Your editor was semi-conscious over the Pacific ocean at the time, so he can't vouch for reports. But our 30 hour trip back from Baltimore, via Chicago, L.A., and Sydney gave us time to think. Are we just being a paranoid nutcase about the global economy? Or is the position - gradually reduce your exposure to stocks and increase your tangible asset holdings - pretty sensible in a world with soaring debt and ambitious socialists?

You'll find our answer in just a moment. In the markets, it's pretty sunny out. While most of Australia idled its way through Labour Day yesterday, the ASX/200 crested through 4,800. It was a six-week high for the index. And then the news got better.

Newswires report that Royal Dutch Shell and PetroChina have offered $3.31 billion in cash and stock for coal-seam-gas player Arrow Energy (ASX:AOE). There's some consolidation going on now in Queensland's unconventional gas sector. So what should you do?

Nothing. The time to do some speculating was in November and December of 2008. That's when our colleague Kris Sayce tipped two of the entrants in the CSG race in Queensland. As the projects were "de-risked" the share prices went up. We phoned up Kris down the hall this morning and it is long-since out of his LNG positions.

The point? You have to be a year or two ahead of these big ideas and risk looking like a fool to make the big money on them. There's probably plenty of safe money to be made still. And if you are not a speculator or you don't have money you can't afford to lose, you shouldn't be playing the small cap game at all.

But as we contended at a dinner in Baltimore last week, the best reason to be in equities at all right now is for the chance to make five or ten times your money. These are Taleb's positive Black Swans, the low-probability, high-magnitude events that are actually good for your portfolio. Your much better off owning a portfolio of disruptive technologies or prospective ore bodies leveraged to higher commodity prices than blue chip stocks. Why?

The share market as a method for long-term, safe wealth-generation is a dead letter. That is, it ain't gonna happen that way anymore. Stocks are up nearly 70% from their March 9 lows of last year. The reflation rally engineered by monetary and fiscal expansion in the last year has merely papered over some huge structural weaknesses in the global economy.

But more importantly, the share market is at risk now for a big fall as it was in the middle of 2007 when the Bear Stearns story broke. Since then the perimeter of global markets has gradually been overrun by the forces of wealth destruction. Investors retreat into a smaller and smaller circle of "healthy" institutions and currencies - which only heightens their risk to further asset write downs.

The basic problem is that the global illness of too much debt has been remedied by more debt, which is no remedy at all. France and Germany may bail out Greece. But who will bail out Europe? And who will bailout the United States when public debt could rise to be 716% of US GDP in the Congressional Budget Office's alternative scenario (see page 20 for the figures).

Of course if you really think stocks are cheap now, your best bet would to be buy them and hold them. It's worked before. But we wonder, given the demographic forces in the Western world, if there is simply going to be more sellers than buyers in the coming years as the boomers liquidate.

Granted, we're arguing for a change to the prevailing conventional wisdom of the last 30 years. But hasn't the last two years given you every indication that the world really is different now and that what worked for you before in investment markets may not work again?

Or if you prefer the argument in more concrete terms, have a look at what Karl Denninger has said about the systematic balance sheet fraud going on in the United States. Dennigner shows that the suspension of market-to-market rules for U.S. banks did not - surprise surprise - lead to any improvement in asset quality.

But it's only at liquidation when the banks are taking over by the FDIC that the banks admit they've been carrying loan portfolios at much higher valuations than market prices would suggest. They only realise their losses when they are technically insolvent on their fictitious asset values. You wonder how many U.S. (or Australian) banks are doing the same thing.

Denninger reckons, based on the write-downs in assets on the firms seized by the FDIC, that total unrealised losses on bank loans could be between $1.5 and $3 trillion. Imagine what that would do to credit markets. And if the Fed tried to paper it over, imagine what that would (will) do to the dollar. Now imagine having the chance to buy gold at $1,124 an ounce.

Of course the underlying assumption to the recovery narrative has been that the bank collateral would always recover in value once the real estate market recovered. And that would happen with the passage of time, low interest rates, and short memories.

But in America at least, it's nowhere close to happening. If anything, a second and destructive down leg is coming. This is why banks continue to hold large excess reserves at the Fed. They know they're going to need it.

The underlying belief to all of this is that the credit boom has already gone bust and assets won't fall any further. You see this fiction over and over in America with the ramshackle and largely failed attempts to modify mortgages with longer terms and lower interest rates. But the basic problem - the house just isn't worth that much - is ignored.

Here we are, then, a year into the rally. The great central bank counterfeiters of the world have pumped up prices - presumably so those in the know can sell at a smaller loss, or in the case of the investment banks, at a substantial profit. But the real economy remains massively burdened by debt. For the rest of this week, we'll look at why we think the end-game to all this will play out over months, and not years. And why it won't be deflationary. Until then...

Dan Denning
for The Daily Reckoning Australia

• A Sovereign Debt Crisis Bullish for U.S. Dollar and Bearish for Gold
• Corporate Debt is Just One Aspect of the National Debt Problem
• Debt Problem Has Not Gone Away
• It All Comes Down to Debt Again for NAB
• Australia Has Highest Household Debt to Disposable Income Ratio in World

The past week has been confusing. Stock markets around the world have rallied, but the elation doesn't seem to be spreading. Instead, the bastions of optimism and long standing opponents of the Daily Reckoning have turned gloomy and sometimes downright apocalyptic.

The first exhibit is Mr. Debelle, the Assistant Governor of the RBA:

"While most of the recent jitters have been associated with sovereign concerns, I think the risks stemming from the financial sector are still there. A significant risk is that we are still yet to see the full impact of the weakness in the North Atlantic economies on the loans on the books of financial institutions."

That is gloomy. But hold on to your hats, here comes worse.

Albert Edwards from Société Générale has broken the mould when it comes to being an investment banker. In other words, he is saying it like it is. Exactly like it is.

"My own view on this is that obviously we should never have got into this wholly avoidable mess in the first place. But having got here, there really is no way out that does not trigger a major market-moving upheaval.

