The Austrian bank Boden-Kredit-Anstalt was rendered insolvent in the aftermath of the late 1920s credit boom. It was 'saved' in October 1929 by merging with the stronger Oesterreichische-Credit-Anstalt. An international syndicate headed by the Rothschild's of Vienna, and including J.P Morgan and Company, injected new capital into the merged entity.

The Austrian Government guaranteed the bad debts of the old bank and the merged entity spent 1930 'muddling through'. But then in May 1931, the Credit-Anstalt bank collapsed. Some blamed the political climate at the time, with the economic union between Germany and Austria (Zollverein) spooking France. Others simply stated that Austria had 'consumed its capital', with the result that a banking collapse was inevitable.

Whatever the reason, the collapse of Credit-Anstalt triggered a run on German banks by French and US creditors, leading to the forced closure of the German banking system. London financiers were heavily exposed to German banks and industry, and were caught out by the banking sector shutdown, which effectively froze their assets.

This in turn caused panic amongst London's foreign creditors and a run on sterling, at the time the world's (weakening) reserve currency, began. And so went the contagion that crippled the world economically and provided the impetus for Hitler's rise and decades of economic and political turmoil.

In the 1930's, contagion went from the periphery to the core in very quick time. Austria folded in May 1931. By September of that year, Britain had gone off the gold exchange standard (a poor imitation of the classical gold standard) and devalued the pound sterling.

The situation in the global economy today is eerily similar. Greece, a peripheral European economy, is close to defaulting on its debts. Any default would lead to contagion, as creditors pull funds from other highly indebted countries. The list of targets is well known; Spain, Portugal, Ireland, Italy...England.

While the economic climate in Europe today has worrying parallels with the 1930s, importantly, there are huge political differences. In the 1930's, France was the premier European power. Deeply scarred by WWI, the French were in no mood to 'bail out' Austria or Germany. And of course each country back then had their own sovereign currency, which increased the motivation to 'bring funds home'.

Today, Germany is the premier nation of the Eurozone. France is the second power and both are heavily motivated to keep the currency union together. The spirit of cooperation amongst European nations is far stronger than it was 80 years ago. But Germany, or anyone else for that matter, will not be bailing Greece out of its financial difficulty. To do so would irretrievably damage the euro project, not to mention the fact that such action would be legally and politically impossible.

Very simply, a bailout, if feasible, would soothe the markets for a short period of time only. But then there would be an expectation that other struggling euro economies should receive assistance. Supporting the edges at the expense of the core is a strategy that, if followed, will lead to the long term demise of the euro.

The best that Europe can do is buy more time for Greece to get its house in order. As things currently stand, that does not look like happening. The EU (European Union) has ordered Greece to cut its budget deficit from 12.7% to 3% of GDP in three years.

As economic historian Niall Ferguson wrote in the Financial Times recently, that would be "one of the most excruciating fiscal squeezes in modern European history."

Generally, when a country builds up too much foreign debt, it devalues its currency. This is a type of default. Foreign creditors take a haircut because their debt, while nominally still the same, is denominated in a devalued currency.

Being part of the Eurozone, Greece does not have the option to devalue. Granted, such a policy is not a panacea. Interest rates would skyrocket and asset prices plunge. The heavy lifting would be left to the export industry so the country could trade its way back to economic health.

As harsh as this option sounds it would be easier to bear politically than the current EU austerity plan. It may not be long before calls for a return drachma grow louder.

Why?

Consider that Greece is being asked to effectively endure an extremely painful deflation. Only countries with very flexible labour markets and minimal government involvement can handle such an economic adjustment without social upheaval.

But Greece's economy is woefully inflexible. The government employs one in three workers and the black economy is huge, eroding the tax base. In other word's around 33% of the economy is unproductive and feeds on the rest of the country's productive capacity (and foreign credit, we might add).

And the unions are very vocal and very strong. With this many people, supported by economically illiterate unions, sheltered from the real world, we think it extremely unlikely that Greece will be able to cut its deficit as quickly as the EU expects.

If we return to the 1930s, we can see parallels with England abandoning gold at the time. The currency, the pound sterling, was overvalued, rendering England's major export industries uncompetitive. Unions were heavily represented in these industries and refused a proposal to cut wages. Unemployment was high and the structure of the whole economy was inefficient.

England had two choices - austerity or devaluation. She chose devaluation because the politics of austerity were too hard.

Perhaps they might be for Greece as well.

Should Greece return to the drachma, there is a risk that others might follow and bring the euro experiment undone. This would also usher in another sharp global slowdown as European banks would be pushed towards insolvency by the associated writedowns on sovereign debt.

There is a chance that even if Greece left the Eurozone the other nations (Spain, Portugal etc) would aim for fiscal discipline and stick with the euro. After all, the long term benefits are enormous - lower borrowing costs for both the public and private sector. In such an outcome, the euro could actually benefit as member states vote implicitly for sound economic policy.

Or as Otmar Issing, former member of the European Central Bank, wrote in the Financial Times this week "This is a big chance - probably the last for Greece, and others - to adapt fully to a regime of stable money and solid public finances".

The EU's monetary leaders are advocates of sound money practices. If they can convince the peripheral European countries of the benefits of pursuing such polices, the euro may well have a strong future. But the road ahead looks very difficult indeed.

What does this mean for investment markets?

Suffice to say, any news of default, a collapse of a Greek bank, or statements around a return to the drachma would have adverse consequences indeed. The global economy is in the middle of a historic reflation attempt. This is built on liquidity and confidence.

