'We didn't ask you to stock up all those dollars,' as Obama might have put it. 'It's not our fault if the dollar goes down and you lose money.'

Perhaps Mr. Obama should have quoted the immortal words of a former US Secretary of the Treasury, John Connolly. "It may be our dollar, but it's your problem."

Over at USA Today, the editors are more concerned about human rights. The paper must imagine itself back in the days of Woodrow Wilson or George W. Bush, when the US nobly embarked on a mission to raise all of mankind out of sin and error. In effect, Mr. Obama said that all people have 'universal rights,' including the right to a free press. China figured this was just the sort of opinion that its people didn't need to hear. So, it killed the story in its own press. The American president might as well have been talking to himself.

China is today's big story. Throughout the world's media there is much buzz and blather about the "romance"...the "historic relationship"...between the two titans. Some reporters see love. Some see jealousy. Some see rivalry.

Here at The Daily Reckoning we are suckers for romance. Give us some "a cigarette that bears a lipstick's traces...an airline ticket to romantic places..." and we are moonstruck. But we don't see much romance in the US and China hook up. What we see is the sort of things that delight psychologists and bore everyone else - perversion, co- dependency, and enabling.

On the surface, the two giants bicker over money like any other couple. The US accuses China of being a tightwad...holding its currency down and saving too much. China accuses the US of being a spendthrift, destroying its own purchasing power by wanton and reckless expenditures.

"US president's currency call breaks with script," says a headline in The Financial Times today. US economists think China should raise the value of the yuan. This would immediately lower the value, domestically, of the trillion(s?) worth of US-dollar assets China holds as reserves. It would also make Chinese products less competitive on the world market.

Mr. Obama wasn't supposed to say anything about it on his trip. It would be like bringing up your husband's drinking problem on your wedding anniversary; it would spoil the occasion.

Apparently, Obama couldn't help himself. Or maybe he just thought the folks back home would like to hear him give the Chinese a piece of his mind.

But how does the American president know what price to put on the yuan? A sinking dollar is good for the goose over in the US. Why isn't it okay for the gander in the Middle Kingdom?

A strong yuan would help the world economy "rebalance," say economists who think they know what they are talking about. In a nutshell, the Chinese produce too much; Americans consume too much. A higher yuan would come down on the high side of the scale - giving the Chinese more purchasing power (thus increasing consumption in the Peoples' Republic)...and making Chinese exports more expensive (thus decreasing consumption across the Pacific). With a stronger yuan, the Anglo-Saxon economies would be able to produce and sell more things to the Chinese...thus tilting the US economy more towards capital formation and production.

Chinese authorities are no dopes. They know they have a "floating" population of some 150,000 million people who are looking for work. They know that if they don't find some way to keep these people occupied they are likely to cause trouble. Trouble is the thing China's leaders most don't want.

"You think you've got trouble," Premier Hu Jintao might have replied to Mr. Obama. "Did you know that there are something like 200 million Chinese who still get by on as little as a dollar a day? Let's face facts. You're sitting there in Washington, comfortably talking about how much free health care and unemployment benefits to give the American people. We don't have the time...or the money for those kinds of things. Too many Chinese people. They don't earn enough to afford the kind of cradle-to-grave bribes you give your people. We have to keep them working; there's no other way.

"Besides, we don't quite see why we should pay for your mistakes. It wasn't our economy that blew up. It wasn't our financial industry that sold houses to people who couldn't afford them. It wasn't our consumers who spent more than they had and went too deeply into debt.

"It's the debtor who's supposed to pay, not the lender. We're the lender!"

Behind all the superficial arguing, accusing and kvetching, however, is a sick relationship. It has give and take. But the US is all take. China is all give. And now, on both sides, public authorities make the same mistake. In the US, they try desperately to prod Americans to take more...to continue doing what they were doing wrong. They offer incentives of every sort to lure consumers to consume even more. And their solution to the debt overhang is to hang on even more debt.

In China, meanwhile, the authorities desperately prod their people to give more...to produce more. Or, at least to build more plant and equipment with which to turn out more goods.

In the US, consumer spending is about 70% of the economy. In China, fixed capital formation is estimated to have made up 70% of China's growth in 2008 and as much as 90% in the first half of this year.

Is this a formula for a happy marriage? Over the last two years, this co-dependent relationship has broken down. Paul Krugman wrote in The New York Times that we've seen "the greatest collapse in world trade in history."

But neither side has learned a thing. The taker now proposes to take more. The giver now proposes to give more.

They don't need counseling. They need a divorce.

Bill Bonner
for The Daily Reckoning Australia

• Chinese Yuan Marches Towards World Domination
• Admonishment from China and the Decline of U.S. Credibility
• US Has Highest Unemployment Rate of All Major Economies
• Chinese Consumers Are Getting Shiny New Credit Cards
• Geithner Reassures China that America Takes Financial Obligations Seriously

Throughout history, no empire has managed to rule forever. Instead, empires rise to power, they prosper and spread their influence. Thereafter, they over-extend themselves and then break down in some fashion. In fact, all the glorious empires of history had one thing in common - a spectacular collapse.

