Yet there is a common thread to the current state of economic melancholy. It's money. Most failed marriages, we've heard, end up breaking up over money. Why would Europe or America or Australia be any different?

But before we get into family counselling, let's have a look at markets. Over in America the Dow Jones Industrials Index has closed at its highest level since October of 2008. The Dow sits at 10, 979 and has risen eight days in a row. Woop woop.

The volume figures on the Dow, however, show a disturbing lack of faith, or conviction if you prefer. The chart below shows the Dow since the March 9th low of 2009. It's been a pretty steady rise since then. But you can see that average daily volumes are less than half of what they were when the low was made a year ago. What does it mean?

"It's bearish. That's what it means," said Murray when we ambled over to his desk to show him the chart above. "It means there's a general lack of conviction by buyers. You'd want to look out below."

Where are all the buyers? Is the market just drifting higher based on programmed money flows by institutions? Granted this is an index of just thirty U.S. stocks. But it shows you that once you go below the surface of the index levels, the waters in the market are eerily calm and not frothy at all.

The other point about this is that in market-cap weighted index, a few key constituents can account for big day-to-day moves. For example, the table below from Standard and Poor's shows the top ten weightings in the ASX/200. The financials and the miners dominate, with property, telecom, and consumer staples all making cameos.

Click to zoom in on Top Ten Weightings table

In other words an up or down move in BHP or Commonwealth Bank has a bigger effect on the direction of the index based on the size of their respective market capitalisations. That sounds like gobbeldy gook. But the takeaway is you should beware light volumes and indexes whose higher movements are driven by just a few stocks. It shows a lack of breadth which can turn quickly and result in big sell off.

Now, you probably don't want to talk about this. But we need to talk about Greece. Its on-again, off-again bailout flirtation with the European Union is driving the market nuts. Its reality sovereign debt finance theatre at its most dramatic. But what, really, is at stake?

The European monetary family is in crisis. It meets on March 25th and 26th to discuss whether to kick Greece off the island (survivor style) or to intervene and save the prodigal son. The problem, from a German perspective, is that Europe is full of prodigal children. To save Greece means to save the rest of the economies troubled by rising public debt-to-GDP ratios. Where will it stop? With the trashing of the euro.

But is doing nothing an option? The Greeks have already said they will meet with the IMF on April 2nd if Europe resolves nothing by the end of March. And in the meantime, bond yields on Greek debt are left twisting in the wind. Rising bond yields wipe out the benefits of austerity measures and deficit reduction.

According to Bloomberg, "The yield on Greece's 10-year government bond rose 12 basis points to 6.21 percent. The euro fell for a second day against the dollar, slipping as much as 0.7 percent to $1.3648. Credit-default swaps on Greek sovereign debt rose 7 basis points to 295, the highest in a week, according to CMA DataVision prices."

It's hard to imagine the Northern European powers hanging Greece out to dry. Families are supposed to look out for each other. You do more for your family when the chips are down than you do for most people in the world. But maybe Greece will spare Germany the hand-wringing and default on its own....just throw up its hands and shrug.

The willing default on sovereign debt is what Societe Generale analyst Albert Edwards expects. In a note to clients earlier this week Edwards wrote, "Ultimately, as my colleague Dylan Grice writes, I think we head back to double-digit inflation rates as governments opt to default. I certainly again expect to see CPI inflation above 25% in the UK and indeed in most developed nations in my lifetime."

This is the old "asset-deflation-first-then-hyperinflation-later" two-step. It's the Big Crash dance, with the Bernanke/CNBC orchestra providing mellow tunes as your promenade your way to the lifeboats. Edwards writes that, "In the near term, however, the deflationary quicksand will suck us ever lower until we suffocate. A key driver for underlying inflation remains unit labour costs. While unit labour costs decline at an unprecedented rate, they are sucking us inevitably into a Fisherian, debt-deflation spiral. Only then will we see how far policymakers are willing to go to debauch the currency. Last year saw them cross the Rubicon. Monetisation is now the policy lever of first resort."

Some readers think we're trying to have it both ways on the inflation/deflation debate. But it is one of the issues you have to be flexible about and be willing to go both ways on in order to keep your money safe. Prepare for falling asset prices and a sovereign debt crisis. And then watch out as central banks reach out and take us to strange new monetary places and boldly go where Weimar Germany and Argentina have gone before.

Buckle up buttercup.

Dan Denning
for The Daily Reckoning Australia

• USA Has Fives Times As Much Sovereign Debt As All the PIIGS Put Together
• It’s the Little Economies that Have Trouble
• The Sovereign Debt Disaster
• Historians May Write: In Order to Save Greece, it Was Necessary to Destroy the Euro
• European Governments of the Eurozone are Separately Responsible for Their Euro-debt

Debt, debt, debt, debt, debt! Everywhere you go, it's waiting for you.

From government, to private lives, it has become the number one facilitator of any given action. For proof, we suggest you resist the urge to channel surf during commercials. Instead, why not endure the financing options that will be spruiked at you by hyperactive dancing sales people. Or, for a less painful option, consider the effect an interest rate rise has on the disposable income of new home owners victims.

Money may make the world go around, but it's debt that dominates the world of money.

Like a giant spinning top, the global economy has relied on the increased economic flow and circulation that debt provides. Eventually it will stop spinning and fall over on its side.

You see, it works like this: Central banks are like the tip of the spinning top - the point upon which our debt based economic system expands from and pivots off. It's a very narrow tip.

The Financial Crisis is an indicator that the world economy has become extremely top heavy with debt and is dangerously wobbling around like a slowing spinning top.

Governments and central banks have managed to engineer some more spin, but only at the expense of piling more debt on top of the already wobbling structure. This only increases the stakes of keeping it spinning.

But have we discovered the point where more debt will not provide more growth - only more instability? Who knows? (Other than these two academics, who reckon they've figured it out.)

The key point is that a roaring economy might be great, as the boom period showed us. But if this boom is at the expense of stability, and only artificial spin is keeping it going, then we are going to pay for it eventually.

National Debt

''Prepare for a very difficult economic time, which you will not be able to escape,'' said the chairman of the Netherlands Authority for Financial Markets at the ASIC summer school.