Bad news from Greece would damage confidence, which would in turn impact liquidity and all risk assets. European and British banks would again come under pressure and with government finances stretched from the 2008/09 bailouts, the outcome could be very different to the last episode of risk aversion. In what ways we do not know.

Markets today are 'concerned' about Greece and the possibility of contagion. However, we feel there is an underlying attitude that things will work out without too much drama. We certainly hope this is the case.

But hope is not an investment strategy and we continue to see a poor risk/reward outcome with the market at these levels. We would prefer to be taking money out of the market at the moment rather than putting it in.

Absent any major new development, Greece will soon suffer from headline fatigue and move off the front pages of the business news. Does this mean 'crisis averted'? No.

As we have pointed out above, there are no easy solutions. The best we can hope for is that the EU gives Greece more time to get its fiscal house in order. Something will need to happen soon to reassure markets. Greece needs to refinance €30 billion by June.

An interesting few months awaits us.

Greg Canavan
for The Daily Reckoning Australia

• European Governments of the Eurozone are Separately Responsible for Their Euro-debt
• Historians May Write: In Order to Save Greece, it Was Necessary to Destroy the Euro
• Whiskey & Gunpowder
• Capital Flight Out of Greece
• Eurozone Drops GDP Bombs

Both the S&P 500 and the Dow Jones Industrials finished up over 1.5%. There were two drivers of the feel good vibe. First was New York's Empire Manufacturing Survey. It concluded that "conditions" were improving.

As far as we can tell, that doesn't mean anyone actually made and sold more stuff in New York State. But it does mean the state of mind - how people feel about things - appeared to improve. Hooray! It's nice people feel better about things. But things are still pretty bad anyway.

The bigger story is that Greece hasn't been abandoned by the rest of Europe...yet. Europe could probably leave Greece behind and preserve the integrity (such as it is) of the euro as a sound currency. But 50 years of harping on about social justice and economic harmony and humane capitalism is going to make it hard for policymakers to leave Greece to its own devices.

This means the debt crisis is consolidating itself into ever fewer and larger entities...the European Union...the U.S. government...and the U.K. government to name a few. In order to save Greece, historians may write, it was necessary to destroy the Euro.

But investors don't have time machines. In the modern era of central banking, new lines of credit and public assumption of large liabilities - plus more credit creation - has always been the way out of a pinch. Below, we'll tell you why this makes the inevitable disaster that much worse.

Here in Australia, it looks like the financial crisis is receding. We have our doubts. But according to Gail Kelly and the good people at Westpac, bad debts were down even more than expected in the first quarter. That's the good news. The bad news is that, "the average cost of funding is going up."

The strategic weakness of the Australian banking sector - and perhaps the whole economy - is that it's a capital importer. That's why even when Aussie banks didn't have boatloads of U.S. subprime debt; they still faced higher capital costs when the global cost of capital went up. So what?

If Greece goes down or sovereign debt default spreads go up, it's going to make importing money into Australia more expensive. And that will probably slow credit growth in the economy. Aussie banks will get jealous of their capital and stingier with their lending. Maybe even house prices - contrary to the laws of Australian financial gravity - will fall.

And if you think that's gloomy, then you won't want to read what Albert Edwards from Societe Generale has to say about the status quo. Writing earlier this week, Edwards says, "My own view on this is that obviously we should never have got into this wholly avoidable mess in the first place. But having got here, there really is no way out that does not trigger a major market-moving upheaval."

"Ultimately economic prosperity over the past decade has been a sham: a totally unsustainable Ponzi scheme built on a mountain of private sector debt. GDP has simply been brought forward from the future and now it's payback time. The trouble is that, as the private sector debt unwinds, there is no political appetite to allow GDP to decline to its 'correct' level as this would involve a depression. So burgeoning public sector deficits and Quantitative Easing are required to maintain the fig-leaf of continued prosperity."

This what we meant above about the inevitability of the disaster that approaches. When the government "brings forward" demand for housing via the FHOG or for consumer goods via stimulus, it's stealing growth from the future in order to maintain current living standards. In our view, this just perpetuates the misallocation of resources that took place in the credit boom and keeps the money in the weak hands (the financial sector) that took so many bad risks in the first place.

A real free market punishes financial failure with bankruptcy or insolvency. By not allowing a recession to take its natural course, monetary and fiscal policy prevent the conditions for the next growth phase. What's worse, they're doubling down on the debt-backed model of prosperity and piling up more liabilities on the public sector balance sheet.

That's the stage we're at now. And one insignificant survey on manufacturing sentiment in New York State doesn't change much. And by the way, the more important news yesterday is that demand for U.S. bonds by foreign investors fell by its largest amount ever. Strong dollar?

Foreign holdings of U.S. Treasury securities fell by $53 billion December. China reduced its holdings by $34.2 billion. The end game is beginning in the Chimerica relationship of vendor financing (China buys U.S. bonds to help keep U.S. rates low so Americans can buy what China makes).

What China doesn't buy, you can get the Fed will have to monetise - unless the Congress and the President suddenly cut American spending. You can see from the chart below that Japan is now a larger holder of long-term U.S. securities than China.

Click to zoom in on Foreign Holders of Treasury Securities data

The long-term trade on this is to get the heck out of U.S. assets. Whether "risk assets" like commodity currencies or commodities are the ultimate refuge is yet to be seen. But oil, gold, and resource stocks are certainly getting a big today on greenback weakness.