"Ultimately economic prosperity over the past decade has been a sham: a totally unsustainable Ponzi scheme built on a mountain of private sector debt. GDP has simply been brought forward from the future and now it's payback time. The trouble is that, as the private sector debt unwinds, there is no political appetite to allow GDP to decline to its 'correct' level as this would involve a depression. So burgeoning public sector deficits and Quantitative Easing are required to maintain the fig-leaf of continued prosperity."

The main thing we see missing from Mr Edward's analysis is the role of monetary policy in financing the mountain of private sector debt, while government legislated to encourage it. By setting rates artificially low, the Federal Reserve made money cheap and the government then put that money to use by implementing affordable housing policies. Strangely enough, this was all done while touting free market rhetoric and the benefits of deregulation.

So now, themselves confused, global institutions are having a bit of an identity crisis. Even the IMF has decided to go against the mainstream by suggesting an "overthrow of inflation targeting as the central goal of economic management." While we agree in principle, we do not "urge inflation be allowed to rise to 4 per cent to give governments a better ability to manage downturns."

This idea is blatantly stupid. But who are we to claim that? Unlike the IMF, we have not been accused of destroying African agriculture nor disregarding human rights. In fact, if we had the IMF's track record, we wouldn't be able to sleep at night. Our humble suggestion, along with many of the people who predicted the crisis, is to not have an IMF, nor a World Bank, or even a central bank.

On that note, it is worth going off on a tangent for a moment. The idea that government formed institutions can bring about free markets and globalisation is a paradox. The book "Globalization and Its Discontents" by Nobel Laureate Joseph Stiglitz is an amusing illustration of this inherent contradiction. The book is not about globalisation, so the discontents identified aren't even relevant.

The book is about the IMF and its failures. For some reason, Stiglitz thinks globalisation comes about by management from institutions like the IMF. It is in fact the absence of institutions like the IMF and World Bank that defines globalisation. That is something people need to grasp for globalisation and its "contents" to emerge.

Anyway, let's focus on the suggestion of abolishing central banks.

Last week featured a discussion of how banks are the most regulated businesses in the world. They cannot control the price they provide their goods/services at (the interest rate), nor can they control how much they sell (the money supply). Both of these are controlled by the central banks. (See lasts week's edition for a more detailed explanation).

Deregulation is meaningless if you can't even control price and quantity, so blaming the crisis on regulatory reform or greed is just ignorant. Only the central bank has enough influence to cause a crisis in the banking system. A free market doesn't stuff up that badly.

Ponder for a moment a world without a central bank manipulating interest rates and without a financial services regulator implementing regulations. What do we get? Well, historically speaking, we get the safest banking system possible.

Don't believe it?

Check out these podcasts on Free Banking and the Austrian Business Cycle. For a more current example of how transactions occur safely, but out of the government's sight, check out Hawala Banking. You just gotta love the free market at work - because it works.

Fear the Boom and Bust

For those of you who don't like podcasts, but want an understanding of the crisis, I suggest the following rap video. It is more informative than any economics lecture I have ever been to.

Part of the rap is about the Austrian Business cycle theory, which explains how the crisis we are in comes about and how it plays out. "Blame low interest rates" says the chorus.

Here are the key verses:

"The place you should study isn't the bust
It's the boom that should make you feel leery, that's the thrust
Of my theory, the capital structure is key
Malinvestments wreck the economy

"The boom gets started with an expansion of credit
The Fed sets rates low, are you starting to get it?
That new money is confused for real loanable funds
But it's just inflation that's driving the ones

"Who invest in new projects like housing construction
The boom plants the seeds for its future destruction
The savings aren't real, consumption's up too
And the grasping for resources reveals there's too few

"So the boom turns to bust as the interest rates rise
With the costs of production, price signals were lies
The boom was a binge that's a matter of fact
Now its devalued capital that makes up the slack."

If this sounds familiar, have a look at the Albert Edwards quote above. Mr Edwards comes up with the same argument almost 100 years later than the Austrian School of Economics.

It's the "expansion of credit" that signals the onset of another bubble, or "fig-leaf of continued prosperity." If you don't see that expansion of credit happen here in Australia, then we may be heading for trouble instead of another fake recovery. We will keep you posted on that.

Mainstream Reckoning II

According to The Telegraph, Société Générale isn't just talking the talk:

"Société Générale has advised clients to be ready for a possible 'global economic collapse' over the next two years, mapping a strategy of defensive investments to avoid wealth destruction."

So it's official now. You should be concerned. Alan Kohler is now doing some reckoning in the Business Spectator.

"In general, what we are seeing is not just a Mediterranean muddle - it is the beginning of the great global fiscal stimulus reckoning... In other words, the entire western world is insolvent and each country is facing its own day of reckoning - starting, appropriately enough, in Greece, the place where western civilization itself began."

The article carried the same title as a book written a colleague of ours in 1992.

"In The Great Reckoning, Lord Rees-Mogg and I [James Davidson] warned that the coming fall in real estate would cost trillions as the ill-considered guarantees kicked in, on Freddie, Fannie and other guarantees that proved to be AIG-style Credit Default Swaps on real estate."

Noting the date, it would seem Jim is worth listening to. What is his latest claim? Nothing less than an upcoming "Little Ice Age". He even coined a term to describe the evidence cited by the global warming camp. You'll find it just below.

Statistical Falsies

No, the subtitle is not meant to read "Statistical Fallacies". The word "Falsies" refers to the un-biological content sometimes found in bras. Statistical falsies are proving just as disappointing to the global warming camp. I find myself on thin ice here, so let's get back to the point.

On the real climate change front, the former Chairman of the IPCC has made an intriguing point about the amassing "errors" made by its "scientists". If, as the IPCC claims, these "errors" are innocent, then why do they all overstate the impact of climate change? Innocent errors would imply a mixture of results, while it seems the fallacious claims of IPCC cited material all point to global warming.

My personal favourite of those "errors" was the claim that Himalayan Glaciers would disappear by 2035. Evidence suggests they got their numbers muddled. 2305 is more like it. Sadly, the data still suggests they will disappear... Just as they have in other places around the world since before man first rudely released the greenhouse gas methane.

