Maybe it's the end of the dollar carry trade (where speculators sell risk assets). Or maybe not. Whether that little thesis turns out to be correct we'll know in due time.

In the meantime, there are some other things we might learn this week. First up is the TD Securities - Melbourne Institute Inflation Gauge. This will probably show that except for food, fuel, energy, healthcare, and housing, prices in the economy are stable and inflation is contained.

One quick note about this: there is obviously plenty of inflation in the prices you pay every day. But most consumer price indices are rigged to understate inflation, as our colleague David Evans pointed out yesterday in Canberra at the Gold Standard Institute conference in Canberra. Trimmed medians...hedonic adjustments...there's quite a bit of statistical hocus pocus going on.

Inflation is evident if you just follow the money. The returns on wealth (rent, capital gains, income from bonds) are accruing to that group that's benefitted the most from low rates. Dr. Michael Hudson called them the 'financial oligarchy' in his recent trip to Australia. This group has benefitted from inflation in the form of higher asset prices. And meanwhile, the Fed and other central banks have been able to say their policies are not inflationary because consumer prices and, more importantly, wages, aren't moving up.

Duh.

Is it really a surprise that there's no inflation in wages in a world where tens of millions of workers in emerging market economies are willing to do the same work as those in Western economies, but at much lower prices? Wage deflation is the order of the decade. Maybe the century. You generally won't find inflation in consumer prices or wages. But that doesn't mean it isn't there.

So what will the Fed and the Reserve Bank do this week? The RBA meets tomorrow and everyone is expecting another rate rise. The Aussie dollar has all but priced it in. The RBA also puts out its commodity price index week and its always exciting quarterly statement on monetary policy which we just can't wait to pore over for signs of continued credit and debt growth in the Australian economy.

Westpac will also post results this week. If it follows the lead of NAB and ANZ, it will report higher-than-expected bad debts, but claim the bad debt cycle has peaked. Don't be so sure, though. And why not?

Well, over the weekend, CIT Group Inc. (NYSE:CIT), with US$71 billion in assets, filed for the fifth-largest bankruptcy in American history. CIT is the latest victim of the credit crunch, which obviously still isn't over. It's a commercial lender to small businesses that's been unable to refinance its debt. As a non-deposit taking bank holding company, it has to finance asset growth through securitisation and borrowing, both of which are still pretty hard to do these days.

CIT's Chapter 11 allows it to restructure under the protection of the courts. Bondholders might make out okay. The U.S. Treasury, though, has already lost $2.3 billion in TARP money it put into the firm. And the biggest losers are the small businesses who will no longer have financing. That's bad news for the real economy.

As deposit taking institutions, the Big Four Aussie banks are not nearly as vulnerable to this kind of crisis as CIT obviously was. But as we showed last week, Aussie banks still rely on quite a bit of short-term borrowing in the wholesale funds market abroad, borrowing money from foreigners to financing lending here. That's always going to be a weakness.

Hold everything!

Last week we warned that a result of the Fed's low rates is that U.S. banks have stocked up on U.S. Treasury bonds and notes to stabilise their balance sheets. We warned that this could put the banks at risk again, IF the value of those bonds was slashed by market forces. You'd get another bank collateral wipe-out which could, if large enough, wipe out equity. Insolvency becomes an issue again.

But don't underestimate the ability of the bond bubble to go on longer than anyone thinks. The Feds meet this week and will probably not change a thing. Its formal program to buy Treasury bonds and mortgage backed securities with newly created central bank reserves (quantitative easing) can always be extended. So should bond bears like your editor (who agrees that U.S. Treasury bonds are a great short) be wary?

Yes!

The reason is a new regulation passed by Britain's Financial Services Authority which lays out new liquidity rules for bank assets. Rolfe Winkler has the story in his blog. The short version is that the FSA may require banks to own a certain percentage of assets that can quickly be liquidated to raise cash if need be. Lower credit quality assets (junk bonds or lower rated corporate bonds) might not qualify.

What that means - if you read between the lines - is that the only assets which would meet the new liquidity requirements from the FSA are sovereign government bonds. Now maybe this does make bank assets more liquid. But we wouldn't say owning more government bonds makes bank assets any safer, or improves the capital position of the financial sector.

What it DOES do is give the government a way to force new bond issues down the throats of banks. Rather than having to find creditors among the high-saving emerging market nations, governments in the UK and the US would have a captive market in their own financial sector. The banks would gradually gorge themselves on sovereign government debt, provided Moody's or Fitch or Standard and Poor's didn't downgrade the credit ratings of the US and the UK.

It sure looks like another move toward the nationalisation of the financial sector, although in a very clever way. And the banks probably don't mind that much right now. Trading government bonds with new Fed money was a virtually risk-free trade that propped up bank profits in the first half of the year. It's a good trade.

But in the bigger picture, as Nial Ferguson and Ken Rogoff mentioned this weekend, this means that the financial crisis may soon become a sovereign debt crisis. So far, the liabilities of financial firms have been transferred to the public sector balance sheet. But this has not solved the problem. It's merely moved it to a larger stage on which it must play out.

As we mentioned in our remarks yesterday at the gold show, we believe this marks the beginning of the end of the Super Cycle in paper money. A sovereign debt crisis is the same as saying that the funding model for the fiscal welfare state is broken. Only in this case, there is no organisation large enough to bail out the fiscal welfare state. What does that mean? More on the consequences, and the opportunities tomorrow.

"This is the first time I've been in Canberra," we began our remarks yesterday. "I spent most of last night trying to figure out what it reminded me of. And then it came to me. It reminded me of Washington D.C., and not in a good way. I spent four years in college living in DC. Both cities make you feel like you've stepped onto a very orderly and sterile brothel."

Dan Denning
for The Daily Reckoning Australia

• Biggest Factor Affecting Consumer Price Inflation is Growth in Bank Credit
• Hyperinflation and the Dollar’s Monetary Destiny
• Everyone We Know Expects a Fairly Quick Up-move in Inflation
• The Asian Banks Have Finally Been Heard From
• Australia to Borrow as Much as $300 billion

Yesterday, the Dow soared over they 10,000 mark. If it keeps going at this rate - up 144 points yesterday - it will soon equal the post-'29 bounce. All we need is two more days and we're there.

Oil rose over $75. Gold closed the day at $1,064, after a big move to the upside over the last few days. And the dollar fell - to just $1.49 per euro.

The reason for yesterday's big move is announced on the front page of almost every financial rag this morning:

"JPMorgan profits lift the Dow."

