The US has already passed "the point of no return," says a report from Casey Research. Ken Rogoff and Carmen Reinhart put that point where external debt passes 73% of GDP or 239% of exports. IMF data, says the Casey team, shows the US has already gone too far on both scores, with external debt at 96% of GDP and 748% of exports.

We're in Mumbai, India, checking in with one of our 'strategic partners.'

In our family office, where we keep the family money, we take big bets over long periods of time...working with strategic partners who are knowledgeable about key sectors. Last year, we missed the rally in US stocks. But we're lucky in our choice of friends and business partners. Two of our strategic partners - one in the resource area...the other in India - more than doubled our money.

Over the last 12 months, Mumbai's Sensex index has gone up more than 108%.

But our bet on India is for the very long term. In the recent financial crisis, that bet seemed to go bad. Foreign investors pulled their money out of India along with other emerging markets - even though India had very little exposure to the banking crisis itself.

What's ahead? Seven percent GDP growth this year...nine percent next year. The first figure is news. The second is a forecast. But there are good reasons to be bullish on India for the long pull. Stay tuned...

Bill Bonner
for The Daily Reckoning Australia

• A Look at Strategic Oil Reserves – Who’s Buying Oil?
• Tata is Everywhere in India
• India Beats China to Walk Away With 200 Tonnes of IMF Gold
• Bureaucracy and Corruption Holds India Back
• Unlike China, India is Not Willing to Learn from its Mistakes

Debt, debt, debt, debt, debt! Everywhere you go, it's waiting for you.

From government, to private lives, it has become the number one facilitator of any given action. For proof, we suggest you resist the urge to channel surf during commercials. Instead, why not endure the financing options that will be spruiked at you by hyperactive dancing sales people. Or, for a less painful option, consider the effect an interest rate rise has on the disposable income of new home owners victims.

Money may make the world go around, but it's debt that dominates the world of money.

Like a giant spinning top, the global economy has relied on the increased economic flow and circulation that debt provides. Eventually it will stop spinning and fall over on its side.

You see, it works like this: Central banks are like the tip of the spinning top - the point upon which our debt based economic system expands from and pivots off. It's a very narrow tip.

The Financial Crisis is an indicator that the world economy has become extremely top heavy with debt and is dangerously wobbling around like a slowing spinning top.

Governments and central banks have managed to engineer some more spin, but only at the expense of piling more debt on top of the already wobbling structure. This only increases the stakes of keeping it spinning.

But have we discovered the point where more debt will not provide more growth - only more instability? Who knows? (Other than these two academics, who reckon they've figured it out.)

The key point is that a roaring economy might be great, as the boom period showed us. But if this boom is at the expense of stability, and only artificial spin is keeping it going, then we are going to pay for it eventually.

National Debt

''Prepare for a very difficult economic time, which you will not be able to escape,'' said the chairman of the Netherlands Authority for Financial Markets at the ASIC summer school.

The Sydney Morning Herald (SMH) explains why Hans Hoogervorst is so 'optimistic':

"Australia is unlikely to avoid an imminent economic downturn caused by excessive government debt".

Hans' timing is excellent. But why stick to government debt?

Dan Denning reports that "...in another ABS release we learn that the country's net debt figure has reached a new all time high, both in nominal terms and as a percentage of GDP. The net debt (public, private, household) is $647 billion. It was up $14.2 billion in the December quarter and is over 60% of GDP."

International debt flows are particularly big on the economic agenda for Australia. Michael Stutchbury, in Tuesday's Australian Newspaper, explains that the traditional measure of trade flows serves another purpose for Australia:

"Today's economic orthodoxy suggests current account deficit simply measures the extent to which domestic savings are not big enough to finance the mining investment boom."

Going back to Dan's commentary:

"The net foreign debt and current account deficit are a reminder that much of Australia's current prosperity - from house prices to mining profits - comes via borrowed money. Of the $647 billion in net foreign debt, $426 billion - or 65% - is owed by Australia's financial corporations."

With debt running so deeply in the veins of the Australian economy, would it even be possible to have a healthy type of growth emerge? Or would a pickup in economic activity simply be another re-leveraging, doomed to topple the economy at some point in the future?

Austrian economic theory, to which the Daily Reckoning subscribes, would suggest that a period of "creative destruction" must clear out all the malinvestment and excessive leverage before healthy growth can resume. Some of this has occurred, but nowhere near enough, especially in Australia.

Mortgage Debt

Tim Colebatch at the SMH reports that Australia's mortgage debt has "soared" to more than $1 trillion. That's 15 times what it was 20 years ago. The breakdown of the figures since 1990 is fascinating. A 12 fold increase in mortgage debt for people's own homes, as well as a 30 fold increase in mortgage debt for rental investors, while disposable income merely trebled.

"In January 1990, home mortgages ate up just 28 percent of our disposable income. By January 2000, that had ballooned to 66 per cent, and by January this year, it doubled again to 134 per cent.

"Households' willingness to take on greater debt powered much of Australia's economic growth from 1990-2010, but with our households now as indebted as any in the Western world, economists say that will not be repeated."

All this not only inhibits growth, but exacerbates just how sensitive the Australian economy is to interest rates.