The Sydney Morning Herald (SMH) explains why Hans Hoogervorst is so 'optimistic':

"Australia is unlikely to avoid an imminent economic downturn caused by excessive government debt".

Hans' timing is excellent. But why stick to government debt?

Dan Denning reports that "...in another ABS release we learn that the country's net debt figure has reached a new all time high, both in nominal terms and as a percentage of GDP. The net debt (public, private, household) is $647 billion. It was up $14.2 billion in the December quarter and is over 60% of GDP."

International debt flows are particularly big on the economic agenda for Australia. Michael Stutchbury, in Tuesday's Australian Newspaper, explains that the traditional measure of trade flows serves another purpose for Australia:

"Today's economic orthodoxy suggests current account deficit simply measures the extent to which domestic savings are not big enough to finance the mining investment boom."

Going back to Dan's commentary:

"The net foreign debt and current account deficit are a reminder that much of Australia's current prosperity - from house prices to mining profits - comes via borrowed money. Of the $647 billion in net foreign debt, $426 billion - or 65% - is owed by Australia's financial corporations."

With debt running so deeply in the veins of the Australian economy, would it even be possible to have a healthy type of growth emerge? Or would a pickup in economic activity simply be another re-leveraging, doomed to topple the economy at some point in the future?

Austrian economic theory, to which the Daily Reckoning subscribes, would suggest that a period of "creative destruction" must clear out all the malinvestment and excessive leverage before healthy growth can resume. Some of this has occurred, but nowhere near enough, especially in Australia.

Mortgage Debt

Tim Colebatch at the SMH reports that Australia's mortgage debt has "soared" to more than $1 trillion. That's 15 times what it was 20 years ago. The breakdown of the figures since 1990 is fascinating. A 12 fold increase in mortgage debt for people's own homes, as well as a 30 fold increase in mortgage debt for rental investors, while disposable income merely trebled.

"In January 1990, home mortgages ate up just 28 percent of our disposable income. By January 2000, that had ballooned to 66 per cent, and by January this year, it doubled again to 134 per cent.

"Households' willingness to take on greater debt powered much of Australia's economic growth from 1990-2010, but with our households now as indebted as any in the Western world, economists say that will not be repeated."

All this not only inhibits growth, but exacerbates just how sensitive the Australian economy is to interest rates.

Housing

Apparently, a quarter of Sydney homeowners have already experienced the other side to Australia's housing boom. Nick Gardner at The Daily Telegraph writes:

"Despite a broadly rising market, property analyst Residex has revealed 24 per cent of properties bought and sold between January 2005 and January 2010 fetched less than the vendors had paid.

"The average shortfall was more than $54,000 but varied between suburbs.

"The biggest losses were in the affluent Neutral Bay/Spit area, where typical shortfalls topped $275,000.

"But even in Campbelltown, where the median house price is a modest $346,500, 36 per cent of properties sold for less than was paid, with an average shortfall of $31,000."

No matter how wealthy your suburb, you aren't safe from Mr Market.

The real problem faced by people who have lost value in their homes is that the price of the home they are moving to is likely to have risen. Their loss has two sides to it; the nominal loss on their house and the increased price of the new house.

Assuming this is true, it would point out something which has confounded any neutral observer to property markets since the Stone Age. If house prices across the board rise by say 50%, this would be heralded as a success in the property industry. If you realise this gain by selling and moving out, you still have to live somewhere. Your new place would also have increased in price, forcing you to pay more. So, in terms of standards of living, you have got absolutely nowhere.

Any gain is offset by an increase in the price of the house you move to.

Obviously, house prices don't move identically across the board. This means there are opportunities to gain. But spruiking an increase in a nationwide price index doesn't equate to Aussies being better off. It equates to those Aussies who didn't own a home, but want to buy one, being worse off. That means it's even worse than a zero sum game.

So, the property spruikers will claim that it's all about picking the right locations. Well, if house prices in Melbourne rise by 50%, while house prices in the rest of Australia stay the same, would Melbournites be better off?

No, unless they wanted to move away from Melbourne...

Sovereign Debt

The 'Ouzo crisis' has entered a critical phase. The Greek people are having to make crippling blows to their public and personal budgets. Worst of all, Elly Koufakis, who "...used to buy special SpongeBob SquarePants toilet paper for her children, [says] she doesn't anymore."

Other devastating accounts include that of Haris Georgatou: "After years of spending $15 a day on coffee, he now makes his own at work."

My own countrymen, ze Germans, have heard their Chancellor rule out a Greek bailout. She stated it in very Deutsche terms:

"There is absolutely no question of it. We have a (European) treaty under which there is no possibility of paying to bail out states in difficulty. Right now we can help Greece by stating clearly that it has to fulfil its duties."

Germany's history isn't great when it comes to treaties.

It would seem that the statements are just a game of terminology anyway. A German bank (rumours are amassing around KfW Bankengruppe) may be backed by the German government in a Greek bailout.

Die Welt put it unambiguously:

"The pressure is growing -- the chancellor knows that. She is still waiting for the right time to justify the billions (in aid) for Greece... But by then the situation in the financial markets could have spun out of control... The billion euro question is now therefore 'when will Merkel move?'"

Apparently investment banking giant JP Morgan considers California (the Vino crisis?) to be a bigger worry than Greece.

Dan Weil explains this is because of the possibility of contagion. Also, JP Morgan hedges its European exposure, so others bear the risk. Those two points appear largely contradictory, but oh well.

Economic Outlook - Look Out

Some nice examples of how government intervention works come from Sean Hyman at Moneynews, with his article titled "Don't Believe What You Hear: It's Not Getting Better".

"Now Fannie Mae says ... that it needs another $15 billion, bringing its total to more than $75 billion. This company is such "crap" that it's had 10 consecutive quarterly losses. Its latest quarterly loss was $16.3 billion.

"AIG lost $8.87 billion in the fourth quarter.

"The FDIC has shut down more banks in Nevada and Washington. That makes 22 bank failures this year (and 140 banks last year and 25 the previous year)."

Then Reuters chimes in with this:

"Some 400,000 jobless Americans could exhaust their unemployment benefits over the next two weeks, the Labor Department said. By the end of March, 500,000 workers could lose the COBRA subsidies that help them pay for health insurance."

And the Washington Times reports the statistic that sums it all up:

"Moreover, for the first time since the Great Depression, Americans took more aid from the government than they paid in taxes."