Now, there can be no doubt that America ruled the economic world for the better part of the previous century. However, this powerful nation has now entered a terminal decline. The recent credit crisis and the failure of some of the largest American financial corporations is compelling evidence that the world's largest economy is well past its prime.

Today, America finds itself heavily in debt and to make matters worse, its demographics are also worsening. Unfortunately, the American leaders are attempting to postpone the day of reckoning by taking on even more debt! It is noteworthy that over the past year alone, America's federal debt increased by approximately US$2.1 trillion and its projected budget deficit over the next decade is now slated to be almost US$9 trillion! If this does not shock you, then consider the chart below which shows the total obligations of the US government.

As you can see, over the past six years, American unfunded obligations increased by almost 50% from US$79 trillion to US$114.7 trillion! Alarmingly, over the same period, American government revenue rose by only 12%! Now, you do not have to be a genius to realize that no entity can continue to increase its liabilities by more than four times the rate of its revenue. If this spending frenzy continues, commonsense dictates that at some point in the future, the solvency of the American government will come into question. When that happens, foreign capital will flee America, interest-rates will skyrocket and we will witness an epic currency crisis.

Furthermore, it is worth noting that apart from the American government, the Federal Deposit Insurance Corporation (FDIC) is also in serious trouble. In an ironic twist of fate, the FDIC's Deposit Insurance Fund has spent so much money covering bank failures over the past three months that it has completely run out of money! This implies that there is no capital available now to insure bank deposits held at American banks.

Given the horrendous deficits and ugly debt obligations, the American government is now left with the following options:

a. Raise taxes (not sufficient to meet obligations)
b. Cut back on spending (highly unlikely)
c. Default (unimaginable)
d. Print money (only viable option)

Remember, America is the largest debtor nation the world has ever seen and the only way it can repay its obligations is through a process known as quantitative easing (euphemism for printing money). In fact, this stealth confiscation of savings is already well underway. A recent report published by the Federal Reserve revealed that the American central bank purchased half of the newly issued US Treasuries in the second quarter of this year. Needless to say, the Federal Reserve financed these purchases by creating dollars out of thin air - a short- term fix but a long-term disaster.

Let us put it bluntly; the days of American hegemony are drawing to a close and within the next two decades, China will become the world's most dominant economy.

If you are sceptical about our claim, you may want to note that twenty years ago, China's economy was worth only US$342 billion and as of last year, its GDP had grown to US$4.4 trillion; representing an annual growth rate of 13.6%. Now, if China succeeds in growing its economy by roughly 8% per annum over the next two decades, its GDP will grow to US$20.5 trillion by 2029. At that point, China may well replace America as the world's largest economy.

It is worth keeping in mind that whereas American households are up to their eyeballs in debt, their Chinese counterparts have a savings rate of almost 40%! Furthermore, at a time when America and other nations in the West are struggling to stay afloat, China's foreign exchange reserves have surged to US$2.3 trillion!

Now, we are aware that many commentators are criticising China for the sheer size of the stimulus unleashed by its leaders. In our view, this ridicule is baseless because instead of spending printed or borrowed money, at least the Chinese are spending their savings.

In any event, the stimulus applied by the Chinese policymakers seems to be working. Over the past seven months, money-supply growth in China has risen by 26% and loans have surged by 32%. In turn, this inflationary orgy is creating a residential construction boom. All this economic activity is in stark contrast to America, where despite all the policy-actions, private-sector credit is contracting.

Look. The Chinese economy is roaring along...and you can be pretty certain that the country's rapid growth will cause domestic consumption to explode. Already, roughly 900,000 cars are sold each month in China and by the end of this year, the Asian powerhouse will replace America as the world's largest market for automobiles. Interestingly, similar trends of rising consumption can be observed in various household items such as refrigerators, motorbikes, mobile phones and so forth.

So it seems to us that in this low-growth world, investors would do well to take a good hard look at high-growth opportunities like China.

Regards,

Puru Saxena
for The Daily Reckoning Australia

• Geithner Reassures China that America Takes Financial Obligations Seriously
• China is a Key Driving Force in the Gold Market
• Teach Your Children Chinese Because China is the Next Great Country
• American Family’s Share of Government Debt Now Over Half a Million Dollars
• The Chinese Stimulus Plan to Save the World

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

• 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
• Central Banks’ New Money is Piling Up

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
• Unlike China, India is Not Willing to Learn from its Mistakes
• Buying Gold, Gossip & Russia’s Tu-160 Bombers

In markets, one of the most watched and ongoing match races is the one
between Emerging (or developing) Markets and Developed Markets. The
former include China, India, Brazil and others. The latter include the
US, the EU and Japan. Which one do we bet on and when?