Housing

Apparently, a quarter of Sydney homeowners have already experienced the other side to Australia's housing boom. Nick Gardner at The Daily Telegraph writes:

"Despite a broadly rising market, property analyst Residex has revealed 24 per cent of properties bought and sold between January 2005 and January 2010 fetched less than the vendors had paid.

"The average shortfall was more than $54,000 but varied between suburbs.

"The biggest losses were in the affluent Neutral Bay/Spit area, where typical shortfalls topped $275,000.

"But even in Campbelltown, where the median house price is a modest $346,500, 36 per cent of properties sold for less than was paid, with an average shortfall of $31,000."

No matter how wealthy your suburb, you aren't safe from Mr Market.

The real problem faced by people who have lost value in their homes is that the price of the home they are moving to is likely to have risen. Their loss has two sides to it; the nominal loss on their house and the increased price of the new house.

Assuming this is true, it would point out something which has confounded any neutral observer to property markets since the Stone Age. If house prices across the board rise by say 50%, this would be heralded as a success in the property industry. If you realise this gain by selling and moving out, you still have to live somewhere. Your new place would also have increased in price, forcing you to pay more. So, in terms of standards of living, you have got absolutely nowhere.

Any gain is offset by an increase in the price of the house you move to.

Obviously, house prices don't move identically across the board. This means there are opportunities to gain. But spruiking an increase in a nationwide price index doesn't equate to Aussies being better off. It equates to those Aussies who didn't own a home, but want to buy one, being worse off. That means it's even worse than a zero sum game.

So, the property spruikers will claim that it's all about picking the right locations. Well, if house prices in Melbourne rise by 50%, while house prices in the rest of Australia stay the same, would Melbournites be better off?

No, unless they wanted to move away from Melbourne...

Sovereign Debt

The 'Ouzo crisis' has entered a critical phase. The Greek people are having to make crippling blows to their public and personal budgets. Worst of all, Elly Koufakis, who "...used to buy special SpongeBob SquarePants toilet paper for her children, [says] she doesn't anymore."

Other devastating accounts include that of Haris Georgatou: "After years of spending $15 a day on coffee, he now makes his own at work."

My own countrymen, ze Germans, have heard their Chancellor rule out a Greek bailout. She stated it in very Deutsche terms:

"There is absolutely no question of it. We have a (European) treaty under which there is no possibility of paying to bail out states in difficulty. Right now we can help Greece by stating clearly that it has to fulfil its duties."

Germany's history isn't great when it comes to treaties.

It would seem that the statements are just a game of terminology anyway. A German bank (rumours are amassing around KfW Bankengruppe) may be backed by the German government in a Greek bailout.

Die Welt put it unambiguously:

"The pressure is growing -- the chancellor knows that. She is still waiting for the right time to justify the billions (in aid) for Greece... But by then the situation in the financial markets could have spun out of control... The billion euro question is now therefore 'when will Merkel move?'"

Apparently investment banking giant JP Morgan considers California (the Vino crisis?) to be a bigger worry than Greece.

Dan Weil explains this is because of the possibility of contagion. Also, JP Morgan hedges its European exposure, so others bear the risk. Those two points appear largely contradictory, but oh well.

Economic Outlook - Look Out

Some nice examples of how government intervention works come from Sean Hyman at Moneynews, with his article titled "Don't Believe What You Hear: It's Not Getting Better".

"Now Fannie Mae says ... that it needs another $15 billion, bringing its total to more than $75 billion. This company is such "crap" that it's had 10 consecutive quarterly losses. Its latest quarterly loss was $16.3 billion.

"AIG lost $8.87 billion in the fourth quarter.

"The FDIC has shut down more banks in Nevada and Washington. That makes 22 bank failures this year (and 140 banks last year and 25 the previous year)."

Then Reuters chimes in with this:

"Some 400,000 jobless Americans could exhaust their unemployment benefits over the next two weeks, the Labor Department said. By the end of March, 500,000 workers could lose the COBRA subsidies that help them pay for health insurance."

And the Washington Times reports the statistic that sums it all up:

"Moreover, for the first time since the Great Depression, Americans took more aid from the government than they paid in taxes."

That is worth reading twice.

If you are wondering what the Reserve Bank of Australia (RBA) is thinking as it continues its rate rises, check out their October 2009 minutes. It seems the RBA is reading up on Austrian economic theory. The ABC even considered it worth quoting this part of the minutes directly:

"Very expansionary policy could result in the build-up of other imbalances in the economy, which would ultimately be detrimental to economic growth."

This revelation should make RAB governor Glenn Stevens very nervous when he looks to his comrades' rates overseas. The nearest rate of a developed nation is 0.5%. That's 1/8th Australia's and "very expansionary".

Retirement advice for Terrorists

The London based Daily Mail reports that the cancer stricken Lockerbie bomber is alive and well, having so far lived twice as long as predicted when he was released from a Scottish prison on compassionate grounds.

Yes, terrorist and compassionate grounds.

Anyway, upon hearing of the luxury and heroic status being enjoyed by the bomber, American blood began to boil. James Taranto of the Wall Street Journal spun the whole thing like a magician to apply to the socialised healthcare debate, which seems to be reaching our own shores:

Great Moments in Socialised Medicine

"In Britain, the government itself runs the hospitals and employs the doctors," claims former Enron adviser Paul Krugman. "We've all heard scare stories about how that works in practice; these stories are false."