That is worth reading twice.

If you are wondering what the Reserve Bank of Australia (RBA) is thinking as it continues its rate rises, check out their October 2009 minutes. It seems the RBA is reading up on Austrian economic theory. The ABC even considered it worth quoting this part of the minutes directly:

"Very expansionary policy could result in the build-up of other imbalances in the economy, which would ultimately be detrimental to economic growth."

This revelation should make RAB governor Glenn Stevens very nervous when he looks to his comrades' rates overseas. The nearest rate of a developed nation is 0.5%. That's 1/8th Australia's and "very expansionary".

Retirement advice for Terrorists

The London based Daily Mail reports that the cancer stricken Lockerbie bomber is alive and well, having so far lived twice as long as predicted when he was released from a Scottish prison on compassionate grounds.

Yes, terrorist and compassionate grounds.

Anyway, upon hearing of the luxury and heroic status being enjoyed by the bomber, American blood began to boil. James Taranto of the Wall Street Journal spun the whole thing like a magician to apply to the socialised healthcare debate, which seems to be reaching our own shores:

Great Moments in Socialised Medicine

"In Britain, the government itself runs the hospitals and employs the doctors," claims former Enron adviser Paul Krugman. "We've all heard scare stories about how that works in practice; these stories are false."

"This defence becomes harder to believe when a cancer patient can get better care by going to Libya."

To be fair, James Taranto's comments on a daily compilation of amusing articles are not entirely serious.

Global Warming Casualties

There have been further casualties on the global warming front, with a baby girl surviving a gunshot wound in her family's suicide. The wounded survivor lay among her dead family members for three days. Why did they have to die? The suicide note explained it was their fear of global warming.

Dr Mark Perry of the University of Michigan posted the following on his blog:

"From Al Gore's article We Can't Wish Away Climate Change in today's NY Times:

"It would be an enormous relief if the recent attacks on the science of global warming actually indicated that we do not face an unimaginable calamity."

Dr Perry has degrees from George Mason University, the only university in the world which offers a specialisation in Austrian economics (as far as I know).

Lastly, my apologies for providing a reference to an outdated article on Eastern Europe and thanks to the readers who pointed this out. I was intending to feature Eastern Europe in its own section and did not revise the content that I decided to keep. Considering Eastern Europe still exists, it seems the article's forecast did not eventuate - yet.

Have a great weekend.

Nickolai Hubble.
The Daily Reckoning Week in Review

• Global Illness of Too Much Debt has Been Remedied by More Debt
• CBA and Their Bad Debt Problem
• Central Bankers Encourage Debt Booms That Become Debt Bombs
• China Stepping Up Purchases of U.S. Treasury Debt
• Apparently More Debt is Now Acceptable in Australia

So what do you do? Is this the dip you should buy?

Well, as we keep saying...it depends. A few months ago, our view was simpler. We trusted gold because we didn't trust central bankers. We still trust gold. And we still don't trust central bankers. But now we see that the central bankers are even more unreliable than we imagined. They are diligently trying to do the wrong thing, as usual. But they're not very good at it.

They increase the monetary base at central banks. But they can't melt the huge overhang of cash and credit frozen in the system. A depression has iced over the economy. The feds turn on the pumps, but the liquidity freezes up. This cold snap could last a long time. In fact, with the feds blocking necessary adjustments, it could turn into an Ice Age. And there's not much they can do about it - except make the situation worse.

Bond yields are already rising. There is a report of rising prices at the producer level. It wouldn't take much to spook lenders and force the Fed to retreat...just as Greece did.

What's more, there are two major trends underway. Neither has fully expressed itself. The bear market that began in 2007, for example, never took stock prices down to the levels you'd expect at a major bottom. Far from it. That means a major bottom is still ahead. We have had Crisis I. We will probably have Crisis II in 2010. It will make it easier for the feds to finance their deficits. But it will make it harder for the rest of the world to pay its debts.

On the other hand, the other major trend that has not fully expressed itself is the bull market in gold. When we were in the US last week we saw an ad encouraging people to sell gold "while prices are high." People think the rise in gold is a fluke. But markets make opinions. At the top, they will believe that higher gold prices are permanent. Then, we will see ads encouraging consumers to buy gold before the price goes higher.

But don't expect the top in gold any time soon. The major top in gold may have to wait for the major bottom in stocks. And the whole process could take many years.

So, relax. Sit back. Keep your seatbelt buckled. And enjoy the depression.

Bill Bonner
for The Daily Reckoning Australia

• In Gono We Trust
• We Expect No Recovery from the Economy
• Historically, the Only Reserve a Central Bank Can Trust is Gold
• Everyone We Know Expects a Fairly Quick Up-move in Inflation
• Gold Market Was Looking for an Excuse for a Breather

And today we take up a foul and disagreeable task. We ask ourselves: what if we are wrong?

If you bought gold when we first recommended it, ten years ago, you are in a very comfortable position. Gold sells for more than 4 times as much today. But what should you do now? And what if you didn't go for broke on gold in the early '00s? Is it too late to get in on the bull market?

To give you a warning, in the following windy ambulation we come to no conclusion we haven't come to before. We say gold is going to the moon. If we are wrong about when...we will be delighted sooner than expected...self-satisfied...and insufferable for years. If we are right, we may have to wait a long time before saying "I told you so."

First, the press has certainly noticed the bull market in gold. How could it not? Most reporters say gold is going up simply because the dollar is going down. In the popular press, we found no other explanation. In fact, much of the notice of gold seems to occur within articles about the dollar. We found, for example, that the dollar is at a 15 month low...and, coincidentally, gold has just hit an all-time high.

There's something lopsided about this account of things. If the yellow metal has hit a record high, how come the dollar is down for only 15 months and not since the Flood? Makes you wonder if the dollar isn't the whole story.

Elsewhere, we find that the dollar is trading at $1.49 per euro. Wait a minute. We remember the dollar at the exact same level...was it a year ago...more...? And it's been at that same level, more or less, all the while gold has gone up more than 10%.

