As for inflation, the lowest inflation rate among the world's larger economies is in - you guess it - Japan. After 20 years of on-again, off-again deflation, it's on again in Japan...with inflation at NEGATIVE 2.2%. But inflation is negative in the US too - at minus 1.3%.

Both Japan and the US claim positive GDP growth, compared to Europe, which is still in recession. But throughout the world - except perhaps for the BRIC nations - growth is weak and hesitant.

The US and the UK are both consumption economies. No consumption; no growth. But how do you get people who've consumed too much to consume even more? They know they can't afford to keep spending. And they know that going further into debt just makes the situation worse. What can you do?

You bribe them!

You give them more money, say, in unemployment assistance. Or, you give them a tax credit when they buy a new house. Or, you give companies a big tax break. In the most recent stimulus bill, for example, the feds do all three - including giving Pulte Homes a $450 million tax refund.

Here at The Daily Reckoning we never met a tax cut we didn't like. But with the deficit at 13% of GDP, we might make an exception. One way or another, someone's going to have to pay for the feds' big spending stimulus efforts. Taxpayers. Bondholders. Dollar holders. All of the above.

President Obama told the crowd in Singapore this weekend that he would make sure Ben Bernanke stayed away from his helicopters. The Chinese are the biggest holder of US bonds in the world. The Japanese are next. Between the two of them they fund a big part of America's current spending. Naturally, America's president is eager to keep the cash coming his way. So he has had to reassure the nation's largest creditor that their loans to the US will be repaid in good order...and good currency.

China alone has $2.3 trillion in reserves...most of it in dollars. Of course, the Chinese want to diversify out of greenbacks. But they're caught in a trap of their own making. If they turn away from the dollar, they undermine its value...and the value of their own reserves. What's more, America is still China's number one customer. They need to sell to America. And for that they need to keep their own currency from rising too much against the greenback. A higher yuan makes their products relatively more expensive compared to other exporters.

So, the infernal system continues...America creates dollars. The foreigners take them as though they had value. And they will have value...as long as they take them.

In the '90s and '00s the newspapers were full of stories about what a great place America was. Its economy was so dynamic...its entrepreneurs were so clever...its financial system was so highly evolved and flexible. What could go wrong?

Everything!

And now we're going to read a lot of claptrap about what an awful place it is.

"The American dream needs repair," is forerunner of the genre. In today's Financial Times, it focuses on the rigidities of the US system. The time was when a young American could start at the bottom and work his way up. Luck and pluck was all that it took. But now, according to scholars at the Brookings Institution, people stay put. If you're born poor in America you're more likely to stay poor than if you had been born poor in Britain, Denmark, Sweden or dozens of other countries.

What happened? The authors do not say. So we will. Success breeds failure. As a society becomes rich, more and more people find ways to game the system. The elite get tax credits, tariffs, and protective regulations. Every layer of bureaucracy makes it harder for new competitors to get ahead. And every new tax on income makes it harder for upstarts to join the ranks of the rich. The poor get their parasitic benefits too. Welfare, unemployment compensation, child tax credits, medicare, food stamps, social security - all of these programs give the poor an incentive to stay poor.

Bill Bonner
for The Daily Reckoning Australia

• US Economists Think China Should Raise the Value of Yuan
• Obama Plans to Do Away With Ireland’s Tax Advantage
• U.S. Government Hiding True Unemployment Rate in Statistics
• Harding the Last American President to Deal Honestly With a Major Financial Crisis
• Baby Boomers Face Early Retirement With No Money Saved

Readers may know Mikhail Gorbachev as a fellow who advertises Louis Vuitton luggage. But before he made it big as a mannequin, he was the top man in the Soviet Union. It was not an easy job. The empire was falling apart. So, in a rare act for a public official, Gorbachev told the Soviet people the truth: "We can't go on like this," he said in 1986. Three years later, on November 9th, 1989, the test was over.