JPMorgan, the Wall Street firm that was bailed out by the feds a year ago, reported income of $3.6 billion in the 3rd quarter. With that kind of profit in the financial sector, it won't be long before the whole economy is running red hot, right?

That's what the papers seem to think. The International Herald Tribune says the bank's profits are just another sign that a major recovery is underway. Investors seem to believe it, too. "Earnings optimism," is behind the buying, says a broker.

But is it true? Is the real economy growing, expanding, and making money? Let's look:

"Still on the job, at half the pay," is a headline in The New York Times. It tells the story of an airline pilot whose position has been downgraded and whose pay has been cut in half. The fellow is now earning $30,000 a year rather than $60,000. He is not counted in the unemployment statistics but he has much less spending power than he had a year ago. Practically all his discretionary spending power has been wiped out.

The NYT:

"The Bureau of Labor Statistics does not track pay cuts, but it suggests they are reflected in the steep decline of another statistic: total weekly pay for production workers, pilots among them, representing 80 percent of the work force. That index has fallen for nine consecutive months, an unprecedented string over the 44 years the bureau has calculated weekly pay, capturing the large number of people out of work, those working fewer hours and those whose wages have been cut. The old record was a two-month decline, during the 1981-1982 recession.

"What this means," said Thomas J. Nardone, an assistant commissioner at the bureau, "is that the amount of money people are paid has taken a big hit; not just those who have lost their jobs, but those who are still employed."

All over the country incomes are falling. Officially, about 15 million people have no jobs. Many others have given up looking for jobs. And now, for the first time ever, more than half of those who lose their jobs run out of unemployment benefits before they find another one. Many others never get any benefits at all, because their jobs are not eliminated, they are merely cut back...either in the number of hours they can work or in the compensation itself.

Yesterday, we reported that Baby Boomers are actually working longer hours...but earning less. The boomers are in an especially tight spot. They've got only a few years to save money for their retirements...and it won't be easy in this slumpy economy.

And we reported the plight of the callow youths...whom BusinessWeek has called the "Lost Generation." Their unemployment rate is twice the national average. They're at the bottom of the labor pool, and unless the economy begins to expand they'll have a very hard time finding the bottom rung of the ladder.

Take all the people who are unemployed...who are working fewer hours...who have given up looking for work...whose positions have been downgraded...and add the family members who depend on them for their daily bread...and you have nearly a quarter of the population. How can companies expect to increase sales and profits with a quarter of the population forced to cut back severely?

They can't. The earnings numbers are misleading. Most of the earnings that we've seen come from cost cutting, not growing top-line sales. How do businesses cut costs? By trimming employees! In other words, the earnings figures we're seeing are contributing to the slump...not alleviating it.

You can see how, in the short run this can lead to increased profits. But it can't go on for long. The more businesses cut costs the more their sales go down, because consumers (who are also their employees) have less money to spend.

And according to a Wall Street Journal report, with too much capacity...and falling sales, businesses "are hesitant to reinvest such profits into their businesses."

That's why business investment, as we reported two days ago, is falling even faster than sales. And it's why people who are looking for a job are going to have a hard time finding one.

How did JPMorgan earn so much money in such a bad economy?

We begin with a bit of skepticism. After all, we know consumers aren't borrowing. Consumer credit is going down. So they can't be making money there. And we know businesses aren't expanding, so they can't be making money by lending to corporations either.

Wait a minute. JPMorgan is a bank, right? Don't banks make money by lending money? Yes...that's what we thought. Then who is JPMorgan lending to?

The only net borrower is the government.

The Financial Times confirms that Morgan's "US consumer businesses continued to bleed, with its credit card unit losing $700 million in the quarter and its retail bank...barely breaking even." It wrote off $7 billion in uncollectible consumer loans - more than twice as much as last year.

Its mortgage group lost money too. And it surely didn't make any money helping US business build new factories and expand payrolls.

So what does that leave? All the components of the business that have to do with the real economy are losing money or barely breaking even. What's left?

The news reports attribute the huge profits to "trading." But trading is a broad category. And our guess is that if you look more closely you will find that JPMorgan made its money the old fashioned way - by ripping off the government.

'You mean, JPMorgan took the feds' money and now is showing huge profits because it is just lending money back to the people they got it from?'

Yes. But not only that. They're also probably speculating on gold, oil and stocks...along with everyone else. The feds' money has pushed all these speculative trades into profit.

'And now, they're going to pay themselves big bonuses, aren't they?'

Yes. The papers tell us, "bonuses explode on Wall Street to a new record."

'So, then...when the next crisis comes...they won't have any money in the banks, will they?'

Nope.

'So they'll have to get bailed out again.'

Yep.

'But maybe the next time the feds will wise up and just let them go broke.'

Not a chance. Wall Street has plenty of friends in the highest places in Washington. A report in today's media tells us that "Geithner Aides Reaped Millions Working for Banks, Hedge Funds." The aides earn about $150,000 for their government work. On the side, they advise the financial firms they're supposed to be regulating, and get paid millions.

Such a nice relationship. They make sure Wall Street prospers - even when it does stupid things. Wall Street makes sure they prosper - even when they advise the government to do stupid things. And when their gig is over in Washington they go back to Wall Street where they earn millions more. America's centers of political and financial power have a cozy little game going. It won't end any time soon. It's too profitable for both of them.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

• JPMorgan and Goldman Sachs Making Billions in Profits
• Federal Government is Sabotaging a Genuine Recovery
• Bear Markets Do Not End With Stocks Still Trading at Nearly 20 Times Earnings
• Should You Buy Stocks Now to Take Advantage of Bull Market?
• Can a Consumer Economy Boom If Consumers Have Less Money?

"What?" we replied to one of our analysts this morning.

"He's the only Storm Trooper named in the Star Wars movie. I bought a card board cut out of him pointing his laser rifle at you. It was on sale the Science Works exhibit. I've put him behind your desk to remind you that you're under the gun."

True enough. It's not just your editor under the gun, though. What's at stake this week is whether attempts by governments and central banks to prevent more credit writedowns have succeeded. If they have, it could prevent the further transmission of the credit crisis from the financial sector to the real economy. And for investors, it could kick off a Great Releveraging.

Are we changing our tune, then, about what to expect from markets? Not one bit. But the question now is timing. The collapse of 2008 was so severe because of the sudden reduction in leverage in the financial sector. As assets fell in value, the most highly leveraged firms (or lenders who raised money by selling debt) went out of business.

