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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Gold is in a Bull Market
• We are Confident the Bull Market in Gold is Not Over
• Investors to Drive Next Leg of Bull Market in Gold
• What Happens to Gold When High Inflation, Excess Cash, and Falling Dollar Jolts Economy?
• A Gold Standard, Without Gold

A majority of those polled by Bloomberg think things are great; 61% said they thought they economy had taken off and was flying high. Stocks are up. Commodities are up. And here's another Bloomberg headline: "Global investors give Federal Reserve Chairman Ben S. Bernanke top marks..."

The recovery has won the approval of economists and the public. It has almost everything going for it. It just won't fly!

Comes news this morning that the US economy is still on the runway. This report from the AP explains why:

"Consumers slashed their borrowing in July by the largest amount on record as job losses and uncertainty about the economic recovery prompted Americans to rein in their debt.

"Economists expect consumers will continue to spend less, save more and trim debt to get household finances decimated by the recession into better shape. Such behavior, though, is a recipe for a lethargic revival, because consumer spending accounts for 70 percent of economic activity.

"The Federal Reserve reported Tuesday that consumers in July ratcheted back their credit by a larger-than-anticipated $21.6 billion from June, the most on records dating to 1943. Economists had expected credit to drop by $4 billion."

Hey, not bad...economists were only off by 430%. Consumers are paying down debt more than four times faster than they thought. Partly because they want to. And partly because they have to. They don't want to borrow...and banks don't want to lend to them anyway. Consumer credit is falling at a 10% annual rate, based on July figures. Credit card debt is going down at an 8% rate.

When they pay down a dollar's worth of debt that is one dollar less in the consumer economy. But it's also a dollar that is not borrowed. Where the consumer spent all his income two years ago...and borrowed more so that he could increase his consumption even further...now, he doesn't borrow...and he doesn't spend all his income either. Now, the money that used to pour into consumer spending leaks out.

As we reported yesterday, personal spending is dropping...the figures were down in four of the last six quarters - something that has never happened before, since they began keeping records in 1947. And the level of consumer spending is down 33% from a year ago - with discretionary spending now down to a level it hasn't seen in 50 years.

Of course, that's just what we've been saying. The great credit expansion began in 1945. It ended in 2007. Credit will contract for many years. One study, also reported here, suggested that consumers would spend 14% less - even after the economy was back on its feet. We estimate that the total level of debt must go down below 200% of GDP. If that's correct, we need to pay down about $25 trillion of debt. That won't be easy and it won't be quick.

And it will mean high levels of joblessness for a long time. Already, two out of five working-age Californians are unemployed. The other three are working the shortest workweeks in history. No wonder; with spending dropping, sales are falling. So businesses don't need so many people to make, ship, sell and service their products. Then, of course, when they lay off workers to cut expenses, the unemployed workers have to cut spending!

How is it possible for a consumer economy to grow when consumers are spending less money? Of course, it's not. This is not a genuine recovery...it's an imposter. A fraud. A recovery impersonator.

While the private sector is paying down debt, the public sector is adding debt at a ferocious pace - about $150 billion per month. Public spending isn't the same as private spending. It is usually spending for things that people wouldn't buy if they had a choice.

And it comes with a whole new risk attached - the risk that the feds will inflate their way out of debt rather than pay it off.

Government spending does not bring a durable, real prosperity. (If it did...think how easy it would be to make people rich; governments love to spend money!) It may look like a recovery. It may have shiny wings and spiffy-looking stewardesses. But it won't fly.

The World Economic Forum has taken the United States down from the number one position. America is no longer the world's 'most competitive' economy. That title goes to Switzerland.

Meanwhile, the US banking system is rated #109 in the world - just below Tanzania.

"More than one in four US banks announced an unprofitable quarter," Strategic Short Report's Dan Amoss tells us.

US banks became leveraged casinos during the bubble years. They've still got a lot of leverage...and are still trying to relive those glory days when players lined up to spin the wheel...and free drinks flowed by Niagara Falls.

Dan will certainly find the best way to play the downfall of US banks - after all, he did call the collapse of Lehman six months early - leading his readers to as much as a $200,000 profit. Look for regular updates on the banking industry from Dan in these pages...

"Keeping up with children is a full-time job," said Elizabeth last night. "There is always at least one of them who needs help. Sometimes more than one.

"Sometimes I wonder if we shouldn't devote ourselves more fully to helping them. That's our main project, isn't it? It's the thing that is most important, isn't it?