It's a particularly good question now, as we pick through the
smoldering ashes of the 2008 bust. Emerging markets have had a hot 10-
year run, even if you include the crackup in 2008. In fact, even if you
had invested in the MSCI Emerging Markets ETF (NYSE:EEM) on Jan. 1,
2008, you would be sitting on a profit today. By contrast, the S&P 500
Index has delivered a double-digit loss over the same timeframe.

The emerging markets have snapped back surprisingly quickly. As
Jonathan Anderson, a UBS strategist put it, "Not even the worst
economic crisis in the postwar era has been able to derail [them]." In
financial markets, ideas, like thoroughbreds, run hot and cold. Past
performance doesn't necessarily decide the issue any more than it does
in horse racing. But it turns out there is a pretty reliable way to
handicap the race between Emerging and Developed Markets.

The "handicapper" in this case is the aforementioned Mr. Anderson, who
wrote about his findings in the Far Eastern Economic Review. His title,
"Emerging Markets Poised to Perform," hints at his conclusion.

It all comes down to those old financial constructs called balance
sheets. In essence, a balance sheet shows you what you own versus what
you owe. These are snapshots in time, a measure of financial health,
like an EKG of one's heart rate. You can often spot trouble here before
it becomes fatal.

In my investment services, I always seek out companies with strong
balance sheets - the sorts of companies that own much, but owe little.
Enterprises like theses have the ability to withstand adversity better
than those with weak balance sheets. A strong balance sheet also means
that a company can fund its growth independently and more securely,
without having to rely on fickle lenders.

As investing star, Martin Whitman, wrote in his most recent shareholder
letter: "Don't invest in the common stocks of companies which need
relatively continual access to capital markets, especially credit
markets... Even the strongest, best-quality issuers can be brought
down, or almost brought down, if they continually have to refinance."
Unfortunately, many investors learned this lesson the hard way during
last year's severe credit crisis.

As it turns out, balance sheet strength is also very important for
entire nations. But that's hardly a surprise. Countries that owe a lot
of money tend not to grow as much or as reliably as those with healthy
balance sheets. Anderson created a "stress index" to measure the
financial health of entire nations. A country with high debt levels and
deficits earns a high stress index score. He then plotted this index
(inverted) against a rolling average of GDP growth, a rough measure of
economic growth.

Guess what? There's a close connection between the two.

So one way to explain the growth of emerging markets is to consider the
strength of their balance sheets. When they have healthy balance
sheets, they grow faster than when they have weak balance sheets.

You can see that the last time the emerging markets had a long stretch
in the sun was in the 1960s and 1970s. Emerging markets grew 5% or
better. As Anderson notes, not a single emerging market - not Africa,
not even the Soviet Bloc - failed to post 5% annual growth during this
time. And you'll also note that the balance sheets were healthy.

As a result, emerging markets sailed through the first global oil shock
in 1973-75 without much trouble. The developed world, by contrast,
suffered the pain of a deep recession. Investors who stuck with their
emerging market stocks throughout this period reaped big rewards.

According to Anderson, "Between 1965-1980 the dollar-adjusted return on
nascent equity markets in Mexico, Hong Kong, Taiwan, Brazil, South
Africa and other lower-income nations ran into the hundreds of percent
- while indexes in the US and Europe were essentially flat over the
same 15-year period."

Of course, as I say, these things run hot and cold. The emerging
markets "imploded" after the 1980-82 recession. A dozen different
countries reported inflation rates north of 100%. As Anderson points
out, 20 currencies lost 50% of their value each year. From 1980-99,
emerging markets struggled mightily and barely grew. And as you see
from the chart, their balance sheets went south as well.

Emerging Market returns during this period were poor overall. A dollar
invested in emerging markets in 1990 was still worth only about a
dollar 10 years later. In 2000, though, the game changed again.
Emerging markets opened up. They cleaned up their debts. And the
emerging markets went on a tear that continues today.

In general, emerging markets still have healthy balance sheets today.
In fact, they are as strong as they've been in 50 years. At some point,
that will swing the other way, as these things always do. At some
point, there will be too much debt and too much leverage. But for now,
that condition seems a ways off.

As Anderson concludes, "All the preconditions are in place for a
protracted period of strong economic growth." He guesses 5-6%, which
would crush the Developed World's growth rates. In fact, the superior
(and diverging) growth rates of the Emerging economies are already very
visible.

First up, take a look this graph, from The Economist, which shows the
industrial production of emerging Asia compared to the United States.

Looks like Asia is recovering pretty well. The chart above clearly
illustrates the "decoupling" that became such a hot topic of discussion
last year. The idea was that the Emerging markets would not necessarily
follow lockstep with the Western countries.

