Of course there is. George Soros is picking up more shares of gold and potash producers. Mineweb reports that, "Billionaire investor George Soros' Soros Fund Management substantially raised its shares in PotashCorp as well as invested in gold ETFs during the third quarter. In Form 13F documents filed with the SEC, Soros Fund raised its PotashCorp from 1.98 million shares to 2.95 million shares with a fair market value of $266.4 million."

And while China and America bicker over currencies, Chinese firms are scrambling to buy real assets. And while Aussie banks source foreign borrowing to lend in local real estate, Aussie mining firms go begging for bits of capital that would bring world-class ore bodies (and key strategic resources) into production...by local producers and owners.

Take Moly Mines. It's aiming to operate a 10 million tonnes per annum copper and molybdenum mine at Spinifex Ridge in Western Australia. Prior to the credit crisis last year, things were going swimmingly. Molybdenum is a hardening agent used in steel-making. There aren't a lot of economic ore bodies in the world. Moly, according to the research we published in April of 2008 in Diggers and Drillers, had one of the most economic deposits.

But it all went off the rails with the credit crisis. The company couldn't secure the funding it needed to bring the project into production. And the share price fell. That made management amenable to any offer that would secure financing and rescue what was still, by all accounts, an immensely valuable and lucrative resource.

Yesterday, the Foreign Investment Review Board (FIRB) approved a $200 million investment in Moly by China's Sichuan Hanlong Group. It gives the Chinese group majority control in Moly and could see the development of the project at Spinifex Ridge begin in the middle of next year.

Good on the Chinese for finding a great project to invest in at a bargain price. The truth is, Australia has more good mineral and energy projects than the local capital markets can realistically fund (given the preference by the banks for investing in/spruikin property). BHP CEO Marius Kloppers made this point yesterday in a lecture to the Lowy Institute in Sydney.

Kloppers said there are 74 separate resource projects worth $80 billion the advanced stages of planning. Those projects need capital. "'Although clearly not simple," Kloppers said, "a part of the solution lies in continued foreign investment, meaning that both Australia and Australian companies need to be open to this kind of investment, despite its immediate and strategic implications."

What are those "immediate and strategic implications?" Well, up to now, existing Australian shareholders are being clobbered. Those who owned equity in these projects before the credit crunch have been diluted as the firms in question raised money with rights issues or institutional placements.

That's fair enough. Owning shares implies an assumption of risk. The stock market is not a savings account. But the other immediate implication is the transfer of majority ownership of these key projects to overseas owners (including the transfer of a big chunk of income from the assets).

This is what it is. And in most cases, it is not an issue of national security. The truth is, many of these projects won't get off the ground without foreign capital. They will create Australian jobs, export earnings, and share price gains for Australian investors. They will also secure key resources for foreign manufacturers.

There's no sense getting all lathered up about it. The status quo is a result of Australia's status as a net capital importer and the investment decisions made with the money Aussie banks have borrowed. The banks could have chosen to invest in Australian mines. But mining is a risky business.

Is it as risky as property? We don't think so. But the way the Australian property market is currently structured - with the government supporting prices directly through grants and indirectly through miserly land releases, and the banks channeling new lending into the market - it's a rigged game for the banks. Why wouldn't they invest in property? It's certainly in their interest.

Whether there is a national interest at stake in the mining industry is another question. You'd certainly think so, given how much government revenue is derived from royalties and exports. But most state governments and the Federal government seem happy with the current arrangement.

The large producers have an unassailable competitive position. And the smaller explorers and developers are left to their own devices to find capital for their projects. Hey...that's why they call it capitalism!

For investors with the patience to investigate the smaller fry, it's a great market. Our new editor of Diggers and Drillers, Alex Cowie, looks like an insomniac in a coffee shop when he comes to the office each morning. There are literally more good stories than he can possibly research.

The important point is that what might be a national problem - selling of mining projects to foreign investors - is an individual investor's opportunity. You always want to invest where you have an advantage. And as an Aussie resource investor looking at the mid and small caps, you DO have an advantage.

Sure, you may be investing alongside the Chinese, who may be getting a better deal. But there are dozens of smaller projects across the resource spectrum that - as long as the world does not plunge into a second great manufacturing depression - make compelling investment stories.

Murray got back to us with his U.S. dollar index chart. You may recall that the other day we published a chart of the dollar index showing that the short-term and long-term moving averages were in danger of crossing. Murray, a full time technical analyst, basically said our chart looked nice but didn't communicate any useful information to traders about when to enter or exit positions affected by the dollar's decline (or rise).

Murray sent over his chart with a note that begins, "The US dollar index is still in strong downtrend. My last update (to Slipstream readers) said that we needed to keep an eye on the 10 week/35 week Moving Average as the confirmation for any change of trend. Also we needed to see a close above around 81 to confirm a re-entry into the distribution between 78 and 89 formed over the last year."

"None of these indicators are close to being confirmed. So, from a long term perspective, you have to remain bearish the dollar although entry into any short positions is highly risky at this point. Have a look at the chart and you can see that the lowest dotted blue line comes in around a price level of 73 which is close to where we are now."

Click to enlarge

"The meaning of the lower dotted blue line is just that it is an area where a false break can occur. So even though the current price action doesn't look like it is related to the distribution between 78 and 89, it still could be so beware. You can see from the other ranges that I have shown in the chart that a break through the low of the range saw a move to around that lower blue dotted line and then saw a squeeze from there. The first one saw a move all the way back to the top of the range and the second one tried to re-enter its range but ultimately failed.

"The point being, if you had sold down at the lower dotted blue line on either occasion you would have ended up in a difficult position. The market usually looks terrible at those points, but all too often you will see a reversal there which will at least move back to the bottom of the range.

"In this case that would see a move back to 79ish. And from there a re-entry into the range could see a quick move to the point of control at 84 and on to the highs at 90. I think we will see the Dollar create a low somewhere between 67 and 74 and then we will see a big short squeeze to take out traders in what has become a very overcrowded trade.

"Don't get me wrong," he concludes. "I still think the US Dollar is toilet paper, but it doesn't mean it won't buck around like a wild bronco on its way to fiat currency heaven."

Yee haw!

Dan Denning
for The Daily Reckoning Australia

• Australian Recession in the Works? Ask the Sharemarket
• The Dark Underbelly of Australia’s Resource Boom: Chinese Resource Demand
• Australian Iron Ore Shares on China’s Menu
• The Aussie Dollar as a Measure of Global Risk Appetite
• Foreign Investment in Australia, How Much is Too Much?

Two important things happened yesterday, both of which cast a crimson light on things.

First, the Dow dropped again; it has only gone up one of the last 7 days. It went down 203 points. Could be nothing. Could be something big...the beginning of the long awaited 'next leg down' for the bear market...the opening day of a bloody Red October.

Charts of oil, commodities, copper, the dollar, and Treasury bonds tell us the same story. The greed investments are topping out. The fear investments are headed up.

What's a 'greed investment?' It's anything that benefits from an improving outlook for the economy and inflation - oil, commodities, and stocks, mainly.

What's a 'fear investment?' It's something that goes up when people begin to suspect the boom is a phony - namely the dollar and US Treasury bonds.

The dollar is rising. So are Treasuries. Yesterday, 30-year US Treasury bond yields fell below 4% for the first time since April.

And what about gold?

Well, that's the other important thing that happened yesterday. Gold held above $1,000.

So what?

So what?? Well, dear reader, you are in a prickly mood this morning, aren't you?