"This defence becomes harder to believe when a cancer patient can get better care by going to Libya."

To be fair, James Taranto's comments on a daily compilation of amusing articles are not entirely serious.

Global Warming Casualties

There have been further casualties on the global warming front, with a baby girl surviving a gunshot wound in her family's suicide. The wounded survivor lay among her dead family members for three days. Why did they have to die? The suicide note explained it was their fear of global warming.

Dr Mark Perry of the University of Michigan posted the following on his blog:

"From Al Gore's article We Can't Wish Away Climate Change in today's NY Times:

"It would be an enormous relief if the recent attacks on the science of global warming actually indicated that we do not face an unimaginable calamity."

Dr Perry has degrees from George Mason University, the only university in the world which offers a specialisation in Austrian economics (as far as I know).

Lastly, my apologies for providing a reference to an outdated article on Eastern Europe and thanks to the readers who pointed this out. I was intending to feature Eastern Europe in its own section and did not revise the content that I decided to keep. Considering Eastern Europe still exists, it seems the article's forecast did not eventuate - yet.

Have a great weekend.

Nickolai Hubble.
The Daily Reckoning Week in Review

• Global Illness of Too Much Debt has Been Remedied by More Debt
• Central Bankers Encourage Debt Booms That Become Debt Bombs
• CBA and Their Bad Debt Problem
• China Stepping Up Purchases of U.S. Treasury Debt
• Apparently More Debt is Now Acceptable in Australia

What happened to global warming? This report from colleague Chris Hunter in Ireland, where we have our Family Office:

"Ireland is under snow - lots of it. The media have dubbed it the 'Big Chill.' It hasn't been colder since 1962. I stupidly tried to drive to a nearby village yesterday evening in said snow and got my car stuck in a ditch.

"I'm now holed up in a friend's house waiting for an opportunity to rescue my car and get back to the office..."

Fierce storms are approaching the financial markets too. But almost nobody sees them coming.

"We're now in a period of wealth destruction," says George Soros. "It is going to be very hard to preserve your wealth in these circumstances."

It is astonishing. But after the biggest financial crisis in the history of the planet, few people are concerned about wealth destruction; like James Cramer, they're just interested in "getting back to even."

At least, that's the sense we get by talking to people in America...and from looking inside our own feelings. Are we worried? Yes...when we think about it. That is, we know we SHOULD be worried. But we don't feel particularly worried.

We recall how we felt after Lehman Bros. went broke. We checked our bank balances. We looked at our portfolios. We counted our gold. We took inventory in our wine cellar, wondering if we had enough liquid assets to survive a long, deep depression in the style to which we wanted to remain accustomed.

We ranted and raved. Household and business spending were curtailed. Trips were cancelled. We ordered the children to stop getting pizzas delivered to the door; henceforth, if they wanted a pizza they'd have to walk down the street and get it themselves.

We deliberately tried to create an atmosphere of alarm. We knew trouble was coming...and we wanted to prepare everyone around us. It was a "WorldWide Financial Meltdown," we told everyone. A WWFM, for short. This provided a useful shorthand.

'Hey Dad, I need a new coat...my old one's too small,' Edward said last December.

'Forget it! Remember the WWFM!'

Now, it's more than a year later. Edward went out and bought one of those fashionable "Canada" brand jackets last month. We told him he could...and then gasped when we found out how expensive they are.

The fear has receded, not just from the economy...but from our own souls. We no longer feel it. Afraid? Why? We already faced death...and survived. Everything will be all right now. We count the months until we are even again.

And yet...when we look at the reasons for the fear last fall - they're still there.

The stock market has not been corrected. It could easily get cut in half in the next six months. (We're leaving our 'Crash Alert' flying over the building with the gold balls...until stocks reach bargain prices.)

The bond market could crash any time. The US is borrowing more money than ever before - trillions more. With such a huge increase in supply, demand...and prices...it should crack, sooner or later. Higher bond yields would send the whole economy into a much deeper depression.

Even our gold holdings could lose 20%-30% of their value. And gold stocks? They could get killed in the next stock market downswing.

Despite a truly monumental (albeit imbecilic) effort to revive the economy...the latest figures show the weakest post-recession recovery ever. Jobs are missing. Consumer credit is shrinking. Inflation is going negative. There is no real recovery...it's a mirage created by government spending.

Monetary policy is useless (banks won't lend; consumers won't borrow). And fiscal policy, while apparently more effective, destroys wealth; it doesn't add to it.

The more the government increases spending, to offset the correction, the more the economy becomes addicted to it. It's like trying to cure an alcoholic by introducing him to heroin. Take away the government spending - as Japan tried to do - and the economy collapses into a deeper depression. Not only that, but the budget deficit actually grows!

In other words, the feds spend money they don't have trying to fight a correction. This creates huge budget deficits, but it makes it look like the economy is recovering. So they slack off. Then, they discover that their fiscal stimulus didn't really create any genuine economic activity. Take away the fiscal stimulus and the economy collapses again...reducing tax receipts and widening the deficit. In effect, the cure became a disease of its own! Now they can't cut government spending. The economy depends on it. Instead, they're locked into a debt spiral...more and more deficits...higher and higher debt...down, down, down, until...