The Developed World suffers through what Richard Koo, the chief
economist at Nomura Research in Tokyo, calls a "balance sheet
recession." The Western world suffers from too much debt. That fact
shifts the focus from making profits to repaying debt, according to
Koo. Debt repayment will continue until the West repairs its balance
sheets, a process that takes years to correct, as Japan's long
recession shows.

So the same dynamics that make emerging markets look good, work in
reverse for the Developed World. According to Anderson's model, the
stressed balance sheets of the Developed World predict slow growth.

As investors, then, we'll have to continue to look to the emerging
markets for growth. The market never ladles out its rewards evenly,
though. To drill down further, the big winner is really Asia and its
big markets of China, India and Indonesia.

Anderson estimates that these regions could grow 7% or more annually,
well above the tepid rates of developed markets and better than most
emerging markets. "This is a very hefty gap," he writes, "and one that
is very likely to continue to reward investors who take advantage of
the opportunity."

Chris Mayer

for The Daily Reckoning Australia

• The Century of the Emerging Markets
• Investors Sold Japan Along with the Emerging Markets
• There Are Two Ways of Studying Economic Theory
• Government Could Succeed in Reflating the Bubble
• Dr. Woody Bock’s Essay: The Future Evolution of the Debt-to-GDP Ratio

But then came the huge deleveraging of risk assets beginning in July of 2008. There's an old saying that when established currencies that are widely traded and very liquid, get grounded, the emerging market currencies (like the BRICs) get sent to the woodshed. And so, we had the BRIC currencies lose major ground to the dollar during this period of time.

However, in March of this year, the non-dollar currencies began to rebound versus the dollar once more. This rebound in the established currencies like, euro, francs, yen, and Aussie dollars, has led to an even stronger rebound in the emerging market currencies, including the BRICs.

So... I thought it best to take a step back, and look at the fundamentals of each of the BRIC countries, and see if the stage if set for yet another strong run on the dollar.

Before we start though, I wanted to tell you the two reasons I originally put these countries together to form EverBank's BRIC MarketSafe CD.

In the spring of 2009, China was making noise about the need for a new reserve currency to replace the dollar. The other BRIC nations joined in and at the next G-7 meeting, all four nations stood up and wanted to be counted as countries that want a new reserve currency, for they had see enough deficit spending in the US to convince them the dollar had no other avenue to follow but down.

The "markets" sort of shrugged off the BRIC nations call for a new reserve currency to replace the dollar. But I looked at it differently. I saw nations that had HUGE Treasure chests of dollar reserves, and nations that currently have a very large portion of the globe's population. I believed then as I do now, that these countries would need to be reckoned with, and eventually their cries for a new reserve currency to replace the dollar would be heard, loud and clear.

Since we announced the creation of the BRIC MarketSafe CD, where an owner of the CD receives the positive gains in the currencies over 3 years, but does not experience any currency risk, as the CD has 100% principal protection, the BRIC nations are receiving more notice!

At the last G-20 meeting, of which the BRIC nations are a part of, it was announced that the watchdog duties for the global economies were being taken over by G-20 (from G-8). And a week later, the G-7 Finance Ministers suggested that G-20 take over the currency watchdog duties!

Now G-20 has both global economies and currencies under their watch and care, and the BRIC nations are right there to offer their suggestions...

So... Now that we've gone through the background, let's take a look at the current fundamentals of these four nations, to see if the prospect of further potential currency appreciation is warranted.

First up... Brazil!

Brazil was the first Latin American country and first in the Americas to see its economy grind out of its recession. Brazilian GDP for 2009 overall will probably be just a nick over flat, while the forecasts for 2010 GDP show that economic growth will expand by 3.8%, as firmer domestic demand leads the economy.

For instance, Brazil's recent Industrial Production output grew 1.2% in August, which was the eighth consecutive month of growth.

Brazil currently enjoys a Trade Surplus of 1.5% of GDP, with forecasts for the Surplus to also grow to 3.1% of GDP by 2011.

Overall, Brazil's Current Account Balance is a narrowing 1.1% of GDP Deficit... as the economy gets back on track; the Current Account Deficit is expected to grow to 1.5% of GDP.

These are "manageable" deficit figures, and ones that would be welcomed in many countries of the world.

Inflation as always been a problem in Brazil, but assuming no economic shocks, and a strong currency (the real), it is expected that inflation could fall to 4.1% by year-end 2009, and remain stable throughout 2010- 2011.

Brazil is one of the world's largest democracies and emerging markets, which leads one to believe that their influence on the international stage will only continue to grow. Recently, China has moved past the US as Brazil's top trading partner. It is believed that Brazil and China will sign a currency swap agreement that would remove the dollar in trade settlements. I'll talk more about this in the "China segment".

The prospects for the real are good. However, one must always remember, that even with strong economic fundamentals, any mass sell off of risk assets, would be magnified for an emerging currency like the real.

Next, we have Russia...