"So...shouldn't we go to where they are...and give them advice...help them get their careers and families established? I mean, we're in Europe. Our children are mostly in the US. Shouldn't we go back so we would be available to help them? Maybe we should rent a house in Los Angeles and stay there until Maria's acting career is on a more solid footing, for example. At least she'd have somewhere to go for Thanksgiving...

"The prevailing view in America is that children leave the nest when they are 18 or 21...and then, they're on their own. But that's not the view here in Europe. In Paris, I know lots of parents who stick with their children all their lives. They spend their vacations together. The parents buy an apartment for the children. They direct their careers...and pass judgment on marriage prospects. Not that the children always listen, but one generation is not left to its own devices. That's why inheritance is such a touchy issue in France. People aren't expected to make it on their own...they're expected to get as much support from the family as possible...

"Sometimes I think we should take the same attitude. And we do to some extent. Still, I'm not sure the children would appreciate our help. I'm not even sure our help would really be much use. Sometimes they just need to make their own mistakes...

"Besides, we have our own projects...our own lives. I just don't know what is best..."

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Economists Agreed the Stimulus Was Working and the Recession Was Coming to an End
• No Evidence of Recovery as Unemployment Getting Worse
• Feds Can’t Cause a Genuine Recovery Simply by Throwing Money into Economy
• If Americans Do Not Return to Work, There Is No Recovery
• Is Inflation Necessary for Recovery and Growth in the United States?

We have to pinch ourselves occasionally...and remind ourselves that it is real.

Yes, after the real estate bubble burst, we thought the fun might be over. But no! In come the feds. As you know, what brought about the housing bubble was a sort of madness that caused people to do the damnedest things with their money. But now, the feds are doing even stranger and crazier things!

Actually, we were happy to see the bubble blow up. Spending more than you make is hardly a formula for wealth-building. All in all, we figured our countrymen would be happier, over the long run, if they started saving their money rather than squandering it. Besides, we liked seeing Wall Street getting whacked - those clowns deserved it.

The savings rate in the United States is rising quickly. We reported the falling balances in credit card debt last week. And the last figure we saw showed the savings rate had jumped from about zero to over 3%. Our guess is that it is headed back to about 10%. That's about where it is "supposed" to be.

But thank God for the feds. While the imperial citizens sober up...their government builds a still. While citizens save 3% of GDP, their government spends 15% - and more.

The feds' budget deficit for March alone would have been enough for an entire year during Reagan's...or even Bush's...term. At $196 billion, it is the monstrous fruit of crashing tax revenues and soaring government expenses.

Just a few months ago, we were talking about a $1 trillion budget deficit. When the discussion began, most people refused to believe it. How could the government - in good conscience - spend $1 trillion it didn't have? Here at The Daily Reckoning, we guessed that the deficit would go to $2 trillion. Not that we'd done any calculations...it just seemed to us that people consistently underestimated both the downward pressure from the bear market and the upward pressure from the politicians. The bear taketh away. The jackasses giveth. Well, at least they're trying, right? Of course, we'd all be a lot better off if they didn't do anything. But then, it wouldn't be so much fun to watch.

The total committed to this bailout campaign is now said to be about $13 trillion. Let's see, that's more than $100,000 per family. Better start working on your own 'personal bailout' sooner, rather than later.

It's the "Theft of a Nation" says Stewart Dougherty:

"The United States of America, or, more precisely, the American people, are said to own 261 million ounces of gold, supposedly stored in the same Fort Knox vault that Goldfinger found so appealing. At $1,000 per ounce, the people's gold has a value of $261 billion dollars. TARP 1 alone has cost 270% of the entire value of that singular, tangible American asset. The total $13 trillion bailout cost thus far is 4,980% of the value of America's gold asset. Fort Knox has been robbed..."

They're squandering $13 trillion...or nearly 49 times the U.S. gold supply. But heck, it's worth it. The whole thing is very entertaining now...and will be hugely instructive in the future. When this is over, the next two are three generations are sure to say: well...we won't do THAT again!

*******

We are still a bit stuck on the $13 trillion price tag for these bailouts.

Makes you wonder where former Fed chairman Paul Volcker, who was tapped back in November by Obama to head the President's Economic Recovery Advisory Board, is in all this.

Our friend Barry Ritholtz was pondering the same thing in a post on his blog, The Big Picture.

"If you want to know why the administration's approach to the credit crisis has been lacking, and why the Obama bailouts looks surprisingly like the Bush bailouts, consider this: No Volcker."