This is important because gold could go either way. Gold is a refuge in times of fear - especially when people fear inflation or a falling dollar. Gold is also a target of greedy speculators sometimes, even when the going is good. According to a study done by the World Gold Council, you never know what gold will do. That study was a great comfort to us here at The Daily Reckoning; we thought we might have missed something. But no. We may not know what gold will do, but neither does anyone else.

Looking around, we see no sign of consumer price inflation. So gold's recent rise must have been driven by optimistic speculation - along with oil and stocks. Now, when oil and stocks go down... we have to wonder whether gold will go down too. The answer, given yesterday, was what we expected - yes, but not as much.

There's substantial risk in gold as well as stocks. The ultimate low for the Dow should be below 5,000. That is, let's say, about a 50% haircut from current levels. And let's assume that gold does what it did yesterday...let's suppose that it goes down only 40% as much as stocks. That would still be a drop of 50% of 40%, or 20% - to the $800- an-ounce level.

If you would be gravely upset by a drop of that magnitude...you probably shouldn't buy gold at this level. And, of course, you should have sold your stocks already. Stick to cash - and gold, if you're long-term oriented - until this next phase is over.

The economic news was mixed, as usual...with nothing to make us think that our basic outlook is wrong.

On the optimistic, bullish side...consumer spending rose in August. Pending homes sales went up too.

But on the pessimistic, bearish side... "September auto sales plunge," says a Reuters headline. Yes, auto sales drove off a cliff last month - just like we said they would. GM reported a 47% drop.

What happened? The clunkers program was an economic fraud. Like all attempts to boost consumption, it merely shifted sales from the future to the present (now the past). Which is a big reason why August consumer spending looked good too.

But wait a few weeks for the September consumer spending numbers. Especially if the stock market continues to fall... Then we'll find out how sustainable those retail sales numbers really are.

As you know, here at The Daily Reckoning headquarters...in the building with the gold balls on the south side of the Thames...we are often accused of 'pessimism.' We deny it. We're optimistic about the fate of mankind. But we are pessimistic about many of his current pretensions - such as health food, enlightened central banking, contemporary art, mass education, global climate control and progressive democratic government.

But maybe we are wrong to be optimists. Pessimists always have the last laugh - when the optimists die. "I told you so," they say, under their last breath.

Bill Bonner
for The Daily Reckoning Australia

• Is Gold Going Up Because People Fear Inflation?
• Biggest Factor Affecting Consumer Price Inflation is Growth in Bank Credit
• Abandoned Shopping Malls to Follow Abandoned Houses
• China Stepping Up Purchases of U.S. Treasury Debt
• September is the Best Month for Gold

And what is this "breakeven point" for oil? The last I heard, a couple of years ago, is that oil needed to be higher than $70 a barrel to make their relevant governments' budgets balance, taxes and duties being what they were.

However, that was back when the inflationary idiocy of "quantitative easing" was still considered an absolute stupidity by every known theory of economics since Adam Smith in 1776, but which now has become "conventional operational mode" thanks to a system of cowardly, corrupt and embarrassingly ignorant-to-the-point-of-stupidity governments (especially the federal one), a laughably incompetent public school system that has turned out generations of ignoramuses, the irresponsible greed and ignorance of the populace, and an ignorant and often complicit media, a pox upon all their houses.

With higher energy prices begins the bleating of us beleaguered bumpkins who must pay these higher and higher energy prices, and the higher prices of all of the things made with petroleum products, without an offsetting increase in our incomes because my stupid boss says that I am overpaid as it is and she would cut my salary and fire me if she wasn't so afraid of me.

And we whine, "Why doesn't the government think about me and my precious, precious children, and do something about higher prices, like give me money like they are giving everyone else?"

And it is not just oil, but all commodities that are shooting up, as Ian Mathias here at The Daily Reckoning reports that commodities are on a tear (up 12.3%), and that "May was the best month for the CRB Index since 1974," which was more than a third of a century ago.

And things are going to get worse, as we import most everything nowadays, and Mr. Mathias notes that "After falling through its 200-day moving average earlier this month, the dollar index has been in steady decay. The index crashed through another important level this morning - the 80 score, a long-standing point of support."

Sure enough, he includes a chart that shows the dollar index falling from 89 to less than 80 in a month! This is a shocking collapse in relative buying power, sort of like my IQ during that "lost" phase of my life that I don't talk about mostly because it's all kind of a blur, but I somehow ended up married and working a full-time job, which I assume is the karmic price I must pay for whatever I did, which I figure must have been really bad.

And when talking of foolishness, it is no mystery to me why the dollar has been falling, and is thus no mystery to me why Randall W. Forsyth, in his Current Yield column in Barron's, notes that "This has been the worst Treasury bond market ever, at least by some measures," which is sort of like saying "your performance has been the worst in company history, at least by some measures," which is almost exactly what my boss told me in my last Employee Annual Evaluation, although she could not cite relevant, inflation-adjusted statistics to prove the allegation of "worst in company history" to my complete satisfaction, and so the meeting degenerated into a shouting match of me calling her a lying shrew who is out to get me because she lusts for my Hot Mogambo Body (HMB), and she is yelling at me how she is disgusted and revolted at the thought of my HMB and she's yelling into the phone, "Get security personnel in here! Now! All of them!"

Just as that episode in the Tragic History Of The Mogambo (THOTM) turned out badly, I expect the same for the economy, as Mr. Forsyth notes that "Amid concern about the Treasury's trillion-dollar borrowing needs, the reluctance of creditor nations to accommodate them and the Federal Reserve's money printing, the benchmark 10-year Treasury yield climbed to a high of 3.70% Wednesday, from just over 2% at the turn of the year. And the 30-year long bond vaulted more than two percentage points from its December lows to 4.63%"

These are virtual doublings! Gaaahhh! Higher interest rates are NEVER a good thing!

This comes at the same time as the Federal Reserve is "quantitatively easing" So Damned Much Money (SDMM), and then using the money to buy up scads and scads of other people's bad debt and Treasury debt, exploding the balance sheet at the Federal Reserve, so this is exactly what you would expect; inflation rises so interest rates must rise, too.

And that means that our old friends gold, silver and oil, will rise, too, in the general inflation! Whee! This investing stuff is easy!

Until next time,

The Mogambo Guru
for The Daily Reckoning Australia

• Federal Reserve Has Destroyed the Economy
• No Silver at the U.S. Mint
• Oil Prices Has The Mogambo Guru Sticking His Thumb in His Eye
• SOS: Suffocating On Spending
• Gold Flourishes but Silver is the Real Precious Metal Story of Late

Last year, London had a beautiful summer too. But we were gone that week and missed it.

Alas, many of the best things in life are fleeting. And thankfully, so are the worst things.

What put us in such a reflective mood were yesterday's news reports. The Dow rose again - up 19 points this time. Gold edged closer to the $1,000 mark - at $984. Oil traded at $68. And the dollar fell to only $1.43 against the euro.

These trends - not to mention the broad rise in commodities and stocks worldwide - lead many investors to think that the fair weather is back, permanently. Asset prices are rising. Investors are less afraid of risk. Hallelujah - a dove with a sprig of green in its beak!

Of course, it may be true. But our advice, dear reader, is to take an umbrella with you anyway. As far as we can tell, nothing has happened to disturb the major weather pattern that began developing two years ago. Anyone could see it coming years in advance. "You gotta expect trouble when the average house is more expensive than the average person can afford," we kept saying.

But it was only when high winds hit the housing market that the newspapers took notice. Then, for 40 days and 40 nights the rain came down.