It's not the fall of the dollar that is driving the gold market, in other words, it's something else...it's the fall of ALL paper currencies. For when the dollar goes down, so do the rest of them - more or less. No nation wants its currency to rise too much against the greenback. Americans are still the world's biggest spenders. They spend dollars...not rubles...not euros...not zloties. A nation whose currency rises against the dollar is in a competitively weaker position. Its costs - in local currency - go up while its sales - in dollars - go down (it has to charge higher prices). Typically, central banks buy up dollars with money created for that purpose...thus increasing their own money supply and thus decreasing the value of their own local currencies relative to the dollar.

Since all the world's central banks, more or less, are doing this, all paper currencies are going down together - compared to gold.

But wait, wouldn't they be going down together against everything else too? If currencies are getting weaker...shouldn't they be getting weaker against oil...and McDonalds' hamburgers...and woolen underwear? The oil price is at $78 - where it's been stuck for a while. Oil is a special case, but almost all consumer prices are stuck too. Take out energy and food, and consumer prices are deflating in the US. Put back in the energy and food and they're just stuck. There is no sign of generalized consumer inflation - not in the USA and not in Europe either.

The only thing that is going up is gold. There is a bull market in gold and gold alone. But why?

According to the law of supply and demand, you expect the price of a thing to fall when its supply increases faster than the demand for it. In today's news are two reports on gold production. One, from South Africa, tells that a scientist says the nation's residual gold in-the- ground is much less than expected. It has been overstated by 900%, he says. Another report shows the output of from the gold mining industry clearly topping out. Gold supply, in other words, is increasing, but not as fast as it used to.

The supply of paper money, on the other hand, needs no new discoveries. Since there have been huge increases in the monetary base of paper money all over the world, it is reasonable to expect the price of paper money to go down. Gold, traditionally the thing that paper money is priced in, should go up. Speculators are buying it now in anticipation. Even central banks are buying again. And nearly everyone expects the price to continue going up.

As near as we can tell, gold is properly priced already. Comparisons are rough, but an ounce of it appears to buy about as much stuff as it did 2,000 years ago. You can buy a suit of clothes for an ounce of gold - no problem. Go to Wal-Mart; you can buy 4 suits.

As Roy W. Jastram wrote in his 1977 book, The Golden Constant, gold's "price has been remarkably similar for centuries at a time. Its purchasing power in the middle of the twentieth century was very nearly the same as in the midst of the seventeenth century."

Gold...or the people who speculate in it...may be looking ahead. Or, they are dreaming. If gold is already about where it should be why would you pay more? You must expect paper currencies to go down...to buy less stuff. In other words, you'd have to be anticipating a fall- off in the value of the paper currency.

It may come to pass exactly as they imagine it. Gold may rise and rise and rise...as paper currencies fall and fall and fall some more. In that case, we here at The Daily Reckoning headquarters as well as all of our dear readers who followed our advice 10 years ago will be delighted. Gold may hit $1,500 by the end of the year. By the end of next year it may be $3,000. By the year after, well...who knows...? "We told you so," we will say.

But there is almost always more under Heaven than speculators think. When we look into it, we see gaudy increases in the monetary base...but only very modest increases in M2, the money that buys stuff. What's more the rate of increase for M2 has fallen in half over the last 8 months. It's now only about 7% annually in the US. And when we look at the CPI we see no increase at all. And despite the 'recovery,' unemployment is still rising and house prices are still falling. So, if speculators see the price of stuff going up in paper currency terms, they must be looking way over our heads.

To more fully describe our own state of mind, we don't doubt that all the liquidity added to the world's monetary system will eventually be soaked up by paper currencies. But it could take a long time; we might be dead before it actually happens.

But since we are entertaining the possibility that we might be wrong; let us look at what is going on in more detail. If there were a real recovery - as announced in the world's newspapers and proclaimed by its stock markets - you'd expect a rising increase in demand...leading to higher prices...leading to a higher gold price.

Yesterday's news brought word of greater retail spending than anticipated. This was greeted as more evidence that a recovery is actually underway. But upon examination, we discover that the evidence comes almost all from auto sales. We also find that the number crunchers contributed to the lift by revising figures for September. These are month to month movement numbers. So you can raise October's number simply by lowering the number for September.

What's more, while sales went up...auto prices actually went down - in paper dollar terms. This doesn't sound inflationary to us.

Meanwhile, news reports said that fewer people are defaulting on credit card debt. The reports also tell us that delinquencies on credit card debt are up. So, we'd have to call that a draw.

And then there's the news from GM. The giant, government-owned auto company says it will repay its loans from the feds earlier than expected. But wait...we also find that the company continues to lose money. How then will it repay debt? Perhaps by refinancing!

Other reports are similarly confusing and inconclusive. Profits are up on Wall Street. But wait...sales are down. You can increase profits by cutting expenses (getting rid of employees, mainly). But you can't increase sales. And as long as sales are falling you have to expect lower profits in the future. (Stock market buyers...take note.)

Our colleagues over at The 5-Min. Forecast sent through this chart, illustrating the "recovery that wasn't."

"With the majority of publicly traded companies done reporting third quarter earnings," writes 5 editor, Ian Mathias, "the trend is clear: Profits were way better than expected, revenue was flat at best.

"Of what little we recall from freshman year, Finance 101 insists that profit equals revenue minus costs. Thus there really can't be any questions left as to how the market pulled off this quarter...companies are simply trimming the fat at an incredible clip. Not exactly a long- term plan for growth."

The New York Times reports that job losses continue to be "deep and enduring." Mortgage applications are running lower than they were 9 years ago. "More households report food shortages," says a Wall Street Journal headline. And insiders are still selling their own companies.

So, it still looks to us as if we are in a depression...one that will take many years to sort out. It is unlikely that the bull market in gold will reach its final blow-off top while the depression continues. But stranger things have happened. Eventually, gold will reach the apogee of its bull market. And when it does, we want to be ready for it. We will celebrate with champagne and sparklers.

Still, we wouldn't get out the party hats...not just yet.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Gold is in a Bull Market
• We are Confident the Bull Market in Gold is Not Over
• Investors to Drive Next Leg of Bull Market in Gold
• The Final Blow-out Phase of the Gold Bull Market?
• Gold in the Next Stage of a Bull Market

The Dow went up too - 203 points yesterday. It's over 10,000 again. Not very impressive for a bear market bounce. A 50% retracement would take the Dow to 10,300.