..until the whole thing finally crashes.

Japan faced this problem in the '90s. It eased off its stimulus program...and the economy collapsed. Now, it's become hooked on government spending. Where does it lead? We repeat this prescient note from The Telegraph, which we sent you yesterday:

"This is the year when Tokyo finds it can no longer borrow at 1pc from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time...

"Once the dam breaks, debt service costs will tear the budget to pieces. The Bank of Japan will pull the emergency lever on QE [quantitative easing...aka 'printing money']. The country will flip from deflation to incipient hyperinflation..."

But we're not worried. Somehow it will all work out. Americans are still trying to get even. They still believe that the stock market will recover - fully. They still think the Fed is in control...and that our economists know what they are doing. They are delusional, in other words.

Today is a big day for economists. The feds are supposed to tell us if the economy is still losing jobs...or not. They think December was a good month for employment in the US, and they believe they can prove it. If jobs are stable...or even rising...they will announce a great victory.

But whatever numbers come out, Daily Reckoning readers are advised to ignore them. The Labor Department treats its raw data like Baltimore treats raw sewage. It gets pumped up and churned out...and finally, dumped in the river. By the time it comes out, it doesn't smell so bad.

Here's John Crudele in The New York Post with more details...

"First, there will be invisible seasonal adjustments that will skew the figures.

"Since so few jobs were created in December 2008, the Labor Department's computers were probably expecting the same pattern in this latest Christmas season, meaning that few jobs would be created in 2009 as well.

"So even a small increase in jobs last month compared with December 2008 could be magnified in the accounting into something much bigger.

"And that one isn't even the biggie.

"Friday's figure will also be altered by job growth that the Labor Department is pretending has occurred at newly formed companies. The department calls this its birth/death model and by itself this assumption could be more destructive to the US economy than any terrorist attack could ever be.

"For instance, in December 2008 the Labor Department assumed that 60,000 jobs were created by infant companies that couldn't be surveyed, and weren't contacted, by its workers. Without that assumption, the job losses that month would have been worse than the almost incomprehensible figure of 681,000 that was publicly announced.

"The trouble is, those extra 60,000 jobs don't exist.

"The birth/death model since this past April has added an additional 900,000 jobs. And eventually those 900,000 jobs will probably also have to be extracted from the Labor Department's count.

"But it gets worse.

"Remember, it's called the birth/death model. And while the Labor Department adds jobs 11 months a year, it also subtracts jobs, the 'death' part, during one month.

"And that month is January.

"In January 2009, a stunning 356,000 jobs were removed from the overall count because of the birth/death model. That resulted in a much larger- than-expected loss of jobs during the first month of the Obama administration. The panic was palpable.

"Without a change, the Labor Department will subtract a similarly large number of jobs this January. And when that month's labor figures are reported on Feb. 4, watch out! The stock market will not like this. "

Bill Bonner
for The Daily Reckoning Australia

• Job Losses From Private-sector Rose Since Beginning of Recession
• U.S. Government Hiding True Unemployment Rate in Statistics
• Don’t Bet on a Recovery
• Lower Bond Yields by Any Means Necessary
• Credit Default Swap: Buying Insurance Against Default in Your Bonds

It is not April Fool's day. Federal Reserve Chairman Ben Bernanke is Time magazine's man of the year. Good on ya Ben! But beware the curse.

On February 15th 1999, Alan Greenspan, Larry Summers, and Robert Rubin made the cover of the same rag with the audacious tag, "The Committee to save the world....the inside story of how the Three Marketeers have prevented global economic meltdown...so far."

It turned out that "so far" would last about another year. As you can see from the chart below, the S&P 500 peaked in March of 2000, and then crashed. It wouldn't reach another new high until July of 2007 - right about the time a couple of leveraged funds from Bear Stearns stuffed to the gills with CDOs started to shake the financial system to its foundations.

Click to enlarge

The world doesn't look very saved, does it? Judging by today's Fed statement the world needs more saving. The Fed didn't change rates. But it didn't say when it would remove its support for the housing market (via purchases of mortgage-backed securities) or when it would wind down its other programs that support the fragile state of credit in the American market.

The truth is the Fed can't remove that support yet - or the cost of housing finance would rise in the States. But it may rise anyway. The spread between two-year U.S. Treasury notes and 10-year notes is widening. Thirty-year mortgage rates in the U.S. are tied to the 10-year note. Higher ten-year yields drive up new mortgage and mortgage refinance rates in the States.

Double plus ungood.

By the way, not that we're a bond sleuth, but we read in the Wall Street Journal earlier this week that the spread between 2-year notes and 30-year U.S. bonds is as wide as it has been at any time since 1980. It's the yield curve. So what does it mean that the U.S. yield curve is so steep?

We reckon it means that investors want to be paid more to lend money long-term. This means they fear inflation. They're happy to load into shorter-term notes and bonds. But loan the U.S. government - a government Barack Obama says will go bankrupt if health care costs are not restrained - for 30 years? Fugeddaboutit!

Note that Obama did not say what Senator Barnaby Joyce has said, that America could default on its debt. You have to applaud the Senator for uncharacteristic candour, as far as politicians. Technically, he's probably not quite correct though.