The Great American Liquidation Sale

Dan Denning's predictions of China's attitude toward US government bonds have gone from being scoffed at, to reality. He reports in the Daily Reckoning that "foreign holdings of U.S. Treasury securities fell by $53 billion December. China reduced its holdings by $34.2 billion. The end game is beginning in the Chimerican relations."

CNBC manages to paint a much brighter picture with the title "Foreign Demand for US Treasurys Takes Record Fall".

One wonders what could happen to the banks, who hold vast reserves of US treasuries to sure up their capital structures. "U.S. Treasury and agency debt makes up about 60% of the world's banking reserves" says Porter Stansberry. Banks are on shaky ground as it is (real estate). Dan Denning named this a "double collateral whammy".

Could banks survive a big hit to US Treasury prices?

Of course they could, just not by themselves. They have learned the government will come to the rescue - if the size of their bets are big enough to cause instability to the wider economy.

But then again, the legendary Paul Volcker has other ideas:

"If a big non-bank institution gets in trouble and threatens the whole system, there ought to be some authority that can step in, take over that organization and liquidate it or merge it -- not save it... It's called euthanasia, not a rescue."

As Mr Volcker is President Obama's economic advisor, his proposal is worth paying attention to. Except that a fall in treasury prices would spell trouble for just about all banks at once, so it would be more like genocide than euthanasia.

Acronym Update

Thanks to the readers who have submitted their alternative acronyms for debt ravaged nations. Unfortunately, I assumed it was a task that could be safely left to sophisticated and mature Daily Reckoning readers, so I didn't do any pondering myself. The endless variations of the following should have been predictable: "PIIGSUSUK (PIGS-U-SUK)."

Although adopting this acronym would allow bacon references going forward, it does not have a nice ring to it.

Strangely enough, the PIIGS matter has become quite an issue. No, not the debt, just the name. Particularly enjoyable was the specific attempt to point out the acronym in a Bloomberg article.

"With all of the issues the EU had with the PIGS, one would think we would see a continued flight to quality," said Thomas L. di Galoma, head of U.S. rates trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. He used an abbreviation for Portugal, Ireland, Greece and Spain.

Did he now! Golly gosh.

Meanwhile, a big thanks to David G. for submitting the best new acronym for debt ravaged nations:

BIGPISA = BRITAN, IRELAND, GREECE, PORTUGAL, ITALY, SPAIN, AMERICA

Those nations certainly look like they are leaning towards a collapse.

Also, thanks to James for sending this in:

I quote from the instructions [of Monopoly]: 'The Bank never "goes broke". If the bank runs out of money, the Banker may issue as much more as may be needed by writing on any ordinary paper."

Ah the irony.

Nickolai Hubble
The Daily Reckoning Week in Review

• Bank for International Settlements Report Looks at Origins of Credit Crisis
• Central Bank Tries to Determine Interest Rates as Far as it Can
• Central Bank Has Lost Control of Credit Crisis
• Global Credit Shortage is Over According to European Central Bank
• Credit Markets Threaten Retail Banking, Bank Runs Next?

But instead of atoning in a dank cell, these same economists strut onto the stage to congratulate themselves.

"The Greatest Depression that could so easily have happened in 2009 but did not is the tribute that the world owes to economics." Wrote Arvind Subramanian in The Financial Times.

We were lost from the get-go, trying to interpret the sentence. It is as tangled and puerile as the staggering conceit behind it. Then, Mr. Subramanian sets up the stage props:

"In 2008, as the global financial crisis unfolded, the reputation of economics as a discipline and economists as useful policy practitioners seemed to be irredeemably sunk. Queen Elizabeth captured the mood when she asked pointedly why no one (in particular economists) had spotted the crisis coming. And there is no doubt that, notwithstanding the few Cassandras who had correctly prophesied gloom and doom, the profession had failed colossally..."

He then brushes off the Queen's very sensible question:

"But crises will always happen, and even if there is a depressing periodicity to them as Professors Reinhart and Rogoff have catalogued, their timing, form and provenance will elude prognostication."

Of course, the record doesn't show that the crisis eluded prognostication; any dope could have seen it coming. But the prognosticators who had contributed so mightily to the crisis had blinded themselves with their own claptrap. Still, Mr. Subramanian figures that they "vindicated" the profession in the way they responded to the crisis.

"On monetary policy, Bernanke was true to the word he gave to Milton Friedman on the occasion of his 90th birthday: 'Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.' Bernanke, the pre-eminent student of the Great Depression, found conventional and some very unconventional ways of not doing 'it' again. At the peak of his interventions, the US Fed came to resemble the Soviet Gosbank, more a micro-allocator of credit than a steward of macroeconomic policy."

It probably wasn't the point he intended to make, but the Fed does resemble the Soviet era Gosbank - manipulating, meddling and micro- managing the economy towards destruction. Meanwhile, Congress is doing some Soviet style management too; it is now owner of the nation's largest automobile company and its largest insurance business: "They took their cue from the writings of the academic scribbler of yore - Lord Keynes - and provided massive public demand for goods and services where private demand had collapsed...."

We were still gasping for air when, on the 30th of December, columnist Martin Wolf called upon Keynes ghost again. He too shuddered to think how horrible things would have been if the financial authorities had not taken resolute action:

"We could not in such times, even take the survival of civilization itself for granted. Never before had I felt more strongly the force of John Maynard Keynes's toast 'to the economists - who are the trustees, not of civilization, but of the possibility of civilization.'"

Is there any doubt that Keynes was a scalawag? Civilization flourished for thousands of years before anyone made a living as an economist. Crises came and went. In the 19th century, for example, there were panics followed by depressions in 1819, 1837, 1857, 1873, and 1893. Not one of the depressions seemed worthy of the "great" modifier. Hundreds of banks failed. Civilization didn't seem to care. The rich and powerful took their lumps along with everyone else; most people enjoyed watching them go down. Business went on.