But you have to give the bounce credit. It's been going on since March. That is impressive.

And now everyone is bullish, except us. We'll see who's right... in the fullness of time...

Gold seems to be advancing towards a new milestone - $1,100. Makes us nervous. We always feel more comfortable out in the wide, open spaces...that is to say, in trades we have all to ourselves.

But gold is still a marginal holding by marginal investors - like us. Central banks - especially those in emerging countries - have very little gold. The man on the street doesn't know anything about gold. He wouldn't know a gold coin if it hit him on the head.

As gold becomes accepted as a true store of value, we can expect more and more people to want to own it.

Governments are running breathtaking deficits...and accumulating alarming debts. Japan has a national debt of nearly 200% of its GDP. Where did that debt come from? It came from 20 years of trying to buy its way out of a slump with borrowed money. Of course, it didn't work. But now, Britain and America are following the Japanese lead...and the Japanese are still at it! At the present rate, Japan's government debt will grow to 300% of GDP in 10 years. America's debt could grow to 100%...and then 200% of GDP...over the next decade (depending on whose projections you believe). And Britain, if we read the report in The Financial Times correctly, will have debt equal to 200% of GDP within 3 years.

Just what kind of crisis do these numbers portend? It's hard to say. Probably a combination of confidence, followed by debt default and inflation.

Would the US actually default? We agree with Paul Samuelson; the answer is 'maybe.' Samuelson, writing in The Washington Post:

"The idea that the government of a major advanced country would default on its debt - that is, tell lenders that it won't repay them all they're owed - was, until recently, a preposterous proposition. Argentina and Russia have stiffed their creditors, but surely the likes of the United States, Japan or Britain wouldn't. Well, it's still a very, very long shot, but it's no longer entirely unimaginable. Governments of rich countries are borrowing so much that it's conceivable that one day the twin assumptions underlying their burgeoning debt (that lenders will continue to lend and that governments will continue to pay) might collapse. What happens then?

"...People have predicted such a crisis for decades. It hasn't happened yet. The currency's decline has been orderly, because the dollar retains a bedrock confidence based on America's political stability, openness, wealth and low inflation. But something could shatter that confidence - tomorrow or 10 years from tomorrow.

"Despite huge deficits, interest rates on 10-year Treasury bonds have hovered around 3.5 percent. In time of financial crisis, investors have sought the apparent sanctuary of government bonds. But the correct conclusion to draw is not that major governments (such as Japan and the United States) can easily borrow as much as they want. It is that they can easily borrow as much as they want until confidence that they can do so evaporates - and we don't know when, how or whether that may happen."

Why wouldn't the US just "print its way out of debt?"

Because it's not that easy. In effect, the feds are trying to print their way out of debt now. They've added huge amounts to the monetary base. But that money is not getting into the real economy. Instead, it's going into vaults and speculations.

"Jittery Companies Stash Cash," says The Wall Street Journal.

And banks, too, borrow...but they don't lend. They can borrow at negligible rates of interest...and buy US Treasury bonds on a leveraged basis...producing a 20% yield. That means, the US dollar has replaced the yen as the go-to currency for speculators.

Net effect? Lots of cash in what appears to the Mother of all Carry Trades. The Financial Times:

"The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates - as low as negative 10 or 20 per cent annualized - as the fall in the US dollar leads to massive capital gains on short dollar positions."

But in the economy itself? As in Japan, very little economic progress comes from this kind of speculation.

Bankruptcies rose 7% last month. Unemployment gets worse.

The financial markets bubble up. The real economy shrivels up. And people with any sense are stocking up.

David Rosenberg, again, on gold:

We are still contemplating the massive gold purchase by the Reserve Bank of India - the largest in at least 30 years that took up half of what the IMF intends to sell. Look for China to come in next.

But here is the reality. All India did was bring gold to a 6% share of its total FX reserves from 4%. Fifteen years ago, that representation was closer to 20%. China has increased its gold holdings by 76% over the past six years but they are a mere 1.9% of the aggregate 2.2 trillion of reserves and Russia's gold holdings is just under 5%. This is not the 1990s when Bob Rubin was running a hard US dollar policy, US fiscal deficits were vanishing and gold production was on the rise. Today's world is exactly the opposite. Policymakers beginning in the 1990s wanted disinflation and got it. Now they want inflation - it will take years, maybe a decade, but it will come. For the near-term, we are still optimistic on Treasury securities but be forewarned that this view has an expiry date that is earlier than the peak we are likely to see in gold.

It is very clear that central banks are behaving in a way that would suggest that gold is now again being considered a currency within the global monetary system. As we said before, it is all about relative scarcity and a well-defined supply curve - fiat currency at this juncture does not share that quality. As a good friend reminded me yesterday, when the Fed was created nearly a century ago, it was acceptable to have at least 40% of the money supply backed by gold reserves. The US now has 8,133 tons of gold in reserve, which equates to $285 billion at this year's pricing.

Meanwhile, the Fed has spiked the punchbowl to such an extent that the monetary base now stands at $1.7 trillion. Do the math - under the old regime (which indeed hamstrung the Fed), the US alone would need to buy an incremental $400 billion of bullion or the equivalent of what would be nearly four times the typical level of annual demand. We could do the same calculation based on M2 but we don't want anyone falling off their chairs.

And finally today, we're still ruminating about what to tell you about our trip to the ranch. The funny thing was...it had little to do with cattle ranching...and a lot to do with the personalities that we brought with us. It's no easy job being a parent...especially when the kid is 38 years old...and not your kid.

More to come on that another time...

Bill Bonner
for The Daily Reckoning Australia

• Optimists Expect Mild Inflation in a Decent Recovery
• Gold is Money
• Denmark, Spain, the U.K. and Ireland Have Begun to Register Falling Housing Prices
• An Irish Bond Bomb
• Investors to Speculate on Gold Instead?

Last week, stocks went up. Stocks went down. Not much was proved one way or another. The week ended in a draw, as near as we can tell.

But we think we are making progress in understanding what is going on. The private sector is de-leveraging. Now, it's the public sector doing the heavy lifting. It is leveraging everything it can.

Leverage in the private sector led to the banking crisis/bear market of 2007-2009. Debt always leads to trouble. Next up: a crisis in the public sector.