The U.S. government sells debt in dollars. It also prints dollars. That means it can print new dollars to pay off its debt. It needn't default, i.e. be unable to find currency to pay its creditors. If it were issuing debt in a foreign currency, say Yuan, then it would have to pay debt off in that currency and COULD default.

But perhaps we are quibbling over details. An inability to service its debt or pay off its long-term obligations, or just a willingness to do so by printing more money, is effectively a devaluation of the U.S. dollar. That's what the currency markets have been telling us all year. And that's one reason why the yield curve is starting to look like an Olympic ski jump.

This fear of the sustainability of the U.S. deficits is another reason investors and people who use their brain own at least some gold. And on that subject, we copped it a bit from a friend last night for our comments yesterday. He also trotted out a famous quote about gold from Warren Buffett.

"Don't you think you were a bit self indulgent yesterday going after Pascoe?"

"No."

"Well, it is a fair point."

"What is?"

"If the world goes to hell like you say, you can't eat gold. You can't sleep on it, although you could sleep with it I suppose. How useful is it really going to be as a medium of exchange or a store of value if economic activity grinds to a halt?"

"I don't know. I'm not Nostradamus. But I'm not recommending people convert all their equity holdings into precious metals either. I AM recommending they own some bullion and, for leverage purposes, some gold shares. That doesn't seem so radical. Why would anyone find the idea of hedging your bets against monetary policy so kooky?"

"Because monetary and fiscal policy have basically worked, at least here in Australia."

"Are you drunk?"

"I'm serious. The stimulus worked. It kept Australia out of recession. What more do you want?"

"Less. Less is more mate. The stimulus increased the debt and maintained the appearance of growth. But the economy didn't need growth. It needed to reduce personal debt levels and consumption and get a less leveraged balance sheet. The government encouraged the exact opposite."

"Blah blah blah. Even Buffett thinks you're wrong about gold. What's that quote of his... 'Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.' What do you say to that?"

"Buffet is a better investor than I'll ever be. And obviously he's a smart guy. But surely he's heard of Gresham's Law."

"Huh?"

"Gresham's Law. Bad money drives out good. Or to quote the late, great Harry Browne, 'If an individual holds two types of money of unequal value, he will spend the bad money and save the good money.'"

"I'm afraid I'm not following you."

"That's because you're a moron. But it's the argument between owning all paper and at least some gold. You don't convert all of your wealth to gold because right now, that's not useful. You need cash to conduct transactions in the real economy. And when the government is inflating away systematically, it makes absolute sense to get rid of cash before its purchasing power diminishes. Trade it for tangible goods that DO have value or utility like whiskey, cigars, and bullets."

"How about something less revolutionary like houses? "

"Maybe not a bad idea if you're using cash and not debt. And it would be a good idea if the price of the asset wasn't going to collapse imminently. You don't want to convert your cash into a capital asset that rapidly depreciates in value, which is possible with house prices."

"But isn't that possible with gold too? You convert your cash into a tangible asset whose value fluctuates? And it doesn't even pay a yield! And you can't exactly live in it either."

"Of course that's all true. But the reason central banks and households own gold, and the reason people have hoarded it for thousands of years, is that they KNOW intuitively that gold is good money, sound money, and that paper money is generally not good money - especially when it's being actively destroyed by bad fiscal and monetary policy. Generally it's not something you have to consciously think about. Most of the time the money in your pocket is exchangeable for the things you want."

"So what's the problem?"

"The problem now is that people are beginning to understand that monetary inflation is theft. If you trade your labour for wages paid in the form of cash, and the government devalues that cash, it's stealing your productivity. It's trading its paper product for the fruits of your labour at a discount. It's cheating you. Gold doesn't cheat you. It doesn't love you either. It doesn't do anything. That's why people prefer to hold some of their wealth in that form, for those times when they are being cheated by government."

"Well, that's pretty much all the time isn't it?"

"You know what H.L. Mencken said about elections in democracies? He said they are an advanced auction of stolen goods. There's a whole lot of stealing going on these days. A fiat money system is systematic theft because it's based on unsound money. That's what's being exposed by this financial crisis. The entire funding model of the fiscal welfare state is collapsing because it's based on debt and fraudulent, counterfeit money."

"Hey do you want to go see Avatar?"

"Yes!

We're not saying people who don't understand gold's role as money are stupid - although maybe a few of them definitely ARE stupid. What we are saying is that it's not rational to hedge against what you don't know is coming. Most people have no experience with a currency collapse. So they don't prepare for it. It seems so unlikely that it's not worth hedging against.

Incidentally, until we start hearing this conversation in barber shops, we won't be convinced gold is in a bubble. But in the meantime, if you are less dogmatic, a strategy for converting your equity holdings to something more tangible is just as practical.

For example, earlier this week we mentioned ExxonMobil's big natural gas play in the U.S. This matches a theme we laid out earlier in the year at Diggers and Drillers that unconventional natural gas plays - gas from shale formations - would be the next intelligent speculation in Australian energy shares.

That's a classic case of substitution. The high oil price makes other energy alternatives economically realistic. They can stand in as substitutes for the fuel we get from oil (most of the time). This is what Michael Pascoe correctly pointed out when he said we can "make more" of the stuff.