In 1913, on Christmas Eve, Congress passed the Federal Reserve Act, setting up America's central bank. Only then did economists get their hands on the economy's throat. The dollar was worth about the same thing it had been worth 100 years before. Now, almost a hundred years later, it is worth only 3 cents. And only 16 years after economists took their positions at the Federal Reserve came a depression worse than anything the nation had ever seen - at least, it was worst after government economists finished with it.

The Great Depression may have been an accident, but the debasement of the dollar certainly was not. It was a matter of policy. Economists, led by Keynes, had the idea that they could spur the economy forward by creating phantom demand - in the form of additional units of purchasing power. The gold standard stood in the way; it was abandoned like a bad neighborhood. First, temporarily, then partially, then, in 1971, completely. The first consumer credit boom came in the '20s...leading to the Great Depression. By the 1980s, 50 years later, Americans had lost their residual fear of debt. Consumer credit boomed again. Then it bubbled. Economists didn't understand what was going on. They rarely do. But they had created a hundred year flood of consumer debt. Now they congratulate themselves; households sink...but civilization floats.

Regards,

Bill Bonner
for The Daily Reckoning Australia

• David Ricardo is the Dominant British Economist of the Nineteenth Century
• Economic Crisis Discussions in the House of Lords
• The Public Still Has Faith in Economists – But Why?
• How Simpleminded Economists Really Can Be
• Why Weren’t Economists On Top of This Thing?

But gold rose to a new high - $1,146.

Whatever else may be going on, there's a real bull market in gold. It's a bull market that began ten years ago. If you'd bought stocks then, you'd have about what you have now...less inflation. If you'd bought gold...you have about 4 times what you had then.

Today, a quick glance at a chart shows gold looking a little toppy. Expect a correction. But remember, this is a bull market. In a bull market, you buy the dips.

Stocks, meanwhile, are in a bear market. In a bear market, you sell the rallies. This looks like a good time to sell - if you haven't done so already.

"Take Your Gains," says Forbes. And once you're out of stocks, stay out until the bear market is over...probably at around 3,000 - 5,000 on the Dow. When the price of gold equal the price of the Dow, it will be time to switch.

We haven't seen the last of this bull market in gold. It's what you buy when you think government is making a mess of the monetary situation. You put your trust in gold as an antidote...as protection...as wealth insurance.

Are the feds making a mess of the monetary situation? Oh dear, dear reader...please ask us something harder. Trillion dollar deficits as far as the eye can see... Stimulus spending that turns the US into a Zombie Economy... Handouts to the bankers...gifts to the carry traders...

The feds are out-doing themselves...

As for the bear market on Wall Street, investors are counting on a miracle...a 'recovery' that doubles corporate earnings in just a couple years. They think it's "just like 1982". Of course, it is just the opposite of 1982 ...see the chart below.

Besides, there is no recovery...and profits will go down, as businesses compete for less spending.

The recovery may be all in your head, writes Robert Shiller, in The New York Times:

"Consider this possibility: after all these months, people start to think it's time for the recession to end. The very thought begins to renew confidence, and some people start spending again - in turn, generating visible signs of recovery. This may seem absurd, and is rarely mentioned as an explanation for mass behavior late in a recession, but economic theorists have long been fascinated by such a possibility.

The notion isn't as farfetched as it may appear. As we all know, recessions generally last no more than a couple of years. The current recession began in December 2007, according to the National Bureau of Economic Research, so it is almost two years old. According to the standard schedule, we're due for recovery. Given this knowledge, the mere passage of time may spur our confidence, though no formal statistical analysis can prove it....

Back in 1931, for example, The New York Times attributed the emerging economic cataclysm to a "mood of pessimism which had been carried to grotesque extremes." In 1932, it compared reckless talk about "depression" to shouting "fire" in a crowded theater."

It doesn't matter what anyone says. It's a depression. It's nothing like the garden-variety recessions of the Post-War period.

It's a depression because of the nature of the work it has to do. It has to clean up 3 decades' worth of filthy balance sheets. It has to wipe away trillions in trashy consumer debt. It has to defuse trillions more of Wall Street's debt bombs. It has to wash out billions...maybe trillions...worth of bad decisions - houses that are too big, too expensive, too grandiose for their buyers...shopping malls with far too much retail space for the new, thrifty customers...businesses geared up to produce goods and services for millions of people who can no longer afford them.

When will the depression be over? When the work is done.

But wait... the world's government piling up trash faster than the depression can haul it away. And here comes the next mega-crisis!

"US cost of paying i.o.u.'s gets steeper," says a front-page headline at The International Herald Tribune.

And over at The Financial Times in London, Gillian Tett asks "Will sovereign debt be the next sub-prime?"

Everyone knows what when wrong with sub-prime. When you lend money to people who can't pay it back, you're asking for trouble. So, if you're out of a job and looking for a sub-prime loan to buy a double-wide trailer you're out of luck. Bankers won't give you a dime.

But now, the world's lenders are doing something just as dumb. They're lending to governments. Imagine you were a banker. And the US government comes to you for a loan.

"Do you have enough income to cover the payments," you ask.

"Well, no," comes the answer. "In fact, our revenue has fallen off a little. Because of the recession, you know. Like everyone else."

"How bad is it?"

"Uh...we spend nearly two dollars for every dollar of income."

"Oh...and you expect us to lend you money? What do you have for collateral? What is your net worth position?"

"We were hoping you wouldn't ask. The most recent tally of our obligations comes to $113 trillion."

"Well, don't you have assets?"

"We have some buildings in Washington...military bases around the world...things like that. But as a practical matter, you could never foreclose on them."

"Oh, I see..."

What is interesting is that the world's investors are beginning to see that the US and many other governments are bad credit risks. This is an extraordinary event. Until now, the US government has been able to finance and refinance its debts at the lowest rates in three generations. Lenders have wanted to lend the feds money, because they believed they were the safest credits in the world.