This kicked off a chain reaction in which other market players were forced to sell assets and preserve capital. Banks preserve capital by not lending. This is how the credit crisis "jumped" from the financial sector the medium and small businesses (those not big enough or politically connected enough to qualify for government bailouts). And from businesses the deleveraging crisis went straight to households, who began saving more and cutting back spending.

And now it comes full circle. When households cut back, it eats into corporate profits and bank profits. Households with members who've been fired get behind on bills. Securitised credit card receivables, car loans, and mortgages - a large chunk of bank assets - start to go pear shaped. And banks face more credit writedowns, accelerating the cycle.

This is the cycle the Feds and global monetary authorities set out to short circuit this time last year. Their main objective: increase asset prices to stabilise bank balance sheets and prevent the spread of the credit crisis. How did they do it? TALF, TARP, CAP, the suspension of mark-to-market accounting rules, and the maintenance of low interest rates (in the States especially).

All these clearly did support asset prices, and especially allowed banks to post a quarter two of quarter over quarter earnings growth. This has created the appearance of stability. But what has not improved one bit is the quality of those bank assets purchased with borrowed money. There will be more writedowns to come. But when?

We should entertain the possibility that the Feds can support asset prices for some time. Take Australian housing for example. This week the Federal government announced that it would chuck another $8 billion in taxpayer money to purchase residential mortgage-backed securities (RMBS). Treasurer Wayne Swan says he's doing it to support "the home lending market."

We'd say he's doing it to keep money flowing into the housing sector so builders stay busy, banks stay profitable, and house prices stay high. Remember, this subsidy to non-bank lenders in the RMBS market is there because other investors won't fund these lenders. And why would they when the government is happy to put your money on the line.

The government says the securities are collateralised by high-quality residential real estate. But that's what pretty much anyone who was hawking this kind of debt said in the U.S. for the three years of peak mortgage issuance. This is how real estate - traditionally a local industry where prices vary from place to place - becomes a national market - through the nationalisation of the mortgage bubble. A national mortgage bubble can inflate house prices across the board-making the entire country vulnerable to higher interest rates and/or a credit crisis.

Here you see the public sector adding debt while the private sector scales back. Also, in Australia, there is still widespread public belief that house prices only ever go up. That means the government can support lending because borrowers are still borrowing. This just makes the inevitable house price correction much more devastating. The borrowers with the smallest margin for error are going to be hurt the most.

Here's something else to think about: what happens when the stimulus spending dries up? Treasury Secretary Ken Henry says that the economy could lose another 100,000 jobs and that the withdrawal of stimulus spending will shave 1.5% off Australian GDP in 2010. This is another way of saying the peak effect of the stimulus (in terms of supporting both consumer demand and employment) was in middle two quarters of the year.

So how will Aussie consumers and businesses behave when the stimulus is withdrawn? Did the Rudd government give the economy just enough free money smack to keep its credit high going? Or will the comedown be just around the corner around Christmas? If they're cautious, Australians will put away their wallets and cut up the credit cards and reduce spending growth to match income growth. The retail sector and retail stocks will be hit hard.

There's one other big question for investors heading into the end of the year. We know the government can support some sectors more effectively than others. Big ticket items like housing and cars can be subsidised with tax rebates or, in the case of housing, with a fresh injection of credit to support politically connected non-bank lenders in the RMBS market.

But you have to reckon the economy boosting effects of supporting the housing market are limited. The main beneficiaries are the banks and the builders. Granted, if you're a politician, those are two important constituencies to keep happy. But what about the rest of the economy?

The basic question is how much of it will stand on its own two feet once you remove the stimulus. The stimulus, the FHOG, the government backing of the RMBS market...these are all attempts to revive an economic growth model that's dependent on asset inflation and credit bubbles. That's the model that led to the bubble that led to the bust.

Papering offer the holes blasted in bank balance sheets by the credit crisis seems to have worked in terms of restoring confidence. Call it a successful psychological operation by the government spin doctors and their buddies in the media and banking. The whole purpose of the operation was to appear to recapitalise banks to healthy levels. But really it was to prevent the banks from having to take further credit writedowns, which itself feeds the process of forced asset sales, declining asset prices, and more household deleveraging.

One immediate risk to watch for is Australia's resource export industry. Export volumes are down year. But for the largest export categories, last year's contract prices are still in effect. Looking forward, 2010 could see lower export volumes AND lower prices for bulk commodities like iron ore and coal (especially if Chinese inventory restocking is complete). This would make the current valuations on resource earnings look pretty generous. You'll read more this week on which sectors are going to thrive and fail in this Great Releveraging.

Back to gold and the dollar and the new world currency order. A simple question: what was all the fuss about last week with a new reserve currency anyway? Here is an answer. If OPEC demands payment for oil in something other than U.S. dollars, then people who buy oil (and who doesn't?) have to stockpile the other currencies in which oil is priced and traded. That would be pretty tough on America.

To support its oil appetite, the U.S. would have to buy the currencies in which oil is priced. It couldn't use good old greenbacks. How do you buy foreign currencies?

Well, you can sell your assets (gold, real estate, stocks) and use the money to pay for oil. This is what Australia does. Or you can borrow in a foreign currency (did anyone say future Chinese bond market?) It's also possible you can use earnings on your foreign-owned assets - provided those assets generate enough money to support your oil habit.

These are all options within the free market system. The main point is that all other things being equal, you have to sell something to pay for something. This is why the foundation for economic health is always wealth production, not consumption. Production creates the goods that facilitate the trade that creates the profits to increase purchasing power for the things you don't produce.

But outside the free market system, you could opt for just taking the oil by force. By that we meant that should the U.S. be put in the position of having to pay for oil with new borrowings or asset sales, it might take the geopolitical path of least resistance and resort to a good old fashioned overt resource war. The declining Empire will strike back with its principal remaining asset, its military.

Likely candidates for an oil war? Not Iran. It's too far away. There are too many U.S. troops in Iraq and Afghanistan that would become targets. And the effect of a Middle East war would be too destabilising on oil prices. But Venezuela, on the other hand, is much closer to home.

Granted, comrade Obama is a peace maker. He was a won a price for it. Peace be upon him. And it would not seem like he's not likely to attack his good friend Comrade Chavez.

But if the current president flounders in the fiscal morass he finds himself in, he'll be a one term savior. Some pundits are already calling him "America's Gorbachev." He's the man who will preside over the swift fall from grace of a Superpower.

There will be no second coming (term). And that leaves room for a challenge from a more hawkish member of his own party (Hillary Clinton) or a populist Republican with a handy doctrine of liberty within the hemisphere (let's call it the Palin Doctrine). If Obama is America's Gorbachev, who is America's Putin? That's what Glenn Reynolds at www.instapundit.com is asking.