Unfortunately for Ben Bernanke, the Fed can only make more dollars, not more gold. There are not many ready substitutes for precious metals. That's part of what gives them their inherent value; their scarcity. Gold is not exactly unobtainable, like the unobtanium in Cameron's Avatar. But it's certainly getting a lot more desirable the more sovereign states go into debt they can never repay.

Dan Denning
for The Daily Reckoning Australia

• European Governments of the Eurozone are Separately Responsible for Their Euro-debt
• U.S. Bonds Better than Greek or Other Sovereign Bonds
• Federal Reserve Wants to Debase the U.S. Dollar
• Choking on Debt in the Unfolding Anglo-Saxon Bond Crisis
• Inflation: Ron Paul Explains How We Got Into This Mess

There is a risk in holding cash in an environment of asset price inflation - a condition that usually occurs when governments create large fiscal deficits and inflate the money supply. The practice is endemic to banana republics and declining empires...and it is happening in the US at this very moment.

The global recession and financial crisis have refocused attention on government stimulus packages. These packages typically emphasize spending, predicated on the view that the expenditure 'multipliers' are greater than one - so that gross domestic product expands by more than government spending itself. Stimulus packages typically also feature tax reductions, designed partly to boost consumer demand (by raising disposable income) and partly to stimulate work effort, production and investment (by lowering rates).

The existing empirical evidence on the response of real gross domestic product to added government spending and tax changes is thin... But the evidence is quite strong that these policy responses usually trigger inflation.

I suppose that even someone without any common sense might understand that a "strong currency" over longer periods of time reflects a high degree of prosperity and economic success, whereas a chronically weak currency is symptomatic of economic imbalances, such as a lack of competitiveness or overconsumption, arising usually from excessive supply of money and credit.

I would also suppose that even if someone never travels overseas, he would understand that if the US dollar loses 50% of its value against all the other world currencies (everything else being equal), it means the US is 50% poorer relative to the rest of the world. (Now, this is not entirely correct, since the US has overseas assets that would appreciate in value in USD terms).

Moreover, stock price movements become extremely volatile and erratic in countries with a depreciating currency. In the long run, the depreciation of the currency will usually more than eliminate the gains in local currency terms. So, whereas in 2007 both the Dow Jones and the S&P 500 exceeded their previous highs reached in 2000 in US dollar terms, these indices failed to make new highs in Euro terms. In addition, whereas the US economy expanded in US dollar terms between 2001 and 2007, in Euro terms it actually contracted!

Even with the S&P 500 having shot up since the beginning of the year by over 25%, it has merely kept pace with the price of gold. And during the last 10 years, the S&P has lagged behind the official US inflation rate...while lagging VERY far behind both the euro and gold. Since the end of 1999, the S&P 500 has delivered a total return after inflation of about MINUS 25%.

Unfortunately, the US is not the only country that is busily debasing its currency. "Everyone" is doing it. Because of the current collective debasement of all paper currencies by central bankers, I believe that precious metals and mining companies will maintain their purchasing power.

In the 1980s the US dollar was a very strong paper currency compared to the Mexican Peso. Today, there is no paper currency that is as strong relative to the US dollar as the US dollar was relative to the Peso in the 1980s! The only "currencies" that have a chance of becoming as strong against the US dollar as the US dollar was against the Peso between 1979 and 1988 are precious metals such as gold, silver, platinum, and palladium.

Also, I should add that precious metals could appreciate even if the US dollar miraculously recovered strongly against foreign currencies for an extended period of time. Such dollar strength would probably be a symptom of some horrible economic or political problems around the world, which could be friendly to precious metals.

Central bankers and pundits seem to believe that they have averted the second Great Depression, while ignoring the fact that more and more debt produces less and less GDP and fewer and fewer jobs.

For now, though, the low ten-year bond yield is the lifeline from which all support flows. Much of the investment universe holds together because money can still be had for cheap - not by the volition of a cooperative private sector, rather induced by a US government that simply distributes money for free. Such an ill-conceived idea could only have been born in the test tube of a central banker.

Private lenders comprehend the difficulty of making profits when being forced to lend for nothing, so the government increasingly finds itself to be the interest-free lender of last resort.

Ultimately, if central bankers continue this process for long enough, it is the dollar, and any currency or economy still pegged to it, that could eventually crash. Therefore, we investors find ourselves in the precarious position of having to maintain sufficient liquidity, but not too much in case the real value of these liquid reserves is wiped out by politicians and central bankers gone mad.

Regards,

Dr. Marc Faber
for The Daily Reckoning Australia

• US Dollar As Reserve Currency Not Working Very Well
• 4 Ways to Protect Against a Falling Dollar
• Is Gold Money?
• Gold Falls for Four Straight Days but is the Low Price a Bad Thing?
• Transfer of Wealth

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
• Government Pretending Debt-fueled Spending is the Same as Growth
• Feds Have Used the Correction to Increase Their Power and Add to Their Wealth
• Why Weren’t Economists On Top of This Thing?

"The dollar looks awfully like sterling after the First World War," said David Bloom, the bank's currency chief.