Dan Denning
for The Daily Reckoning Australia

• The Story Behind China Dumping its US Treasury Debt
• The Great Correction: Awaiting Bailouts that Will Never Come
• USA Has Fives Times As Much Sovereign Debt As All the PIIGS Put Together
• 1 Out of 10 American Mortgages Are Owned by Other Countries
• China Buys its Own Gold

Things are getting back to normal in the Baltimore-Washington metropolitan area...or, at least back to the way they were before the big storm.

There's nothing really ever 'normal' about what goes on here. It's a government town...the capitol city of a great nation...the citadel of a great empire...

..which only makes us wonder. Shouldn't great nations and great empires have great leaders? And yet, we look around. What do we see? Hacks. Glad-handers. Shills. Suits. Wonks. And of course...imbeciles.

That's the problem with living in the country you come from. Your own people disappoint you. Or at least, those running your government. Living overseas is a pleasure. The imbeciles are fun to watch. But here...we cringe when we hear the news. We turn green when we read the paper. And TV? Can't bear it. These are our people. Our race. Our countrymen. Ay yi yi...

More on that below...

Let's look at the financial news. Wassup?

Well, the Greek story was big this week. 'The Big Fat Greek Meltdown,' as Justice Litle calls it. It pushed stocks and bonds down early in the week. By the end of the week it was pushing them up.

What happened in the meantime? Well, the euro-feds made it appear that they were going to do the same dumb things our own feds did. They said they were going to fix the situation. Just like the US fixed Fannie Mae and AIG!

There are 27 different nations in the European Union. And guess how many languages? Two-hundred and thirty. That surprised us too. Spain alone has 6 official languages.

But without doing any real research on the subject, we have discovered one word which is common to all these languages: bailout. Yes, dear reader, it was 'bailout'...spoken in hundreds of different languages and dialects...that lit a fire under the financial markets late this week. The embers were still hot yesterday; the Dow rose 106 points. Gold had it best day in weeks - up 18 bucks.

But doth a single bailout a real boom make?

Let us rephrase that. Will bailing out the spendthrift Greeks really make American businesses more profitable?

You know the answer. It won't. In fact, it will make them less profitable. What it does is allow the Greeks to continue spending in the style to which they've become accustomed. And if the Greeks are going to do that you can bet that the Irish aren't going to want cut back. Or the Portuguese. To say nothing of the Italians. And what about the English?

Bailing out the Greeks is a big mistake. But it's a mistake everyone seems to want to make. There's probably a Latin dictum for this sort of thing. But since we don't know what it is, we'll have to coin the phrase ourselves: Imbecility begets imbecility; especially when the bankers come out ahead.

What did you think? Who do you think the Greeks owe money to? That's right, the big banks are behind this. They've got hundreds of billions at stake in Greece. If the Greeks can't pay, the banks take a hit. Since no one wants the bankers to take a loss - except for us - once again, the feds are coming to the rescue.

Oh...why does this make US businesses LESS profitable? Well, it's a marginal thing. But what we're witnessing is a shift of economic power away from the private sector towards the public sector. Private businesses no longer borrow like they used to. Now, the feds do the borrowing and the spending. That leaves less capital...and less spending power...in private hands. Ergo, businesses will find it harder to make money.

They'll also find it harder to make money because interest rates will rise. Instead of letting the bad credit risks default, the feds weaken all credit. They're giving debt a bad name, in other words. The risk of default for the particular country goes down; the risk of default of the entire system increases. After all, the debt doesn't disappear. It has to be paid by someone. Sooner or later. Guess who that will be?

We were snowed in Tuesday, Wednesday and Thursday. By Thursday, essential supplies were running short. All we had left was two cases of red wine. Would that be enough to last until Friday? We had our doubts...

Cabin fever had set in. In desperation, we read the paper. Big mistake. The papers in Washington take themselves seriously. They tell us about congressmen, senators, agency heads, lobbyists, crooks, perverts and other politicos. One man has held up a liquor store. Another has waylaid an entire nation. These are the people who could be called the "power elite." They are at the head of our government...they are leading and directing our great empire. Which only makes us wonder about the whole thing. Maybe a country isn't so great after all...but just an accident...one that happens in spite of the dumbbells running it? And maybe an empire comes about not because of the drive and vision of the imperialists, but of its internal momentum...and on its own schedule...no matter what the nincompoops think.

This may seem like a trivial thought to you but it has its roots in a respectable intellectual tradition. Is it men who make history...or history that makes men?

Probably a little of both. But if we're counting on the men (and by that we also refer to the distaff half of the population) in Washington to guide this empire on to greater glory...we're going to be deeply disappointed. They aren't capable of it.

Take the wars in Iraq and Iran...please! Everyone who's ever cracked a history book knows that you don't fight expensive wars in distant places with your own troops and your own money when you have nothing to gain from it. Especially not when you have to borrow the money! You get someone else to fight the war...at his own expense.

But our beat here at The Daily Reckoning is money...not war. Still, our opinions are the same about them both. America is overstretched...overextended...and overdue for a serious correction. Her wages are too high. Her debts are too heavy. Her expenses are too great. And her leaders have no idea what is going on.

As to most of the foregoing list, our opinions are probably no better than anyone else's. But as to the last item, we speak with authority. We are connoisseurs of imbecility. We have watched it for decades. It amuses us. It fascinates us. It intrigues and perplexes us. How come people can drive down the highway at 70mph...making thousands of precise calculations with mortal stakes, but then ask them a question about economic policy or foreign policy or no-shirt, no-service policy...and psssht...their good sense goes out the window? We've studied this question for many years....