What they were going on with was a system of compulsory economics - in which bureaucrats made the key decisions. They decided how much capital to allocate to what sector...how many people to employ...how much to charge for the output, and so forth. Of course, in order to make these decisions, Soviet economists had already discovered that they needed to make a lot of other decisions too - such as where people would live, how much they would earn, what they would do, and which of them would be starved to death. So, it was a very controlled experiment. Conditions were so miserable in the East that the government needed a vast network of spies and gulags to keep the malcontents from ruining the test. Still, 5,000 people fled to the West. 136 were killed trying to get over the wall that separated West Berlin from the East.

The results were obvious even before the test began. Ordinary people, looking out for themselves, always make better decisions than economists working for the government. Taxi drivers are better at getting people from place to place. Automobile manufacturers are better at making cars. Bakers bake better bread. Consumers buy what they really want. And capitalists make better investments. But just because a thing is absurd doesn't mean it is unpopular. There are people who get upset when they discover that there is H2O in their drinking water. There are also people who want aparatchiks to make their decisions for them. And recently, there are more of them. Many Germans in the East long for good old days when things were under control. They call it 'ostalgie.'

After a bit of food and a roof over his head, a man becomes more concerned with status than with survival. It is not how rich he is that matters; it's how rich he is compared to those around him. Status brings reproductive advantages, say the socio-biologists. But it brings disappointments too. And envy. So wicked and destructive is the urge to envy that the Catholic Church banned it as a cardinal sin. Societies suppress envy in a variety of ways. Some tax the rich. Some force everyone to wear the same dreary clothes. Most level the population by sticking everyone into the same education, retirement and healthcare systems.

Capitalism doesn't make anyone rich. It only allows people to compete for wealth on more or less equal terms. Naturally, some are better at it than others. Most people prefer alcohol, television or jobs on Wall Street to the rough and tumble of real enterprise. And almost everyone is prey to bubble delusions, hoping to get something for nothing from the latest fad investment. And then, when capitalism corrects their mistakes, they turn ostalgic, longing for the state to intervene and rig the game in their favor.

"After the wall fell: capitalism is a disappointment" says a headline in yesterday's Montevideo paper, La Republic. A poll showed that of people asked in 27 countries only 11% thought capitalism was working properly now. We're surprised that anyone thought so. With so much finagling by the feds, it's a wonder that it works at all.

But even among the complainers, few suggest a return to the policies that wrecked East Germany between 1949 and 1989. Instead, what they want is a kinder, gentler form of capitalism with the state as a benevolent partner. Full employment, with Audis. Guaranteed health and retirement benefits, with wifi and cappuccinos. Unlimited government bailouts, but without state bankruptcy.

Alas, the lumpen are worse at rigging the game than they are at playing it. The elites are better; that's why they're the elite. They use corrections the way a general uses a cease fire - to strengthen their positions. They connive with the government for more regulations to keep out competitors, bailouts to protect them from their mistakes, and handouts to enhance their status. That's why, scarcely a year after they were all on the edge of insolvency, the world's big financial firms are paying the biggest bonuses ever.

Does rigging the system like this make people better off? Many thanks to those teuton guinea pigs again! They conducted another test. After the wall came down, the Federal Republic in Bonn decided to intervene in the Eastern states in order to lift the ossies out of poverty and put them on a level playing field with the West. Beginning in 1991, the West transferred an amount equal to 4% of GDP each year to the East. Public works. Public health. Public education. Welfare! Handouts! Bailouts!

Unwittingly, which is the only way to do this sort of thing, they were merely adding to the test data. For next door was the Czech Republic, which also suffered under the Soviet boot, also engaged in absurd and counterproductive policies, and also flew the coop as soon as the Soviets dropped their guard. The Czechs had no rich relatives. They had no source of free money. They had no booming economy that they could join. No money. No port. Not even a language anyone else could speak.

Well, guess who won that race? The Czechs, of course. GDP growth rates in the Czech Republic pulled ahead of those in East Germany in the early '90s; since then, they've been pulling farther and farther ahead each year.