"The whole picture of risk-reward for emerging market currencies has changed. It is not so much that they have risen to our standards, it is that we have fallen to theirs. It used to be that sovereign risk was mainly an emerging market issue but the events of the last year have shown that this is no longer the case. Look at the UK - debt is racing up to 100pc of GDP," he said

The Telegraph reports:

"Crucially, China and rising Asia have reached the point where they can no longer keep holding down their currencies to boost exports because this is causing mayhem to their own economies, stoking asset bubbles. Asia's 'mercantilist mindset' of recent decades is about to be broken by the spectre of an inflation spiral.

"The policy headache was already becoming clear in the final phase of the global credit boom but the financial crisis temporarily masked the effect. The pressures will return with a vengeance as these countries roar back to life, leaving the US and other laggards of the old world far behind.

"A monetary policy of near zero rates - further juiced by quantitative easing - is completely incompatible with circumstances in most of Asia, the Middle East, Latin America, and Africa. Divorce is inevitable. The US is expected to hold rates near zero through 2010 to tackle its own crisis.

"What is occurring is an epochal loss in the relative wealth and economic power of the old G10 bloc of rich countries compared to rising regions of the world. The euro, yen, sterling, Swiss franc and other mature currencies will be relegated along with the dollar in this great process of rebalancing, but the Greenback will bear the brunt."

That said, we repeat a headline from Seeking Alpha:

"Dollar shorts should look out."

We agree with HSBC and the Telegraph: the dollar will probably slide - especially against Asian currencies - for the next few decades.

But that's the long term. In the relatively short term we still face the shock of another leg down of the credit contraction crisis. Risk is likely to make a comeback. When that happens - and it could happen in a 'Red October' - the dollar will seem like a relatively solid refuge. This is what happened last year. We wouldn't be surprised by a replay of that 'flight to safety' we saw at the end of last year.

But we know what you're thinking: what? When did the dollar become a 'safe currency?' Of course, it's not safe. But when the end of the world approaches, it will seem safe.

For a while.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• The Dollar Left Behind
• Will Synchronized Rate Cuts Solve International Financial System Problems?
• Fed Vice Donald Kohn Urges Emerging Markets to Drop the Dollar Peg
• Where Do the Feds Get Any Money?
• Prices of Gold in the Top 10 World Currencies

We spent Sunday with the publisher of International Living magazine.

"Prices have fallen so much in Florida that you really get more for your money there than practically anywhere else," she continued.

"I think Florida may be cheaper than Buenos Aires," added son Will, who's been living in Argentina for the last three years.

Housing is cheap in the United States. In Texas and Arkansas, housing is probably the best bargain on the planet. Food prices are going up; still food in the US is much cheaper than it is in Europe. And cars? We have a friend in Paris who goes back to the US to buy his Mercedes. Even with the cost of shipping the car back to France...and the cost of refitting the car to European standards...he still saves about $10,000.

"I was just in Paris," Will continued. "You pay $10 for a cup of coffee and a croissant. In Florida, I can get the 'Breakfast Special' for $5.95...and it has everything. Pancakes. Bacon... Everything."

"But what is amazing," continued our International Living colleague, "is that interest in moving overseas is going up. It's not about money. Apparently, a lot of Americans are just fed up...or afraid. They want to get out. They see taxes going up or they see the society going down the tubes. I don't know. But many say they just don't like the way things are going.

"One thing I hear is that they think American society has become meaner...ruder...less civil. You can't have a polite discussion of politics anymore. People get really upset and nasty. I mean, someone yelled out and called Obama a liar in the middle of a joint session of Congress. And a substantial part of the US population regards the guy - the guy who called him a liar - as a hero. They think Obama is a traitor...

"I think this is really a result of the financial downturn. People feel betrayed. Let down. They think something is very wrong. That the nation is in decline. So they look for someone to blame. And they tend to blame each other. Conservatives blame liberals. Liberals blame conservatives. They blame the bankers. They blame the capitalists. They blame the government.

"I guess that's what happens when you get a major correction or a big financial crisis."

We recalled what happened in Germany in the '20s and '30s:

"Germany was probably the most civilized country in the world - before WWI. Artists, philosophers, scientists, mathematicians, musicians... Germany had the best in the world. The war shook the public's faith in its leaders. But then, according to people who lived through the period, the financial crises of the '20s and '30s were worse. Hyperinflation...depression...strikes...a decade of financial chaos and disruptions led to a breakdown in social order. By the early thirties, groups of communists and fascists were battling in the streets. People seemed to leave the center and move to extreme positions. Soon, the Nazis had the upper hand and Hitler was voted into the government."

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Lending Rates Will Go Up With Inflation
• No Way Today’s Economy is Going Back to What it Was Pre-2007
• Does This Mean You Should Sell Your Gold?
• A Financial World Not Yet Recovered From the Bubble Madness of 2002-2007
• Baby Bush: The Worst President in History?

"Since the global financial system started unraveling in dramatic fashion two years ago, distinguished economists have suffered a crisis of their own," starts the article. "Ivy League professors who had trumpeted the dawn of a new era of stability have scrambled to explain how, exactly, the worst financial crisis since the Great Depression had ambushed their entire profession.