In other words, we know an imbecile when we see one. And when we see Ben Bernanke or Tim Geithner our eyes light up. Our nostrils flare. And our chest expands. Before us is a specimen we know very well. Boobus Americanus Economistica. It is a variety of imbecile that has gotten far too little attention from the academic world. Too little research has been done on them, in our opinion. That's why it is left to us amateur imbecile-spotters to keep track of them.

Mr. Bernanke is a standout example. The former head of the Princeton University economics department knows all there is to know about a depression - except the important part. He doesn't understand what causes them. And he completely misunderstands what the role of government should be in dealing with them. But we have already explained all this to you, dear reader, so we won't repeat ourselves here...except to say that any truck driver and hair stylist knows you can't spend your way out of debt. Mr. Bernanke doesn't believe it. That's the very definition of Boobus Americanus Economistica; he has educated himself out of his common sense.

Mr. Geithner, meanwhile, tries to make up for what he lacks in scholarly gravity with one heckuva nice wardrobe and a spiffy haircut. It's definitely a plus to have such a sartorial crackerjack at the head of the Treasury Department, but it would be nice if he had some dim notion of how the bond market works too.

Moody's warned that the US would lose its triple-A rating if it continues borrowing money at the present rate. Our old friend Marc Faber was on TV this week explaining what the consequences would ultimately be: the US will default on its debt, he said.

Mr. Geithner did not even bother with the idea of default. It was beyond his imaginative powers. As to losing the three As, he said that would "never" happen. Which is what set us to thinking about the quality of US leadership. Of course, the US will lose its bond rating...and will default. There is no question about it. No nation has ever existed, except for present company...whose histories have yet to be completed...that didn't default, renege, collapse, go bankrupt, disappear, disintegrate, capitulate, or otherwise fall over and die. The only questions are when and how.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

• Entering into a Culture
• Normally Small Businesses Lead the Economy Out of Recession
• Trichet Should Tell Greeks to Drop Dead
• Government Sachs
• Ratings Agencies Picking on the Greeks

"Mr Aveling said Collection House, which sources most of its business by recovering customer debts for banks and service providers like phone and energy companies, opted to use its money to pay off debt, rather than borrow more to buy the debts of others and try to chase defaulters. He also said shareholders could expect an increase in interim dividend, contributing to Collection House shares rising beyond 90¢, before settling to a 12¢ gain at 84¢."

How about that? A debt collection company growing earnings, paying off its debt, and paying a dividend? What does that tell you about the world when the debt collection business is booming?

To be fair, earnings were up at a few companies like Flight Centre and Computershare. But the banks sold off and the market closed down about 1%. So which is it? Are Australian earnings going to be stronger than expected? Or are stocks already priced for earnings perfection?

We'll ponder that on the tram on the way into the CBD today. A group of investors touring Australia is in town and we're on our way to speak to them about our forecasts and strategies for 2010. Mostly this involves more cash, fewer shares targeted to industries where there is scarcity, and a handful of energy, precious metals, and small cap shares.

That may seem like a bit of contradiction: bearish on the stock market but bullish on the riskiest sectors of it. But we'd make that case that it's owning the banks and other so-called blue chips that's the bigger risk - given the rewards on offer. It's better to have at least some shares where when one good thing happens, the share can go up 3-1, 5-1, or 10-1.

But true to form, 2010 is going to be the year the solvency of the welfare state dominates the front pages. People are slowly beginning to understand that huge social welfare states have to be paid for by someone. And if your economy isn't growing, it's hard to "spread the wealth around." You have to "borrow it around." And that puts you in debt.

For example, Greece has a fiscal deficit that's nearly 12%, or four times what the suits at the European Union in Brussels say you're allowed to have and still be a member in good standing. What's worse for Greece, its total debt-to-GDP ratio is working way to 120% - which is pretty bad, even by American and British standards (although modest by Japanese standards).

It may be satisfying for the EU's finance chiefs to scold Greece. But they all live in the same very large monetary glass house. This is the proverbial Achilles heel of Europe's monetary union. Twelve economies, one interest rate, zero flexibility. It's hard to imagine a better recipe for a fiscal crisis.

Our old friend Marc Faber says to beware the PIIGS - Portugal, Ireland, Italy, Greece, and Spain. These are the Euro nations that borrowed up in the boom and now have to pay it back. If these nations ran their own monetary policy, they could set interest rates low or print money. That would inflate away some of the accumulated debts.

But Europe's central bankers are not as willing as their Fed counterparts to throw their currency to the dogs. Thus the PIIGS don't have the any monetary or fiscal stability left. They must live within their means, cut spending, or get some kind of bail out from their neighbours.

The whole situation makes you realise how much of modern "wealth" is just debt dressed up in fancy clothes with a flashy car. And that's just at the household level. We think some European nation's will realise this year that you can't infinitely redistribute wealth to achieve the goals of social justice and equality...if the economy itself isn't producing that wealth in the first place.

Faber reckons one of the PIIGs will default in the next few years. Whether this provokes a currency crisis in Europe is the open question. What the euro has going for it right now is that it is not the U.S. dollar nor is it the yen. That's not saying much.

Australia doesn't yet face the kind of fiscal reckoning that the PIIGs, the U.S., Britain, and Japan face. We meant to show today how that could change quickly in the future. It's a new scheme to put ultimate responsibility for bank solvency on the Aussie tax payer. But we have a tram to catch, so the story will have to wait until tomorrow. Until then!