First, the house flippers were caught off guard. They were in the middle of flipping condos when all of a sudden the wind shifted and sent their contracts aloft. Mortgage rates were rising and buyers disappeared. The flippers lost their deposits and walked away from empty buildings.

Then, resets and higher rates blew the roof off the subprime market.

Then, the whole housing sector was getting knocked down - builders, suppliers, and financers.

Next came the credit crunch...when major lenders and investment banks realized that they were in heavy seas. Their ships were swamped with mortgage-backed debt and derivatives...and their captains were morons. Lehman went down. Wall Street abandoned ship. And the feds sent out rescue planes.

By late in 2008, everyone was taking shelter. Businesses were cutting payrolls. Banks were squeezing their reserves. Consumers were staying at home. And GM was hiring bankruptcy lawyers.

Everything was falling in price - houses, office buildings, stocks, commodities...practically everything except the US dollar, US bonds, and gold... These three were seen as the only safe refuges for storm- tossed investors.

But on March 9, 2009, came a lull. Reluctantly, investors came out of their storm shelters. The skies lightened...the sun shined. Oil has gone up 53% since then. Stocks worldwide are up about 30%.

And now...people say "the worst is behind us."

We meteorologists here at The Daily Reckoning watch the skies like everyone else. But we also read reports from big storms of the past. And what we notice is that this doesn't look like the passing storms of the '80s or '90s. It looks to us like a major change in weather patterns. To be more precise, it looks to us like the Great Storm of the '30s. Do you remember that one, dear reader? No? Well, we don't either, but we've read the histories. It was a doozy. And it began...well...just like this one.

In 1930, six months after the initial storm front passed, world output was down about 15%. Today, it is down about 15%, too. Stock markets were only down about 20% in mid-1930. Today, they're down about 35%. And world trade slipped about 15% in the six months following the onset of the Great Crash of '29. Today, it is down 25%.

One thing you notice is that like the Great Depression, this downturn is global. A collapse in world trade followed the Crash of '29. It is usually blamed on two protectionist bumblers in Congress - Smoot and Hawley. But in a real depression, trade falls anyway. World commerce needs to readjust to new realities...whatever they are. That's happening again now.

The other thing you notice is that this adjustment takes time...and takes the losses much further...much deeper...than anyone expects. The actual bottom in the '30s didn't come until 2 to 3 years after the crash. And it took stocks all over the planet down to about 65% below their peaks. World output eventually fell to only about 2/3rds of what it had been in the late '20s.

It took two decades and a major world war before the world was back on its feet.

Bill Bonner
for The Daily Reckoning Australia

• Hidden Inventory of Unsold Houses Will Depress Housing Prices
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• Investors in China Have Learned Nothing From the Crash of ‘07-’08
• Investors’ Objective: To Make Money
• Come And Get It!

If we're using numbers instead of metaphors, we'd say the CRB Reuters/Jeffries Index had its biggest monthly rally in 34 years. It was up 14% on the month. That was the best performance since July of 1974.

A monthly performance like that can only mean one thing. We're just not sure what one thing it is. It could mean commodities have rebounded from being oversold, as they were in late 2008. It could mean that markets are less pessimistic about the global economy than your editor at the Old Hat Factory (though we doubt that).

It could also mean that investors increasingly prefer tangible assets as a long-term growth strategy over financial assets. Even after $1.465 trillion in realised losses by global banks and financial institutions, there are trillions more to come. Commercial real estate...the option-ARM recast period in the U.S. housing market...European banks...any or all of these things could conspire to lead to more losses and more capital raisings in the financial sector.

Perhaps that is what explains crude oil's biggest monthly gain in a decade. July crude futures traded at $66.52 in Friday's New York action. The U.S. dollar price of gold powered to $981.20, before sliding back a bit $975.

The Aussie gold price is fighting its way up despite the fact that the Aussie dollar keeps gaining on the greenback. While the Aussie gold price is up just $1.71 in the last 30 days (0.14%), the U.S. gold price is up nearly nine percent. We reckon the Aussie gold price will begin moving up closer to $1,500 again on a combination of events (weakness against the greenback for one.)

There are also two data releases this week that will affect the Aussie dollar. The RBA meets tomorrow to decide the price of money in Australia (set interest rates). And then Wednesday, the March quarter GDP figures come out. This will tell us how bad the recession is, although not how bad it may become.

It's no use predicting these things. But for what it's worth, our view is that we're in a bit of a plateau between down moves. The "down moves" will come again in financial stocks, although they may not be as "down" as before, and employment. Mostly, the indices are going to have to price in very slow GDP growth for the remainder of the year and more job losses.

The wildcard for Australia is trade. Its proximity to Asia means that a rebound in that part of the world provides some cushion to resource companies. But then, we thought the resource stocks would be pretty well insulated from the first round of deleveraging too, and we were wrong about that. And the second time around?

Well, even if the long-term underlying demand for Aussie resources is real and growing, it still takes real money to make new projects happen. The financing of resource projects will continue to be a key issue in your stock selection. The other issue, obviously, is the direction of commodity prices.

Take LNG, for example. Last year the Australian Petroleum Production and Exploration Association said it wanted to triple Australia's LNG output to sixty million tonnes per year. Meeting this weekend in Darwin, the group says 50 million is a more realistic target, given both the slump in energy prices and tight credit markets.

If LNG prices track oil prices-as they did in the big run up to $150 per barrel for crude-the economics of big Aussie projects get a lot better. Our view is that energy prices are going structurally higher anyway. Global recession aside, the big plunge in energy capital spending virtually guarantees a supply shortage in the coming years anyway.

Besides, you have to wonder why big international energy firms would be investing in conventional and unconventional Australian LNG projects if they weren't convinced that a) oil prices were going higher, or b) more carbon-friendly fuels like gas would gain as coal gets politically demonised and punished with cap-and-trade or emissions-trading-schemes.

Obviously, if global trade continues to contract and a second round of losses in the global banking industry triggers another financial crisis, demand for energy is going to fall. And while we're at it, stocks would probably test the 2003 lows too. We enter a new stage of grimness.

In the meantime, energy and precious metals stocks are riding higher commodity prices. And there's a distinctly 2007 mind-set in the air. It's vogue to be long-commodities and indifferent to risks in the financial system. It's enough to make an investor with a short memory nervous. More on that tomorrow.

Dan Denning
for The Daily Reckoning Australia

• Red Bear Rising: Russia’s Resource Based Geopolitical Strategy
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Not much time to write this morning. In a few minutes, we're getting on a flight from L.A. to Buenos Aires. Now, in the lounge in Houston, we're wondering if the bear market rally is over...

The Dow fell again yesterday - down 186 points. It could be that the rally is over...and at only about 15% up from the bottom. That would be a disappointment to many investors. They were just beginning to think the worst was over.

Which makes us think that the rally is probably NOT over. It's too soon to hammer the bulls. Not enough of them yet. This market should rise more...in order to draw in more suckers.

You saw our guess yesterday. We're headed towards a Great Deception.

The bulls are deceived into believing we're in a new bull market. They'll be disappointed when this rally falls apart. They'll give up on stocks and sell the market down to the 5,000 level...or below.

The gold and commodities markets deceive the bears. They expect prices to go up as the feds put in more money. They'll be disappointed when gold sinks. You saw the big whack they gave gold on Monday. It went down hard. Yesterday, it recovered slightly - back up $10.

The big spenders will be disappointed too. They've got debt. And they're counting on consumer price inflation to lighten up those debts, making them easier to pay. Instead, deflation will make their debts heavier...weighing down so heavily on the debtors that many of them will be crushed by it.