When we announced the BRIC MarketSafe CD, I received a lot of responses to the announcement with wishes that we had not included Russia in the CD. Well, it wouldn't be a BRIC without Russia!

I told people that in essence, the only way I would buy Russian rubles is in a MarketSafe CD, and that the only way to look at Russia was as an "oil play"...

Who among us believes that oil prices will continue to remain in the $70 a barrel range?

OK... now that we've played that game... Let's get to the data!

Russia went against the flow in September, by cutting their base interest rate, when it was believed that a good number of countries around the world were preparing to begin rate hike cycles.

Russia's economy is still mired in a deep recession, as witnessed by the 10.5% fall in GDP from a year earlier, and industrial activity contracted by 12.6% in August!

Russia's economy had seen two consecutive months of growth before this step backwards in August, and thus the rate cut in September. There are only mixed signs that the recession in Russia has bottomed out. But that means the Russian ruble is much cheaper than a year ago, and will probably remain weak as long as 1. The price of oil remains in the $70 range, and 2. The Russian economy remains mired in a deep recession.

Growth for 2010 is forecast to be 3.5%, which would mean that Russia's recession will have ended late in 2009. An end of the recession and economic growth are very dependent on the persisting problems of the bad assets on the books of Russian Banks.

So... the rebound in the ruble may take some time to come to fruition. The good thing about that is that the ruble will remain cheap for new buyers.

Next... India...

India has maintained strong economic growth through the global financial meltdown, and will post a very impressive growth of 5.5% this year. This does represent a sharp deceleration from the 10% growth rates during the go-go years before the global financial meltdown. So, while 5.5% growth is lower than previous growth rates, it remains one of the best rates of economic growth in Asia!

Economic growth in India is forecast to grow 6.3% in 2010 as private consumption, investment and trade growth all show renewed strength.

Inflation in India, at present is not a problem coming in at 1.3% in 2009. However, as domestic growth takes hold, inflation is expected to rise to 5.1% in 2010.

The Indian Central Bank will continue to fight inflation, probably raising rates as we go along in 2010. The higher interest rates will go a long way toward additional currency strength.

India does not have a problematic current account deficit, like many emerging market countries. With rising exports at a 9.6% rate, the current account deficit will be the equivalent of 0.5% of GDP... Future growth in India will present itself as a problem as far as the Current Account Deficit is concerned. But it will remain manageable, and again, not the stuff that some countries experience.

The prospects for the rupee remain strong going forward.

And, last on the roster, but number one in the hearts of the fans....

China...

This is the proverbial 200 lb gorilla in the room! China has long been on my mind as the most undervalued currency on the planet, and as long as the Chinese government has their hands on the purse strings of the renminbi, it will remain that way.

However, there are signs that the Chinese government is looking to widen the use of the renminbi, which would eventually lead to more of a free float or at least a wider band of currency movement allowed.

The IMF recently wrote that the renminbi remains the most undervalued currency at probably a level of 40% undervalued versus the dollar. As long as the renminbi's daily movement is controlled so strictly by the Chinese government the renminbi will not be allowed to cut into that 40% figure by very much. However, with the signs of a wider use of the currency, it is thought that the renminbi could be allowed to float more in the future.

What is this "wider use" I'm talking about? Well... you see, the renminbi is not a transactional currency, it is not liquid, and is traded on what's called a "non-deliverable forward". Which simply means it cannot be converted to physical form, or deliverable form.

It is my belief that China is taking baby steps to one day, have their currency take over the title of reserve currency of the world replacing the dollar. And to do this, the Chinese must begin to obtain a wider use of their currency.

They began this process by signing currency swap agreements with most of the Asian countries, and then moved on to Argentina. As I said earlier, it is believed that China will soon sign another of these currency swap agreements with Brazil.

The currency swap agreement between two countries eliminates the dollar from any transaction between the two countries, and only uses the currencies of the two respective countries. This is the "first step" toward gaining a wider use.

The "second step" came in September when China issued renminbi denominated bonds in Hong Kong. These were the first renminbi denominated bonds issued by China.

A wider use, in my mind, is equal to a stronger renminbi versus the dollar going forward.

Now for some data!

China's GDP is expected to grow 8% in 2009, and 8.6% in 2010. China's economic recovery this year has been fueled by government stimulus. But Hey! China has a treasure chest of reserves and surpluses... So, if any country was going to spend some money to boost their economy, China would be the one, for they have the money to do so!

And... with China being a Communist country, they were able to dictate where and to whom the money was being directed to, and how it was to be spent. This has gone a long way toward seeing the results of China's stimulus.

Inflation remains a problem in China, and the sooner the Chinese realize that a strong currency can go a long way toward fighting inflation, the better!