Dan Denning
for The Daily Reckoning Australia

• USA Has Fives Times As Much Sovereign Debt As All the PIIGS Put Together
• Central Bankers Encourage Debt Booms That Become Debt Bombs
• It’s the Little Economies that Have Trouble
• Commonwealth Bank (ASX: CBA) Nearly Doubles Bad Debts Over Last Year
• Note to Australia: Buy Resources, Not Banks

"The world's future is up to you. Please use the chance and act wisely NOW." - Mira Kapfinger, Austria

"Dear World Leaders, I am praying for you all at this critical time. Let's do the right thing for the poor and the environment." - Carl, UK

Those are just four messages out of 3,860 posted on the Copenhagen Climate Change Conference website.

Reading just a handful of those messages - all in favour of world leaders "doing something" of course - it's no wonder bureaucrats and politicians of the world believe they've got a mandate to rip billions of dollars from the hip pocket of the world's taxpayers.

As we've written on several occasions in Money Morning, we've no idea whether climate change is genuine. And we've also got no idea whether it's man made. After all, it's been quite a while since we studied science.

Over twenty years actually. But what we do know is this...

It isn't possible for the talking heads in Copenhagen to do anything about it, whether it exists or not.

Time and again we've seen governments cause more problems than they cure. And not only that, but it inevitably costs the individual taxpayer thousands of dollars for the privilege.

Why should we believe that this time will be different? That suddenly government has found the one thing that it's good at - solving a problem that may or may not exist.

But you only have to look at the "How this affects your household" document from the Department of Climate Change to see that the Carbon Pollution Reduction Scheme (CPRS) is little different from any other government wealth redistribution scheme.

It does what most other government schemes do, it takes money from one of your pockets hands it around various government departments and then deposits it in another one of your pockets, usually minus a few cents on the dollar.

Of course, if you happen to be "rich", such as a single income couple with two dependent children and you earn $120,000 per year then you can expect to pay an extra $1,027 per year thanks to the CPRS.

If you're an average wage earner on $65,000 in the same household formation then you may actually make a profit out of the scheme. According to the Department of Climate Change you'll receive total government assistance of $1,082 compared to a forecast increase in living costs of $767.

That's if you have any faith in the forecasting ability of any government department. More likely it will still cost you money - and lots of it.

If governments did want to do something about Climate Change then what they really need to do is get out of the market and let free enterprise solve the problem.

Think about it, almost every opinion poll shows that individuals are in favour of environmentally friendly practices. Clearly there is a will among the global population to reduce pollution.

After all, who wants to breathe in smoke and fumes? No one wants to do that.

And we're sure that contrary to popular opinion, "evil capitalist" businessmen don't have a preference for spewing out noxious fumes from their factories or for dumping dangerous chemicals in rivers.

And likewise individuals don't consciously choose or prefer to do something that causes more pollution instead of something that causes less pollution.

The fact is it's the very people and organisations - politicians and governments - who claim to be the saviours of the planet that ensure the problems of pollution will last even longer.

For instance, 'green' energy provider Jackgreen Ltd proudly boasts that 190,000 households in New South Wales are signed up to one of its 'green' services.

These are services that allow you to receive either 10%, 50% or 100% 'green' power. For the 10% option you pay nothing extra, for the 50% option you pay $3.30 per week extra, and for the 100% green power option you pay $6.60 extra per week.

That's just a total of $343.20 per year added to the cost of a fuel bill. That doesn't seem like much if you really are concerned about saving the environment.

And remember, the opinion polls tell us that around 80% of Australians believe something needs to be done.

But then you look at the numbers again. 190,000 New South Wales households isn't quite as impressive a number as it first seems.

According to the 2006 Census there were 2.7 million households in New South Wales. That means only 6.9% of households in the Premier state choose to use the 'green' option through this particular company.

But maybe that's not a fair representation. What about a bigger energy provider such as Origin Energy?

Well, the numbers are better but still not mindblowing. In 2008 Origin Energy claimed to have over 423,000 customers signed up for its 'green' options, more than double those signed up through Jackgreen.

But still that only represents 14% of its national customer base of three million customers.

So, what does that tell us? Does it suggest that say, three-quarters of the population couldn't care less about the environment and pollutions, or does it suggest there are other reasons why more households don't participate?

We'd go for the latter option.

When you consider the amount of money remaining in the taxpayer's pocket after they've paid taxes, food, mortgage/rent, bills, and travel, there isn't that much left to spend on optional items.

It's no wonder individuals feel they need for governments to do something, because most individuals don't have the spare capacity to do something about it for themselves.

But surely the better and more efficient option is to allow the individuals to make their own choices.

I mean, do we think that in a free market, individuals would choose to support a polluting industry at the expense of a 'green' industry?

Or course, we don't know for sure, but the odds are that with more money in their pockets, individuals would make a rational decision to support 'green' at the expense of 'black' energy.

The idea that individuals only have short time horizons and are unable to make decisions based on a long-term payback doesn't hold true. People make long term decisions all the time. To suggest that only a government which has a three or four year election cycle to contend with is the only one capable of thinking about the long term is false.

We're pretty sure that left to a free market, individuals wouldn't artificially support polluters at the expense of 'green' energy just to save jobs in one particular industry.

In a free market, individuals would know that jobs lost in a dirty industry would result in jobs gained in a 'green' industry. The presence of government and its manipulation of markets prevents this adjustment from happening.

As for the Copenhagen Summit, the one saving grace you have as a taxpayer is that in the short term it's unlikely to achieve anything. But that doesn't mean you should drop your guard.

