Only an economist would dare to look 10 years ahead. Only a fool would put money on it. Today, we do both. But our new "Trade of the Decade," is not so much a look into the future as it is a look at the past.

Ten years ago, your humble correspondent offered his first 'Trade of the Decade.' He should have stopped there, for the trade was a big success. It was a simpleton's trade: Sell US stocks/buy gold. That was in the year 2000. At that time, US stocks had been going up for the previous 18 years, multiplying investors' money 11 times. By then, stocks had been going up for so long that the memory of man ranneth not to the contrary. Investors' imaginations saw no alternative. Stocks for the Long Run was the title of a popular book. It was also an investment formula that seemed unbeatable.

Alas, the formula proved beatable. It was time for stocks to go the other way. The first decade of the 21st century proved to be the worst time to hold stocks since the '30s. Net returns were negative - especially when adjusted for inflation. Adjusted to the CPI, the Dow ended the decade down 40%.

The other side of the trade - the buy side - was just as simpleminded. Gold hit a high over $800 in 1980. Then, it slipped for the next 20 years. It didn't come to rest until September 1999 at $260. That was the famous "Brown Bottom" in the yellow metal...when the then chancellor of the exchequer, Gordon Brown, sold Britain's gold at the lowest price in two decades. (To bring readers up to date, now Mr. Brown applies his vision and energy to Britain's economic recovery efforts.)

Gold is real money. But in the years when gold was being beaten down, other forms of money were running wild. Financial assets mushroomed all over the globe. A whole new 'shadow banking' system emerged...with new financial instruments, representing trillions...no, hundreds of trillions...of dollars. Prices on everything were soaring - equity, debt, real property. It did not take a genius to see that gold would have to catch up, sooner or later. As it turned out, no major asset class did better. Gold finished every single year higher than the year before. It doubled. Then, it doubled again.

What made the trade a success was neither clairvoyance nor omniscience; it was merely an observation known as 'regression to the mean.' The word 'normal' has been in the dictionary for a long time. It must be there for a reason. What it describes is where things tend to go when they've gotten out of whack. Regression to the mean is so powerful, no one escapes it. For every decade of walking around time, a person spends a million years dead. Over a century, practically every human regresses to the grave. So, what is so abnormal now that regression to the mean is as certain as death?

Almost all investments are expensive by most historical measures. But if all go down, what will they go down against? Money! That's why real money - gold - is likely to go up again in the next 10 years. But gold is not cheap. It rose nearly 400% over the last 10 years and now is fairly priced. Gold in the treasure trove found in England last year is worth today about the same thing it was when it was buried 12 centuries ago. It cannot regress to the mean; it is already there.

On the buy side, we are looking for an investment that is despised...not one that is admired. And so, back to Japan, where equities peaked out in 1990 and have been going down ever since. While the Japanese government wanders among the stars, the private sector has dropped back to the ground. Or beneath it. Tokyo-listed stocks have lost 75% of their value, wiping out an entire generation worth of growth. Many Japanese companies sell for less than the value of their current net assets.

And now, after twenty years, Japan's private businesses are finally benefiting from the stimulus programs. The government will go broke, but by destroying its own credit, Japan cuts the value of the yen and boosts profits for its exporters. Toyota's local labor costs - in dollar terms - fell 5% in the last three months. And by the time the catastrophe is complete, Japan's businesses could be the most competitive in the world. One way or another, 10 years from now, we'll wager that Japanese stocks will be higher...if only relative to the rest of the world's equities.

But of all the whack that investments might be out of, US Treasury debt stands above them all. For the last 27 years, the US government's cost of borrowing has gone down. But while bond yields declined, the quantity of US debt exploded. Official, on-the-books debt trebled. Include off the books, unfunded financial obligations and the total reaches $118 trillion - 8 times GDP. And now the explosions come every month. As the depression continues, US deficit-financing needs could rise to $150 billion every 30 days. So far, the bond market has absorbed the shocks with good grace. But sometime in the next 10 years, the angels are bound to be proven right.

Sell US Treasury bonds. Buy Japanese stocks.

Regards,

Bill Bonner
for The Daily Reckoning Australia

• Will Gold Have Another Great Year in 2010?
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Volcker was the last central banker in America to have any real integrity. He saw what needed to be done and he did it. He hiked up rates and brought consumer price inflation under control. Thus began the bull market in bonds that continues to this day...29 years later.

Volcker saved the dollar...and saved the US economy from a worse bout of stagflation.

Circumstances are very different today. Now, our central bankers are trying to weaken the dollar. They see it as a way to escape debt and get out of a depression. This is, by the way, the depression caused by their own loose-money credit policies. Under the influence of artificially low interest rates, people borrowed too much. Then, they had to cut back...creating today's depression.

Bernanke and company think they can hold off a correction forever - by increasing the amount of cash and credit available.

How does that work, again? People have too much debt...so you give them more, right? Investors and businessmen made too many mistakes...so you enable them to keep making them, right? The bankers lent too much money to too many people who couldn't pay it back, so you insist that they offer more credit, right?

Everyone is mad at bankers. Not us, of course. We pet underdogs. We champion lost causes. We stand by diehards.

As far as we're concerned, the bankers stole their money fair and square.

But the poor English bankers aren't getting away with it. The sourpuss government of Gordon Brown just hit them with a 50% super-tax on their bonuses. Boo hoo.

And here's Paul Volcker, as reported in the London Telegraph, telling them to wise up:

The former US Federal Reserve chairman told an audience that included some of the world's most senior financiers that their industry's "single most important" contribution in the last 25 years has been automatic telling machines, which he said had at least proved "useful". Echoing FSA chairman Lord Turner's comments that banks are "socially useless", Mr. Volcker told delegates who had been discussing how to rebuild the financial system to "wake up". He said credit default swaps and collateralized debt obligations had taken the economy "right to the brink of disaster" and added that the economy had grown at "greater rates of speed" during the 1960s without such products. When one stunned audience member suggested that Mr. Volcker did not really mean bond markets and securitizations had contributed "nothing at all", he replied: "You can innovate as much as you like, but do it within a structure that doesn't put the whole economy at risk." He said he agreed with George Soros, the billionaire investor, who said investment banks must stick to serving clients and "proprietary trading should be pushed out of investment banks and to hedge funds where they belong."