Bankers can always be counted on to find the worst investments at the worst time. They are at the tail end of the chain of insights that begins with the sharpest, most independent-thinking analysts...runs through the broker/hedge fund community...passes on to the financial journalists and the TV pundits...arrives at the lumpeninvestoriat through the popular media...and finally gets to bankers when they pick up the Wall Street Journal and read about what's going on.

Now, the bankers are buying sovereign debt - government paper - because they think it offers a "risk free" return. In fact, it is one of the riskiest investments you can make.

This year and next, major governments will need to raise $12 trillion to fund their debts and deficits. That is a huge increase to the world's supply of sovereign bonds. Colleague Porter Stansberry estimates that the US government alone will need to finance $4.5 trillion worth of bonds next year. That amount is twice the total capital of the world's biggest central bank - the Fed. Even if the Chinese took every penny they have in financial reserves and used it to buy US debt, there would still be about $2.3 trillion in bonds left unsold.

As to the cost of servicing the debt, that too is expected to reach breathtaking levels. Even the Obama Administration forecasts the interest payments to increase from $200 billion at present to $700 billion by 2019. This is surely a misunderestimation. If the deficits rise to the level predicted by former OMB head David Stockman, the national debt will soar from $12 trillion to more than $20 trillion in about 5 years. Lenders are sure to wise up and ask for higher yields. Even a banker is likely to want more than 3.5% interest for lending money to the feds for 10 years. Maybe 5%...maybe 10%. Remember that during the early years of Volcker's time at the Fed, the lending rate rose to 18% on a 10-year Treasury note.

There is also a possibility - which seems remote as of this writing - that a government bond auction could go 'no bid.' It happens. When lenders come to see the risk higher than the potential rewards, even at high yields. And when it happens - or even approaches - the feds will be in the same situation that hundreds of their forebears faced over many centuries. All governments go broke from time to time. Then, they default. When they run up more debt than they can pay...like a sub- prime borrower, they always go broke.

And here's something interesting. As near as we can make out this is a joint effort by David Rosenberg and Barry Ritholtz.

It is an answer to the question: Isn't this just like 1982 all over again?

The short answer: no, it isn't.

Regards,

Bill Bonner
for The Daily Reckoning Australia

• We Trust Gold Because We Don’t Trust Central Bankers
• Only Thing Rising Faster than Demand for Government Debt is Supply of It
• Paying More Than 3 Times as Much for Gold
• Everyone is Getting Tough on Bankers
• Optimists Expect Mild Inflation in a Decent Recovery

But then everything is up this year, at least since the markets started buzzing in March. The S&P 500 is up over 64% from its March 6th low. That's an exceptional bounce even by dead cat standards. With negative real interest rates in the States, owning cash is losing money. Hence the rise in stocks.

Yes, rising U.S. stock prices could have something to do with a fictitious recovery. But with labour markets weak and housing getting worse (rising foreclosures) we're not counting on it. So we'll stick with the credit-fuelled stock rally.

It's gotten so surreal on markets that yields on some three-month Treasury bills briefly dipped below zero in trading action. As it is, the yields on Treasury bills are hovering just above zero. Bloomberg reports that, "For the first time in seven decades, Treasury bills are paying no interest while stocks continue to appreciate."

Why would investors lend their money to the American government for nothing? And why would they continue buying stocks at the same time? Ponder....and discuss.

We think the answer is that the Fed's policy has forced global investor into an either/or situation. You either get out of cash and into equities to beat inflation. Or, you are so terrified of buying equities divorced from normal valuations that you prefer capital preservation in the form of Treasuries, even if you're losing out to inflation there as well. At least you get your money back at a non-inflation adjusted par value three months later.

Or, you could buy assets like gold, oil, silver, and copper.

Why the sudden move in markets yesterday? It could be that Federal Reserve of St. Louis President James Bullard told markets the Fed should keep buying mortgage-backed securities after its self-imposed March deadline for exiting the market expires.

The Fed's plan to purchase $1.25 trillion mortgage debt and agency securities has effectively kept U.S. interest rates from creeping up. It's also kept the housing market afloat, although even at these levels you are not exactly seeing refinancing boom. But it's the prospect of more quantitative easing by the Fed that must have markets spooked about inflation.

Bullard said, that, "If the economy came in very weak, let's say, in 2010, weaker than expected, we would have the option of doing further quantitative easing." The Fed would do this through additional asset purchases, presumably with more, uh, "money" it created.

Bullard also said that, "If the economy came in stronger than expected and inflation expectations started to ratchet up a little bit we could maybe sell off some of these assets and remove some of the accommodation from our quantitative easing program."

The market must not have heard that second part. Or maybe it didn't believe it. Maybe it concluded that the Fed loading itself up with mortgage-backed securities is not a healthy expansion of the central bank's balance sheet. Maybe that's why the dollar fell and gold rose.

Hey it turns out that we were wrong and man-made global warming is real after all. A bunch of scientists have colluded to invent it by suppressing evidence that the earth is actually cooling. It turns out that empirical data do not support the agenda to expand government power and control over nearly aspect of our everyday lives.

How inconvenient!

You won't find the story of the leaked IPCC e-mails in too many main-stream press outlets. Most of the media is in collusion with governments to cram some sort of climate change carbon law down our throats. Publishing evidence that suggests there is still real scientific debate doesn't suit that agenda.

Before you send us e-mails condemning us to hell for hating the earth and clean air, let us make a small point. Of course the climate is changing. But - as these leaked e-mails show - the scientific community is not nearly as unanimous in its "interpretation" of what the climate data are showing as the political community would like you to believe.

Be sceptical. It works with investing. It works with politics. Any time a group of people tries to shout you down and make major changes to the law, you should be very concerned. The debate about how we inhabit our ecosystem is an important one. But it's obvious the science has been politicised.

And please don't write in saying that doing nothing is not an option. Doing nothing IS doing something. It means NOT doing something stupid until you have a fuller picture of what's going on. And there are still many in the scientific community who are modest enough to admit that the earth's climate is too complex a system to determine whether releasing carbon dioxide into the atmosphere is actually causing temperatures to rise today.