So... For now, the renminbi remains pegged to a basket of currencies, and controlled by the Chinese Government, through the Chinese central bank. However, there are signs that this arrangement for the currency is changing, and a wider use of the renminbi is the objective... If that's the case, then the prospects for a potentially stronger renminbi versus the dollar are very good.

And that's how I see the BRIC currencies/ countries...

Regards,

Chuck Butler
for The Daily Reckoning Australia

• BRIC – Brazil, Russia, India and China Suffer High Rates of Inflation
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• Brazil is a Good Place to Become Rich
• US Dollar Declining as China’s Currency Rises
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But let's not forget about oil. It too is priced in dollars. In fact, the big gold move started because Robert Fisk claimed the Gulf States and China et al. are tired of paying for oil in an unstable currency. You could say that gold moved closer to being money again because of how important oil already is to the real economy.

We'll get back to oil in a moment. But there was a story in today's Age that gave us the willies. "The Aussie dollar is poised to storm past parity with the US dollar, propelled by local interest rate rises and Australia's close ties to the booming Chinese economy, according to currency analysts," reports Chris Zappone.

It doesn't sound too creepy. But there IS a creeping hint of euphoria to the Aussie story at the moment. The dollar...the economy...the fact that summer is just over the horizon...you can feel the animal spirits getting friskier. It was like this in the summer of 2008 as well, right before the bottom fell out.

But enough of the weird sense of déjà vu. How does the big picture affect your investments? That is always the tricky part. It's one reason why we are stuffing our new offices with all kinds of traders and analysts and writers whose ideas would probably get them thrown out of a respectable job. These are just the people we want thinking about the investment future.

Dan Denning
for The Daily Reckoning Australia

• Gold, the Aussie Dollar, the Greenback and You
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• Rally in Stocks and Rise in Aussie Dollar is a Result of the Carry Trade
• The Aussie Dollar as a Measure of Global Risk Appetite

Where have all the jobs gone
long time passing
Where have all the jobs gone
long time ago
Where have all the jobs gone
Gone to graveyards everyone
When will they ever return
Oh when will they ever return

- Sung to the tune of "Where Have All the Flowers Gone?"

"Many lost jobs in US will never come back..." says The Wall Street Journal.

Need we explain why? Because they're not lost, waiting to be rediscovered. They're not missing in action, to be repatriated after the fighting stops. Instead, they're dead. Gone forever.

There have been 7.2 million jobs lost since recession began. Many of these jobs were Bubble Age jobs. Millions of people, for example, earned their money in 'housing.' They were putting up houses in the sand states...or building granite countertops...or selling, flipping, financing the houses. Those jobs are gone forever. Never again in our lifetimes are we likely to see such an explosion in the housing industry. Sure, people will still build houses...and do all the other work involved in the traditional housing industry. But it will be only a fraction of the industry it was in the 2002-2007 period.

There were also all the jobs involved in selling things to people who didn't need them and couldn't afford them. Labor was needed at every step of the way - manufacturing (perhaps in China), shipping, stocking, retailing, fixing, and financing the stuff.

And don't forget all that mall space...and all the trucks...and all the other things that supported the over-consumption of the Bubble Age.

And now the Bubble Age is over. It will not come back, no matter how much cash and credit the feds pump into the system. (Not that they can't make things worse...in a BIGGER bubble...but that is not yet in sight.)

In The Wall Street Journal yesterday was an item about Las Vegas. The casinos are folding up their expansion plans, says the WSJ.

But the big news yesterday was that the service industries are growing again...at least that's what the latest figures show. This news so delighted investors that they bid up Dow stocks 112 points. Oil rose above $70. Gold posted a $13 gain.

Don't get too excited about that rise in the service sector. Everything bounces...even dead jobs. Dead jobs bounce; they still don't get up. After months of decline, it may be true that the service industries have had a rebound, but don't expect them to begin recovering the stamina and strength of the bubble years. A few more people may have gotten jobs serving drinks in Detroit's bars last month, but it is not likely to turn into a durable recovery of the job market.

In the 1990s, the US economy added 2.15 million new jobs every year. It needed to add at least 1.5 million or so just to remain at full employment - that is, with about 5% of the workforce unemployed at any time.

To put that number in perspective, this year the economy as LOST 2.5 million jobs, just in the last six months. Those jobs aren't coming back. As we keep saying, this is a depression. It is a major correction, in which the economy needs to find new jobs...because it can't continue to do what it has been doing.

New jobs are typically created by new businesses - small businesses that are growing. Big businesses already have all the market share they're going to get. They also typically have all the employees they need. Then, when hard times come, they discover that they don't need all that they have, so they cut back.

Job cuts from large businesses is what you expect in a recession. But this time it is different. This time, big businesses have let people go by the million. But small business has not been hiring them either. So not only is unemployment growing...the trend shows no signs of coming to an end.

Economists are reconciled to high unemployment levels for a long time. The head of the IMF says unemployment might peak out in 8 to 12 months. Even if that were true, it will be a very long time before the job market recovers. Just do the math.