Naturally all of this is pure speculation. But our main point is that the oil game is not just a currency game. It's a power game. And it's silly to think the U.S. would relinquish its control over the oil market so easily. There will be a fight.

Not that the U.S. could maintain the reserve currency status quo by force. But sooner or later someone at the policy level in America is going to realise that once the reserve currency status is lost, the country loses a huge strategic and competitive advantage. Its standard of living, already in major decline, would face a major body blow.

Just how American policy makers plan on maintaining that advantage is yet to be seen. Of course maybe they don't plan on it at all. The Empire could be so narcissistic and full of false confidence that few people fail to see the inevitable chain of events the country faces. You'll just get more spending and more chest-thumping and more fiddling. Or more war.

Dan Denning
for The Daily Reckoning Australia

• Banks Could Face Larger Asset Writedowns and Losses than IMF has Modelled
• Gold Sales Cost Europe’s Central Banks Billions
• Biggest Factor Affecting Consumer Price Inflation is Growth in Bank Credit
• Everyone is Busily Debasing Their Currency
• The Greatness of a Depression is Commensurate to the Government’s Efforts to Prevent It

..how does it all work? We're doing some serious thinking this week. What is it that actually causes a depression? A stock market collapse? Or too much debt? How come government can appear to cure the problem sometimes - 2001-2007 - but not other times? How come the Japanese were not able to increase consumer prices? Even now...Japan's inflation rate is negative. And why is it, despite the most massive effort at monetary inflation ever undertaken, the US bond market still forecasts an inflation rate of less than 2%?

An interview with Richard Koo, author of The Balance Sheet Recession, and a new book by Ken Rogoff and Carmen Reinhart are helping us understand what it going on. More to come...

In the meantime, the Dow went down 42 points on Friday. Gold dropped $7. Still no sign of the Chinese coming to the rescue in the gold market.

"Global rally shows signs of running out of steam," says The Financial Times.

Reuters says the job data will "test the rally." The New York Times says the ratio between job seekers and jobs available has never been worse.

The Wall Street Journal, on the other hand, tells us that greater than expected profits will support the rally. So far, the increase in stock prices has not come from increased earnings. It's come from increased P/Es...based on the hope of higher earnings. In terms of forecast earnings, the Dow is selling at a P/E ratio of 27. But in terms of actual, reported earnings...the ratio if 180.

A friend made the mistake of asking us what to expect from the economy. We said it would go do down.

"You mean, you expect a W-shaped recovery," he said... "A double-dip recession?"

"No...we expect no recovery at all. It's a 'W' without the last stroke..."

Of course, we were exaggerating. But not much. We do not think that the economy of the Bubble Era can ever be revived. It will never recover...because it is dead.

But that's doesn't mean we will march backward forever. The economy may lose 10% of GDP...maybe 20%. But we do not expect to be slithering in the mud of the Middle Ages, with each man is planting his own wheat and brewing his own beer. No, not at all. It only means that the depression must continue until it comes to an end.

"But when will it come to an end?" you ask.

"When it is over."

A depression ends when it has done its work. It must correct mistakes. It must punish errors. It must destroy the bubble economy...and the mindset of the Bubble Era. Only then can new real, sustainable growth begin again.

So far, in 2009, 95 banks have gone broke. How many more need to go broke before the depression is over? We don't know. This is where is gets complicated. Because the feds are determined to keep us from finding out!

Here's how it works. The Fed lends the bankers money. Then, the bankers turn around and lend it back to the feds. The banks are happy; they're making money on a risk-free trade. The regulators are happy; what could be safer in a bank's vault than US Treasury bonds? Investors are happy; it looks like the financial sector is making money again. And the feds are happy; they're able to finance their deficits.

Who's not happy? So far, so good. But hold on...

"This is not a sustainable recovery," says fund manager Crispin Odey in The Financial Times.

What a spoilsport! You mean you can't build a lasting recovery on debt and shell-game finance?

Nope. Apparently not. Just look at what has happened to the auto industry. The feds borrowed money to help Americans pimp their rides. And this Thursday, when September sales figures come out, we find out how sustainable that boost was. Many Americans got new wheels. But now they don't need new wheels. And now the feds are out of the auto- incentive business. So now we get to see what happens next.

Stay tuned...

Bill Bonner
for The Daily Reckoning Australia

• Krugman Warns That the Run-up in Stocks Can’t Be Justified By the Fundamentals
• No Evidence of Recovery as Unemployment Getting Worse
• We Don’t Expect to See Australian Banks Suddenly Keen to Expand their Loan Books
• Where, Exactly, is this Economy Headed?
• Feds Can’t Cause a Genuine Recovery Simply by Throwing Money into Economy

Probably most incredible is that the dollar has NOT collapsed. It has lost ground, and was trading at $1.43 per euro on Friday, but no one laughs at you when go to exchange dollars...or offer to pay in dollars rather than the local currency.

For the last 10 years, the money supply in the United States has expanded at roughly twice the rate of GDP growth. And the Fed doubled its balance sheet in just the last 18 months. This last bit of information is stunning. It took the central bank nearly 100 years to build a balance sheet of $1 trillion. Then, under the leadership of Ben Bernanke, it added another $1 trillion in just a few months.

What does that mean, exactly? It means they bought a lot of debt from US agencies and the financial sector. It means also that they "monetized" this debt...transforming it into cash by paying for it with money especially created for that purpose. It also means that the whole financial sector has a bigger financial base against which to lend. The Fed lends against its balance sheet to member banks. These banks then lend to other banks who lend to business and consumers. So the amount of potential credit - as well as the amount of actual cash - has gone up.

There is an iron law in economics. Quality and quantity vary inversely...which is another way of saying that when you add more of something...each unit is worth less than the unit that preceded it (assuming everything else remained unchanged.) Certainly, this is true of money. The more money in a financial system, the less each unit of it is worth. Add enough new money - as Zimbabwe proved recently - and each unit becomes worthless.

But so far, the dollar has not collapsed. It has fallen, but gently...

Meanwhile, the inflation rate has NOT gone up. Instead, it's gone down. Go figure. You add that much monetary inflation and you'd expect to get a boost in the CPI. Nope. Not yet.

On the other hand, we're already a year-and-a-half into a major recession/depression. You'd think you'd get deflation. That hasn't happened either. Prices are down. But not as much as you'd expect, given the scale of the downturn.