If you were even more sceptical, you might conclude that promoting global warming (or climate change) has become a lucrative industry for both scientists and failed U.S. presidential candidates with massive carbon foot prints. Both have a strong desire to tell other people how to live.

In any event, climate science is not our beat here. But the behaviour of hysterical crowds and how to survive it IS our beat. So have a look at the ClimateGate story in your spare time and let us know what you think. And in the mean time, keep an eye on your wallet and your mind on guard.

Dan Denning
for The Daily Reckoning Australia

• An Old Friend With a New Idea on Global Warming
• What Assets are Going to Beat Inflation in the Coming Ten Years?
• Quantitative Easing Explained
• 1 Out of 10 American Mortgages Are Owned by Other Countries
• U.S. Fed Now Accepts Credit Card Debt as Collateral

We're back in civilization... Wait...you call this civilization? Looks more like Bubble Land again!

Gold is headed towards $1,100...

Bonds are soft...so is the dollar...

Speaking of old friends, Marc Faber says he's long the dollar. Faber thinks the buck is over-sold. It could rise 10% in this last quarter.

But the Fed says it will keep interest rates low for an "extended period." So there is still no sign of the kind of policy turnaround that might send the greenback back up.

Instead, we'll have to wait until the bubble pops!

Oil is over $80...

Republicans are winning elections...

Hey, party like it was 2006...

The Dow is moving back up, too...and so are all the world's markets...led by Asian stocks. China is booming...with its stocks up 4 days in a row...

The rise in gold comes as India's central bank does the smart thing. Central banks need reserves. And historically, the only reserve a central bank can trust is gold. Putting US dollars in your vault - instead of gold - is a little like laying in a supply of lettuce to tide you over in a bad harvest year. Imagine what would have happened if pharaoh had stocked up on radicchio instead of grain? Those 7 lean years would have been a lot leaner than they were.

The Chinese have seen what happens when you rely on dollars for a reserve. You're stuck. Because your reserves can wilt fast.

The Indians have a better idea - they're buying gold.

The metal has outperformed stocks and bonds this year as it heads for the ninth straight annual gain. The Standard & Poor's 500 Index has risen 15 percent in 2009 through yesterday while returns on the benchmark 10-year US Treasury note are down 5.7 percent.

Gold may average $1,125 in 2010, "with strong investment demand anchored by a negative real-interest-rate environment and probable central bank purchases," analysts at Toronto-based Desjardins Securities Inc. said in a report.

And here's another interesting item we found when we got back to an Internet connection: "Companies that become too big, complicated and debt-ridden should be allowed to 'creatively destruct,'" says our friend Nassim Taleb, author of The Black Swan.

Taleb likens the process to natural selection. "Why is it that there are no land animals bigger than an elephant?" he asks. "Because nature doesn't permit it. Bigger animals die off. Likewise, the market system disposes of companies that are 'too big to fail.' It gets rid of them."

Unfortunately, says Taleb, the US government is impeding this natural process. The government is preventing the bankruptcies of large corporations that would clear the way for a new generation of healthier, more nimble, corporate organisms. Furthermore, these trillion-dollar bailouts are polluting the financial ecosystem with toxic piles of debt.

"We're not destroying debt," Taleb complains. "When you move it into the government, it stays in the government and that's a problem."

Bill Bonner
for The Daily Reckoning Australia

• We Trust Gold Because We Don’t Trust Central Bankers
• Naturally the Feds Want to Raise as Much Money as They Can
• Life Goes On
• There is More to Wealth than Money
• Global Credit Shortage is Over According to European Central Bank

Something more than meets the eye is going on here. The IMF sale was part of a plan to unload 403.3 tonnes of gold. It's halfway there, and will use the proceeds to fund itself and loans to the developing world (or perhaps Britain and America when they go broke). But what else is going on?

In the past, larges sales of gold - mostly by European central banks - swamped the gold price and kept it in check. The European CBs either felt like they had too much gold doing too little work on the balance sheet. Or, they were manipulating the price of gold down by increasing the supply to the market whenever the gold price began rendering its verdict on global fiscal and monetary policy.

India's central bank is now the proud owner of 557 tonnes of gold. That gives it the tenth largest gold holdings among central banks. But it probably isn't finished. Gold makes up just six percent of India's foreign exchange reserves. There's plenty of room for that to grow.

But don't forget China. China has $2.3 trillion in foreign exchange reserves. But 70% of those - or $1.6 trillion - are in U.S. dollars. It owns over just a 1,000 tonnes of gold. That makes up less than 2% of China's reserves and makes China the seventh largest holder of above ground gold. In fact the gold exchange traded fund (NYSE:GLD) owns more gold than China. France, Italy, the IMF, Germany, and the United States round out top five (from fifth to first).

What this tells you is that China could double (and then double again) its gold reserves and gold would still make up less than 10% of its total forex reserves. Compare that to 66% in Italy, 69% in Germany, 70% in France, and 77% in the U.S., according to official numbers. So what's the big deal?

There will always be a threat that European Central Banks release gold supply on to the market. In fact, European central banks just renewed a five-year agreement (including the IMF) to sell down a maximum of 400 tonnes of gold per year from their holdings. They've agreed to this to disgorge their gold in an orderly fashion.

But it would not surprise us to see the Europeans fail to sell the gold they're allowed to sell under the agreement. Our old desk mate in London, Adrian Ash (now with Bullion Vault) is at the London Bullion Market Association's annual meeting in Edinburgh. Word from UBS analyst John Reade, also at the meeting, is that European Central Bank official Paul Mercier reckons that official holders of gold will, "no longer be net sellers of gold."

As we predicted earlier this year, the European central banks would rather hoard their gold than sell it in a rising market. There may be a price at which they do sell it, in order to pay down sovereign debts. But psychologically, the fact that central banks want to own gold and not sell it is pretty important.

Also, it shows you how the balance of economic power in the world has shifted East. True, the European banks can still dump gold on to the market to drown the price. But between the ETFs, central bank buyers in India and China, and the average man on the street in Beijing, Mumbai, and elsewhere, there are more buyers of gold now than sellers.