Bill Bonner
for The Daily Reckoning Australia

• We’re Not Threatened by Inflation but by Depression
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But Congress and the administration not only ignored the French (as they had when Charles DeGaulle advised against intervention in Vietnam in the early '60s - it was a "rotten country," he said) they accused France of cowardice, dumped good bottles of Bordeaux down the drain and renamed French fries 'freedom fries.'

Remember the jokes? When a bomb blew up a Spanish train, France raised its color-coded Terror Alert system...from mauve for "Collaborate" to chartreuse for "Run and Hide."

And remember what Anglo-Saxon economists said about the French economy? It was 'sclerotic'...it was a 'museum'...first, it was tied up by labor unions and then the socialist politicians did kinky things to it.

But every dog has his day, and now the French are enjoying a delicious moment of schadenfreude.

The frogs stayed out of Iraq...avoided a housing bubble...and side- stepped a credit crisis.

And now, the "French model" for managing an economy is the envy of the world. At least, that's what you might think if you read The Economist. A recent issue has Sarkozy on the cover...looking confident and pleased with himself. By contrast, Britain's Gordon Brown and Germany's Angela Merkel look as though they needed a drink.

What's the 'French model?' It's a system where the state meddles heavily in the economy. Health care, education and public transport are all government enterprises. And political cronies, rather than entrepreneurs, run key businesses.

Heck the French don't even have a word for "entrepreneur," as George W. Bush pointed out.

It seems to work fairly well. The health care system functions fairly well - while taking a smaller percentage of GDP than in the US. The trains run on time (except when there is a strike). Grammar and secondary schools are probably better than in the US; the universities are probably worse. And many of France's private businesses are world leaders - Air Liquide, Danone, LVMH, to name just a few that come to mind.

And so far, France has suffered less from the worldwide financial meltdown than any of its rivals. The last time we were in Paris, the restaurants seemed as full as ever; taxi cabs were as hard to get as ever; and Paris property had barely come down at all - at least, officially.

"I'm not so sure..." said a colleague in Paris. "I've been looking for an apartment for the last year. A year ago, there was almost nothing available in my price range. Now, I'm seeing lots of places. I looked at one last week. It is listed at $340,000 - about what it would have been a year ago. But the agent told me that the seller would probably take $275,000. If they're telling me that right off-the-bat, I figure it might go for $250,000."

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• The French are Feeling Pretty Smug
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"You weren't here today," began the cab driver. "You missed the excitement. You know, the G20 meeting. They held it here in London...

"Some lads got out of control. They smashed a window over at the Royal Bank of Scotland, and then broke up the computers and so forth...

"Nothing very important, but the media makes a big thing of it. They kept talking about that G20 meeting - as if they were going to change the whole world - New World Order and all that...but what could they change? These hotshots at the banks took some bad bets. Now they've got to pay for them. What's all the fuss about?"

Clearly, our cab driver should go back to school. He could study macroeconomics and learn about counter-cyclical fiscal stimulus...and the multiplier effect...and the need to restore liquidity to the financial sector. Then, he could be spouting the same claptrap as other commentators. He could get on board with the plans to save capitalism from...well, from capitalism! It's all very well for the capitalists to make money, he will discover, but when they begin to lose it, well government has to step in and bail them out. The "creative" part of capitalism is fine...but spare us the destruction, okay.

Yesterday, the heads of state of the world's 20 leading countries decided to put more muscle into their efforts to stop capitalism's downswing. Notably, they decided to treble the budget of the IMF. In all, today's International Herald Tribune tells us it's a "One Trillion Dollar Deal."

Gordon Brown pronounced it a "New World Order," which sounds a lot like what George Bush I was aiming for 15 years ago. One world government. One multi-national police force. Harmonized tax collection. (No more tax havens...nowhere to run...nowhere to hide...) Keep the masses happy with bread and circuses...and "wars" against imaginary and unnecessary enemies. (The War on Terror and now - the War on Depression.)

Hey, maybe we'll all have to speak Esperanto, too...

But at least now the IMF will be about to bailout more bankrupt governments before it goes broke itself.

Most of the money is coming from a country that doesn't have any: the U.S.A.

Look up. What do you see? Why, it's our Dollar Crash Flag. The dollar's days are numbered. What's the number? We don't know. But whatever it was a week ago, it is a smaller number now.

Yesterday, the dollar gave up a little ground. The euro rose to $1.24. Oil went up to $52. Gold, however, fell hard - down to $904. Gold stocks, on the other hand, did rather well.

Hugo Chavez was in the Mideast this week at a meeting of oil producers. He called for a new petro-currency...which, we suppose, is a currency backed by oil. The Associated Press:

"Venezuelan President Hugo Chavez sought Arab support Tuesday for a proposed oil-backed currency to challenge the U.S. dollar in his latest swipe at Washington's dominance in global financial affairs."

He probably won't get very far with that. But he's not the only one looking for a solution to a crisis that hasn't happened yet.

The dollar's been king of the monetary mountain for a long time. But it had better be careful...watch it's back ...give a little of the food to a dog before eating it itself. Rivals are plotting against it. Much of the world wants to dethrone "King Dollar," says the French financial journal, La Tribune. China has already called for a new reserve currency based on IMF Special Drawing Rights. What's more, it's worked out bilateral agreements with many of its neighbors to swap goods, rather than use the dollar as a common unit of exchange. This week, it went further afield, making a deal with Argentina. This is the first deal of its kind in the Latin American world. But it's probably not the last. People see trouble coming with the greenback. They don't want it to hurt their sales of raw materials to China.

The Russians, too, have called for a new reserve currency. They, like the Arabs and Chavez, are sellers of raw materials. They don't want to get stuck with dollars that are losing their value.

That's the real New World Order...the United States will find it harder to stay in the driver's seat of this bus...and the U.S. currency will no longer give Americans an automatic ticket to the first class section...

More news from Ian in rainy Baltimore:

"First Friday of the month, you know what this means...time for the U.S. employment scene to hit a new low," writes Ian in today's issue of The 5 Min. Forecast.