Related to both the dollar and inflation is the bond market. Even more surprising is that the bond market has NOT fallen apart. Let's see, a huge input of monetary inflation; that ought to kill the bond market. Then too, the biggest sales of Treasury bonds in history - needed to cover a $1.7 trillion deficit this year. That ought to kill the bond market too. And on top of it all is a projection from the White House telling us that the feds will add $9 trillion to US debt over the next 10 years. And that assumes a full recovery in the economy! Now, that ought to kill the bond market for sure.

Not at all! Bond yields have risen...but the 10-year T-note still only gives you 3.4%.

Of course, you say, it's a depression. Bond yields always go down in a depression.

But if it's a depression, how come commodities are up? And stocks are up? Above all, how come Chinese stocks are up? Everybody knows China earns its money selling products to Americans and other non-Chinese. If the rest of the world is in a depression, who is China going to sell to? How come China isn't in a depression already? But there you are - there's another thing that hasn't happened. Chinese stocks haven't collapsed.

And getting back to commodities, they're all up. Commodity prices don't go up in a depression; everybody knows that. They go down. But commodities are NOT in a bear market. Go figure.

And, of course, there's gold. The metal gave up a dollar on Friday, but it's still just $4 short of the $1,000 mark...and just a shadow below its all-time high. Gold is a commodity...but it's also money in its purest, more reliable form. Commodities go down in a depression. Money goes up. But since gold is an alternative to paper money, it tends to go up only when paper money goes down. As explained above, the dollar has NOT collapsed. So why is gold going up? It should be going down, reflecting the effect of a recession...

There are two possible answers.

First, maybe the iron laws of economics have been repealed.

Or, second...maybe the iron laws just haven't caught up to the market - yet.

Unemployment is at 9.7%. It will probably rise above 10% this month. The economy is supposed to be recovering. Now, The New York Times is talking about a "jobless recovery."

You'll remember the phrase. It came out in 2003. Then, the economy was allegedly recovering from a micro-recession. Economists were surprised that there were so few new jobs created.

What was really happening was that there was no genuine recovery. Consumers just decided to go deeper and deeper into debt - egged on by the feds. A regional governor of the Fed actually urged consumers to "go out and buy an SUV." So Americans bought more products from the Chinese...on credit...and the Chinese enjoyed a boom.

And now the boom is over. Americans are paying down their debt. And unemployment is getting worse. This time the feds are pumping trillions into the system. This time, it's not the consumer who is willing to go further into debt; it's the government. And once again, few new jobs are being created.

Without jobs, the recovery is an impostor...a phony...a fraud. Without jobs, people have no extra spending power. So they can't buy - except by going deeper into debt. They were willing to go further into debt in '03-'07. But not this time. They've reached their limit on debt. Besides, with house prices falling, who would lend to them?

No new jobs = no new income. No new income = no new sales. No new sales = no new profits = no new jobs.

But what about the government? The feds are still willing to borrow. How come federal borrowing can't create a new boom - even if it is a phony one - like the one in 2003-2007?

Federal borrowing, spending, bailouts and monetary inflation are not helping the real economy. But they are making a lot of money available for speculation. That's why so many things are NOT happening. Investors are speculating on commodities, gold and Chinese stocks - for example. And US bonds.

But this is not a durable, reliable trend. And it's not laying the foundation for a genuine recovery. Borrowing by the feds is different from borrowing by individuals. Private households can go broke. But they can't take the dollar down with them. When the feds borrow, they pledge the full faith and credit of the United States - and its currency - as security. So, as they borrow more...the value of the US currency comes into doubt...then, into play...and then into jeopardy.

Investors eventually sell off dollars and US bonds...then, what should happen finally does.

Caution: what has to happen does eventually happen. But it doesn't have to happen when you think it should. The big surprise might be how long it takes before these things happen. If we were Mr. Market, for example, we probably would not take gold much higher - not just yet. We'd let deflation take gold down for a while - long enough to separate the speculators from their money. Then, we'd let investors get used to falling prices - before bringing inflation back.

Bill Bonner
for The Daily Reckoning Australia

• Where, Exactly, is this Economy Headed?
• Geithner Reassures China that America Takes Financial Obligations Seriously
• Gold Doesn’t Always Need Inflation to Rise
• Fed Will “Monetize the Debt”
• We Expect No Recovery from the Economy

'The Singularity' is an idea from Ray Kurzweil. The gist of it is that computers will soon be smarter than humans; by the middle of this century they'll be smart enough to figure out how to get smarter and smarter, faster and faster.

No doubt, many of them will go into finance. And no doubt, many will make a fast buck. But will more smartness really make the world a better place? According to the singularists, increased brainpower will be able to solve all sorts of problems - from global climate change to market crises.

But the brain is a big disappointment. No mechanical engineer has ever improved the old-fashioned kiss. Nor has any brain ever straightened out the business cycle. Dumb as a slide rule, the brain does what it is told to do; it doesn't ask questions. Tell it to build a bridge and it is on the case. Put it to work packaging tranches of toxic assets or selling aluminum siding...it is just as happy with one task as with the next. And the more a man's brain bends to a challenge, the more it elbows out of the way his finer senses...and the dumber the man becomes. He turns his back on his own intuition as well as the accumulated wisdom from previous bust-ups and bruises. Like a man who has gone crazy, as G.K. Chesterton put it, all he has left is his sense of reason. Then, with nothing more to work with, he comes down on his work like a blacksmith's hammer on a fine Swiss watch.

During the bubble period, the big banks were the biggest employers of top graduates from the world's top schools. Oxford, Cambridge, Harvard, Yale...the financial sector drew them in like flies to an open latrine. The financial industry made so much money it had a hard time explaining it. The smart dudes did not toil in the fields, neither did they spin. Then, what did they do? They earned millions, bought BMWs and got dates with actresses. They claimed they were doing a fine job of allocating the world's wealth and making everyone better off.

But when the bubble blew up, it was apparent that the financial world they created was fragile and perverse. Not a single one of the largest Wall Street banks survived without government handouts. And a news report from this week tells us that Americans were so damaged by the Bubble Epoque that their discretionary spending has now been cut to levels not seen in 50 years. The geniuses wiped out a half-century of economic progress in the richest, most successful economy the world has ever seen.

Smart people were also to blame for the biggest single error of the last century: central planning. The central planners thought they could fix the supposed evils of the natural economy with logic and reason. The idea was so alluring half the world fell for it. If the Nobel Committee had been on the ball they would have given Karl Marx a prize.

If the bug had come from stupid people...smart people might have avoided it. They might have come through the period without permanent scaring. But the wheezy intellectuals behind it were too clever for their own good. They soon infected the top universities...and the government. They convinced almost everyone that central planning was the wave of the future and that anyone who stood against it was a bumpkin, a parasite or a fool. Then, in the name of human progress, they took control in two of the world's largest countries and turned them into prison camps.