And if we were right yesterday that the GFC is slowly morphing into a sovereign debt crisis, then the case for gold is that much stronger. This explains why gold futures were up by nearly 3% overnight and old yeller hit a new high at US$1,084.90.

The only worry? So many hedge fund managers and pundits are singing the same tune: long gold and short U.S. Treasuries. As we mentioned yesterday, the bond bubble could go on much longer than anyone expects. And when so many people agree on something, none of them are usually right. As a contrarian, you'd be worried about becoming a victim right about now.

But yes, in the long term, the end of the Super Cycle in fiat money results in the remonetisation of gold. That is what you're seeing now. And it's probably what you'll see for a few more years. It also ought to benefit other precious metals, and of course, precious metals shares.

Dan Denning
for The Daily Reckoning Australia

• IMF Deems Gold An Idle Asset
• Gold: The Ultimate Unlevered Hard Asset
• IMF Gold to be Used
• The U.S. Dollar is Not the Euro
• Power Begets Gold, then Gold Begets Power

"Why so high...so fast?" That was the question in our Daily Reckoning analyst meeting this morning.

"In the last big boom in gold - in the late '70s - gold followed inflation...and the central bank. Investors saw inflation increasing. And they saw the central bank failing to react fast enough. They bought gold to protect themselves.

"But now...there is no inflation. And central banks are alert to the problem. They haven't raised rates...but they don't need to. There's no need to protect against a problem that doesn't exist. So what are investors trying to protect against?"

No one at the table had a good answer.

"They're just looking ahead to when all that money the feds put in the system finally shows up in inflation. If you believe there's a real recovery you might think it is coming soon..." said one analyst.

"They're worried about a crash of the dollar...they're just buying gold because it's the anti-dollar..." said another.

"Maybe the Chinese are switching their reserves to gold...just like they said they would. And maybe instead of buying at below $1,000 they're buying quietly below $1,100..." offered another.

"Gold is being re-monetized," says MoneyWeek editor Simone Wapler. "All the world's paper monies are losing value - and credibility. There's a race to the bottom as they try to devalue their currencies."

All countries are fighting for market share. In a price-sensitive world, they increase exports by cutting prices. And the fastest - sometimes, the only - way to do that is by devaluing the currency. But when one nation devalues - say, by printing extra money - other nations must devalue too in order to stay competitive.

What can they all devalue against?

"Gold is rediscovering its old role," says Simone. "Once again, it is the way we preserve wealth and keep track of what things are worth."

Your editor had his say too.

"Most people are buying gold only because gold is going up. Maybe they realize that the world's financial system is in a period of crisis. They see the central banks are being derelict in their duty. Instead of protecting the value of their paper money the bankers are intentionally undermining it. They figure that if the central banks aren't doing their jobs - that is, if they aren't maintaining a reserve of real money - they'll have to do it themselves. Each person now needs to be his own central bank, with his own reserve of real wealth - gold.

"Or maybe investors don't see that all. Maybe they just see the price going up and they want to hitch a ride. What else can they buy that has been going up for the last 10 years? Gold is up $150 - about 17% - in the last 6 months. It's up 27% in the last year. It's up 300% since 1999."

Gold is in a bull market. How far it will go and how long it takes it to get where it is going, no one knows. No one knows, either, how many scrapes and setbacks it will suffer before it finally reaches its destination.

But it is a bull market. And you don't ask questions in a bull market. You get on board and ride it to the end.

Then, you wished you had asked some questions.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• We are Confident the Bull Market in Gold is Not Over
• Gold is in a Real Bull Market
• A Bull Market in Gold and Gold Alone
• China is a Key Driving Force in the Gold Market
• Gold Falls for Four Straight Days but is the Low Price a Bad Thing?

Here at The Daily Reckoning, this is not the first time we've paid homage to these lesser deities. Nor is it the first time we've mentioned their perverse method: Those whom these gods wouldst destroy are first cursed with good luck. Today, we look at the bright side: later, they are blessed by misfortune.

According to a pair of researchers from the University of Michigan, a depression does more for longevity than diet or exercise. Life expectancy during the worst years of the Great Depression increased from 57.1 years in 1929 to 63.3 years in 1933, says the report by Jose A. Tapia Granados and Ana Diez Roux. It didn't matter whether you were a man or a woman, black or white. And it didn't matter if you were in the US during the Great Depression or in Spain, Japan or Sweden during their economic downturns. The results were the same.

By contrast, life expectancy declined during the boom years. For most age groups, "mortality tended to peak during years of strong economic expansion (such as 1923, 1926, 1929 and 1936-1937)," they wrote in the "Proceedings of the National Academy of Sciences."

Conventional wisdom holds that recessions are times of stress. People do not eat as well. They skip medical check-ups. They should drop dead earlier. Instead, they live longer. Perhaps it is because the economy slows down, allowing people to live at a more comfortable pace. Maybe the unemployed get more sleep. We don't know. But if you want to live an extra six years, nothing works like a slump. When it comes to economic health too, nothing beats a depression.

Last week, World Bank president, Robert B. Zoelick, explained to Washington how the dollar made Americans wealthy:

"The United States is incredibly fortunate that the dollar enjoys this special status [as the world's reserve currency.]" It made it possible for Americans could buy things abroad with dollars and then, rather than come back to the United States as a claim against US assets, the dollars stayed in foreign central bank vaults. It was as if the Untied States, and the United States alone, could issue IOUs and never have to pay up. An "exorbitant privilege," Valery Giscard d'Estaing called it.

Since the end of WWII, the world had no real alternative. It had to use the dollar in its international transactions, just as it once used gold. This had a marvelous effect on world trade and roughly the same effect on America as a winning lottery ticket. And like a lottery winner, she was ruined by it.

With no effective limit on the number of IOUs they could issue, Americans issued far too many. From a low of around 2% of disposable income in 1945, US debt service rose to nearly 15% in 2007. In terms of total debt/GDP, the ratio was only about 150% in 1945, but that was with public debt from the war years at 120% of GDP. By 1950, the war debt had been cut down to about 70% of GDP, with private debt still at about 35%. At the height of the bubble years - 2005 to 2007 - total debt in America hit 360% of GDP, only 60% of it owed by the federal government.