"Amid the hand-wringing and the self-flagellation, a few more cerebral commentators started to speak about the arrival of a 'Minsky moment,' and a growing number of insiders began to warn of a coming 'Minsky meltdown.'

"'Minsky' was shorthand for Hyman Minsky, a hitherto obscure macroeconomist who died over a decade ago. Many economists had never heard of him when the crisis struck, and he remains a shadowy figure in the profession. But lately he has begun emerging as perhaps the most prescient big-picture thinker about what, exactly, we are going through.

"A contrarian amid the conformity of postwar America, an expert in the then-unfashionable subfields of finance and crisis, Minsky was one economist who saw what was coming. He predicted, decades ago, almost exactly the kind of meltdown that recently hammered the global economy."

Economists went off their heads in the last few decades. They thought capitalism would make us all rich. And they thought capitalism automatically tended toward beneficent equilibrium.

Here at The Daily Reckoning, intuitively, we guessed the contrary. The system produces a kind of orderly chaos...in which the rich are frequently impoverished, the proud are humbled...and the goofballs who think capitalism fails inevitably make things worse.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

• Nobody Appreciates Laissez-Faire Capitalism
• Depression: A Natural and Recurring Feature of Capitalism
• Gold Price Should Continue Going Up as the Dollar Accelerates its Terminal Decline
• Capitalism and Capitalists
• Mainstream Economists Congratulate Themselves

But first, what the stock market and the economy are doing...

In the past two days, the price of gold has shot up more than $40. It's now near $1,000 an ounce.

Why? We don't know. Rumors, talk, noise...there's plenty of that. But as for why investors are suddenly putting so much money into gold, we'll have to wait to find out.

But should you buy gold now? The answer is simple: yes and no.

The Trade of the Decade is still buy gold/sell stocks. And the decade isn't over. If you have US stocks, this is a good time to sell. The Dow went up 63 points yesterday - a weak bounce after several days of losses.

This is no time to hold stocks - for the reasons we outlined yesterday.

But gold? Should you buy gold and hope to get rich when gold shoots up to $3,000 an ounce? A bad idea, in our opinion. You should buy gold to protect your assets. The risk is in the paper money...because they can create as much of it as they please. And they're under pressure now to create a lot. You buy gold as insurance against inflation, a dollar bust, a bear market in stocks and bonds, or a financial crisis. Gold is nature's money. It is better than manmade money. Because, with gold, what you have it what you've got. They can't artificially depreciate it or easily increase the quantity of it. That's why the feds don't like it. It won't support their cause du jour - whether it is a war, a bailout, stimulus, health care, or whatever. Gold doesn't cooperate with the financial engineers. That's why it's a good thing to hold when you think the financial engineers are making a mistake.

But our view at The Daily Reckoning headquarters is that while the engineers are making a mistake, they not very good at it even when they're making a mistake they're good at. Typically, they're pretty good at causing inflation. But now the credit bubble is deflating, not inflating. It will take them a few years before they become reckless enough to move prices up again. And then, they'll probably overshoot their objectives considerably.

In the meantime, there's no inflation to speak of...no dollar crisis...no bond bust. So we wouldn't expect the price of gold to soar...not just yet. That's the big surprise - that this period of deflation will last longer than expected. Then, when it begins to seem permanent, inflation will suddenly come roaring back.

By then, most investors will have given up on gold...especially those who were speculating on it going to $3,000. It will go to $3,000, but only after speculators have dropped their positions.

So far, everything is happening just as we expected. After more than half a century of boom, we are now in a bust. People need to downsize...cut back...and live a little less large than they had in the boom years. That means...well...just what you'd expect.

Wasn't it just yesterday that we reported that Florida was losing population? People just aren't retiring like used to. Here's comes the evidence:

From The New York Times comes this headline: "Older US Workers Put Retirement on Hold."

The Times tells us that older people are continuing to work because they don't have a choice. They can't afford to retire. So they hold onto jobs, which is another reason it's so hard for the unemployed to find a job. Those who have them aren't giving them up. A Bloomberg report today, for example, tells us that more people are applying for job benefits than expected. Another tells us that millions of people are running out of benefits before they find a job.

Just what you'd expect, in other words. Here are some of the other things we expected:

1. Unemployment is still rising.

"Investors discouraged by US jobs report," says a headline at the International Herald Tribune. To make a long story short, August was a disappointment. More jobs were lost than expected.

We don't know how many jobs we should expect to lose. But we're in the downhill part of the credit cycle; we're bound to lose a lot of them.

2. Sales are falling.

That's another thing we would expect. People have to cut back. So...they do cut back. Sales go down. That means fewer sales and fewer jobs. No point in making things, shipping them and retailing them if no one is buying them, right?

3. What else would you expect? Lower house prices? Check. Higher savings rates? Check. More bankruptcies? Check. Falling prices? Check.

Isn't it nice when things work out "as they should?' Check.

Bill Bonner
for The Daily Reckoning Australia

• Should You Buy Stocks Now to Take Advantage of Bull Market?
• Economy Has to Grow at 1% to Stay Even With Population Growth
• The Bailout is Approve So Now It’s Time to Buy Gold
• You Buy Gold When the Government is Making a Mess of the Monetary Situation
• You Can Lead Investors to Liquidity but You Can’t Make Them Buy Stocks