.S. is ahead of the curve! The U.S. has had its slower growth, weaker currency, massive housing meltdown, and lived to tell about it. Now, with Fannie and Freddie taken into Uncle Sam's bosom, America is ahead in the global game.

That's the theme anyway. It's probably true with respect to a country like Britain, whose currency continues to plummet and whose house prices won't be far behind. Yet you don't get the feeling that America's fiscal position was substantially improved by this weekend's action. The responsibility for the losses was simply transferred from a pseudo-public balance sheet to a very public balance sheet. How is that good for the dollar in the long run?

It isn't. But in the meantime, the other losers this weekend are those financial institutions who owned preferred equity in the GSEs. The common shareholders never had any rights (and the recent ones, no common sense either). But according to the FDIC and there, "while many institutions hold common or preferred shares of these two government-sponsored enterprises, a limited number of smaller institutions have holdings that are significant compared to their capital."

These smaller lenders are, ahem, screwed. The government intends to work with them on "capital restoration plans." But if you thought this event signalled the end of the losses, think again. There will be more bank failures, and they will happen soon.

What about bondholders in China and Japan? They'll be alright. We don't know exactly how it will work. But somehow we reckon those GSE bonds will end up on the Federal Reserve's balance sheet, in exchange for fresh new U.S. Treasauries (issued by the Treasury Department). In other words, we reckon the GSE bonds will be monetized.

Exactly how THIS is good for the dollar, well, you figure that one out. We can't. However, we're not going to stand in the way of a big relief rally. More on the story as it unfolds.

Out here in Colorado where the energy boom keeps on keeping on, we notice that U.S. firm Conoco Phillips has offered US$8 billon for half of Origin Energy's coal-seam-gas assets in Queensland. Good on ya, Conoco!

We may not have finanicials to kick around anymore, but we'll always have energy as a secular investment theme. We hope Conoco had some back-channel conversations with the Queensland government about the futures of CSM before it ponied up its cash. But Conoco may just be trying to get rid of spare cash before it's stolen away in a windfall oil tax scheme by the next U.S. administration. Either way, from uranium to coal to LNG, it's a good time to be an energy invnestor in Australian projects.

You editor will do his best to stay in contact this week before leaving for Sydney on Thursday. We arrive Sunday for a mining show at the Hilton. But in the last week, we spent four days in Annapolis, Maryland with about 80 of our global publishing colleagues.

The Agora publishing family is truly global now, and it was good to hear how others are faring in such a tough market. Mainly, we wanted to know what sentiment was like in other markets and what customers were expecting in today's very competitive market.

About the only upbeat folks was the team from India. They are as excited as can be over what's ahead. They managed to get us excited too! India shares at least one quality with Australia (in investment terms): there are more good stocks than there are analaysts to tip them. That's precsiely the kind of advantage you want as an independent investor willing to do your own research.

By the way, it would be hard to see the Fannie and Freddie nationalisation as anything other than a massive official back-pedal from the free market. Maybe we are entering a new era of less free trade, higher taxes, and more nationalisations. The government backlash against globalisation could last for awhile. Capitalism is in retreat. Hmmmn.

Dan Denning
for The Daily Reckoning Australia

• Fannie and Freddie in a Free Market Economy
• Fannie and Freddie Say Goodbye to Veto
• A National Mortgage Bubble
• Fannie and Freddie: Playing With a Stacked Deck
• Government Sponsored Enterprise Debt and Australian Banks, a Ticking Time Bomb?