But by the last decades of the 20th century it was obvious even to central planners themselves that it wouldn't work; in both Russia and China, the planners simply gave up.

Central planning didn't work because people had plans of their own. They resisted. Then, the planners brought down their hammers. "If you're going to make an omelet, you have to break some eggs," said chef Vladimir Lenin. The "Black Book of Communism" puts the death toll as high as 100 million.

Then too, central planning didn't work for less obvious reasons. Planning requires information. The planners had plenty of it. But private individuals had far more - local, current, more accurate information from first-hand observation and experience. With better information, they could make better plans. Most important, individuals didn't limit themselves to only the fresh fruit of their rational brains. They put their hearts in it...and drew on instinct and tradition - the distilled spirits of previous generations - giving them a huge advantage over the apparatchiks.

But the brains kept at it. When the forensic experts sifted through the debris from the 2007-2008 financial blow-up they found fingerprints from a whole list of Nobel winners. It was they who had developed the formulae and the theories that deceived investors, and themselves. They believed they could tame risk...by calculation! They figured out the odds and worked out prices - to as many decimals as needed to put investors to sleep. And then along came a risk they had not foreseen - the risk that their own formulae were claptrap and that they were idiots.

Meanwhile, the brains were at work in the public sector too. There, they were still pushing central planning...albeit on a much less ambitious scale than in the last century. In Western countries, government economists fixed lending rates and credit policies in order to encourage over-consumption. In the East, they fixed exchange rates and recycled credit back to their customers in the West in order to encourage over-production. And what ho! Wouldn't you know it; now the world has too much debt and too much capacity.

And so the brains are back on the job. In China, the government boosts production. In America, the central planners are trying to boost consumption. In short, the fixers are still fixing. And soon, the world will be in an even worse fix than it is now.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

• Can Government Bureaucrats do a Better Job of Allocating Capital than Free Markets?
• The Bubble Deniers Deny that Their Own Stimulus Caused it
• Chinese Economy Seems to be Growing
• One of the Biggest Humbugs in Capitalism is Private Equity
• Fed’s Balance Sheet Increases As Much As $2 Trillion

"Chinese economy bounces back," says one headline in the International Herald Tribune.

"JPMorgan profit soars despite downturn," says another.

The average reader or TV viewer will go no further. "Ah," he says to himself, "good news; the worst is over. China is a green shoot as big as the Amazon. And JPMorgan is a leader in the financial sector. If the financial sector is doing well, the whole world economy must be doing well."

But here at The Daily Reckoning, we can't help ourselves. If we see a silver lining, we look for the cloud. We see garbage...we look for the rat... We begin with the JPMorgan profit announcement, because it is the most intriguing. Let us set the stage:

In the last half century, credit has expanded faster even than dress sizes. Naturally, this has made the business of hawking credit extremely profitable. Profits in the financial sector soared to 40% of the U.S. total. And every momma wanted her baby to grow up to be an investment banker.

But then, in 2007 & 2008, the bubble in the financial sector popped. Many banks and financial institutions went broke...or had to be bailed out by the government. Instead of being the world's highest-flying industry...finance became the scene of its biggest crash.

And now, from all we've been able to detect, a fundamental shift has occurred. People are no longer eager to go deeper and deeper into debt. Instead, they are eager to pay off debt...that is, to rid themselves of finance...and to get as far away from the financial sector as possible. Savings rates, for example, have gone from zero to 7% in just the last 12 months.

But in the midst of this remarkable and historic change, we get news that at least a couple of the biggest firms in the financial sector - JPMorgan and Goldman Sachs - are making billions in profits:

"Even as it weathers the worst economic downturn in decades, JPMorgan Chase said Thursday that it had made a $2.7 billion second-quarter profit as a result of stellar trading and investment banking results."

This was essentially the same story we got from Goldman. Neither bank made its money the old fashioned way -- by lending to worthy projects; they made their dough by "trading" and "investment banking." In other words, they made billions from speculation.

Anyone who takes this as evidence of a recovering economy should work for the government. Only a government economist or a mental defective (excuse us for being redundant) could believe that genuine prosperity can be built on a foundation of speculating by large financial institutions. You can see why by asking a simple question: whom were they trading against?

Speculating is a zero-sum game. No matter who wins, the economy is not a bit better off; it has not a centime more in resources. Goldman and JPMorgan report earning, together, more than $6 billion. Who was on the other side of that trade?

There is also something fishy about the whole thing. Trading is not only a zero-sum game, it's a game of chance. Traders lose money about as often as they make it. Of course, normally, the traders at the big banks have an advantage; they are not idiots. They make money by taking it away from the amateur traders, who are idiots. But what amateur traders put up $6 billion?

Our guess: the fix is in. They are taking advantage of the feds' stimulus programs...and trading against the biggest patsy in the world, the U.S. taxpayer. How? We'll find out how, later...

Meanwhile, there is the news that China is back in business.

"Government spending pushes GDP growth to 7.9% for 2nd quarter," reports the IHT, "...fueled by a large economic stimulus package and aggressive bank lending...a surprisingly strong showing during the global economic downturn...

"...while most other major economies are contracting and suffering from the worst economic crisis in decades, China appears to have turned a corner...

"Growth in the second quarter was driven by strong auto and property sales, a rebound in manufacturing and huge infrastructure spending, which was propping up global commodity prices."

Further investigation reveals that bank lending and property speculation have gone wild. (More on this in today's essay, below...) And stocks in Shanghai are up 75% so far this year.

Now, let's try to get this straight. The world is in a slump. China sells stuff to the world. And yet, China is booming.

How could it be? Again, there's something fishy about it...as if the government were jiving the figures...as if the speculators had taken leave of their senses...and as if the whole thing were just the result of the same kind of misguided 'stimulus' that got us into trouble in the first place...

The Richebacher Letter's Rob Parenteau agrees that something isn't quite right. "Ask anyone who's done business there. Keeping a double set of books in China isn't just common, it's considered 'good strategy.' You've also got under-regulated Chinese banks hiding as much as $500 billion in bad debts - China's own version of 'subprime' loans to small businesses and Asian property speculators.

"On top of that, you've got a $40 billion tab left over from the Beijing Olympics... and a $140 billion tab for rebuilding Sichuan after their 2008 earthquake."

Boom...boom...ka-booooom!