Regards,

Bill Bonner,
for The Daily Reckoning Australia

• The Government Bureaucrats of East Germany Exist in the United States of America Today
• HOORAH FOR CAPITALISM!
• Capitalism is Inherently Unstable
• Britain, the Empire Which Had Paramount Global Power
• Rich Blamed for Financial Debacle of Last Few Years

Can anything stop stocks and gold?

Trees do not grow to the sky, dear reader. And for every bounce there is a bust.

"It's amazing; the US is doing everything that Japan did wrong," said a friend yesterday.

Let's see, in the 1980s Japan's corporate leaders thought they were going to take over the world. Investors thought so too. They expanded. They wheeled. They dealed. Prices shot up and they all thought they were geniuses.

In the '80s, everyone wanted to be Japanese. Management consultants used Japanese words to describe commonplace insights. For example, instead of saying that businesses always need to try to do things better, they referred to "kaizen" as if it were the secret of success. And US economists urged the Reagan Administration to have an "industrial policy" - because that was what Japan had. Japanese businesses were the envy of the world. Japan was the world's second largest economy. But in growth and stock prices it was Numero Uno.

It turned out, as it always does, that Japan did not have the secret to everlasting success. Instead, what it had was what comes before a fall. The stock market crashed in Tokyo in 1989. The Japanese economy entered a recession. At first, the experts believed it was temporary. They urged investors to take advantage of the opportunity to buy into Japan, Inc. at record low prices. They thought Japanese industry was unstoppable...unbeatable. It would recover in no time, they said.

But Japan, Inc. didn't recover. Instead, it went into a long, drawn-out recession that lasted year after year...with on-again, off again deflation...and several stock market rallies. Each time stocks rallied, they fell again. Each time the economy began to grow...along came another setback. This continued for the next 20 years...until March of this year...when Tokyo stocks hit their lowest point for the whole bear market. A generation of investors had been nearly wiped out. Over two generations they had made nothing. Trillions worth of wealth had been erased.

What did the Japanese authorities do during these last two decades? They fought the correction every step of the way, with the boldest attempt at fiscal and monetary stimulus every undertaken up to that point. Interest rates came down to effectively zero. And government spending soared, creating the largest deficits in Japanese history. Now, Japan's national debt approaches 200% of GDP - a peacetime record. If it continues to grow at this rate, it will hit 300% of GDP in just a few more years.

Sound familiar? It should. The key US interest rate is now effectively zero. The Fed says it will leave it there for "as long as it takes." And deficits have reached staggering levels - 13% of GDP. At this rate, the US debt/GDP ratio will hit 100% in just a few years. And if it continues, US debt/GDP will reach 200% not long after - as recession- reduced tax revenues meet stimulus-increased outlays.

But wait...the feds say they won't let it happen. They'll turn this thing around. The economy will begin to grow. Tax revenues will rise. Prices will go up.

Hey...that's just what the Japanese said!

So far, the US is doing almost exactly what the Japanese did...propping up zombie companies and stimulating the economy as best it can.

But if it does the same thing the Japanese did, won't the US get the same results the Japanese got?

Here is where it gets interesting. Because the US economy is not exactly like the Japanese economy. Japan had high savings...and a positive trade balance. It could run up huge government debts and "owe it to itself." It could finance its government debts with the savings of its own people, in other words. It never had to worry about foreigners refusing to buy its bonds...or selling them suddenly.

America's government debt is different. The US doesn't save enough to finance its own deficits. So it depends on the kindness of strangers. And if those strangers ever lose faith in America's ability or willingness to repay its debts, they'll drop the dollar like an annoying girlfriend. And when they do, the whole global monetary system will come crashing down.

But suppose savings rates go up in America - to, say, 10% of GDP, like they were before the bubble years. That would make $1.4 trillion of savings available to finance the feds' deficits. And suppose the slump continues...as we think it will, with another big scare in the investment markets. People will seek safety in...yes, you guessed it...US bonds. This will take the pressure off the dollar and permit the US to finance its countercyclical spending without depending heavily on foreigners. The recession/depression will be annoying...but not insufferable. And Bernanke will figure he has more to lose by undermining the dollar than to gain from it. In that case, the Japan- like slump could go on for many years - just as it has in Japan!