This action in the gold market tells us that we're a long way from the final stage of the bull market in gold. Investors sell it when they think things are getting better. But when things get better, gold will soar. Because then the monetary inflation the feds have put into the system will turn into consumer price inflation. We could see rates of consumer inflation substantially higher than we saw in the '70s. And we could see gold prices over $2,000...maybe over $3,000 per ounce. On an inflation-adjusted basis, the price of gold would have to go to about $2,300 an ounce just to equal its price in 1980. If this inflation is worse - as, most likely, it will be - gold should go much higher.

Then, it will be the dollar savers who are disappointed. They think dollars are the safest place in the world to put your money. But when inflation rises, their savings will lose half...maybe 3/4s...of their value in just a few weeks.

But don't hold your breath, dear reader; the final stage could be years away...

Here's Addison and The 5 with some insight on how the final stage might begin:

"Registered voters now consider 'budget deficit and national debt' the biggest threats to America's future," reports Addison Wiggin. "Check out this survey released by the Peterson Foundation this morning:

"Of course," continues Addison, "the Peterson Foundation would benefit from the poll going this way... they're debt hounds through and though, like us. David Walker, their President and CEO, was a protagonist in our documentary on fiscal irresponsibility.

"But best we can tell the poll was legit, and frankly the results are hardly surprising - consider that $11 trillion national debt and another $50-60 trillion in entitlements. Between The Fed, Treasury and FDIC tack on another $8 trillion in bailouts and purchase programs since the recession began. Bush's $160 billion stimulus plan. Obama's $787 billion stimulus...

"We know conceptualizing the debt a few years ago might have been tricky for 'Joe Sixpack.' But after all we've been through, how could even the most countrified American not see the forest for the trees?"

In lieu of writing their daily musings this week, Addison and the rest of Agora Financial's editors are converging upon our Baltimore headquarters to discuss the market, the economy and the world as we know it. These editorial meetings typically bear some of our most exciting new investment themes and economic forecasts... ideas that will likely appear first in The 5 Min. Forecast. Stay tuned.

And back to Bill, with more observations:

This is the worst financial crisis since the '30s. Housing in the Golden State is down 40%-50%.

Near Maria's apartment, in the hills above Silver Lake, we saw a house for sale. A rundown affair, it was surrounded by bamboo, which at least gave it some privacy. "Bank Owned," said the sign. Maria needs a new place to live, so we were curious. We jotted down the phone number and called. It turned out, it was two separate units...and it had just sold for $150,000. A couple of years ago, it probably would have brought twice that amount.

The place was a wreck, of course. But it was a small wreck; it couldn't cost too much to set it right. Let's see, if you rented each unit for just $1,000 net of direct expenses...you'd have rental income equal to about 15% of your investment. Not too shabby.

Unemployment in California just went over 10%. Tax revenues have collapsed, bringing Arnold Schwarzenegger's state government to the brink of bankruptcy. Out of cash, the state was forced to pay its employees in IOUs.

Many people in the state must feel like they're awaiting execution.

But there is no sign of panic...and no sense of alarm.

We saw no food lines. We saw no tent cities. We didn't even see many "For Sale" signs on the houses - at least, not in the old parts of town. Instead, there were crowds in the shops...in the restaurants...and on the highways. And the cars on the freeways all seemed to be expensive brands - Audis, or Lexuses, or Mercedes...

At least in L.A.'s old neighborhoods, life seemed to go on as it always has.

What to make of it? How come there is no obvious sense of desperation? How come there is no hint of revolution?

More tomorrow...

Until then,

Bill Bonner
for The Daily Reckoning Australia

• Bear Markets Do Not End With Stocks Still Trading at Nearly 20 Times Earnings
• Every Bear Market Has a Surprise
• Top Five Bear Markets of All Time
• Your Second Chance to Escape the Bear Market
• Why the Bull Market in Commodities Isn’t Over

Can sound money really bring about peace? Actually, it plays a big part in peaceful international relationships. Money based on commodities, rather than paper, is not subject to government manipulation, and is a key component to free and honest trade. History shows that if countries engage in trade with each other, their governments tend to find ways to get along for the same reason you do not kill your customers at your place of business, even if they occasionally annoy you. If someone outright cheats you, however, you may engage in "war" by taking them to court, for example, and the relationship will sour. Governments and central banks with unfettered power to manipulate currency also have the ability to cheat their creditors. One way they do this is to simply create enough currency to pay off debts. This devalues the currency and "cheats" the recipient out of what they are owed. It would not be fair if you watered down your product the way our government waters down its currency, so it is not hard to understand, in these simplified terms, why loose monetary policy contributes so much to ill will and war around the world.

Sound money, on the other hand, simply is what it is. Removing governmental power to manipulate money, removes the temptation for government to spend, print and cheat. Sound money ensures that our government's spending priorities would be brought into sharp focus and reduced to only what we can afford.

Sound money also limits the ability to wage wars of aggression. Imagine how much more careful Washington would have to be about starting a war if they did not have this financial sleight of hand at their disposal! Fiat currency allows government do expensive things they should not be doing while paying the bills with cheap money. The Federal Reserve has lately been auctioning off large amounts of treasury bills as a way to finance the wars in Iraq and Afghanistan, and our crushing entitlement burden. The resulting devaluation of the dollar is quickly eroding our image as a good trading partner in the world. As a consequence, there is therefore more talk of economic isolation and war.

This vicious cycle of spending, fighting and inflating is not what Americans want. It is what the government wants, and it has had to deceive the citizens into allowing and supporting it. Sound money curbs the government's ability to engage in these shenanigans and reduces the wars we fight to only truly defensive ones, for which Americans are more than willing to stand and fight. So in these ways, sound money is very conducive to peace.

Another benefit of sound money is financial security.

Can sound money give you financial security? There is something very comforting in knowing that what you earn today will retain its purchasing power in the years to come. Indeed, the same silver dime that bought a loaf of bread in the 1960's can still buy a loaf of bread with its precious metal content - which is worth about $1.00 today. An ounce of gold has always been about evenly exchangeable for a finely tailored men's suit, which these days is roughly $800. And in these days of fluctuating gas prices, when priced in gold, oil has been stable. Meanwhile, since the creation of the Federal Reserve, the fiat dollar has lost 94 percent of its purchasing power. The erosion of purchasing power rapidly accelerated when it was completely uncoupled from gold in 1971. This sort of fluctuation in the medium of exchange creates a lot of uncertainty in the marketplace and necessitates that you either take extraordinary defensive maneuvers, or face financial ruin. Trusting in government for financial security in retirement is not a safe option. Indeed, a recent study by the Consumer Bankruptcy Project shows that bankruptcies among those 75 and older has more than quadrupled since 1991. This represents wealth and savings that have been eroded by inflation, and trust in entitlement promises that were more fantasy than reality. Even with the pittance that social security pays to seniors, it is bankrupt and bringing the economy to its knees. It is no wonder that many in the younger generations want no part of it, and they should not be forced into a failed system.

On the other hand, holding physical gold can defend against aggressive government monetary policies that threaten to inflate away the value of your life savings. During the hyperinflation in post WWI Germany, what used to be a comfortable nest egg was suddenly the value of a postage stamp. If one held just a portion of their savings in precious metals, the crisis was greatly softened. Gold will never be worth nothing, even if the exact price fluctuates. There is a famous photograph, however, of a German woman during this time period burning piles of tightly bound banknotes to keep warm.