But wait...hold on...not so fast...we haven't reached the end of the private sector crisis yet! Bank lending is still falling. House prices are still falling. Unemployment is still falling. Soon, stock prices will be falling again too...

First, let's see what's in the headlines. Last week there was a lot of press about the pay czar and his efforts to limit compensation in the companies that the feds bailed out. The public and the news media love this sort of thing. It's a battle between the greedy rich and the public interest, or so they believe. The public hates bankers. But they don't want to see just pay capping; they want to see knee-capping. We'd like to see it too. Or maybe public flogging. Or at least a lapidation or two.

But our true sympathies are with the greedy CEOs. After all, they stole the money fair and square. They should be allowed to keep it. The feds wanted to leverage up the financial sector by giving money to the banks. What'd they expect? The bankers took it.

Yes, the financiers are paid outrageous amounts of money - far beyond anything they are worth. In fact, if you studied it carefully, you'd probably discover that their net contribution to the betterment of mankind is now negative.

The bankers are betting that the money they were given by the feds will be worth less next year than it is this year. So they exchange it for everything and anything, confident that when it comes time to pay it back it will be even easier to come by than it is now.

So far the bet has gone their way. Copper has doubled. Gold is up 20%. Stocks markets all over the world are up 60%. Foreign currencies, too, have beaten the dollar.

Will the wager against the dollar continue to pay off? Well, that's the big question. If so, you should stay in stocks, gold and commodities. If not, you should move to cash.

But it hardly matters to the gamblers. They're playing with someone else's money! If the bets go well, they pay themselves huge bonuses. If they go badly...well...hey...gimme a bailout!

In the long run, bets against the dollar are almost sure to turn out okay. All paper currencies go to zero, eventually. But in the short run, who knows? The whole world is betting against the greenback. With such a massive short position against the buck, it would be just like Mr. Market - aka Mr. Mischief- maker -- to send the dollar up.

But you can't blame the bankers. They're performing a very valuable service. They are helping to separate fools from their money. Too bad we taxpayers are the fools....

Among all the whiners and kvetchers about bankers' huge bonuses hardly a single one draws the obvious conclusion:

That them that deserve to go bust should be allowed to do so.

"I remain of the view," writes Martin Wolf, a bit pompously, in The Financial Times, "that the only thing worse than rescuing the system would have been not rescuing it."

He's welcome to his opinions. And if he used his own money to bail out the bankers we would have no objection. In that case, it would just be a futile and foolish act. Instead, he insists upon using our money...which raises the charge from stupidity to larceny.

Another message that came through last week was that the real economy is not improving. Good news came in from several quarters. But the news that really counts - housing prices and jobs - was bad.

"It's all bad. That's all we know," said John Stepek, editor of MoneyWeek. "People ask if we're going to have inflation or deflation. The bulls think we're going to have inflation. The bears bet on deflation. But I'm not sure it matters. We're probably going to have both.

"The point is, whichever we have, it's going to be the bad sort. Neither inflation nor deflation is necessarily bad. Prices have to adjust. That's how the market conveys its signals. When prices rise, it tells producers to get busy and increase output. When prices fall, it tells them to lay off. In the natural order of things prices usually fall. Or, they should fall. This is 'good' deflation. It just means that producers are becoming more efficient, as they should. There's good inflation too - when prices rise due to increased real demand. When people earn more money, they can buy more things; prices rise.

"But what we're going to see is bad. Bad inflation. And bad deflation. It is the result of monetary problems and mismanagement. And it is going to send all the wrong signals and inevitably make things worse. First, the deflation is bad because it is result of a massive de- leveraging accompanied by a write-down of debt and assets. It's a depression. Or a major recession. Or a 'great contraction.' Call it what you will. It's a deflation in which prices fall...and it's not going to be any fun.

"Then, there's most likely going to be bad inflation too - caused by the central banks printing too much money. This is bad inflation because it is just an increase in the quantity of paper money, not an increase in real demand.

"We don't know exactly what is coming. But whatever it is, it will be bad."

Another big item in last week's financial press was the "Cash for Houses" scheme. The feds give new house buyers an $8,000 tax credit. But since not all new buyers buy because of the credit, the actual cost to the government per additional new house purchased is much higher than 8 grand. For each additional house purchased because the credit taxpayers are paying as much as a quarter of the entire cost of the house.

And now there is a proposal to extend and broaden the credit. Soon it may be "Cash for Everything."

This sounds crazy, but there are a lot of economists who think more stimulus is necessary. Nobel prize winner Paul Krugman, for example. And Richard Koo, mentioned here last week. They've seen what happened in Japan. And they see that the real economy is not recovering as they hoped it would. Now, they warn that America might have a "Lost Decade" if it doesn't continue to stimulate the economy.

How long must it continue bailing out and stimulating? Until consumers have finished de-leveraging, they say. How long will that take? Maybe another 5 years, by our calculation...maybe much longer.

But wait...the whole problem is too much debt, right?

Yep.

But the only way the government can stimulate is by going further into debt, right?

Yep.

And isn't the budget deficit already at $1.6 trillion...or 11% of GDP...the most it has been since WWII?

Yep.

Well, then where's the benefit? Won't the public sector have to de- leverage too?

Bingo!

How does the public sector deleverage?

Two possible ways - honestly...and dishonestly. It can pay down its debts to a level at which they can be carried even if interest rates go up sharply. They did it after the War Between the States...after WWII...and even during the Clinton years. Believe it or not, when the Congressional Budget Office looked ahead in 2001, it saw a budget SURPLUS for 2008 of more than $600 billion. Surpluses had been coming in for years during the Clinton administration. They thought it would keep going like that. Instead, 2008 saw a DEFICIT of nearly $500 billion.

The higher the debt and deficits go the harder it is to pay them down honestly. Eventually, the feds reach the point of no return...like a guy who's so deep in debt he can't possibly work his way out. Then, you get another crisis...either in the form of default...or (hyper) inflation...or both.

Tomorrow, we're off on the road to the Andean highlands...

No phone. No internet. No fax. No Blackberry. No iPhone.

We've got cows to round-up, wrestle, and vaccinate.

In the meantime, we'll leave our "Crash Alert" flag flying...and send a message as soon as we can...