Bill Bonner
for The Daily Reckoning Australia

• Recession for the Japanese Economy Once Again
• Japan “Wasted Trillions” on Stimulus Programs
• Difference Between the Dollar and the Yen
• How Will the United States Finance the Biggest Deficit of All Time?
• U.S. Government Must Roll Over $3.4 Trillion in Debt Over Next Four Years

The financial crisis of '08-'09 was not a head cold. It didn't go away.

It was more like diabetes, a stroke, or cancer. It was serious. Life threatening. We may not recover. Our only hope is to change our habits, undergo some nasty treatments...and endure a long convalescence.

But that's not what most people think. They are convinced that the feds gave the economy a miracle drug. It cleared up the trouble lickety split. Now, our troubles are behind us.

The Dow moved up 17 points on Friday, leaving it above the 10,000 mark. Gold rose too - it is at a new record high, only $5 below $1,100.

According to the news reports, the US economy is 'growing' again. Yes, that's the official storyline.

But wait, what kind of growth is this? David Rosenberg:

"All we can say is that if the overwhelming consensus is correct that the recession is behind us, then what we have on our hands is the mother of all jobless recoveries and whatever economic growth is being squeezed into the system comes courtesy of the most dramatic intervention by the government in recorded history, including the New Deal 1930s era. President Obama is now running fiscal deficits that would have made FDR blush."

The quacks at the Fed and the Treasury department have delivered the biggest jolt of adrenaline in history. People in the private sector won't spend? Heck, the feds will spend for them!

It took the Fed nearly one hundred years to grow its balance sheet - which is the foundation of the US money supply - to $800 billion. Then, after Lehman Bros. went broke, it doubled its balance sheet...to more than $1.8 trillion.

Early last week, the Fed announced that it would keep the firehose- sized IV in place. Then, by the end of the week, the G-20 meeting of finance ministers confirmed said they were all sticking with their stimulus programs.

You can't put that much cash into a financial system without getting some kind of reaction. Goldman is making record profits, for example. How does Goldman make money? It is finance business. It profits by offering credit. When credit expands, the moneylenders and speculators at Goldman make money.

The private sector isn't borrowing. Every day brings more proof.

Consumer credit contracted again in September - the 8th month this year.

Unemployment just passed the 10% mark, reports The New York Times.

"Small Businesses Hunker Down to Survive," says another headline story.

Another big bank went bust in California.

But while the private sector de-leverages, the public sector expands. Now, it's the feds who are doing the borrowing - about $1.7 trillion this year.

This is great for the people who help the feds finance their spending. But all it does is add more debt to the system. And debt is the real problem.

If former OMB director David Stockman is right, we'll see deficits over $2 trillion for a decade.

What people once took for absurd they now take for granted. Such as trillion-dollar deficits. For even with a hole in public finances equal to 13% of GDP the US House of Representatives passed a law overhauling the health care system, at a cost of more than $1 trillion.

What were they thinking?

Well, they were probably thinking that 'deficits don't matter.' And they were probably justifying the expense on the grounds that it was 'countercyclical spending' that would help pull the US out of its slump.

Whatever they were thinking, they weren't remembering what happened 20 years ago. It was 20 years ago today that the Berlin Wall fell, bringing to an end a 40-year demonstration project. The East Germans/Soviets wanted to show the world how well economists working for the government could run an economy.

And we found out!

Bill Bonner
for The Daily Reckoning Australia

• Government Debt
• Bankers Take Money From the Government and Use it to Speculate
• Feds Have Used the Correction to Increase Their Power and Add to Their Wealth
• Why Weren’t Economists On Top of This Thing?
• Where Do the Feds Get Any Money?

But along came two very important bits of information.