"663,000 Americans lost their jobs in March, the Labor Department claims today. That puts the official unemployment rate up to 8.5%, the highest its been since 1983. March's loss marks the 15th month in a row of net job losses. Since the recession began, the government estimates 5 million Americans have lost their jobs."

"Today's number stands in line with the jobless claims details earlier this week - a record 5.7 million people are currently filing for unemployment benefits.

"But from a trading perspective, as dark as this might sound, today's jobs number was a non-event," continues Ian. "March's losses were just a bit higher than the Street anticipated, and the small details were mostly in line with expectations.

"The only real surprise came in the form of a big January revision. The government added 86,000 lost jobs during the month, to a January tally of 741,000. That's actually the biggest monthly drop in 59 years. Such a number would have sent stocks to the woodshed back in early February, but since the revision is now so backward looking, there isn't much traders can do. Clever trick, eh?"

Each weekday, Ian and Addison bring readers the The 5 Min Forecast, an executive series e-letter that provides a quick and dirty analysis of daily economic and financial developments - in five minutes or less.

And Bill with more thoughts:

The rest of the world is enjoying tweaking the nose of the United States of America. The U.S. dollar has dominated world markets for more than half a century. Even before that, it was a favorite for many of the world's peoples. England ceased having the world's largest economy in the last decade of the 19th century. It was surpassed by the United States...and then by Germany. And since then, it has been surpassed by Japan, China and France too. Even California has a bigger economy than Britain.

Both Britain and its pound were victims of WWI, with the United States and the dollar taking the lead position.

But what goes around, comes around. Now it is the dollar's turn. Maybe not this year. Maybe not the next. But it will have to get knocked off the top of the mountain sometime.

One of our French dear readers wrote to say he thought it wouldn't happen for another 10 years. Maybe he's right. As we predicted more than five years ago, the United States is sinking into a Japan-style slump. Unless it begins printing money - hell-for-leather - it is doomed to follow Japan. This from MarketWatch:

"The great recession of 2008 and 2009 is likely to be not only the longest downturn since World War II, but also the most geographically widespread recession since at least the 1970s.

"For the first time on record, all 50 states were contracting at the same time, according to the state coincident indicators for February released by the Federal Reserve Bank of Philadelphia on Tuesday. The state-by-state indicators have been tracked by economists at the bank since 1979."

Of course, if it prints money too aggressively, or if people THINK it will print too aggressively, it could follow Zimbabwe. Either way, we want off this train...

As GM goes, so goes the nation. Obama assured the nation that America would be the leader in car manufacturing. Alas, it is probably not to be. What makes Germany and Japan so competitive today is the fact that their industries were destroyed in WWII. They were forced to rebuild...amid tough competition. The United States, on the other hand, never had the benefit of aerial bombardment. And its auto industry has had such huge advantages - it was practically doomed from the beginning. Detroit has ready supplies of steel...rubber...plastic...labor - everything you need to make a modern automobile. Japan and Germany had to import almost everything. U.S. automakers also had a much bigger domestic market than either of its competitors...protected by two grand oceans. And it had vastly more open road...and gasoline that sold for only a fraction of the price in Japan or Germany. U.S. automakers would have to be numbskulls to blow this opportunity.

Of course, that is exactly what they did.

Not that it is any of our business. How they run the auto business is entirely up to them, as far as we're concerned. We just note, and not for the first time, that you've got to get in the habit of compensating for your strengths. Because it is your advantages that will kill you, not your weaknesses.

Why are Americans broke? Because they had the world's strongest economy and the world's most trusted money. As a result, everybody wanted to lend them money.

Why are the Chinese sitting on the biggest pile of money on earth? Because they had to live under one of the worst governments in history...because they were starving only a few years ago...and because nobody would lend them any money.

Now, what Americans have is the world's most powerful military machine...immensely more powerful than the closest rival. In fact, the word "rival" has no sense to it. In order to match the United States, you'd have to put together all the rest of the world's military forces. Even then, they'd be no match for the United States...neither in technology nor in organization.

With that, we invite you to imagine how the world's most successful military will destroy itself...just as the world's most successful economy just did. Cursed with far too much money...and far too much luck, (its major enemy just gave up!) it's just a matter of time before the Pentagon finds its own road to Hell. Maybe it already has!

Are we rambling? Maybe...but we were stuck on the Eurostar on our way back to London when we wrote this part. What else is there to do but ramble?

Out in the street, the demonstrators - including some who looked like professionals - got to tussle with police. The bankers generally laid low, but a few provoked the demonstrators. In the window of the Royal Bank of Scotland, for example, someone had pasted the words:

"WE LOVE MONEY."

Others held 10-pound notes out the window...taunting the demonstrators.

All in good fund, as near as we can tell.

Bill Bonner
for The Daily Reckoning Australia

• The New Chinese Era
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They got together and had a fancy dinner. They blamed hedge funds, corporate fat cats, tax dodgers, and the credit ratings agencies. They threw some more money at the IMF so that it can send gift baskets of currencies to poor countries. Then they took a silly class photo and immediately began congratulating themselves on how smart and courageous they are.

There you have it. The summit in sixty-two words.

Yes, the G20 meeting has ended in London and its results have been met with rapture by participants and the media alike. But looking at the group photo this morning, we couldn't help thinking these guys are absolutely clueless (or very good actors). It looked like a room full of American auto executives who don't fully appreciate the existential threat their institutions face.

Mission Accomplished!

U.S. President Barack Obama, Italian Prime Minister Silvio Berlusconi, Russian President Dmitry Medvedev, and Chinese President Hu Jintao

We're talking about the institution of government. Because that's what this G20 meeting was all about. It was about Big Government getting even bigger. It was about Big Government using the crisis as a chance to put the shackles on the free market. And it was about Big Government defending the way it funds itself (through debt and paper money).

But we suppose we should at least let you know what the G20 leaders agreed to. They've tripled the lending power of the International Monetary fund to US$750 billion. This is mostly in the form of creditor countries like Japan loaning the IMF money so it can loan it out to debtor countries like Mexico. Loans to make loans.