Imagine if the money you earned had honest, stable value, or even appreciated like an investment! No such special measures, like converting dollars to gold, would be required to ensure that your savings would sustain you in your golden years. That is the way it could be and is supposed to be. However, the government's thirst for power will not be easily, or cheaply, quenched. Fiat currency is one tool governments have to extract wealth quietly from the working class. It is time for the people to wake up to this ruse and look to the Constitution to restore sound currency.

Sound money keeps government spending in check, keeps trade fair and honest, which reduces the temptations, and many underlying causes, for governments to wage wars. It also gives you the peace of mind of knowing that your savings will be able to sustain you in your retirement.

So if sound money is such a good thing, what is stopping people from simply trading with each other in gold and silver? Why are you still being paid in fiat dollars, and why can't you pay for gas in gold? The answer is that the government has enacted policies that provide considerable stumbling blocks to such transactions.

One of the main stumbling blocks is Federal legal tender laws, which state that government-controlled fiat currency MUST be accepted for many kinds of monetary transactions. In light of this, Gresham's Law takes effect. Gresham's Law states that bad money drives out good money. Meaning, if someone is forced to accept your bad money, it is to your advantage to pass it off, like a hot potato, in exchange for something of value. Any good money you have, you will hoard. Eventually, real money is driven out of circulation and under people's mattresses, so to speak. In the absence of legal tender laws, people are free to accept the medium of exchange of their choice, and are likely to insist on payment in something of real value.

Related to legal tender laws, contracts in gold are not enforced. Meaning if two parties agree to exchange goods or services for gold, and end up in a dispute, the courts will simply settle the dispute in Federal Reserve notes. While gold clauses have been legally enforceable since the late 1970's the fact remains that disputes over gold clauses might well be resolved in court with a dollar figure calculated in terms of Federal Reserve Notes. In the recently decided case of 216 Jamaica Ave v. S&R Playhouse, which reversed a district court decision, the court upheld the enforceability of a gold clause, but sent the case back to the district court to decide what obligations the gold clause imposed on the defendant. It is not inconceivable that this will result in a decision that the value of the "gold coin" referred to could be valued by the court in terms of Federal Reserve Notes, not in terms of ounces of gold. Furthermore, given the federal government's actions against Robert Kahre (the Nevada businessman who paid his employees at the legal tender face value of gold bullion coins) it is obvious that the government is still waging a war on gold. Whether either of these cases establishes a precedent remains to be seen. Additionally, because 31 USC 5103 establishes Federal Reserve Notes as legal tender, it would likely take a court challenge to determine whether a gold clause or legal tender law takes precedence.

Governments should do very little, in my estimation, but it should enforce contracts and property rights through the courts. But in this instance it shirks this basic duty, when it comes to gold, as one way to keep control of our economy and the medium of exchange. One is also expected to pay sales tax on the purchase of gold. This is as ludicrous as if you paid sales tax at the bank when you converted dollars into quarters! The IRS also expects you to pay capital gains tax on gold, which is so backwards, since gains on gold really represent decline in the value of the dollar!

Legal tender laws should be repealed at the Federal level. Congress has the Constitutional duty to protect the integrity of our money. However, since it has passed this duty off, and the Federal Reserve has only debased our currency, Congress should no longer force Americans to do business in dollars if they would prefer to transact in gold, or silver, or cigarettes or seashells, for that matter. Free people should be free to associate and do business in ways that benefit them. Instead they are forced to use the unstable dollar to their own detriment, and the benefit the government.

Regards,

Congressman Ron Paul
for The Daily Reckoning Australia

Editor's Note: Dr. Ron Paul is a Republican member of Congress from Texas and perhaps the only voice in Washington still advocating "limited" government in the Jeffersonian tradition. He has delivered several stunning addresses before Congress, including: "Sorry, Mr. Franklin, We Are All Democrats Now" and "We've Been Neo-Conned."

• The Destruction of the Dollar by the Federal Reserve
• Embrace Inflation
• US Dollar As Reserve Currency Not Working Very Well
• David Ricardo’s Economic Theory is Sound Doctrine
• Can China Change the Rules of Global Capitalism?

Yesterday, stocks held steady. The dollar lost ground. And gold rose back over $900.

So, are we at the beginning of a major rally...or did it end in a single day? We wait to find out.

In the meantime, let's look at China.

Yes, dear reader, the whole world turned its lonely eyes to the reds: "Touch us!" "Heal us!"

China, with its bumptious population...its boisterous growth...and its boney-handed politicians...is the world's hope for a fast recovery.

"China will the first out of the slump," says our old friend Jim Rogers. Jim has staked his fortune, his fame and his future on two things: commodities and China.

Of course, the two go together. If China can continue to grow, she will demand more and more commodities. Prices for wheat, iron, tin, coal - just about everything - will rise as China raises living standards. Or not.

China doesn't even need to grow wealthier in order to use more commodities. Like her saffron neighbor to the South, India, her population is so large, and growing by such huge numbers, she struggles just to keep up. One percent population growth is not a lot. But one percent of 1.3 billion is 13 million people - equal to America's entire jobless population. And that, of course, is an increase that happens every year.

The Middle Kingdom, as it is known, is thought to have an advantage in the fight against depression. It doesn't have to argue with Republican lawmakers, civil libertarians, or sensible people of any sort. If the reds want to do something - no matter how inspired or moronic it is - they can usually do it.

But here is a fork in the road. So we will take it. We don't follow events in China the way Jim does. Maybe he's right; maybe China will be the first one out. But we have a feeling that William Pesek might be right too. The idea that China will tug the whole world out of depression is "pure fantasy," says he.

"Chinese exports slump 25% as demand wilts," says a headline in the Financial Times this morning. Not hard to figure out why. Remember, this is a depression, not a recession. In a recession, consumers take a breather...orders slide...and exports decline. But it is only temporary...and not catastrophic.

But let us follow the export trail to see if we can figure out what is going wrong.

Let's see... there's the factory in Quangzhou. Hmmm...it has cut its production schedule. And there's the truck leaving the factory...only 3/4 full. Orders have fallen off... It arrives at the harbor in Hong Kong. And there it finds the shipping schedule has been cut (along with prices) drastically. After the container is placed onboard, the ship hoists anchor and is off. Two weeks later - for it is sailing more slowly than it used to, in order to cut expenses by preserving fuel - it arrives in Long Beach...where it is quickly unloaded and put on a truck that will take it to a warehouse, where the container will be opened and its contents off-loaded onto other trucks for distribution to retailers all over the United States. The whole process takes less time than it did a few months ago - simply because there's less traffic and less back-up at every step. When finally the merchandise gets onto the shelves, it finds fewer shoppers looking it over and fewer buying.

And here we find the source of China's troubles...and the reason it cannot quickly recover. It has set up its economy to provide end products for foreigners. Those foreigners can't and won't buy like they used to; they don't have the money. The credit bubble has popped. It's over.

Well, maybe the Chinese could lend U.S. consumers money? Ah...there lies a trap. U.S. consumers have more than twice the debt they usually carry. The last thing they want is more. They've seen how hard it can be to pay back debt - especially when you lose your job. Unemployment in the United States is already over 8%. It will probably be over 10% by the end of the year. In four states, it is over 10% already. Each percentage point represents about 1.5 million people who aren't buying many Chinese goods.