First, we got word that the crisis was officially over. GDP grew last quarter. Thanks to all the Cash for Clunkers, Cash for Bankers, Cash for Houses, Cash for Trash, and cash for every other blessed thing under heaven, the number crunchers were able to report positive economic growth for the third quarter.

Let's not get too excited. Stocks bounce. Bonds bounce. An economy bounces. Even dead economists bounce. And if we're following the Japanese experience, with a long, slow on-again/off-again period of depression, we can expect some quarters of growth, followed by quarters of non-growth. It's going to be a painful adjustment to the 'new normal,' whatever that is.

The other important bit of news was that the Fed - faced with undeniable evidence of growth and prosperity - decided to err on the side of caution. It will keep monetary policy loose from here until kingdom come, if necessary, in order to avoid a Japan-style slump.

But so far, a Japan-style slump is just what we seem to have...and our public officials are fighting it, Japan-style.

Unemployment is headed up. The U6 figure - a more accurate picture of how many people are out of work - is up to 17%. There are 1.5 million homeless children in the US now, including 300,000 in the state of California alone. One out of 10 Americans will not bite the hand of government - for it is the hand that gives him his food stamps.

Foreign direct investment has dropped 30%. International trade is down 10%.

Do you call this a recovery? We don't.

As David Rosenberg puts it, the man on the street is perhaps "less enthused by the fact that a lower rate of inventory de-stocking is arithmetically underpinning GDP growth at this time."

In other words, it's 'growth' that only an economist could love...and then, only an economist who was an idiot. Rosenberg:

"Put simply, a Wall Street Journal/NBC News poll just found that 58% of the public believe the economic recession still has a ways to go - and that is up from 52% in September and means that the private investor, unlike the hedge fund manager, is not interested in adding risk to the portfolio even after a 60% surge in the equity market.

"Only 29% of those polled believe the economy has hit bottom - imagine having that psychology with nearly zero interest rates, a bloated Fed balance sheet and unprecedented fiscal deficits (poll was taken from October 23-25). Nearly two in three (64%) said the rally in the stock market (still a bear market rally - not the onset of a new bull market) has not swayed their view (or ours for that matter). There is going to be some very tough slogging ahead as far as the economy is concerned."

Growth is largely illusional. It is the result of delusional policy- making at the Fed.

So, we'll just keep our Crash Alert flag flying.

Bill Bonner
for The Daily Reckoning Australia

• Markets Rise While the Economy Sinks
• Take Away Stimulus Spending and You’ve Got an Economy Entering Depression
• Bear Market Bounce a Sure Thing
• AIG to Receive $85 Billion Loan from Fed
• Feds Have Used the Correction to Increase Their Power and Add to Their Wealth

Much will be revealed this week in the Aussie market, although a lot will probably remain obscure too. Producer price data for the September quarter comes out from the Australian Bureau of Statistics. Inflation anyone? Maybe not in wages. But certainly in raw materials (energy).

And speaking of inflation, the Housing Industry Association will report new homes sales data for September later this week too. What do you reckon it will show? Our prediction: how prices in Australia are outrageous and getting more so with each passing month, as the banks double down on home lending.

You may even see a move in the Aussie gold price this week. It could come if the U.S. dollar pulls itself together for a bit of a rally, as we're expecting. But the other reason Aussie gold may go up is a small item on the front pages of today's Australian Financial Review. "Big Banks gear up to lend again," reports the AFR. Uh oh.

No one's been too terribly worried about consumer price inflation lately, mostly because it's been masked - until recently - by cheaper oil prices. Of course the biggest factor affecting consumer price inflation is the growth in bank credit. The RBA reports on that later this week. But bank lending is the main engine for new money creation in the economy...and new money creation is the main engine for inflation.

"The Big Four banks are keen to lend more aggressively to large businesses as the economy recovers and competition for assets intensifies, in a development that is likely to drive down corporate borrowing costs," Katja Buhrer writes. "The major banks are seeking to take advantage of surplus capital and improving corporate growth prospects."