We'll keep it simple. The economy needs, say, 1.5 million new jobs per year. Instead, over the last two years, it lost 7.5 million. Now, it has to stop losing jobs...let's just say that happens a year from now. By then, the total of jobs lost may be near 10 million. Plus, there are the new jobs it needed - but never got - over that 3 year period. That's another 4.5 million. So, the total will be about 14.5 million jobs down. Then, let us say, because we are in a generous and optimistic mood, that the economy then begins creating jobs again...at the rate it did during the '90s. What ho! After five years, that still leaves the economy more than 10 million jobs short, doesn't it?

In order to get back to full employment, the economy has to surprise us on the upside. It has not merely to return to the growth levels of the '90s...it has to surpass them. It needs to grow so fast it creates 3 million jobs per year. And even then, it would take nearly 10 years to get back to full employment.

Pretty grim, huh?

Well, don't worry about it. It won't be like that. It will be worse.

"Uh...Bill...what do you mean, 'worse'?"

Glad you asked.

In the typical post-war recession, jobs are lost...then they are recovered when the economy gets on its feet again. But this happened in the credit expansion of the '45-'07 period. Each recession was just a pause, when the economy was catching its breath. Then, it was off again...in the same direction - up the mountain of credit.

This time, it's not a typical post-war recession. It's something different. Now, we've reached the peak. We're coming down the other side...wheee! Look out below!

Now we don't need all those people building houses, stocking the shelves and selling things. We don't need such a big financial industry either. Now, people want to get rid of credit, not get more.

And the businesses that were goosed up in the credit bubble are now deflating fast. They're not just taking a break. They're lining up the jobs and shooting them in the back of the head. Those jobs are gone. (See below...)

In a 'normal' recession, jobs reappear because the economy continues in the same direction. In a depression, it changes course. Debts are paid off. Spending goes down, more or less permanently. The economy actually contracts...until consumer debt is once again down at an acceptable level...or a new model for growth can be found.

The Wall Street Journal mentions a statistician who was making $100,000 a year. He too is a victim of depression. His job has been outsourced to India. Businesses, with less revenue coming in the door, must cut costs in whatever way they can. Labor is the single biggest item on most firms' ledgers. They will reduce it however they can. And once the change is made, there is little chance that the job will come back.

It is a little like a battle. In an attack, troops often get separated. They are 'lost' - for a while. Then, the winning side is able to recover its missing troops as it advances. But the losing side gives up its troops forever. They are stuck behind enemy lines and cannot rejoin their units.

We are now on the losing side of a credit battle. Having gained so much ground, and so many jobs, in the advance, the United States is now giving them up.

"I expect over the next several months, mainstream pundits and forecasters will start worrying about tepid hiring, even as the pace of job losses slows," Strategic Short Report's Dan Amoss chimes in. "As we 'lap' the 2009 corporate cost cutting by early 2010, and top lines fail to rebound, earnings estimates will have to come back down. I'm amazed at how many sell-side analysts are modeling V-shaped recoveries in 2010 earnings. Most stock prices are disconnected from reality."

And here is a story we foretold years ago. Private equity was mostly a fraud, we said. Sharp operators bought companies for more than they were worth, loaded them with debt, collected huge fees, and then sold them back to the public or to other private equity firms. Come the revolution, we mused, these deals would go bad.

Well, the revolution has come. The deals have gone bad. The New York Times reports:

"Simmons [the mattress company] says it will soon file for bankruptcy protection, as part of an agreement by its current owners to sell the company - the seventh time it has been sold in a little more than two decades - all after being owned for short periods by a parade of different investment groups, known as private equity firms, which try to buy undervalued companies, mostly with borrowed money.

"For many of the company's investors, the sale will be a disaster. Its bondholders alone stand to lose more than $575 million. The company's downfall has also devastated employees like Noble Rogers, who worked for 22 years at Simmons, most of that time at a factory outside Atlanta. He is one of 1,000 employees - more than one-quarter of the work force - laid off last year.

"But Thomas H. Lee Partners of Boston has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company's fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise.

"Wall Street investment banks also cashed in. They collected millions for helping to arrange the takeovers and for selling the bonds that made those deals possible. All told, the various private equity owners have made around $750 million in profits from Simmons over the years."

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Normally Small Businesses Lead the Economy Out of Recession
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Today is a big day in China...it marks the 60th anniversary of the communist victory. "The Chinese people have stood up," said Mao, announcing the victory in 1949.

Then, over the next two decades, whenever the Chinese stood up...Mao shot them down himself. Mao's long march to power was a huge setback for human political progress - if there is any. The man was a thorough scoundrel and a complete incompetent at everything, except getting power and holding onto it. Every program was a disaster. When he set out to 'liberate' the masses, they ended up as slaves. When he set out to feed them, they starved. When he proposed to empower them with his "democratic dictatorship," they ended up with bullets in the back of the head.