They've also expanded by US$250 billion the IMF's Special Drawing Rights (SDR), which are an obscure but emerging kind of uber reserve currency. No one is really sure what this means yet or where it is taking us.

As far as we can tell, the rest of it was just bashing of the private sector. A new Financial Stability Board will be set up at the IMF to oversee the vague new agreements on the regulation of hedge funds and the treatment of tax havens. The French wanted to 'name and shame' the tax havens for non-compliance with OECD rules on transparency. But the Chinese apparently shot the naming and shaming down.

So really, what do we have here? Is this, "the day that the world came together to fight back against the global recession," as British Prime Minister Gordon Brown said? Is it, "A turning point in our pursuit of the global economic recovery," as President Hopeychanger added? Or is just a bunch of well-heeled guys in suits trying to convince the world they are in charge and know what they are doing? Our take on that below. But first, how are markets taking the news?

Stocks are up and gold and government bonds are down. That's the short story. It wasn't news, but the summit statement reiterated a plan floated by the IMF last year to sell 403 tons of gold. The IMF planned on doing this last year to fund its operating deficit. It's advancing the idea again to raise money. Gordon Brown said, "Gold of the world is now being used to help the poor of the world."

When Gordon Brown sells gold, it's usually good for gold. In his role as Chancellor of the Exchequer, Brown infamously decided to sell half of Britain's gold at rock bottom prices in May of 1999. Not content with selling gold at the bottom of a 20-year cycle, Brown actually announced the move ahead of time, depressing gold prices even further before the selling began.

Gold sold for an average price of US$276 an ounce that May. It bottomed around $252 it July of that year and is up 258% since then, if you're using yesterday's futures price of US$905. This is why Bill Bonner's trade of the decade-sell stocks, buy gold-was so successful in the last ten years.

But what about the next ten years? Can gold do even better? Or is this concerted effort by the G20 to reinflate the credit bubble, sell gold, and increase debt and spending going to lead to temporary rally in stocks and a sell-off in gold?

One day does not a trend make, but it's worth noting that after dipping below $900, gold steadied the ship to climb back up. And now?

Let the G20 leaders have their self-congratulatory moment in the New World Order sun. Their plan is a failure because it blames the credit crisis on de-regulation, fraud, free markets, and bad bankers. This is a deliberate attempt to obscure the origins of the credit crisis and the recession/depression we now face: the credit boom that preceded it.

Governments themselves were largely responsible for that credit boom. Their coordinated interest rate cuts and the dollar-pegged global currency system led to an explosion in money, credit, and inevitably, leverage, risk-taking, and now, losses. They are trying to prevent those losses by throwing more borrowed money at the recession to "fight it."

That's moronic. "A recession is the liquidation period following an inflationary cycle," writes Harry Browne in "How You can Profit From the Coming Devaluation." How right he is. More from him in a moment.

Don't get us wrong. Greed and poor regulation certainly had a huge role in the credit boom. Leverage was allowed to go unchecked. Lending standards were lax and in many cases, non-existent. Ratings agencies gave gold-plated credit ratings to the collateralised assets flogged by Wall Street to pension funds, insurance companies, and Central Banks.

Mistakes were made. But it's clear the G20 leaders have no desire to admit their Prime Mover role in the formation of the credit bubble which has now popped. It is politically unacceptable to endure a recession which liquidates the bad investments. It means you have to stop pretending that bad bank assets are merely "impaired" and admit they are worth a fraction of their nominal value.

Instead what you see is the G20 moving to consolidate the position of government as the most powerful and intrusive institution in your economic life. Their tax harmonisation efforts would normally be called anti-competitive collusion. But by branding nations that offer low tax rates as renegades, they hope to make it impossible (practically speaking) for you to move your money and your assets to places that treat capital well.

So yes. It's just more of the same. A wealth and power grab. Steal from the future with borrowing. Rob from savers with inflation. Use the coercive power of the law to accomplish your goals. And wine, dine, and fly at taxpayer expense to achieve it all.

Realistically, we think this counter attack by Big Government to stave off the second wave of the credit crisis gives you time to sell stocks into a rally and diversify your assets ahead of the coming devaluations and inflation. Ultimately, the credibility of national governments and their currencies will be eroded and damaged beyond repair, based on unsustainable fiscal and monetary policies.

But for now they are pretending it will work and that everything is fine. Maybe that's what they really think. Or maybe that's all they know. "In thousands of years of monetary history," writes Harry Browne, "only one temporary solution [to warding off recession] has ever been discovered."

"Governments know only one way of holding back recession. What do you suppose it is? Yes, the only solution they can think of is to continue the inflation. The 'boom' is regenerated with more bank credit and government subsidies. Companies appear to come to life again."

"Prices go higher, but in such irregular patterns that businessmen and wage earners are unable to make rational decisions from the distorted price structure. Inefficient businessmen stay in business with more credit-at the expense of other companies."

We think Harry is right. But the question is, which prices? It doesn't look like consumer prices will be rising any time soon. There is still massive global production over capacity.

But the money bomb dropped on markets by the G20--"more money than ever before," said Gordon Brown-may sucker people back into the stock market and ignite a short round of leveraged risk taking. What should you do?

Well, Australia posted its second-largest trade surplus ever yesterday, according to the Australian Bureau of Statistics. The surplus was just over $2.1 billion. Exports were up 4%. But the big driver was not, say coal and iron ore but what the ABS called "other goods." And what are they?

Well, "other goods" exports were up 49% to $816 million and the major contributor to that was gold. Aussie gold exports totalled $784 million for the period and were up 55%. So what does it mean?

The IMF may be selling gold. But we reckon a lot of people are happy to buy it. With the massive expansion in global stimulus, borrowing, and spending, we are approaching the next phase of this crisis. And we reckon when the G20 meets in New York again in September, they may not be smiling anymore.

Dan Denning
for The Daily Reckoning Australia

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APRIL FOOL'S CAME a day late to the gold market this week.

"The biggest interest-rate cuts in history...An unprecedented fiscal expansion, injecting by next year $5 trillion into the world economy...expansionary policies as long as they are needed..."