Until then,

Bill Bonner
for The Daily Reckoning Australia

• Bankers Take Money From the Government and Use it to Speculate
• The More Money in a Financial System the Less Each Unit is Worth
• Warren Buffett: People Do Not Make Money by Betting Against the US Economy
• Japanese Government Displays Generosity as Prices Fall in Japan
• The Feds Are Trying to Avoid Deflation

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

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

Amen.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dan Denning
for The Daily Reckoning Australia

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

October is almost half over. Will we get through the month without a major sell-off?

Dear reader, if you think we know the answer to that you've got us mixed up with someone else. Someone who is crazy.

No one with his wits about him thinks he knows what the stock market is going to do.

Still, here at The Daily Reckoning, we have our hunches. We think it's time for a major pull back. Frankly, we'll be disappointed if we don't get one soon. Because, once again stocks are too expensive.

Too expensive for what? Too expensive for the circumstances.

The Dow rose another 20 points yesterday to a new bounce record. Oil rose to over $73. Gold didn't budge.

Of course, everyone now knows that the recession is over. NABE interviewed 44 economic forecasters. Four-fifths of them said the recession was over.

But we don't care what they said. These are the same seers who missed the biggest single event in financial history. There are many banking crises, recessions, panics and defaults in the record books. But none were as great as the one that hit September a year ago. Most economists didn't see it coming; why should we trust them to tell us when it is going?

Besides they've got the whole thing wrong. It isn't a recession; it's a depression. There is no recovery from a depression; instead, the economy has to re-invent itself in another form. Things aren't going 'back to normal,' in other words. Because the period leading up to the crisis was not 'normal;' it was a bubble. After a bubble explodes, you have a lot of debris to clean up. The bigger the bubble, the more damage it does when it blows up.

"The force of a correction is equal and opposite to the deception that preceded it."

You've heard our dictum before. In fact, you've heard our explanations for all these points before.

We just lived through the biggest bubble in history. Get ready for the biggest bust. Not just two years of falling stock prices and news- making bailouts. Not just 10% unemployment. Not just 100 bank failures and 30% off housing prices.

Noooo... We're talking about a worthy correction...a real correction...a noble and distinguished correction...a correction that can hold its head up in public.

This is a correction that will take many years...one that will knock housing prices down for at least five years...and stock prices down to the point where people no longer want to buy them. It's a correction that goes deep enough and continues long enough to do its work - wiping out the bad investments and mistakes of the Bubble Era, while allowing the survivors to pay down their debts and build up their savings.

Now, here's a confusing little item. Yesterday's news tells us that consumer spending as a percentage of the entire economy has edged up to 71%. Now wait just one cotton-pickin' minute. How could consumer spending be going up?

Hold on, cupcake. It's not going up. It's going down. It's just that the other components of the economy are going down even more.

In the second quarter consumers spent $195 billion less than they did the year before - a 1.9% drop. In the 20 years before that, consumer spending increased at an average rate of 3.3%. So, you do the math... that's an about-face of more than 5% of GDP - a loss to the economy of about $700 billion!

Consumer credit is going down (we reported the figures earlier in the week)...unemployment is going up...consumer spending is going down...

..those are not the circumstances in which stocks sell for 27 times earnings...and move higher. Those are the circumstances in which stocks crash.

David Rosenberg:

"By some measures, the S&P 500 is already trading at valuation levels that would ordinarily be consistent with an economic expansion that is five-years old as opposed to a recovery that, at best, is in its infancy stages.

"On an operating ('scrubbed') basis, the trailing P/E multiple on the S&P 500 has expanded a massive 10 points from the March lows, to stand at 27.6x. Historically, when the economy is taking the turn away from contraction towards expansion, which indeed was the case in Q3, the trailing P/E multiple is 15x or half what it is... While we will not belabor the point, when all the write-downs are included, the trailing P/E on 'reported' earnings just widened to its highest levels in recorded history of nearly 140x, which is three times the levels prevailing during the height of the tech bubble."

So, here goes...yes...today, we are officially running our "Crash Alert" flag up the pole here at the London headquarters of The Daily Reckoning. Cross Blackfriars Bridge and you might see if flapping in the wind, between the two huge gold balls on the roof.

Our Crash Alert flag is out because stocks have become too expensive...and because this bounce should be reaching its apogee by now. Already, central banks are talking about cutting back on their efforts to sustain the bounce with easy credit. Australia led the way last week with a rate hike.

It is also becoming clearer and clearer that the feds' efforts aren't really working. They can give money to their friends in the banking industry. They can give money to speculators who then make bets on the stock market, among other things. They can bailout major companies. But they can't really get much money into the real economy.

Au contraire; they take money OUT of the real economy. The feds will absorb $700 billion of private savings this year alone...to finance their deficit. They expect $1 trillion deficits at least for another 10 years. That won't leave much money for the private sector.

Naturally, Washington, DC, is doing well. While unemployment is near 10% in the rest of the nation, it's only about 6% in the Washington area.

But let's face it... What's good for Washington is bad for the rest of the nation. The feds have used this correction to increase their power...and add to their wealth. The average federal employee now earns twice as much as his counterpart in the private sector - if the fellow in the private sector has a job at all.

A news item tells us that TARP recipients spent $114 million lobbying for their bailout money - most of it going into Washington, of course.

And the feds now own major stakes in what used to be the private sector - insurance, automobiles, and banking industries.

This has been a great period for government. Money, power...it is all floating down the Potomac like raw sewage...and coming to rest in the capitol city.

Our advice to the feds: enjoy it while you can. When stocks fall again...and people figure out what a mess you've made of the economy...you'll be lucky if you aren't tarred, feathered and run out of town on a rail.

Bill Bonner
for The Daily Reckoning Australia

• Government Pretending Debt-fueled Spending is the Same as Growth
• Economists Agreed the Stimulus Was Working and the Recession Was Coming to an End
• Household Debt Represents Spending Taken From the Future
• Feds’ Plan is to Reflate the Economy
• Debt Built Up to Levels Even Obama Says Are “Unsustainable”

Another pile of hay had another message: "Farmers On Strike."

The story behind these signs has a depression-era, black and white, look to it. Newsreels from the Great Depression show US farmers dumping milk rather than sell it at deflated prices. Now, French farmers do the same. Prices have fallen so low that many refuse to sell it at all.