A global tax scheme looks to be inevitable, and it's something to be avoided at all costs. As I wrote in Money Morning a few weeks ago, when the European Union began it was nothing more than a free trade organisation covering coal and steel.

Fifty years later, it's a gigantic bureaucratic undemocratic monster, as decisions effecting the people are made ever further from the people.

The fear from the Copenhagen Summit is that national governments will cede power to a global organisation which can never be recovered.

Kris Sayce
for The Daily Reckoning Australia

• U.S. House of Representatives Passes Climate Change Bill
• Climate Change and Hyperinflation Reader Mail
• Copenhagen Climate Talks Possibly Sent the Market Higher
• In Europe, Banks Borrow Money and Lend it Back to the Government
• An Old Friend With a New Idea on Global Warming

Depends...

If you need a place to live and want to own a house, why not? Prices in some areas are fairly reasonable. But if you're speculating, our guess is that you'll get a better deal if you wait.

Why? For the many reasons we have given you in these Daily Reckonings. House prices may be firming in some areas - that's what the Case- Shiller numbers seem to show. But nationwide, they are probably headed down for quite a while longer.

Herewith, four reasons why:

First, as you know, this is a depression. It will probably be long. And deep. You wouldn't know it from looking at the stock market or reading the news. The Dow went up another 114 points yesterday. Oil rose to $71. And the dollar - anticipating inflation - fell to $1.44 per euro.

But that's what bounces are supposed to look like. They look good enough so that people mistake them for the real thing...and get suckered into more losses.

This is a depression. Depressions drag down asset prices. Typically, prices become much more reasonable. And then they reach UNREASONABLE levels. House prices have become reasonable. Now they will become unreasonably cheap...

Second, waves of resets and foreclosures are still washing over the housing market. As Barry Ritholz told us in Vancouver, we're only half way through the foreclosure process. There are more than 18 million empty houses in America. A news report yesterday told of a 32-storey apartment building in Florida with only one lonely tenant. And still coming up are more refinancings...more drowning homeowners ...and more people giving up on homeownership altogether. The bubble era created new households at the rate of 1.2 million per year. Practically every one of them wanted to get in on the housing boom. Now, there are only 500,000 new households per year. And few of them still believe that housing is the route to wealth. At the current rate, it will take many years to fill up all America's empty houses.

Third, incomes are falling. Property crashed because people with average incomes could no longer afford to buy the average house. Now, they can afford even less. Ken Rogoff estimates that the consumer needs 6-8 years to pay his debts down to a more reasonable level. Part of that deleveraging process will mean getting rid of heavy mortgage debt - one way or another.

Fourth, there are too many houses that are too big...and in the wrong places. Big houses were a status symbol in the bubble years. Now they're a symbol of extravagance and error. Plus, they're expensive to own. People will want to dump them - even if they can afford them. There was far too much building in the outlying suburbs of the sand states too - Arizona, Nevada, California and Florida. Those houses may have to be abandoned as people are forced to move closer to where the work is.

There are also a couple of more technical reasons why the Case-Shiller numbers may be erring on the bright side: seasonal adjustments and a changing mix of houses sold. But our guess is that real house prices - adjusted for inflation - will continue going down for many more years.

You want to see deflation? Go to Tokyo City in London. The restaurant chain says it is going to give its food away for free. Customers will pay for drinks plus 2 pounds 50 pence for service.

Meanwhile, in Tokyo itself prices are falling - again. The Japanese have had on-again, off-again deflation for the last 20 years...ever since their stock market crashed in 1989.

Hey, what's the matter with those Japanese? Don't they know about stimulus?

Hold on there, pilgrim. What the Japanese don't know about stimulus ain't worth knowing. They've stimulated their economy so much that their government debt now measures 200% of GDP. And what did they get for all that stimulus? Did it get their economy moving?

Are you kidding? Now, the latest news tells us that they also have the highest jobless rate in 6 years. And the latest figures show the inflation rate NEGATIVE. In fact, never has the inflation rate been lower.

In other news, jobless benefits are running out for 1.5 million unemployed Americans, says a New York Times report.

And here a commentary by David Pauly on what Wall Street is doing about low earnings - lying!

"Stock analysts continue to promote corporate earnings lies, insisting that net income isn't really what investors need to know...

"In analyst speak, Intel Corp. wasn't hit with a $1.45 billion fine from the European Union in the second quarter for anticompetitive practices.

"After setting aside funds to cover the fine, which Intel is appealing, the semiconductor-maker had a quarterly loss of $398 million, or 7 cents a share. Disregarding the fine altogether, analysts maintain the company earned 18 cents a share, beating their average estimate of 8 cents.

"As Wall Street tells it, the employee stock options Google Inc. granted in the second quarter didn't cost its shareholders $293 million.

"Google, according to generally accepted accounting principles, earned $1.48 billion, or $4.66 a share, in the period. Not enough for Wall Street, which prefers to say the company earned $5.36 a share, leaving out the cost of stock options.

"Viacom Inc., an entertainment company, this week reported second- quarter net income of $277 million, or 46 cents a share. Analysts had estimated profit as if money Viacom paid out in severance in the period wasn't the real thing. On that basis, Viacom earned 49 cents a share, beating the average estimate by 1 cent.

"Time Warner Inc., a rival of Viacom for entertainment dollars, said it earned $519 million, or 43 cents a share, in the quarter. Analysts insist Time Warner earned 45 cents, excluding, according to Bloomberg data, costs related to litigation and asset sales. Lawyers must work for nothing.

"By similar Wall Street reckoning, the expense of cutting jobs and selling an asset that reduced McGraw-Hill Cos. second quarter earnings per share by 10 percent was immaterial.