So said Gordon Brown, summarizing the G20 summit of world leaders at its conclusion on Thursday.

On top of what's already been promised, the UK prime minister then announced "Additional resources of $1 trillion through the International Monetary Fund and other institutions [plus] $250 billion from Special Drawing Rights [the IMF bank reserve currency] issued to member countries...trebling the resources of the IMF with up to an additional $500 billion" on top.

What's more, Mr.Brown's and the other top 19 world leader have agreed "not 100 billion but $250 billion of trade finance...provided over the next 2 years through export credit agencies, including $50bn through the new World Bank initiatives..."

In short, "More money than ever before," as the prime minister put it.

Meantime, however, the Gold Price dropped $30 an ounce, dipping below $900 for only the fourth time since February.

Why? "A Reuters story released just after noon UK time highlights considerable short-term risk to the gold market" gasped UBS in an email at lunchtime.

"We had expected any conversations and statements about gold at the G20 to be limited to the proposed sale of 403.3 tonnes of gold," went on John Reade, the Swiss bank's highly respected metals analyst in London.

"But a statement from the UK Treasury Minister and [a] G20 source suggests that more than this amount may be sold to support the IMF.

"This is potentially really bad news for gold market sentiment in the near term."

Those 400-odd tonnes, already proposed for sale by the International Monetary Fund (IMF) since February 2008, had look too small by half to several African delegates ahead of the G20 summit.

Gordon Brown himself has been agitating for IMF gold sales for the last 10 years, ever since he himself ordered the Bank of England to sell half the UK's national reserves at rock-bottom prices. (The gold price rose 17% as those sales then took place; when the IMF Sold Gold at the end of the 1970s, "dumping" 1,600 tonnes onto the market, the price rose eight-fold regardless...)

But anyone looking for G20 fresh action - rather than just a re-hash of existing commitments - only got it in money inflation, not in proposed gold sales by the IMF.

Citing only "agreed sales of gold" - and then confirming in questions-and-answers that the pre-proposed 403 tonne sale will be the limit - "Gold of the world is now being used to help the poor of the world," said Brown.

Here's hoping the poor take their chance to squirrel away a little more of that metal on Brown's latest gold-selling success. Because with all that money headed their way - barely 9 months after crude oil hit $150 per barrel and global inflation reached 30-year highs - they might just need all the help they can get.

Adrian Ash
for The Daily Reckoning Australia

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"If, on the breaking out of any future war, we shall not have very considerably reduced our debt, one of two things must happen, either the whole expense of that war must be defrayed by taxes raised from year to year, or we must, at the end of that war, if not before, submit to a national bankruptcy; not that we shall be unable to bear any large additions to the debt; it would be difficult to set limits to the powers of a great nation; but assuredly there are limits to the price, which in the form of perpetual taxation, individuals will submit to pay for the privilege merely of living in their nation country." (Ricardo, Principles, Ed. Straffa, p.249).

Gordon Brown has no intention of embarking on a new war, though he has defence commitments in Afghanistan, but he has failed to foresee that a large deficit makes it more difficult to support future deficits. They will be harder to meet by borrowing and they will result in levels of taxation which will discourage enterprise and possibly lead to migration.

On page 356 there is the statement on which the nineteenth century gold standard was based:
"Experience, however, shows that neither a State nor a Bank ever have had the unrestricted power of issuing paper money, without abusing that power; in all States, therefore, the issue of paper money ought to be under some check and control; and none seems so proper for that purpose as that of subjecting the issues of paper money to the obligation of paying their notes, either in gold or bullion."

Under the gold standard, national governments had to regulate the issue of money by the discipline of convertibility into gold. William Stanley Jevons published his book on Money in 1873 - 58 years after Ricardo. He quotes Daniel Webster's observation about the U.S.: "We have suffered more from paper money than from every other cause or calamity. It has killed and caused more injustice than even the arms and artifices of our enemy." Jevons also observes, in his own right: The principle objections to "inconvertible paper currency are two in number,. 1. The great temptations which it offers to over issue and consequent depreciation. 2. The impossibility of varying its importance in accordance with the requirements of trade."

The essential qualification of an exchange system in classical Ricardian economic theory is therefore one of convertibility. The value of a currency is determined by its relative scarcity, and its relative scarcity is determined by its convertibility at a fixed rate into a fixed commodity; the Victorian economists regarded gold as the most convenient commodity, and the one which had the nearest to a stable rate of production.

There is a growing feeling that the present economic crisis requires a stabilisation of national currencies against some sort of world currency. The Chinese Government is interested in a world currency system such as Maynard Keynes advocated at Bretton Woods in 1944. The Russians have called for a partial restoration of a gold based system. In The Daily Telegraph of March 30th, Ambrose Evans-Pritchard reports that Arkady Dvorkevich, the Kremlin's Chief Economic Adviser, has stated that Russia "favours the inclusion of gold bullion in the basket-weighting of a new gold currency based on 'Special Drawing Rights' issued by the International Monetary Fund."

Historically, the world has moved in the course of a century from the pre-1914 gold standard, which was a system of classical discipline based on convertibility into gold, through a succession of floating rates, with the ultimate American convertibility into gold broken in 1971. As Jevons observed, an inconvertible floating paper money is in practice extremely liable to over-issue, leading to inflation. In the absence of convertibility at a fixed rate, a currency degenerates into mere paper. The Russians are the second largest gold producer, and are also major oil and gas producers. Naturally, they would like gold to play a part in any bundle of assets on which a new world currency might be based. We are in an early stage of a new exchange debate. What is interesting is that the debate has started with big power participation from China and Russia.

William Rees-Mogg
for The Daily Reckoning Australia

• Is Gold Money?
• There Are Two Ways of Studying Economic Theory
• Financial Crises in History
• A New Bretton Woods Vs. The Old Bretton Woods
• Will Synchronized Rate Cuts Solve International Financial System Problems?

You get the sense that investors are of two minds, both probably subconscious. On the left shoulder, a little devil whispers into their ear that there is still at least another US$1 trillion in losses to be taken by the global financial sector. It warns that asset deflation can last for years and resist quantitative easing.