Well, maybe the Chinese could make stuff for their own people? Yes, they could...and they will. But that's what makes this a depression and not a recession. The whole structure of the economy must change. In the photo accompanying the FT article, for example, it shows a factory in Beijing that makes a third of the world's violins - almost all of them exported. Sure, the Chinese could decide to take up the violin en masse. But that's the sort of cultural change that takes time. Or, the factory could switch to making laundry cabinets. Again, it is possible...but it takes time. And the adjustment is painful. The violin makers need to be retrained. Many will be fired as the factory searches for a new product line. Without revenues, perhaps it will go broke...and then be repurchased at auction by a laundry cabinet manufacturer.

This is the process of creative destruction that Schumpeter described. One industry is destroyed so that another might be created. It is what depressions are good for. It is what we all face now - including China. Maybe especially China.

Won't the Chinese able to do it faster - since the commies are still in control?

Oh dear reader...you are treading on our soul when you ask a question like that! If we learned anything in the last 100 years it was that command economies don't work very well. Compared to the free market - with its elegant intelligence and infinite information - central planning is clumsy, ham-fisted and ultimately unproductive. The commanders are invariably morons. And the commanded spend their time and energy not doing their bidding, but finding ways to avoid doing it.

Keith Fitz-Gerald at Money Map Report believes China is the main engine of world growth, and that role seems likely to continue - in spite of the current difficulties the emerging Asian giant appears to be facing.

*** Meanwhile in the West...the parasites and wealth destroyers are angling for other peoples' money. Jamie Dimon, head of JP Morgan, urged lawmakers not to behave like a "dysfunctional family." Instead, they should get behind the president, he said. 'And start shoveling out the money,' he didn't say.

Yes, the president is asking for 'shovel ready,' projects...and everyone seems to have a shovel now. Browsing the Internet, we found an ad:

"Trillions in Government Grants Available...here's how to get yours."

There, you discover that the government is giving away "grants," and all you have to do is apply for one. Following the headlines is a series of testimonials from people who've actually gotten money "you don't have to pay back" from Uncle Sam.

"Maybe it's just a scam," Elizabeth suggested when we described it to her.

"That's the sad thing...it's probably real. The feds are so eager to give away money that people probably can get a 'grant' if they put their minds to it.

Rarely have the leeches had so much public support. "This is an emergency," says a typical headline in the financial press, "government has to get its act together."

And so the fix is in. Too bad it only makes things worse.

*** Earlier this week, Obama overturned the Bush-era policy that limited the federal tax dollars for embryonic stem cell research.

This is big news for scientists and investors alike. Breakthrough Technology Alert's Patrick Cox explains:

"Egyptian scientists have announced that adult stem cells can prevent diabetes-associated heart dysfunction. I've already written about the successful treatment of multiple sclerosis by rebooting the immune system with stem cells. Within a week of that news, a similar procedure was shown to successfully treat AIDS.

"The stem cells used in the AIDS therapy came from a donor with a rare genetic resistance to the disease. It worked so well, in fact, that the patient no longer takes AIDS drugs. The donor stem cell transplant also cured his leukemia. This is reality, not science fiction.

"The success of the AIDS SC therapy has huge implications. The most important is that it demonstrates the potential of genetically engineered stem cells to give individuals new immunities and biological capabilities.

"This is critical because humans are born with a broad range of genetic strengths and vulnerabilities. Now, we're seeing that those strengths can be transferred via stem cells. These donor cells will give your body the ability to knock out diseases you would not otherwise have the ability to fight. Eventually, designer stem cells will be used not only to cure, but to enhance our physical states. Immunities to cancers, Alzheimer's and other diseases will be routinely delivered via GE stem cells as a new form of inoculation.

"The company I'm recommending to my Breakthrough Technology Alert readers this month, in fact, is on the cutting edge of the convergence between genetic engineering and stem cell technologies. Fortunately for early investors, it has been largely ignored by the financial media. However, there are indicators that this is about to change."

The company Patrick is referring to controls an entire branch of stem cell science and patents. Moreover, it is far closer to market than many of the "big" SC companies that are getting so much old media attention.

*** Alan Greenspan rose to his own defense this week. It's not his fault the world economy is a mess, he said. The report from Bloomberg:

"Given the decoupling of monetary policy from long-term mortgage rates, accelerating the path of monetary tightening that the Fed pursued in 2004-2005 could not have prevented the housing bubble," Greenspan said.

It matters "a great deal" to understand what caused the bubble in the real-estate market, he said.

"If it is monetary policy that is at fault, then that can be corrected in the future, at least in principle," Greenspan wrote. "If however, we are dealing with global forces beyond the control of domestic monetary policy makers, as I strongly suspect is the case, then we are facing a broader issue."

Keep reading for today's guest essay by Ron Paul, who has famously stood up time and time again to the Sir Alan about his monetary policy and the move away from sound money when he was at the helm of the Fed.

That does it for us today. Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• When Computers Meet Cell Biology
• Price of Water Rises in China
• China is a Key Driving Force in the Gold Market
• The New Chinese Era
• Rio Scraps Deal to Sell to Aluminium Corporation of China

Well, that does it for us here at The Daily Reckoning . If Greenspan is in favor of it, we're against it. No one man bears more responsibility for the present worldwide financial crisis and coming depression that Alan Greenspan.

The Fed's job is to take the punchbowl away when the party gets too wild, said former Fed chairman William McChesney Martin. Greenspan did no such thing. As soon as the party began to quiet down and people began fumbling for their car keys, Greenspan added more rum to the punch and turned up the music. By the time the credit cops finally shut it down, people were dancing on tabletops all over the world.

And now, poor Mr. Obama has to deal with the headaches.

Yesterday, the Dow held steady. But the Dow is a bit of a fraud anyway. Failing stocks are routinely removed. In the present case, financial stocks slipped below $10 and were taken out of the index. Result: the index does not measure real world results.

Elsewhere in the financial news, oil traded at $37 at close of business yesterday. The dollar rose - to $1.25 per euro. And gold added another $10, to bring it to $978.

Gold looks a bit stretched. It could be ready for another pull back. But the bull market in gold is unlikely to end anytime soon.

What is odd is that while gold goes up, so does the dollar. And so do U.S. Treasury bonds. It is as if investors couldn't make up their minds. They bid up the price of U.S. Treasuries...and bid up the price of anti-Treasuries at the same time. What gives?

On the right side of their brains, they figure that U.S. Treasury bonds are the only place you can put your money and be sure of getting it back. Stocks are a disaster. Bonds - except for U.S. Treasuries - are too risky; heck, even England could go broke.

Commodities? We've seen what can happen there...just look at oil! Even gold could easily take a 20% haircut. That's why U.S. Treasury bonds are the place to be.

But wait... the left side of the brain is sending a message too. Buy gold, it says; something fishy is going on in the Treasury bond market, it tells us. How it is possible that the feds can borrow trillions of dollars without causing interest rates to rise? How can they increase the quantity of something so much...without lowering its quality? Where's the point of diminishing returns?

One question leads to another one: 'How are they going to pay this money back?' the left side wants to know.

The more the left side thinks about it, the more it doesn't understand what is going on. Let's see...the biggest spendthrift on the planet issues trillions more in IOUs...with no obvious way to pay back the money...

...and let's see...this same spendthrift actually has the right to pay off its IOUs with more IOUs that it prints up itself....

...and it actually WANTS to make its IOUs less valuable...so that people won't hold on to them. It wants people to spend its IOUs on goods and services...as fast as possible...in order to "get the economy moving again."

'What am I missing here?' asks the left side of the brain of no one in particular.

"The rest of the world has queued up to lend America as much money as it might wish to borrow in order to get its consumers to spend again," writes Spengler in the Asia Times . "It won't work, but that is another matter..."