"Analysts also say investors should ignore $129 million that Textron Inc., maker of small airplanes, helicopters and golf carts, charged against net income in the latest quarter. Included was the cost of shutting a plant for an eight-seat jet Textron decided not to build.

"General Electric Co., which makes jet engines and electric power equipment and has a financial services arm, had a second- quarter profit of 24 cents a share. GE and the analysts emphasized earnings from continuing operations, which at 26 cents a share, exceeded their estimate by 2 cents. A $194 million loss from discarded businesses was discarded."

And so on...and so on...

Bill Bonner
for The Daily Reckoning Australia

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• The Profits Depression
• Investors Were Fairly Confident Stocks Would Perform Well ‘Over the Long Run’

You surely know that windmills don't turn when the wind doesn't blow. And solar does not generate electrons in bad weather or at night. But geothermal runs 24 hours per day, in essence "mining" heat from the bowels of the earth. (That is, the fuel is "free.") Thus, geothermal offers reliable baseload power. And geothermal emits near-ZERO carbon dioxide (trace amounts at worst), so it completely trumps any and all fossil fuels for a clean power source. There are no long-term waste or storage issues, like with nuclear. There are many locations within the U.S. - and around the world - that are completely suitable for geothermal. Geothermal is a technology whose time ought to be here.

Yes, the time for geothermal ought to be here. So why isn't the geothermal business exploding? First, geothermal power is competing against a worldwide installed base of existing power systems and economics. When most people think of electricity, they don't naturally conjure up images of steam wells turning turbines. Few schools anywhere teach future geologists how to "do geothermal."

Second, the pure-play geothermal companies are small firms subject to the same credit crunch as everything else that has gotten hosed in the past year. (Note, however, that the largest geothermal power player in the world is Chevron.) At the same time, all five of the ESI geothermal companies are following their business plans. There is no bad news from any of them. Each of the geothermal companies is on target and budget. They are generally doing well, with sufficient cash to fund their current business plans. Yet the stock prices of the ESI players are trading flat or down. All I can say is that we should consider it our opportunity to buy a few more shares at low prices and to wait to profit in the future.

Rick Rule has a great way of putting it all in perspective. And I had a long talk with Rick about the geothermal players. Here is some of what he told me.

"Geothermal is easy to understand," said Rick. "You drill a hole. You lower pipe. You get steam up the pipe from the heat of the earth. You use the steam to spin a turbine. You make electricity. You sell the electricity down the wires. But for as easy as it is to understand, it takes special expertise to put it all together. And the world does not have a vast army of people with that geothermal expertise, as you have with the oil industry. So geothermal is still in a developmental stage. That's what we have to realize. It takes patience."

Rick continued: "The good news is that the political and economic climate for geothermal is improving almost every month. Every time the U.S. government, the European Union or the United Nations passes some new regulation about saving the environment, we are one step closer to the geothermal power revolution. Everything that the regulators are doing seems to be making the world tougher for burning carbon and easier for industries that don't emit CO2. That means that they're paving the way to a geothermal power build out."

Rick and I discussed how already, Nicaragua-based Polaris Geothermal is selling CO2 credits to German buyers. "Hey," said Rick, "if the Germans want to give me euros for my CO2 credits at Polaris, I'll take their money. Meanwhile, Polaris is operating and selling power to people who want electrical power down in Nicaragua. Eventually, the stock market will figure this out. I'm patient."

Until next we meet,

Byron King
for The Daily Reckoning Australia

P.S. So the future for geothermal is bright. The worst I can say is that the geothermal future is coming slower than I anticipated a year or two back. But it's coming, of that I'm certain.

In fact, there are three government mandates that could just about guarantee geothermal's future...and one of these mandates could happen soon...very soon.

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"And now nothing shall be withheld from them which they have desired to do..." I mentioned this quote several weeks ago. It comes from one of the many attempts that foolish men have made to be as God. It also brought about one of the greatest cataclysms in history. You can read the whole thing in Genesis 11.

For us, it applies heavily to the advances of government into the field of business. It only makes sense: the occupants of the White House and the Capitol have done such a good job with their budgets over the years, they just want to help everyone else (over the cliff, that is).

It began, as it always does, with just the camel's nose in the tent. A bit of money here, some bank guarantees there. But then, as the fable tells us, the rest of the camel wanted in.

The government insisted on foisting money on companies that didn't even need it. Washington's excuse? If the only companies taking the money were the ones that needed it, those companies would suffer a "stigma." But if every company took the money, even if they didn't need it, the bad ones couldn't be singled out.

We, of course, would never know the difference between the two. So much for more transparency in government. Now the companies who didn't need the money are lashing back. Having to pay 5% interest on money they didn't need to borrow is only a greater liability to already burdened companies.

But the government's fun still wasn't over. It forced out a CEO at AIG, now one at GM... and it passed a stimulus plan that required contractual bonuses be paid, then issued a 90% tax on them when the public outcry became too great.

Now Chrysler is being pressured to bring green cars to the market by none other than their new "boss," the Obama administration. Of course, they already have a green car, but the "boss" says it's too expensive for the public to afford. So, essentially, he pulled the plug on it. Frankly, I'd like to know why he thinks that Chrysler's greenie is too expensive. It certainly could not cost more than the bailout price tag they have forced each of us to shoulder. Expensive is a relative term.

Make no mistake about it, we are living in times that will likely produce great changes in the world. There is a certain theory that attempts to explain the history of the world through great cataclysmic events.