"Look at Japan puny human. Its exports fell 50% year-over-year in February. GDP is shrinking at an annualised pace of 12.1%. Global demand for Japanese goods has collapsed. And it's not just the exporters. It's the consumers too. European and American Banks will need more capital. There will be even more bailouts. The economy won't recover this year. Banks can't resume lending and consumers spending until losses have been taken and debts written off. How can stocks rally? This is not the bottom. Not yet."

In the right ear another devil whispers. "Yes yes, asset deflation is a big worry. But inflation. It has to happen. You can't expand the money supply without causing a rise in prices. It will come when the new money is released from banks into the economy. Watch for it. Prepare. The Fed will create trillions more to buy U.S. bonds. The Chinese will stop buying them. The dollar will crash. Sometime in 2010 prices will begin to soar."

Which devil is right? The devil warning of more asset deflation or the one who has studied monetary history and concludes it has to be inflation? More on that in a moment.

U.S markets dithered with the data on Wednesday. Stocks weren't the story. Bonds were. The bond market tells all. And what's it telling you? Lenders to the U.S. government are demanding higher yields.

The Federal Reserve bought $7.5 billion in U.S. Treasuries. But yields on U.S. ten-year notes rose anyway. Recall that when the Fed announced its plan to begin buying U.S. debt, ten-year yields fell 47 basis points. Since then, though, they've risen by 24 points in five days.

What does that mean? Well, the U.S. Treasury auctioned $34 billion in five-year notes today. Tomorrow, it auctions another $24 billion in lucky seven-year notes. For the whole week, the U.S. is hawking a whopping $98 billion in new debt to finance its old and new spending.

If you're scoring at home, that's a lot of new supply coming on to the market. Just as in any other market, an increase in supply leads to lower prices. With bonds, lower prices mean higher yields. That's bad news for the U.S. government because higher yields mean higher borrowing costs, and the U.S. government has world-class borrowing plans.

So in steps the Fed to try and cap yields, which also keeps other rates that are pegged to the ten-year low, like mortgage rates. The only problem?

Today's action in the bond market suggests that investors are not going to play along. If the Fed wants to keep yields down, it may have to buy a lot more U.S. bonds than it expected. There may be a lot more sellers than it expected. And a lot fewer buyers.

Take the U.K. Today, for the first time in seven years, the U.K. failed to attract enough bids at an auction of £1.75 billion in 40-year bonds. That's right, investors turned their back on sovereign British debt.

It's not so surprising given the economic situation in the U.K. Britain is again the poor man of Europe (unless you count Iceland, which is really the destitute man of Europe). In Britain, you have crashing house prices, a banking sector in disarray, public finances in an absolute mess, and a Prime Minister who wants to borrow even more money for a bigger stimulus (does this sound familiar?)

By the way, do you get the feeling the G20 meeting in London next week is going to be a circus? Stay tuned on that. Markets may not like it one bit.

The demise of British financial capitalism prompted a British member of the European Parliament to rather publicly take Prime Minister Gordon Brown to the woodshed. It was great! He called him the "devalued Prime Minister of a devalued nation." You can watch the whole thing here. Opposition parties in the U.S. and Australia should take notes.

If you get the feeling that the world's modern financial architecture is buckling, you are not alone. It is. With the U.S. and the U.K. facing massive deficits and Japan joining them in a policy of quantitative easing, basic assumptions about how the world economy works (like whether the dollar is a good long term reserve currency and how much debt a nation can sustain) are being called into question.

Czech Republic Prime Minister Mirek Topolanek hold's the EU's rotating six-month presidency. He used his bully pulpit to cause a diplomatic stir yesterday by saying that the, "The US Treasury secretary [Tim Geithner] talks about permanent action and we, at our spring council, were quite alarmed at that."

There's more. "The US," he said, "is repeating mistakes from the 1930s, such as wide-ranging stimuluses [sic], protectionist tendencies and appeals, the Buy American campaign, and so on...All these steps, their combination and their permanency, are the road to hell."

We reckon our asset deflation devil and our inflation devil would both like that. All roads lead to the same place now apparently. And it isn't Rome.

Meanwhile, back in Australia, regulators and politicians face a moment of truth about Australia's economic future and how much if it is going to be determined by Australians. The Australian Competition and Consumer Commission (ACCC) has ruled in favour of Chinalco's $28 billion bid for Rio Tinto. Now all that's left is for the Foreign Investment Review Board (FIRB) and Treasurer Wayne Swan to sign off on the deal.

But according to today's Australian, the ACCC ruling was based on an assumption the commission made. That assumption is that the Chinese government is the ultimate bidder for Aussie assets and that Chinese companies are all subsidiaries of the government.

This leaves the door open for Kevin Rudd to make a deal with his friends in Beijing in the style of Thomas Jefferson's Louisiana Purchase. We'll get to that in a second. But before we do, can someone please explain Australia's policy with respect to investment from Chinese state owned enterprises? The clock is ticking...

The FIRB has three bids in front of it at the moment and it's neither approved nor denied any of them. Hunan Valin Iron and Steel Group wants to buy 17.6% stake in Fortescue Metals (ASX:FMG) for $644.8 million. Fortescue wants to sell. The FIRB wants another thirty days from March 25th to think things over. Meanwhile, Macquarie Group says Fortescue faces a $731 million shortfall to fund its expansion plans.

Next, China Minmetals has made a $2.6 billion bid for distressed miner OZ Minerals (ASX:OZL). But on Tuesday shares of OZL (already in the pits, much to our chagrin) fell as much as 15% when the FIRB announced it was delaying its decision on the Minmetals bid by another 90 days. OZ has $1.3 billion in debt and desperately needs more capital before March 31st.

So now the FIRB must deal with Chinalco's bid too. Will it delay that decision too? On March 18th, the Senate Standing Committee on Economics began a Parliamentary inquiry into foreign investments by state owned entities. It's reviewing how to deal with Chinese Investment. You could also call it stalling.

The trouble is, the inquiry isn't scheduled to report back to the Parliament until June 17th. The FIRB has knocked back the OZ-Minmetals ruling until June 22nd. And it's knocked back the FMG-Hunan ruling until June 14th.