Regards,

Bill Bonner
for The Daily Reckoning Australia

• Rising in Defense of Goldman Sachs
• Meredith Whitney and the Buy Recommendation on Goldman Sachs
• Is the Real Economy Growing, Expanding, and Making Money?
• Traders Sell Bank Stocks Due to Goldman Sachs Surprise
• Warren Buffett is Buying Four Percent of Goldman Sachs

Yesterday, the Dow lost another 131 points. Another big day down and it will be in the 7,000-range. Oil sank too - down to $62. The dollar, bonds, and gold stayed about where they were.

Economists are still talking about an "exit strategy." But in view of what is actually going on in the economy, they'll probably want to stay on this highway a lot longer. This is the long road to ruin, of course. It may be fatal, but it is not - yet - unpopular.

Broadly, what is happening is exactly what should be happening.

The stock market rally is getting old...and may have already peaked out. The consumer is running out of time, money and credit. He has no choice but to cut back. Savings rates are rising fast - from zero to about 5% of disposable income.

Naturally, businesses are finding it hard to make sales. Earnings are collapsing...stock dividends are down sharply...

...and of course, businesses try to cut expenses by lightening up on their payroll.

When the correction began, it was led by losses in the financial sector. Those losses led to cutbacks throughout the economy. Now, it's the cutbacks that are leading to financial losses. The economy followed the markets; now the markets follow the economy. Investors are realizing that their favorite companies will find it hard to prosper in this new economic environment.

"US consumers fall behind on loans at record pace," says a Reuters headline. Delinquencies are going up on a wide range of household debt. Debtors have never had such a hard time keeping up with payments. Credit
card delinquencies, for example, are running at 6.6%.

Well...duh.

And no wonder "banks get stingy on credit," as reported in the USA Today. "Despite massive government efforts to bolster the credit market, banks are pulling back severely on card lending," begins the front-page article.

Once again, we see the feds' plans failing. They give trillions to the bankers; the bankers cut back on consumer credit. And why shouldn't they? They can see what the rest of us see - the consumer can't keep up with the debt he's got already.

"Consumers aren't going to be able to save the U.S. economy this time," The Richebacher Letter's Rob Parenteau reminds us.

"Total U.S. retail sales have rolled back to levels we haven't seen since 2005. Imagine if every single retail shop opened in the last three years shut down overnight. It's already that bad.

"A lot of people, from Wall Street to Washington, have a great deal invested in you believing we can reverse that trend. But, in actuality, the freeze in consumer spending and the consumer economy could actually take many more years to thaw."

At least, the consumer has wised up. He's sick of debt. He's seen where that road leads. What he wants is to get out of debt...to be free...to be safe.

It's the government that remains stuck in deep illusion... The feds know that it was too much credit that got consumers into trouble. Their solution? Give them more credit! The banks are issuing fewer credit cards than they did last year - 38% fewer. They're pushing credit limits down too - the average limit on a new
card is down 3% so far this year.

Instead of passing money on to customers, the banks are using the feds' free cash to build up their own reserves...raise their salaries...and pass out bonuses. Makes sense. What else could they do with it?

Bill Bonner
for The Daily Reckoning Australia

• Feds Can’t Cause a Genuine Recovery Simply by Throwing Money into Economy
• Abandoned Shopping Malls to Follow Abandoned Houses
• Baby Boomers Face Early Retirement With No Money Saved
• The Interest Only Mortgage Option
• Feds’ Plan is to Reflate the Economy

Yesterday, the Dow rose 235 points. And the public's mood is at an 8- month high.

"Look, things seem a lot better now than they did back in October," said a lawyer we spoke with yesterday. "I think we really hit bottom towards the end of last year."

Our friend's view is probably the dominant one. Things are looking up. Not that the news is good...but it just seems "less bad" than it was...or even less bad than was expected.

Foreclosure filings are at a record high. But "most homeowners think bottom reached," said a news item on the internet.

"Bank crisis in US could last to 2013," adds a headline from Reuters. Yet, most people think the banks are on the mend. They don't expect any further major bank failures. They think the financial sector will come back...maybe slowly, but more or less steadily and satisfactorily.

The average bear market bounce in the stock market lasts only 2 months. By that measure the current rebound should be at an end. It began on March 9th. Since then, stocks have recovered 30% to 40% - all over the world. But this rebound doesn't seem to be ending. Why?

Well, it might last longer than most because the crash that preceded it was stronger than most. Or, it might last longer than most because the feds are fighting this downturn far more than they usually do. We're trying to remember the figures...but the total response is at least 10 times greater than normal.

So, it wouldn't be totally surprising if the rebound were robust. But if it's what we think it is - a bear market bounce, not a genuine new bull market - the government's support is pernicious. It helps disguise what it really going on...and draws even more investors into the trap. And the longer it goes on, the more investors will come to believe that this is bull market is for real. As it continues, they'll commit more and more of their money to it...

When the market was still falling last autumn, we looked at other bear market rallies and guessed that there would be an "Obama Bounce" coming. We thought it would begin after the election...and then, when there was only a weak ricochet after the election, we thought the bounce would come after the inauguration. Instead, it didn't really get underway until March. Since then, it has been following the usual path.

How far could it go? Who knows? But it wouldn't be extraordinary if it took the Dow back to 10,000. And it would not be unusual at all if people stopped talking about the 'green shoots' and began noticing entire fields of clover.

So, let's take a minute to try to remember why we think this is only a bear market trap...

The problem is debt. It built up over a quarter of a century to levels that even President Obama says are "unsustainable." People have too much debt - student debt, credit card debt, private equity debt, mortgage debt, and every other kind of debt you can imagine. As long as the economy is expanding...and the credit markets are offering more debt...the problem is not critical. One debt is paid by taking on another, greater, debt. Houses are refinanced, for example, at higher prices...but lower interest rates.

Then, the cycle turns. Instead of continuing to expand, credit begins to contract. When people go to refinance, they discover that their collateral is worth less than it was before, real interest rates are higher, and the lenders don't want to lend any money anyway.

Bummer...

And then, all that debt that they built up over the last quarter century is a problem. It has to be paid down to the point where it isn't a problem. And that means the obvious thing - people have to cut back on their spending. As long as the amount of debt is contracting...as long as interest rates are rising...as long as asset prices are falling...and as long as people have more debt than they feel comfortable carrying - sales, profits, and stock prices are going to be depressed. No reason for a new bull market.

This process should last a long time. Why? Because it takes a lot longer to pay off debt than it does to run it up. People have to earn the money to pay down their debts. And it's harder to earn money in a declining economy than it is when the economy is booming. People have to make changes...they have a lot to figure out...and a lot to reorganize. It could take two years...4 years...10 years or more.