Spengler is a clever guy. Unfortunately, many of his thoughts are unworthy of a clever man.

"A fearful world is buying trillions of dollars of securities from the US Treasury," he continues. "Of all the cash flows in the world, nothing is more reliable than the tax revenues of the American state, the longest-lasting government on Earth presiding over the world's largest economy."

Yes, and General Motors was the world's most successful automobile company - until it wasn't. The fearful world is buying Treasuries, but not because the tax revenues of the American state are so reliable; they're buying Treasuries because the United States is the only substantial debtor in the world that can make good on its debts with money of its own making. Tax revenues in the United States are falling sharply. Already, they're far short of what is necessary to cover America's public expenses. That's why both Republican and Democratic administrations have run deficits - real deficits - since the Nixon administration. And it's why the United States is now the largest Ponzi scheme in the world. The only way to pay off the old lenders is to bring in new ones - or run the printing press. That's all lenders have to worry about - inflation. And for the moment, prices are going down. They'll keep going down too - until they go up.

*** President Obama has come up with another plan - for $75 billion, he's going to try to prevent foreclosures. It was determined a half century ago that home ownership was a good thing. Since then, the government has bent the rules in favor of the homeowner - with artificially low mortgage rates...and substantial tax benefits. As an unforeseen consequence, the feds helped create the biggest mortgage-backed credit bubble in history. Not only that, they changed to geography of America - with vast suburbs stretching out in all directions, rather than cheaper and more efficient tightly packed apartment buildings.

Now, Obama compounds the mistake...

When he signed the $787 billion bailout bill on Tuesday, he warned the nation that we're not at the end of our troubles. "Nor does it constitute all of what we are going to have to do to turn our economy around," he said. "But today does mark the beginning of the end.''

Maybe so. But it feels like the beginning of the middle to us. We've had the initial shock. We've had a small rebound. Now, we're ready for the second phase. In this stage, we ought to have a better rebound...but also another big leg down. Stocks are still selling for 15-18 times earnings (which are falling fast). They need to get down to 5-8 times earnings. That will bring the Dow down to around 5,000, or lower. This could take a long time. We're in a depression, remember. And in depressions economies need to be restructured, not just refreshed.

In the '30s, none of the bailouts and stimulus packages of the Roosevelt Administration did any real good. At the end of the decade, the economy was about where it was when the decade began - with 11 million people still unemployed. And the poor Japanese have been waiting 19 years to get to the beginning of the end of their restructuring crisis. They probably would have gotten to it years ago, were it not for the diligent efforts of Japanese politicians. Instead of letting the banks fail, they bailed them out and propped them up. Result: an on-again, off-again depression that has lasted longer than most marriages.

*** Our intrepid correspondent, Byron King, offers some more insight:

"Congress collects a lot of funds through taxes. But not nearly enough to pay for all the spending. It's not even close. So will Congress raise taxes? And do it during a recession? I don't think so. Herbert Hoover tried that in 1930. Didn't work too well.

"What about the federal government borrowing? OK, it borrows a lot. But can it borrow even more? Trillions of dollars? From whom? Who has an extra trillion dollars lying around that they want to loan the U.S.? Will China and the oil-exporting nations continue to buy up U.S. Treasury paper? If so, with what? Chinese exports are down. Oil income is way down as well. (Oil is selling at $34 per barrel today.) So good luck with borrowing.

"That leaves the U.S. government with only one choice. The U.S. is about to embark on the greatest currency-creating binge in modern history (excluding that of Zimbabwe, perhaps.) A lot of that trillion dollars is going to come right out of nothing. The Fed is just going to monetize the debt. So we'll have new dollars chasing the same amount of goods. That's the basic definition of inflation.

"The bottom line is you need to own precious metals. Own gold. How much? For now, the more, the better. Own coins, if you can get 'em. Own bullion, if you can get it. Own shares in good miners with reserves in the ground while you can buy 'em. Just get some gold."

While there may a short-term pullback in the gold price, Byron believes that in the long-term, our favorite yellow metal is going to go to the moon...all the way to $2000 an ounce. If you haven't already, you're going to want to pad your portfolio with this precious metal. Find out how here .

*** On the other hand, our old friend Mark Hulbert notes that whenever investment advisors become this positive about gold the yellow metal usually goes down.

*** "Dad, this is the best house we've ever had...why would you want to sell it?"

We were sitting on the verandah last night, having dinner. Beneath us, the waves slapped against the rocks. In front of us, a long, wide beach curved around toward green hills. There are a few lights from the condominia in the distance. Above them, the stars began to sparkle in the sky and the moon lit up the ocean like an old newsreel.

To bring you further into the picture, dear reader, this is a house that we built about five years ago. At the time, we thought we might want to retire here. Property prices were rising so rapidly, we saw little risk. Besides, your editor can't help himself. Some men play golf; he works on houses. He's been at it for the last 40 years; at this stage he can't stop.

The house he built in Nicaragua is probably his best work. He didn't build it with his owns hands. "That's probably why," his wife would say. She is no fan of his handiwork. As a carpenter, she thinks he makes a good plumber. As a plumber, she would recommend him as an economist.

But with the help of a good architect and a good crew of workmen, the house went up and now is a delight. It has aged gracefully...and now looks like it has been here forever.

The idea was to build a new house on the beach that reflected the elegance and charm of Nicaragua's colonial past. And so it does. Columns, porches, arches, solid wood doors, shutters, cement tiles - all are recreated from elements found in Granada, one of the oldest cities in the country.

Unlike our other houses, this one is coherent. The whole place was done in one style...at one time...with one design. In France, for example, we have an old house, which was built, rebuilt, remodeled, expanded, reduced and redesigned a number of times over the centuries. To the architectural variety we added our furniture moved over from Maryland...ancestral portraits...sideboards that belonged to our great-grandmothers...and chairs found at a local junk shop.

We still have our house in Maryland too. It is rented out to a carpenter. We built it in the '90s...before we had enough money to build a proper house. Your editor did much of the work himself - including the wood parquet that he made from trees on the farm.

"It shows," says Elizabeth.

It is not a bad house. But it certainly wouldn't be mistaken for an elegant one.

People get attached to houses. That is why we have so many of them. We can't seem to sell them. One is an architectural gem. Another is where the children grew up. Still another is "our family home." And the last of them we keep only because we can't sell it; like one of Elizabeth's broken-down horses, we keep it because no one else will take it.

But each house is a glutton. It eats money. Time. Energy. Attention. Whoever thought houses would be good investments must not have known anything about investments. Or houses. Or women.

"Look," we said to Elizabeth, "we've got to get rid of these houses. They're costing us money. And in the spirit of the worldwide financial meltdown, we have to cut back."

"Are you kidding? They're not worth that much. Besides, the houses are solid. They're not going away. We enjoy them. We can use them. And we can leave them to our children. Not like those gold mining stocks you bought...or those Indian stocks; they lost half their value in just a couple of weeks. They could be worthless tomorrow, for all we know. I'd rather hold onto the houses and sell those stocks."

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• The World Economy is Re-examining Itself
• How Will the United States Finance the Biggest Deficit of All Time?
• The United States Matters Less and Less to the Oil Market
• Housing Market is Becoming More Affordable but That’s Not Necessarily a Good Thing
• Paying More Than 3 Times as Much for Gold

And unknown it will remain for the rest of today's Daily Reckoning. The ins-and-outs of public policy are beyond the scope of this publication. So we leave the stimulus package to its own devices and push on to other issues in the world economy and financial system.