What will the FIRB know by the second week of June that it does not know now? Further, how can it be so sure that credit markets will roll over Oz's debt, or that Rio's share price won't again decline as investors worry about how it's going to finance the massive debt it used to finance the Alcan acquisition?

Markets are moving pretty fast these days. June is a long way away. And here's the important point: Australian firms need capital badly.

The government seems happy to give money away to people who want to drink, buy TVs, and gamble. And it's happy to subsidise commercial property development (because falling property prices would be a national and electoral disaster). But it seems like it's doing everything it can to make life miserable for the miners who make up such a large part of the national economy.

But the Chinese are here to help. They have trillions of U.S. dollars. They would like to get rid of them. A trade of dollars for tangible assets is in order. So shouldn't a deal be made?

After all, let's be candid. Even though there is a lot of engineering and expertise required to be a world-class low-cost commodity producer or miner, extractive industries are low on the value-added chain in economic terms. The raw materials command a certain price. But the finished consumer and manufacturing goods they are turned into command a higher price with a larger profit margin for the manufacturer or the ultimate retailer.

If Australia is trying to figure out how to maximise the value of its natural resources, certain facts about the economy should be put on the table. It's a two tier economy. On one tier you have the banks and the finance sector. On the other you have the resource industry.

We all know it's a bear market in credit. The Aussie banks may or may not suffer more losses on their loan books. But the era of finance as a generator of outsize profits for shareholders is probably well and truly over for awhile. You can't build a national economy on banking (unless you're Switzerland, which cops it for being a tax haven).

That leaves the Aussie economy with resources. It has a willing long-term partner in China. And there's no doubt China will be Australia's principal resource customer for decades to come.

The Parliament, then, has to make a deal or craft a policy that maximise the value Australia gets for its resources. And it has to do so acknowledging that Chinese capital is critical to the development and expansion of the industry as a whole.

So here is our plan: sell China a 50-year lease to Australian resource projects. Demand an annual royalty or excise tax. Distribute the profits from the lease sale to regular Aussies. Presto!

No more need for government borrowing. Nor more stimulus plans. No more hand wringing. Just make a deal with your inevitable partner and guarantee the national cash flow for years. You can even call WA "New South Shanghai."

It might not be popular at first. But just do the maths. Let's say the price of the 50-year lease is US$1 trillion, or about A$1.43 trillion. You might even raise the price, to account for inflation. But even if you leave it at $1.43 trillion that amounts to around $28.6 billion a year for the next fifty years.

You could, if you liked, simply cut everyone in the country a check for $1,361 each year. It would be the Chinese Dividend. Imagine how much stimulating it would do!

There are problems, of course. A mere $28.6 billion a year is admittedly less than the current total value of Australian resource exports. So the lease price might have to be raised. But it's a beginning...

Of course we're joking. But we are serious about one point. The Chinese have capital and need Australia's resources. Australian firms have debt and need capital. It's a global bear market in credit. Australia and China are destined to be long term partners. The Prime Minister speaks Mandarin. Will it really take until June 17th to figure out how this is going to end?

Lots of reader mail on housing came in. So much so, in fact, that we'll deal with it in a special essay tomorrow. Until then, here's some reader mail.

Dear Dan,

You wrote, ""This alleged shortage is often alluded to but never proven..."

Rising rents are proof.

Guy B.

Dear Dan,

Regarding the housing shortage, I own a block of 12 units. About 5 or 6 years ago when a tenant vacated the unit, it would take several weeks to re let the unit. These days when a unit is vacated it is filled within a few days.

We may not have a chronic housing shortage to the point where people are sleeping in their cars, but I do think we have one. And if you are wondering why aren't developers developing than consider this (1) construction costs are still very high compared to resale value, thanks to a lack of competition is steel, concrete, copper piping, copper wiring and other material pricing (2) the GST is a killer for developers, if the govt is serious about getting the construction industry going all they have to do is get rid of the GST and it will boom (3) to a lesser extent bank financing, but the reason this is an issue is because 1 and 2 make most projects barely viable.

Regards,

Michael

Dan,

You write "The number of first home buyer commitments as a percentage of total owner occupied housing finance commitments increased from 25.7% in December 2008 to 26.5% in January 2009. This is the highest level recorded since the series commenced in 1991" - but you omit to state what the annual levels or average level has been since 1991.

If it has always been around the 20-30% mark then it would look like you are sensationalising. If however the figure has risen substantially in recent years from a much lower average then that would be something.
For the record, the AFG mortgage survey we cited yesterday showed that first home buyers accounted for just 12.1% of new mortgages in January of 2008 compared to 26.1% in February of 2009. That's an increase of 115%, and very subprime-esque in our view.

But the Reserve Bank provides a little clarity on this matte too. The RBA's Head of Economic Analysis, Anthony Richards, gave a speech yesterday about Australian housing in which he said, "First-home buyer demand is also expanding following the boost to grants for these buyers. We can see this from the increase in the number of grant payments made in recent months and the rise in the share of first-home buyers in loan approvals to the highest on record."

He also provided this handy little chart. More on his report and housing in the essay section tomorrow.

First Home Buyers Surge Into Housing

Source: Reserve Bank of Australia

Hi Ho Dan,

Love you site, great direct no bull info. I have one nagging question that has been testing my "grey matter" for months.

Let's say 20% of the Milky Bar Kid's "working families" lose their bread winner. We still have 80% of the "working serfs" paying their 9% into super funds. That is a huge lot of paper that must go somewhere safe.

Will the keepers of the cash invest locally in mortgages? Will the Banks soak this up in place of imported funds?

Regards,

Ian H.

Good questions. The banks could fund local lending from local deposits. The question is whether Super fund managers risk putting Super contributions in cash rather than shares or mortgage and property funds (not guaranteed by the government). After all, who wants to pay a Super fund manager to put you in cash? You do that yourself in a self managed fund.

Hi Dan,

The giant ponzi scheme is really heating up with that news from the Fed. Perhaps we could call it a Fonzi scheme?

So Freddie and Fannie, who are essentially bankrupt, are raising debt capital from the Fed. This is used to make new loans, which are then securitised and sold into the open market, trading as agency MBS.