But 60 years later, the commies are still in power. China is still red.

And yet, thanks to the curious way the world turns, China's economy is now freer and more competitive in many ways than the United States. Go figure.

As economies age, more and more people become 'rentiers.' That is, they get some special privilege...some inside angle...some conniving advantage. The latest numbers, for example, tell us that almost half of all households pay no federal taxes. They collect benefits - jobless benefits, food stamps, education, day care, Medicare, Social Security - without contributing to the system that provides them. Add to this number the millions of households that pay taxes but receive a large part of their money from the government itself - employees, contractors, lobbyists, etc. - and you have enough to win any election in the country.

But the welfare chiselers and food stamp cheats are small time crooks. The big crooks go for billions. John Crudele in The New York Post:

"...Sept. 18, 2008 [US Secretary of the Treasury...Henry] Paulson placed his first call of the day at 6:55 a.m., to Lloyd Blankfein, who succeeded Paulson as CEO of Goldman. It's unclear whether the two connected because Blankfein called Paulson minutes later.

"And then Blankfein placed another call to Paulson at 7:05 a.m. for what looks like a 10-minute conversation.

"After that Paulson called Christopher Cox, Securities & Exchange Commission Chairman twice; British Chancellor Alistair Darling and New York Federal Reserve head (and now Treasury Secretary) Tim Geithner two times.

"Then Paulson took another call from Goldman's Blankfein.

"It wasn't even 9 a.m. yet - 30 minutes before the stock market was to open - and Paulson and Blankfein had already exchanged three phone calls."

It pays to have friends in high places. That was the day the market learned of Paulson's bailout proposals. Could Goldman have gotten word before others? Hey, we're not accusing anyone...

Bill Bonner
for The Daily Reckoning Australia

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"The future will be a total disaster, with a collapse of our capitalistic system as we know it today, wars, massive government debt defaults and the impoverishment of large segments of Western society," he writes.

"We have a money-printer at the Fed," he continues, "which guarantees runaway inflation, wholesale debasement of the dollar, and a major lowering of living standards for most Americans and many Europeans as well.

"Meanwhile, Paul Volcker says that China's rise merely 'highlights the relative decline of the US.'"

So there you have it: China on the way up, America on the way down.

That's the drama that we're watching every day, here at The Daily Reckoning. In our view, the peak of US wealth and power probably came during the period between the fall of the Berlin Wall and the fall of Lehman Bros. But there are probably a lot more shoes to drop before people are fully aware of what is going on.

The way we see it, almost the entire 20th century was a mistake...a dead end.

Europeans were clearly on top of the world when the century began. Then, after WWI the Europeans in America took the lead role. But WWI shook their faith in their evolving political order. Not long after, the German hyperinflation and the Great Depression shook their faith in their economic and financial order. This left a huge vacuum, which was soon filled by ruthless adventurers and ideological schemers. Much of the rest of the century...from '39 to '89...was spent in hot wars and cold wars against these Bolsheviks, Fascists, Stalinists and Maoists.

In the end, the more reasonable and consensual societies of the West won the battle. But they, too, were transformed by 50 years of war and nearly a century of bad ideas.

"Whoever fights monsters should see to it that in the process he does not become a monster. When you look into the abyss, the abyss also looks into you," Nietzsche warned.

Looking into the abyss created by Mussolini, Hitler, Tojo, Pol Pot, and the rest, Western societies decided both to fight them...and to join them. Tax rates soared. Regulations multiplied. University professors taught socialism, Freudianism, modernism, cubism, feminism, racism...and every other 'ism' they could think of. Parents spent good money to spend their children to universities that turned them into mush-heads.

And - perhaps most ominous - in the United States of America, the military grew into a greedy, grasping goliath...the very thing Eisenhower had warned against.

Then, there were counter-trends in the '80s...led by Margaret Thatcher in England and Ronald Reagan in the United States. But these were mostly frauds. Top marginal tax rates were rolled back. And there were some cuts in regulatory procedures. But government spending tended to go up anyway. Worse, Ronald Reagan mistook the Soviet Union for a genuine threat and increased military spending even further to combat it.

And now, the United States staggers under the weight of its eternal wars...its imperial illusions...and its everlasting efforts to provide bread and circuses. If it kept its books like a private enterprise, it would be broke. If it were a public corporation, it would be de-listed.

Still, it spends and spends...and there is no stopping the spending. Trillions are spent on wars in Iraq and Afghanistan, for no apparent reason. But who complains? Too much money is at stake. There are too many lobbyists for too many industries and too many special interests involved. Military spending - even in a time when America faces no substantial challengers - cannot be rolled back. Neither can social spending.

Marc Faber is right. There too, there are too many people with too many dogs in this fight. Both military and social spending will continue to expand until the empire is ruined.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

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