But wait a minute. What about all this government bailout money? What about the biggest government program since WWII - the fight against capitalism? What about the most expensive financial commitment every made? Bigger than the pyramids, more expensive than Alexandria and Babylon put together, more colossal than the Colossus itself...

About $15 trillion has been earmarked for the big bailout/stimulus program. Surely, it will short-circuit the correction and get the economy going faster...won't it?

No, it won't. You can't wait for it to happen either.

Because you can't correct financial mistakes by subsidizing them. You can't erase bad investments by putting more money in them. You can't turn bad businesses into good businesses by giving them money. And you can't cure the problem of too much debt by borrowing more money.

Instead of forcing people to correct the mistakes of the bubble era, the government is doing all it can to keep bad investments in the money, brain dead firms alive and keep zombie banks in business. The more money the feds put to the task, the less quickly the economy corrects errors and adjusts to the new realities.

Still, all that money has to go somewhere, doesn't it? Won't a lot of it go into stock prices?

The answer is 'maybe.'

But this money that might go into stocks, where does it come from? Ah, dear reader, there's the glitch...there's the fly in the ointment...there's the rub.

Every dollar that goes to prop up Wall Street, for example, must come from somewhere else. A headline we saw yesterday reported that the "Rich get richer on Wall Street." Of course they do. Instead of going broke and getting fired - as they should have - the government steps in with more money. Not only do the banks stay in business, they're able to pay their managers even bigger bonuses.

The government borrows from the private economy - money that might have been lent to a developer...or to a bakery...or to a homeowner - and puts it to work. Now, it's true that in a credit contraction, borrowing seems to go down. But it does so for a good reason. The economy is not working properly. People don't know what projects will work and what ones won't. Besides, asset prices - which tend to support lending - are falling. Who wants to take a chance on lending money when the collateral might be disappearing? So, new lending tends to freeze up...until the period of shock, adjustment and restructuring is over.

The feds' theory is that they are merely putting idle resources to work...and getting the economy going again. What they are really doing is taking resources out of safe idleness, and wasting them on active projects that don't pay off. That is not the basis for a genuine new bull market. It is the basis for a big disappointment.

And it's adding nearly $2 trillion of new debt to the federal balance sheet each year.

But wait again...the government is not just borrowing money, it's also creating money 'out of thin air.' Surely, THAT will light a fire under the economy, no?

Well, yes and no. But it's too big a subject for this morning...

We'll save it for another day.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Bear Market Bounce a Sure Thing
• Government Debt
• Household Debt Represents Spending Taken From the Future
• Is Gold Going Up Because People Fear Inflation?
• Today’s Current Gold Price

Remember back in November, we waited for the Obama Bounce? It was the one of the most reliable phenomena in the world of investing, we said. Then, we began to wonder. Month after month...no bounce.

It took a long time coming...then, finally, in March prices headed up. Since the 9th of March world stock markets are up 37% - about average for a post-crash bounce.

Now, it looks as though the bear market rally might have run its course. And yesterday, the Dow was down 184 points. We don't know if that marks the end of it or not. But count us out. At this point, it is far too dangerous to be heavily invested in stocks.

Why? Because the Bubble Epoque is over. The bubble in the financial sector blew up last year. That marked the end of a half-century of building up debt. Most likely, now debt is going to be thrown off, shucked, dumped, paid down, worked out and defaulted on.

Without the financial sector puffing up assets, prices will tend to go down, not up. And without the financial sector adding debt...and giving American consumers the wherewithal to dig themselves deeper holes...the whole world economy needs to be restructured. Manufacturers in China can't depend on the consumers of first and last resort in America anymore. People in the US are no longer buying what they don't need with money they don't have. Because no one will lend them money. And so, global commerce slumps. Ships wait at loading docks; where are the containers? Factories wait for orders and stores wait for customers; but where are the customers? The customers aren't going to show up. Because if there is one thing Americans have learned from this crisis it's that they must stop spending so much money. They're facing what the Washington Post calls the "Baby Boomers' Retirement Bummer." They have no choice; they have to pay off debt, not add more of it.

We're hearing that China is recovering. We don't believe it. Who's buying?

They say the US economy is close to a bottom, too. We don't believe that either.

Wait...let's ask Alan Greenspan. Here's the Bloomberg report:

Former Federal Reserve Chairman Alan Greenspan said on Tuesday that "the seeds of a bottoming" in plunging U.S. home markets were becoming visible.

Speaking to a National Association of Realtors summit, Greenspan said there were reasons to believe that bulging inventories of unsold homes were dwindling and that should bring some stability to prices.

"It looks to me, judging from the balancing of household formation on one hand, conversions, mergers, demolitions...that we're at the edge of a major liquidation in that excess of inventories which I suspect and I hope will be of such a pace that it will stabilize prices," the former Fed chief said.

"So as I look at the housing market...we are finally beginning to see the seeds of a bottoming," he added.

We can imagine seeds of a recovery. We can imagine signs of a bottoming. But we don't know what the hell "seeds of a bottoming" is supposed to mean.

Do the seeds grow downward? And turn into a bottom? Then what happens?

But that confirms it for us. If the former Fed chief thinks he sees the "seeds of a bottoming," a bottom must be nowhere in sight. And how could it be? You can't hope to erase the errors of a 50-year debt build up in a single year.

Just look at the auto industry. How long will it take to turn GM around...or to break it up...sell off the assets...and put the good pieces back to work? Many years. How long will it take to work off the housing inventory? Years. How long will it take China to retool her economy for domestic consumption? Years.

And how long will it take the American consumer to pay down his debt to a level where he is comfortable again? Well...forever... Just do the math. The savings rate has gone up to 5% of GDP. That's $700 billion per year. Yet, the excess debt alone is estimated (by us) to be between $20 and $30 TRILLION. At that rate, it could take 40 years, or more, to pay it down.

But wait again...while consumers are paying down debt, the feds are borrowing more than ever. While consumers may pay off $700 billion of debt, the US government is borrowing $1.84 trillion - at this rate, Americans will never get out of the hole.

Bill Bonner
for The Daily Reckoning Australia

• Alan Greenspan Bears Blame for Intensity of Financial Crisis
• Krugman Warns That the Run-up in Stocks Can’t Be Justified By the Fundamentals
• A Letter from ‘Alan Greenspan’ About the Deterioration of the U.S. Economy
• Gold Standard Doubles as the Greenspan Fed Makes Real Interest Rates Negative
• Markets Rise While the Economy Sinks