Hang on! Surplus capital? Just last week we were under the impression that Aussie banks were having to import capital from foreign lenders in order to fuel the housing bubble. Now there's surplus capital? And now the banks are eager to loan it out and build up the asset side of the balance sheet again?

So much for deleveraging in the financial economy! This sounds like re-leveraging. It also sounds like exactly the sort of thing - a fresh new wave of bank lending into the real economy - that could trigger much larger inflation. This is the sort of thing the RBA is trying to prevent by raising rates. But if banks start expanding the asset to capital ratio again, watch out! You could see higher Aussie interest rates AND a higher Aussie gold price.

"West Africa beckons as Aussies go for gold," reports Barry Fitzgerald in today's Brisbane Times. This answers a basic investment question: which Aussie gold producers benefit most from a rising gold price and a strong Aussie dollar? ASX-listed firms with greenfield West African gold assets generally have their costs in U.S. dollars. That's a big advantage over domestic gold producers.

Dan Denning
for The Daily Reckoning Australia

• RBA Rate Cut Does Little to Unlock Credit Market
• Global Credit Shortage is Over According to European Central Bank
• Australian Recession in the Works? Ask the Sharemarket
• Foreign Investment in Australia, How Much is Too Much?
• Banks or BHP?

Then, word came that even Alan Greenspan thinks a recovery is underway.

"This is what a recovery looks like," said the maestro. That settled the matter as far as we are concerned. Alan Greenspan didn't see history's biggest financial bubble until it exploded in his face. In the following few words we undertake to show that Greenspan is as blind as ever.

"Great time for US consumers, America is on sale," says an item at YahooFinance. The "discounts are unbelievable," adds a blogger known as Frugal Rhode Island Momma. All across the nation, merchants are no longer selling the merits of their products; they're selling price. McDonald's advertises its "dollar meals." Hotels have cut room prices by 20% in the last year. House prices are down about 30% since 2006. Sellers are offering bargains and they want buyers to know it. "Sold for $365,000 in 2006. Now $195,000," says a typical house ad.

Foreigners have noticed too. Colleagues in London say they are thinking of moving to Florida where they will get far more for their money. The dollar falls; foreign purchases go up. Stocks, for example. In the first quarter, foreigners were unloading US shares. Now they're buying more than $100 billion worth per month.

It is a deflationary world, at least that part of the world between the Rio Grande and the 49th parallel. The CPI in the United States is negative and falling faster than at any time in 59 years. Households can only be induced to spend money by cutting prices. "Cash for Clunkers" cut prices on new cars by about 20%. As soon as it ended, so did auto sales. Most new house sales could be traced to a tax credit - which reduced the down payment by at least 20%. That program is scheduled to end in November.

And now, the White House frets about jobs. Unemployment is supposed to be a lagging indicator, but this time it seems to have dropped out of the race all together. Still, Congressional elections are coming up. Unemployed voters are surly and unreliable. So, the Obama administration is considering a $3,000 tax credit to bribe businesses to hire them. If the typical employee costs his firm about $40,000, this effectively reduces the cost of labor by 7.5%.

It's beginning to look more and more like the Roosevelt years. By the end of this year, all the jobs created during the bubble era - 2002- 2007 - will have been eliminated, making it the first decade with no job growth since the '30s. We're expecting a fireside chat any day.

Typically big businesses cut workers in a recession. Then, when the economy recovers, small businesses are quick to take them back. But this is unlike the typical post-war recession. This time, deprived of capital as well as customers, small businesses don't have a chance. Neither does a genuine recovery.

The authorities still do not understand what is going on. They are used to fooling most of the people most of the time. They think they can dupe them again - with bailouts and boondoggles. But real demand has vanished as households try to pay down their debt. That is not going to change anytime soon. Not while the federal government is sabotaging a genuine recovery. It's savings - capital - the US economy needs. A capitalist economy in which the capitalist have no capital won't work. Why is there no capital? Because the feds take it.