Bloomberg reports that the Baltic Dry Index "rose the most since at least 1985 in London as the number of idled capesizes fell to almost zero, indicating strengthening demand for iron ore." The BDI measures the cost of shipping bulk commodities.

"Capesize rates have risen more than ninefold from a record low of $2,316 a day on Dec. 2. Steelmakers may be replenishing stocks in China after they fell 22 percent by mid-January from a record in September. Producers abroad, faced with an oversupply of iron ore, may also be shipping ore to China for storage."

This restocking of Chinese inventories is what BHP's Marius Kloppers referred to earlier this week. It wasn't exactly a silver-lining to an otherwise disappointing report. But it did remind us: someday this crisis is going to end.

Today is still not that day.

BHP's first-half net income was down 57%. Qantas' was down 66%. And now Macquarie Group reports it will take another $900 million in write-offs and impairment charges in the second half of the year, on top of the $1.1 billion it took in the first half. GE Capital is firing workers in Melbourne and Sydney and its chief executive Steve Sargent told investors yesterday that, "Australia is going to experience its credit crunch in the first half of this year."

Yikes. Or, if you prefer, daloob.

You might have thought the poor earnings performance that's coming to light during reporting season would have already been factored into Aussie share prices. After all, stocks were down nearly 50% last year. They are already down 7.5% in 2009. But then, perhaps investors were not prepared for the financial crisis moving off the share market and on to Main Street.

It's not much better over on Wall Street. The Dow Jones fell below 8,000 and investors pondered what it means that the head of America's Executive Branch of government is now dictating the salaries of Chief Executive Officers on Wall Street. President Obama announced that heads of financial firms receiving government bailout money would have their salaries capped at $500,000. More on that in a moment.

What about inflation? Where is it hiding? Gary North makes a good point in his e-mail newsletter yesterday. Gary shows that the American monetary base has doubled. But that increase in the money supply has not, so far, made it into the economy where the money multiplier kicks in. Why not?

The huge increase in money supply went to banks, who then parked the money right back at the Federal Reserve as "Excess Reserves." The banks took the money but didn't make the loans, terrified of not getting it back from borrowers. Those excess reserves pay a measly one percent interest. Meanwhile, the banks are paying out interest to depositors at between 2-3%.

Do you see the problem here? It can't go on forever. The banks are losing money on the spread between what the Fed pays on excess reserves and what they must pay to depositors, who are saving more. It is death by a thousand cuts. And now you have Obama and Congress promising to mandate new bank lending.

It means we could reach a tipping point sometime soon where the increase in the monetary base actually begins to make it into the economy in the form of new bank lending. Whether the banks do it because they're losing money on the spread or because they have to do it doesn't matter. They will probably do it.

And it doesn't really matter who the borrowers are. It could be the U.S. Treasury, who then goes on a cash splurge. It could be households refinancing 30-year fixed rate mortgages at 6% into 40-year fixed rate mortgages at 2%. It could be corporations, commercial real estate, private equity, you name it.

But be warned: if the doubling of the monetary base is finally unleased from the excess reserves held by banks at the Fed onto the economy, the money supply in the real economy is going to rise very quickly. Inflation will spread like wildfire.

For now, we have continued asset deflation. But policymakers in Washington may be lighting the fuse that forces banks to lend all that pent up liquidity the Fed has provided into the economy. With an increase in the money supply, prices will rise. It could be asset prices. Or it could be commodity prices like oil, energy, and gold. The general price level will rise very quickly.

Ben Bernanke is always worried about avoiding another Great Depression. The Friedman school of thought holds that the Fed's waited too long to cut rates and a liquidity crisis ensued as banks across the country failed. Money supply shrunk and the price level fell.

This time around, there is no liquidity crisis. Banks have plenty of reserves provided by the Fed. But those reserves are compromised by bad assets. That's why this has always been a solvency crisis, where banks had heavily leveraged balance sheets. On those balance sheets you had a thin slice of equity capital supporting a massive edifice of debt-backed assets.

It's anyone's guess how the assets are going to be handled by Geithner and Obama. But it will probably be a one-two punch of some sort. First, the assets are sold to the "Bad Bank." Next, some form of bank recapitalisation with taxpayer money will include language that requires banks to lend (especially in the commercial paper and residential mortgage markets).

Whatever you choose to call the times we live in, they certainly aren't boring. They are, of course, absurd. Take the case of Washington assuming a morally righteous tone and lecturing New York about fiduciary duties. Gag.

Here's a thought: if Washington can set salary caps on Wall Street because taxpayer money is involved, why can't the rest of America set salary caps on American legislators? Those clowns get government money every single day. They even spend money they don't have by robbing from generations of unborn Americans. And they've run regular structural budget deficits for decades!

Congress, the Fed, the President and the Treasury have mis-managed their institutions even more than Wall Street mismanaged itself. The political class (the world over) now represents its own interests above the interests of the electorate. How could you change that?

We are not normally in the business of offering constructive solutions to political problems. But we'll have a crack at it today. How about a rule that no one in serving in Congress is allowed to make more than the median household income, as determined by the U.S. Census bureau, until the Federal Budget is balanced?

In this new era of accountability, shouldn't everyone be accountable for how they discharge their responsibilities? If CEOs can have their pay capped (something shareholders ought to have done via the compensation committee, if they really cared) then why shouldn't Congressmen and Senators be performance managed by the taxpayers?

Or think of it this way a 19-year old U.S. Marine deployed overseas to a combat zone earns a base salary of about $1,400 per month, according to the Department of Defense. He makes an extra $225 per month in "combat pay" while he's deployed. If he's married, he gets $250 in "family separation pay" each month, too. If he's in Iraq, he gets another $100 in "hardship duty pay". And while in a combat zone, he won't have any withholdings of federal income tax.

He still can't drink a beer, of course (and not just because he might be in a country where that's prohibited). And if we're weighing up his total compensation versus his salary, let's not forget he's not paying for his meals or accommodation, which are assuredly first-class and five-star. Still, assuming he's in Iraq for a year and married, his grand total for the privilege of putting his life on the line on behalf of his country is a whopping US$23,700.

That's about half the median household income of $50,000, using the Census Bureau's figures. But it's considerably less than the $174,000 annual salary paid to rank-and-file members of the U.S. Congress. House Speaker Nancy Pelosi does a bit better at $223,500 per year. But she's probably a lot busier than most Congresscritters.

So let's do the maths. A 19-year old serving his country in Iraq can max out his salary at $23,700. But the people who declined to fulfil their Constitutional duty and properly declare that war in the first place make $174,000. And while making this handsome salary, they run regular annual budget deficits, often fail to pay their taxes correctly, and lecture the American people on the need for sacrifice and how "patriotic" it is to pay taxes.

Can you see why trust in public institutions has reached an all-time low? From 1789 to 1885, anyone lucky enough to serve in public office in Congress received a per diem salary of $6 and nothing else. Perhaps if we made all 535 members of the U.S. Congress live in the same dormitory and eat the same cafeteria food they'd actually spend a lot less time in Washington.

It would be a huge improvement for the nation and the quality of its laws. And if elected officials could make no more than those who put a uniform on for their country and risk death each day, maybe elected office would cease being a lucrative career objective and resume being something you did because you cared about your country.

However that is probably too quaint and earnest a sentiment for this publication. In fact, we're already embarrassed to have written it. Almost as embarrassed as we are by the spectacle of public officials plundering the future while we all just sit there and take it.

Dan Denning
for The Daily Reckoning Australia

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