But they can't stop milking the cows. So what do they do with the milk? They give it away. Or, in a few instances, they throw it at the government's farm agency offices.

Meanwhile, a story in The New York Times explains one of the reasons why milk has become so cheap. New technology makes it easier and cheaper to produce good milk cows.

Technology and globalization are inherently deflationary. The former increases productivity, thus lowering the cost of output. The latter lowers prices by directing business to the world's lowest-cost producers.

Deflation is the natural order of things. Inflation is always an artifice caused by government. Central banks 'target' a certain level of inflation because they think - or say they think - that a bit of inflation helps create full employment. And it does, sometimes. But it does it by treachery. Inflation hoodwinks the working class. It reduces their real wages, making them cheaper to employ. Then, the proles wise up. They realize that prices are rising. They demand more wage increases. That is when inflation begins to get out of control and presidents get out the 'Whip Inflation Now' buttons.

Every time government offers to solve a problem, it inevitably makes the problem worse - except, occasionally, in rare episodes when a government-organized national defense pays off.

Bill Bonner
for The Daily Reckoning Australia

• Australian Dairy Prices Up Due to Grain Prices
• Cattle Prices Have Risen Only 1% This Year
• Feds’ Plan is to Reflate the Economy
• China Fueling Inflation in Australia & New Zealand
• Consumer Price Inflation is What Everyone is Counting On

The importance is dependent on your perspective. Those people who are not borrowing money to spend are thus suffering the pangs of a lowering of their lifestyle, which depended on borrowing money to spend; and then they come around, whining about stupid things like, "Daddy, things have gone up so much in price that I need more money, which you would give me if you loved me. Don't you love me? I love you! Won't you please love me, daddy?"

And so I ask, "Can't you love me if I don't give you any money?" and they say, "No. You could borrow the money, and then we would love you", and I reply, "I have been borrowing money and now I can't pay them back" and so the kids say, "Then borrow some more!"

And, in a terrifying revelation, I realized that it is not only my children, but all the rest of the economy that is totally dependent on everybody else borrowing money to spend, too.

So now you see how Chaos Theory was right, and that all things are connected to all things? If not, then pay attention to how they will now commence to all drag each other down into the Nightmarish Hell Of Inflationary Insolvency (NHOII).

And it doesn't take a real genius to see why, but the point is not that the American people were stupid enough to think they could get a perpetual free lunch by borrowing money to pay for it, or even that a smaller subset of those who are suffering the pangs of a lowering of their lifestyle is composed of those who also think that they can call me on the phone and either 1.) Ask to borrow some money from me, or 2.) Ask me to pay them back the money I borrowed from them.

My response is the same, in that I give neither one of them any money because I don't have any money; so to one I laugh in scorn, and to the other I say that I have just put a check in the mail to them, and that they will get their money soon, and if it hasn't arrived in a few months, call me back and I'll write you a new check and get it right into the mail.

The point is that a much larger subset of those who are suffering the pangs of a lowering of their lifestyle is composed of those people who think that they can elect government representatives who legislate all problems out of existence, that will tax me and then give the money to them, or the Federal Reserve will create more money to loan to investors with which to buy government debt so that the government can spend, spend, spend us into blessed Utopia. Either way, it's Bad, Bad News (BBN).

And, alas, one way or the other, they are right. Unfortunately. And that is one reason that I weep, alone, in the Mogambo Bunker Of Bunkers (MBOB), doors locked, radio blaring, machine guns cocked and loaded, mostly drunk or nearly so, soon to be blissfully comatose.

Another reason that I cry so piteously and drink so abusively is that all this new government borrowing will create so much new money that it will destroy the dollar's buying power, taking my own country down with it.

The only reason that I stop bawling like a little crybaby is the knowledge that the people who own gold, silver and oil will get rich, rich, rich, and since I own gold, then people will want me to loan them a few bucks out of my huge stacks of money because they are starving, and their children are starving, and I will say, "No!" and it will be thin gruel indeed for them to hear my mocking voice again echoing in their heads, "Buy gold, silver and oil, you morons, because your stupid government is letting a private bank (that misleadingly calls itself the Federal Reserve when it is, in fact, neither) to create so damned much fiat money that it will produce catastrophic inflation in consumer prices that will destroy the country, just like it has done to every other stupid country in the last 4,000 years that let its stupid government increase a fiat money supply at its whim! Hahahaha! Now you see why I always said you were freaking doomed! Hahaha!"

But I feel terrible, as this constant infliction of inflationary pain by heedless expansion of the money supply is so unnecessary, and that is why I was pleasantly surprised to read in The Wall Street Journal the headline "Central Banks Consider Gold" in its Commodities Reports column.

The reason is easy to see if you read the article backwards, in that there was a question about central bank buying "last week, when gold saw a record single-day gain", especially Chinese central bank buying of gold, which is already the ninth-largest holder of gold in the world but which holds only 1% of its foreign-exchange reserves in gold, although it actually said it would like to hold more. And Mark O'Byrne at Gold & Silver Investments says that he would "be surprised if the Chinese hadn't been nibbling at the gold market," which leads to the news that Asian banks "are seen as keen buyers" of gold, which leads to the news that "other central banks are now far more likely to be holders of gold", which leads us back to the second paragraph that "Turbulence in the financial markets and recent US dollar weakness are helping the precious metal claw back its reputation as the central monetary anchor within the international monetary framework", which leads to the opening paragraph of "Central banks may be starting to turn one of the few assets in which they can invest; gold."

In short, those crafty Chinese, a fifth of the world's population, may be getting ready to issue a gold-standard money, which will instantly make their currency the strongest in the world, which is just what a country needs if it wants to import a lot of things cheaply so as to respond to demand for internal economic growth without stoking inflation in prices!

And, fortunately for those of us who both love to have large profits handed to us and who also own gold, a Chinese gold-standard may soon make a dream come true as gold would skyrocket when priced in suddenly depreciated dollars.

Whee! This investing stuff is easy!

Until next time,

The Mogambo Guru
for The Daily Reckoning Australia

• Borrowing Money is no Longer in Fashion
• Does This Mean You Should Sell Your Gold?
• Why Do Men and Women Want Money and Power?
• Millions of Zimbabweans Face Starvation due to Nationalisation caused by Hyperinflation
• The Return of the Cattle Market