Supplying cash-for-this and cash-for-that is an expensive proposition, especially when tax receipts are falling. The money has to come from somewhere. As it turns out, the feds borrow it from the very people who are trying to rebuild their personal balance sheets. Of the $1.6 trillion the US government will borrow this year, the biggest single lender is the private sector, chipping in $700 billion. But instead of being put to use in a way that might stimulate a real recovery - providing credit for small business and consumers - it is taken up by the US government and then frittered away.

The banks are happy to play the government's game too. They can borrow overnight money from the Fed at only one quarter of 1%, annualized. But lending to small business is hard work. And it is risky. Why bother? The US Treasury will pay them 4 % for lending back to the government, long term. This is practically free money to the banks. Both the bankers and politicians end up ahead - with a bigger piece of the economy under their control.

Meanwhile, the real economy staggers. "Drought of credit hampers recovery," summarizes The Wall Street Journal. The United States needs to create a million and a half new jobs each year just to keep up with population growth. Currently there are 15 million people without jobs already...and a couple hundred thousand more unemployed every month. And if this recovery continues long enough there won't be a single person left in America who still has a job.

Even if the economy could be stabilized, it will leave millions without jobs - more or less permanently. Add the people working reduced hours, and those who have been looking for work so long they are no longer counted, and their families, and you have a quarter of the population without money to spend. That's why this slump is not going away any time soon. As in Japan in the '90s, we may have to live with this depression for the rest of our lives.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

• Normally Small Businesses Lead the Economy Out of Recession
• The Business Bankruptcies and the Personal Bankruptcies
• Where, Exactly, is this Economy Headed?
• Feds Can’t Cause a Genuine Recovery Simply by Throwing Money into Economy
• There is No Real Economic Recovery Taking Place

Hey, why not! They had such great success with the Clunker tax credit...and with the first time house buyer tax credit. Of course, when you pay people to do things, you can't be too surprised that they do them. And then, you can't be too surprised when they stop doing them after you stop paying them. Thus, when the Clunkers program conked out in August car buyers stopped buying. And when the new house purchase tax credit expires in November, don't be surprised if house sales collapse too. So, if the feds are going to pay people to hire other people, they better be prepared to do it for a long time.

Which brings us back to our calculations. How long will it be before this economy can walk without the feds clutching both arms? A few months ago, we wondered how long it would take consumers to put their finances back in order. Five years? Ten years? There are so many assumptions required that the numbers barely make sense. Still, if you think the total debt burden is headed back to under 200% of GDP, where it was for most of the last century, that would require the elimination of debt equal to about 160% of GDP...or more than $20 trillion worth. How do you eliminate debt? Well, some of it simply disappears...through defaults, foreclosures and bankruptcies. The rest is paid off. How? By saving. Now, imagine that the United States could put an amount equal to 15% of GDP to work paying down its debts. That's savings and capital formation of all types - corporate as well as individual. It ignores government, which is going in the other direction. At 15% of GDP per year, paying America's private debt down to under 2 times annual output is still about a 7-year project.

So, prepare for a long dry spell. In the best of cases, the American public has to stay on the frugality wagon for 7 to 13 years.

And in the worst of cases? Oh, well...that's a different matter. The aforementioned US government is desperate to short-circuit the process of balance sheet repair. It is propping up the old tree every way it can. Thus, the whole period of adjustment may take much, much longer than it should. Instead of coming down with a crash, the limbs fall off one at a time. At this rate, the whole process could take nearly forever.

As the private sector eliminates debt, for example, the feds add it. The deficits are scheduled - by the Congressional Budget Office - to be monstrous, but controllable. Cash for clunkers, cash for houses, cash for jobs - it adds up. But the CBO projections are based on very optimistic assumptions, in which the economy 'recovers' quickly and grows strongly. They do not take into account the real nature of the slump. It is not a pause...it is a permanent change. The Obama administration cannot, ultimately, prevent change. But it can slow down the process so much that the depression begins to seem eternal.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Cash for Clunkers Cars
• Barack Obama is a Strong Favourite to Win the Presidency
• Obama Urged to Fix Airline Industry
• Economists Agreed the Stimulus Was Working and the Recession Was Coming to an End
• The Economy, Too Much for Obama?