Barry mentions an interesting WSJ piece that points out that Paul Volcker was put at the head of an advisory board that has yet to meet. Says the WSJ:

"'Paul was surprised' at the failure to consult him, particularly on issues of financial rescue after his dominant role in resolving financial crises in the 1980s, says one person who has spoken to Mr. Volcker recently."

"To review," writes Barry, "You have access to the greatest Fed chief in history, and you are choosing not to use him during the greatest crisis since the Great Depression."

Our sentiment exactly.

A dear reader poses a question:

"...if you were a single mom, with a little cash & metal in a QRP, who had cut her expenses very, very low, who is staying home to take care of her own children and do contract work to get by AND save a little...what else should I be doing? Move to the country or should I move out of the states?

"Invest in shoes and underwear for my kids now pre-inflation, prepare for self defense, food storage, learn to grow vegetables...I am doing these things, but I just can't get myself to feel 'safe.' I am scared witless because I am afraid, not of a depression...that I can survive...I grew up really poor, but I am scared of the chaos that will ensue and the political/military escalation that will follow that...now that is what keeps me up at night

"What would you tell your Mom or your sister to do? I am really not feeling very well about all of this. How can I get to where I feel safe? I am thinking maybe the Appalachian Mountains or something. The government terrifies me."

What would we say? "Hmmm..." we would probably begin. "As to the financial crisis, we can provide some ideas."

But our reader seems to have already gotten the gist of them already. For the benefit of other readers, the central banks of the world have failed to do their jobs - to provide the world with sound, reliable money. This means that we each have to be our own central banker - stocking a supply of gold against the inevitable collapse of paper currencies. It is as if we couldn't trust the power company to provide electricity. We have to have a portable generator on hand - just in case. We like to have some gold...just in case.

But our reader has an even deeper fear: that we can't trust our government to provide security either. Security is the main reason governments exist - that, and larceny. Nevertheless, they don't always do a good job of providing security. In fact, they tend to fall down on the job often - usually when security is most needed. Most of the time, not much security is called for. People get along, more or less. Most people wouldn't kill their neighbors - even if they thought the cop on the beat could be bought. But occasionally, they get an evil urge and you need someone to step in with a blackjack and a pair of cuffs.

But government can be a source of insecurity, too. One security team attacks another from time to time. And occasionally, the security providers attack the people for whom they are supposed to be providing security. Here in Argentina, for example, there have been few genuine threats from the outside - at least not since the emperor of Paraguay, goaded by his Irish mistress, made a mad bid for control of the country in the mid-19th century. But in the 1970s, the government decided it had quite a few people it would rather not have. They were "disappeared." No doubt, many who were not disappeared were glad to be rid of them. They were troublemakers. But our reader seems to be afraid that she may among those who are disappeared from the United States in the next go-round of violence...or maybe just that she will be caught in the crossfire.

The odds are probably against it. But who knows?

"America: a super-power no more," says a headline at the Christian Science Monitor. Empires come and go. They don't always go easy.

Lately, we've been thinking: There are only three important decisions you make in life: what you do; whom you do it with; and where you do it.

One final thing. We're headed up into the mountains. You won't hear from us for a week, but we leave you in the hands of Kate Incontrera and the rest of the DR contributors.

Adios,

Bill Bonner
for The Daily Reckoning Australia

• Waiting for the Showdown Between Hillary and Obama
• Keynesians Believe Governments Have to Manage Economy in Macro-Economic Way
• Feds’ Plan is to Reflate the Economy
• The Stinging Reproach of a Former Fed Chairman
• Feds Have Used the Correction to Increase Their Power and Add to Their Wealth

The New York Times reports that, "Bond investors first stopped buying private home mortgage deals, then shunned commercial mortgages. Now, they are becoming wary of credit card debts and auto loans. In the first half, private securitisations reached just $131 billion, down sharply from $1 trillion in the same period last year." Investment banks can't pawn off debt-backed assets as easily as they used to.

What does this tell us about the world we live in? People are cutting back on debt. And not just investors either. Inflation in food and energy has made it difficult at the margin for individuals to pay their debts on time. With income growth not matching rising prices, more people are falling behind on their bills and cutting back on their consumption.

If there's any good news in all of it, it's that there's probably a lot of fat to cut in the average household budget. There are many things that are nice to have, but not essential, like espresso machines and Blue Ray players and a Dyson vacuum.