Some are occurrences in Nature; some are wrought by the folly or the genius of men. Let me say at the outset that I am a subscriber to this philosophy, so have no illusions about what I am saying.

Actually, most people who ever think about such things believe that all of existence began with a great cataclysm. You can call it the "Big Bang" - no matter if you're referring to the "Big Bang" that set the evolutionary process in motion, or the "Big Bang" of God creating the heavens and the Earth.

At some point, life came into existence - a big event in the universal process of all things. Of course, this is the point where the two theories begin to diverge from one another. Evolution has no more "Bangs" left in its bag. It is a slow and relatively even process from there on. Which is, I suppose, why it takes them billions of years to get to the point that God was able to accomplish in six days.

But for the recorded history of men, it has been one cataclysm after another, of varying sizes and types. Famines, floods, pestilence, earthquakes, volcanoes... and other natural disasters take their toll, but seem to always right themselves over time.

The follies of men, however, are a different matter.

The wonderful world of economics is no exception, and has no exemption. As I have said before, economics bears within itself the very principles by which God has made it to be governed. The Law of Supply and Demand is not dependant upon Congress. It was not invented by the whim of elected or appointed regulators. It is not governed by the United Nations, the International Monetary Fund or the European Union.

It brings to mind a letter someone once sent to Congress. Perhaps you've heard about it before. If not, please enjoy:

Senator John W. Bricker

The Senate

Washington, D.C.

Dear Senator Bricker,

In my opinion I would suggest that if the Senate and Congress would abolish that awful law of supply and demand, it would increase production. Stop hoarding for high prices as is now being done by the government and others. Push all products for sale to the markets and start competition. The law of supply and demand is a burden to the Consumer because they foot all of the bills.

I trust you and your fellow senators and congressmen will act promptly.

Gerald V. __________

(Taken from Dear Mr. Congressman, by Juliet Lowell {New York: Duell, Sloan, and Pearce, 1948}, p. 91.)

I suppose we ought to give Gerald high marks for even knowing the term "supply and demand," since I tend to think you might be hard-pressed to find it in the vocabulary of modern high school students. I have long felt that it would be a good question for Jay Leno's "Jaywalking" segment of the Tonight Show.

At any rate, the laws of economics are established by a much Higher Power than we will ever be. And while we are at it, we should also understand that the Power is stronger than we can ever successfully contend with.

This is why, try as we might, we cannot substitute our own economic devices and have them succeed.

So let's put a finer point on all this. The value of a nation's currency is built upon the honesty behind it. Even a currency backed by gold becomes worthless if the government holding the gold cannot be trusted. While in days gone by it was easier for authorities to debase a metal and get away with it, all such obligations now are simply based on a government's willingness to part with its gold. Of course, these days it does not happen.

And while the United States has been an expert in telling other countries how to morally treat their people, we have been robbing them blind! It has gotten so bad that even the Evil Empire and the Red Menace have seen through our chicanery. We may look upon them as people less "evolved" than we are, but the jig is up. Our hypocrisy has been found out.

We have become like the man in the Biblical parable who tried to remove a speck from the eye of his friend, when he himself had a log in his own eye. "First remove the log from your own eye, and then you will see clearly to remove the speck that is from your friend's eye." Seems like pretty simple (and common-sense) advice. But in the words of newspaperman Horace Greeley, "Common sense is very uncommon."

I began this by saying that cataclysmic times are upon us. We are seeing the shaping of men and nations. We are setting the groundwork for the impoverishment of generations.

Spain fell in line with the prevailing models of economics by bailing out its first bank in a quarter of a century. And with a broad brush it painted its regional banks as "heavily exposed to property developers struggling during a deep recession."

I have told you often of the difficulties prevalent in Europe. Here is but one more piece of evidence. Authorities are planning to solve this with 2-3 billion euros - but, oddly enough, have promised up to 100 billion euros. Wow! That's a huge disparity. I believe they may think it will take more than just 2 or 3 billion.

On the same topic, European Central Bank President Jean-Claude Trichet sees more ongoing deterioration all across the Eurozone. Market forecasts believe Brussels will announce a 50-basis-point rate cut later this week. Germany, which makes up about 25% of the euro economy, is looking for an acceleration in economic deterioration.

This is a cataclysm.

Central Banks are flying blind with an instrument panel that has no configuration for the geography. The fixes they are trying will lead us to Zimbabwe (hyperinflation) or Tokyo (perpetual slump). Pick your poison.

In the meantime, I am forced to look for more overall dollar strength. The United States still possesses the deepest markets and the "deepest pockets" in the world. If other economies continue to fail, fiat currency supply and demand will favor the dollar. And by "deepest pockets," I mean they are committed to inflating their way out - and have more ability to do so than anybody else.

I know looking for dollar strength seems a little backward while they are inflating. But the truth is, ever since the credit crunch, everything has been turned on its ear. If you are new to the currency markets, say within the last couple of years or less, likely most of this action makes very little sense to you. But in these times we must remember this axiom: The market will eventually adjust to actual realities. In the meantime, it will be moved by perceived ones. As long as fear filters through the markets, the currency flows will come back to the dollar. When there are periods of vacillation between fear and risk, the currencies can swing wildly.

Regards,

Bill Jenkins
for The Daily Reckoning Australia

Editor's Note: Bill Jenkins, founder and managing editor of Master FX Options Trader, knows the Forex currency markets inside and out. After 20 years and a string of losses following other people's crack advice, Bill created his own system for cashing in on tiny currency fluctuations between the British pound and the U.S. dollar.

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