Investors must be pondering the future.

What will the future look like? No one knows. But investors thought they saw things they liked.

For one thing, there was the Federal Reserve governor from New York, who told the world that there was no risk of a rate hike anytime soon. Bill Dudley knows which way the wind is blowing. He said the Fed would hold money policy loose "indefinitely."

Indefinitely is otherwise known as "as long as it takes."

But as long as it takes for what? Ah...as long as it takes until the economy appears strong again.

How long will that be? Ah...maybe longer than anyone realizes.

Yesterday, we were calculating how long it would take to get the jobless number back down to '90s levels...that is, around 5%. There are now about 131 million jobs in the United States...and about 15 million people who would like a job but can't find one. Meanwhile, population growth adds about 1.5 million new workers every year. That means the economy has to grow at 1% (in real terms) just to stay even with population growth. Currently, the economy is going in the wrong direction - backwards. It's losing jobs...maybe 3 million this year...and maybe another 2 million or so before it finally stabilizes (who knows?)...for a total of 20 million jobs down (about 13% unemployment) by the time unemployment bottoms out.

Let's suppose, by some miracle, the economy turns around...and begins growing at 3% per year. That should be about 3 million new jobs per year. Half of those, remember, are just to keep up with population growth. So the other half - 1.5 million - gradually reduce unemployment. Now, let's get out the calculator...20 million divided by 1.5 million equals a little more than 13. By these numbers you can expect full employment again in 2022!

But what if the economy doesn't grow at 3% per year? Ooooh...that's the problem, isn't it? All the feds - and practically all other economists too - are projecting a return to normal. They expect a 'recovery.' But what if there never is a recovery?

Heck, yesterday, the central bank of Australia said it was so sure that everything was going well it raised its key lending rate by 25 basis points.

"Canberra says risk of serious retraction over," The Financial Times reports.

But they get a lot of sunshine down under. Possibly, the heads of the Reserve Bank of Australia got a little too much of it yesterday. Australia is also a supplier of natural resources to China; possibly, the sun burnt bankers failed to notice that China is a bubble.

Or maybe they failed to notice that China's biggest customer is broke.

Right under The Financial Times' article about Australia is the following headline:

"No sign of credit revival for US households."

"The latest data from the Federal Reserve show consumer credit declined at an annual rate of 10.4% in July - the fastest rate since the crisis began two years ago."

Yes, dear reader, Americans are shedding debt. They are cutting back. They are saving.

Another headline in The Financial Times tells us, "Holiday sales [are] set to fall."

Hold on. Who makes all that junk that Americans buy for Christmas? And how can China buy more raw materials from Australia when it is selling fewer finished products to Americans?

Perhaps China is focusing more sales on the domestic market; we don't doubt it. But you don't refocus the world's second or third largest economy in 12 months. It takes years. And you don't get this kind of rebirth without some kind of suffering. The big, old oak tree has to fall down before the sapling can take its place. And when the oak falls - it makes one helluva mess.

Bill Bonner
for The Daily Reckoning Australia

• Job Losses From Private-sector Rose Since Beginning of Recession
• Price of Water Rises in China
• Bear Markets Do Not End With Stocks Still Trading at Nearly 20 Times Earnings
• Consumer Economy Not Going to Return to Robust Growth Anytime Soon
• The Economy Needs REAL Growth

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

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

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

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

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

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

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

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

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

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

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

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

Until next time,

Bill Bonner
for The Daily Reckoning Australia

• Contradiction in the Balance of Economic Forces
• The Greatness of a Depression is Commensurate to the Government’s Efforts to Prevent It
• Good Luck with Money
• RIP Robert S. McNamara and California’s Holes in its Budget
• The Solution to a Depression is a Depression