Of course, most economists saw nothing to worry about. Instead, they set to work proving that such a 'dynamic' and 'flexible' economy would never fail.

They even won Nobel Prizes for elegant formulae that showed investors how to beat the market, year in and year out.

Then, the bottom fell out of asset prices in '07-'09. In March of this year, Americans found that their stocks had fallen back to real values not seen since 1968. Their houses were sinking fast too. By May 2009, one out of every four US homeowners was 'underwater' - with a mortgage greater than the value of his house. Incomes and profits were falling, along with the net worth of the typical American household. Everything was falling - except debt. How the gods must have roared when they saw the looks on their faces! In the biggest, longest boom of all time - even with a monopoly on the world's reserve currency - Americans had lost ground.

But while Americans were once damned by good fortune, they are now blessed by bad luck. "Looking forward, there will increasingly be other options to the dollar," says Mr. Zoelick. Thank the rascal gods. Americans are saving again...rebuilding their balance sheets...and, eventually, their economies. They can even look forward to living longer. And with a little more bad luck, maybe their moron economists will wise up too.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

• How Do You Enjoy a Depression?
• Contradiction in the Balance of Economic Forces
• The Greatness of a Depression is Commensurate to the Government’s Efforts to Prevent It
• Good Luck with Money
• Is Your Money What You Think It Is?

And on to today...Shouldn't this be an interesting week? "Markets have gone up too much, too soon, too fast," says Nouriel Roubini. The ASX 200 fell nearly 100 points on Friday, or 2.11%. This echoed the previous day's trading in New York.

Friday wasn't so bad on the Dow. But the jobs report released by the U.S. Department of Labor showed 263,000 lost jobs in America and an official unemployment rate of 9.8%.

That rate is undoubtedly much higher, once you figure in people who've given up looking for work but are no longer included in the survey. In fact, the "U-6" figure kept by the Department measures labour "underutilisation" in the economy. And according to that figure, U.S. unemployment is at 17%, nearly twice the figure quoted on Friday.

There have been jobless recoveries from recession before. But you still have to wonder how there can be such a big difference between the stark news in the job market and the behaviour of the stock market. True, economists will tell you that jobs are the last thing to recover from a recession. Businesses don't hire until they are sure everything is in the clear.

And we are often told that stocks lead the economy. The market has priced in a recovery which the labor market will confirm...eventually. At least that's the conventional wisdom. It's reassuring.

But the unconventional wisdom is probably more correct. The unconventional wisdom is that low interest rates (near zero in the U.S.) have driven people out of cash and forced them into higher-yielding and often speculative assets. The biggest obvious beneficiaries of low rates and credit facilities has been financial sector stocks themselves (and presumably their options-laden directors).

The question this week is whether there is any momentum left in that trade. Can easy central bank policies keep stocks going higher? Or has the trade exhausted itself? And if it has, what happens next?

Well, one answer is that you may again see a mini-rally in the U.S. dollar and a fall in common stocks and commodities (oil and gold especially). We'd expect this to a cyclical dollar rally. In the bigger picture (a secular trend) the dollar is toast. But markets do not move in linear fashion. They give and they take. And the dollar may be due.

If we do get a greenback rally, this may pave the way for a higher Aussie gold price. The strength of the Aussie dollar has capped the gold price here in Australia. But we reckon you may get a nice move in the Aussie gold price if the greenback rallies. The question is whether U.S. dollar strength takes gold down too, neutralising the benefit of the weaker Aussie.

How do you sort out the relationship between two currencies, one commodity, and many stocks? It all sounds complicated. That's why we've added another mind to the trading desk here at Daily Reckoning Australia headquarters on Fitzroy Street. Murray Dawes is at the helm of the trading desk today. We'll keep you posted on what he has to say.

One question we'll have for him: what the heck should investors do with Woodside Petroleum (ASX:WPL)? Dow Jones newswires is reporting that over the weekend, Federal Resources and Energy Minister Martin Ferguson awarded permits to explore ten new off-shore oil and gas blocks in the Carnarvon Basin off the Northwest coast of Australia.

Woodside is one of the firms that won a permit. Ferguson said that, "The additional investment in Australia's offshore petroleum exploration sector not only offers exciting potential for petroleum discovery but will ultimately help to further develop our petroleum resource and underpin our security of energy supply,"

The security of Australia's energy supply is exactly the issue our special situations analyst Mike Graham took up in his research about Australia's oil industry. You can find that complete report here. The findings may surprise you.

With respect to Woodside, there are not too many better blue-chip energy stocks in Australia. Unlike the smaller explorers though, the blue chips are valued differently. Adding to their reserves is crucial, so that the company is not inexorably depleting its assets. But the energy blue chips like Woodside are well known by analysts and they are well-traded by institutions.

This, in our mind, makes Woodside a perfect candidate for a Slipstream trade. That is, if we were a full time trader, we'd be looking for a pattern in the stock chart to see where key levels of support and resistance were. But since we don't run the trading desk, we'll ask Murray and see what he says.

Today's thought of the day from John Robb at Global Guerrillas, "The American 'kleptocracy' has run out of steam due to too much debt and is already in the midst of a perpetual depression. Why? The US middle class -- faithful to the cult religion of free markets even while being taken for all they are worth via a 35 year process of substituting debt accumulation for income gains -- is financially broken. If this is even remotely true: is the US headed for Privatopia and the viral spread of Global Guerrillas?"

Substitute "Australia" for "America" and it makes just as much sense, doesn't it?

Dan Denning
for The Daily Reckoning Australia

• Looking at WPL and Oil Side by Side
• Apparently More Debt is Now Acceptable in Australia
• Commodities Tell Us the World Won’t Stop Turning in a Financial Crisis
• Oil Prices Under $70
• The Future of the Australian Resource Market, Two Ways the Boom Could End