The trouble is that one man's thrift is another man's profit. A less consumptive/consuming lifestyle for households will inevitably lead to lower jobs and wages for someone. Which industries stand to lose the most if consumption retreats at the margins?

Barrista at Starbucks' would be a good place to start. But if you work for a major car maker, investment banker, or luxury hand-bag maker, then you might want to dust off your CV and work on your interview skills. A lot of economic activity goes away when consumption is reduced, the more so when your economy is driven by spending.

By the way, though we don't have the exact numbers handy, we suspect that consumption contributes less to GDP in Australia than it does in America. In America, consumer spending accounts for 72% of GDP. There's a whole lotta spending going on in America.

In Australia, there's a whole lotta spending and debt as well (or dis-saving, as the economists call it). But there's also a whole lot of business investment and production. More on this tomorrow. For now, take a look at the two charts below from the ABS publication Australian System of National Accounts. We'll tell you what we think they mean tomorrow. But if you want to venture a guess today, ping us at dr@dailyreckoning.com.au

Dan Denning
The Daily Reckoning Australia

• RBA Buys $780 Million in Residential Mortgage-Backed Securities
• Commercial Mortgage Backed Securities Are Back
• Corporate Debt is Just One Aspect of the National Debt Problem
• Household Debt Represents Spending Taken From the Future
• The FDIC Is in Trouble

There's a famous poem we want to introduce you to. We thought of it today when trying to explain what the Fed is doing. It's called "The New Colossus" by an American named Emma Lazarus. It's the poem that appears on the base of the Statue of Liberty.

Not like the brazen giant of Greek fame,
With conquering limbs astride from land to land;
Here at our sea-washed, sunset gates shall stand
A mighty woman with a torch, whose flame
Is the imprisoned lightning, and her name
Mother of Exiles. From her beacon-hand
Glows world-wide welcome; her mild eyes command
The air-bridged harbor that twin cities frame.
"Keep ancient lands, your storied pomp!" cries she
With silent lips. "Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tossed to me,
I lift my lamp beside the golden door!"

The Fed has become the mother of all credit exiles, accepting Wall Street's over-valued, under-performing, dead-beat loans. At least that is what it's done in a metaphorical sense. What did it do practically?

First the Fed increased by US$25 billion the amount of money it will auction to banks (commercial and investment) through its Term Auction Facility (TAF). Here banker people, borrow more. Please.

Second, the Fed expanded the list of collateral it will accept for asset-swapping through its Term Securities Lending (Facility). Remember, that's the one that lets banks and prime brokers swap mortgage-backed securities for Treasury bonds for up to 28-days.

The Fed is now expanding that list of asset-backed securities to include collateralized car loans, credit card receivables, and student loans. It's doing so because the lack of demand for bonds backed by those assets has had a real political impact in an election year. Students can't get loans for American universities because investors won't buy bonds issued by the banks who made the loans to the students. No funding, no college.

We don't know if you are as agitated reading about the Fed loan programs as we are writing about them. It's pretty agitating. You have to translate what the Fed has done from Central Bank speak to what it really means.

What it really means is that that the Fed has lowered interest rates as far as it can to deal with the bank lending crisis. It still hasn't encouraged banks to loan to each other, or investors to buy bonds backed by various kinds of consumer liabilities. But it HAS had some effects.

Remember last week we said the interest rate on U.S. Treasury bonds is below the rate of inflation? Well, American real estate speculator Sam Zell says this has lured some investors back into the market for residential mortgage-backed securities. "Is it in large volumes? No. Is it the natural first step in the evolution? Yes."

The evolution of what? New credit markets? A credit market where the Fed trashes the yield on U.S. government debt in order to make the yield on mortgage-backed debt look less trashy? One asset might look less trashy in a side-by-side comparison. But for investors, isn't this like choosing which leper you'd like to take home and introduce to your mother?

Our take is this: the Fed has probably stopped cutting rates for awhile because it's apparent that cutting rates has not solved the problem in the credit markets. That problem is still the same: poor asset quality. But even on that score, not everyone agrees.

Dan Denning
The Daily Reckoning Australia

• RBA Buys $780 Million in Residential Mortgage-Backed Securities
• Fed Willing to Print Money to Buy More Bonds to Keep U.S. Interest Low
• A Sea Change In Our Love of Debt
• How Did Australia Get Caught Up Losing Money in Commercial U.S. Real Estate?
• Debt Backed Securities Face Deepening Trouble