Actual market players are no longer keen to buy these at low interest rates, so the Fed has to step in as the marginal buyer to affect the price. The Fed prints money to buy agency debt and prints money to buy the securitised asset...itself the product of the debt it created out of thin air.

Then I read some clown who says, 'this action will help everybody, maybe the Fed can put humpty dumpty back together again'. The animals are now well in charge of the zoo. This is not going to turn out well.

G.
Probably not.

Dan Denning
for The Daily Reckoning Australia

• Australia’s Capital Crisis and its Chinese Future
• U.S. Bonds Better than Greek or Other Sovereign Bonds
• Trickle of Chinese Money into Australian Housing and Equities Small Compared to Growth in Bank Lending
• Speculators and Chinese Firms Accumulating Australian Resource Companies and Commodities
• The Iron Ore Pricing War Between China & Australia

Today's the day…the whole world turns its weary eyes to you.

"Obama's moment arrives," says the International Herald Tribune.

"World needs Obama to succeed," begins an editorial in the Financial Times.

"The Hope of the World," says one Paris-based magazine…with a photo of Barack and Michelle on the cover.

Never before have so many people counted so much on just one man.

In the torrent of words and pictures are two thoughts: One, a sense of achievement and pride…in that Americans elected the son of an African as their top man. It is thought to mark a major step forward for the whole human race. We have risen above our prejudices…and our past. At least, that's what they say. Two, there is an expectation…or perhaps only a wish…that this man can somehow keep the world economy from falling apart.

As to the first thought, we have no opinion. We were never able to get into the spirit of racism. In fact, we were suspicious of it. People don't really care about race; it's culture that matters.

But as to the second thought, we have a number of opinions…most of which you have suffered already, dear reader.

Here at The Daily Reckoning, we wish Mr. Obama well. But it is not wishes that make people wealthy. It is work, saving, innovation, and luck. And it is not wishes that fix a post-bubble economy…it is a bust. Best to let it happen.

But we are alone in that opinion…as in so many others. Everyone wishes the errors of the bubble years would just go away…that the bust would disappear. Of course, it doesn't work that way. Instead, the errors of the last boom/bubble period - known as the 'Great Moderation' - get passed to the Obama Administration along with the keys to the washroom. And now, the whole world looks to the captain of the team…waiting instructions.

And here we turn to the rest of the news. Markets in the United States were closed yesterday. But Britain had its worst day in years. And today, Asian markets are trading lower…because of the problems in the banking sector.

"Blue Monday," the Daily Telegraph calls it. The Royal Bank of Scotland has just reported the biggest loss in British history - 28 billion pounds worth. Its share price lost 67% yesterday - also a record breaker.

The Brown government is on the case…like the Obama government on the other side of the Atlantic. Last week, the Bank of America got a $138 billion handout. And Merrill Lynch got guarantees covering $118 billion in dodgy assets. This week, what fixes will her majesty's government come up with? What magic wand will the chancellor wave to make the bust go away?

We remind readers that the Brits were America's closest sidekicks during the boom years. As American house prices soared…U.K. house prices soared even further. And as Americans went deep in debt, the Brits went even deeper. Those were the days when the Bubble Gang robbed the banks of capital - paying out huge fees and bonuses…rewards for making the worst deals and investments in the industry's history. RBS, for example, is in a jamb because its managers went on an acquisition spree - including the biggest banking deal in UK history, the purchase of ABN Amro for 49 billion pounds. Each acquisition was like a conquest, celebrated with champagne and bonuses. But did RBS have 49 billion? Of course not. It borrowed the money; it was a leveraged deal. And naturally, now that the bubble years are over, it's having a tough time paying the money back. Mistakes have to be corrected after all.

And so the Brown government has stepped in. From an initial bailout of Northern Rock, which put the government on the hook for 55 billion pounds in September '07, the taxpayers' potential liability has grown with each step of the banking crisis. In September 2008, it was Bradford and Bingley that needed a bailout. Then, the whole sector needed credit guarantees…and a special liquidity scheme was added in October…followed by further insurance and a "toxic asset" buy-up plan a few weeks ago. Now, the total at risk is nearly 1 trillion pounds…or nearly $50,000 per UK taxpayer.

*** It was only a few months ago that Mr. Brown stood before Parliament and misspoke… "We have saved the world…" he began…before the MPs started laughing.

He meant to say that he had saved British banking with a 37 billion pound program. But even that turned out to be wishful thinking. Now, he's back with another 350 billion pounds in rescue money. The earlier saving grace put 20 billion of the taxpayers' money in RBS. That now looks like a poor investment; the bank is only worth 5 billion. But that doesn't stop the politicians from putting bad money after good. Besides, they've got plenty of bad money…and are about to have a lot more.

Yes, dear reader…we have confidence in our central banks. And our confidence was raised even higher after reading this report in the Telegraph:

"Bank of England edges closer to 'printing money'" says the headline.

The report continues:

"Under the scheme's terms, the Bank will be able to buy assets including corporate bonds and commercial paper, a move which Mervyn King, the Bank's Governor, called "an important additional tool to improve financing conditions in the economy."

"The asset purchase facility does not in itself amount to quantitative easing or 'printing money,' because the scheme initially will be financed by Treasury Bills and does not involve an increase e in the money supply."

And here's the money paragraph…

"However, the Treasury has given the Bank's Monetary Policy Committee the option to go down that road by extending the scheme at a later date and paying for assets with what amounts to newly created money…"

Now, all three of the Western world's leading central banks - the Fed, the ECB and the BoA - are ready to print money. And the big question before us is how long will it take them to get the printing presses oiled and working properly?

Mr. Obama enjoys more "political capital" than any leader in history. The whole planet - and perhaps the whole galaxy - is rooting for him. What will he do with it?

As for his inaugural speech, Mr. Obama is expected to appeal to the public's residual sense of heroic civic service.

"Ask not what the banks can do for you…ask what you can do for the banks," he is likely to say… Just kidding, of course. That is what he is likely to do, but not say. Everyone believes the banks need more money. He is likely to give them more. How? Using the "quantitative easing" technique…otherwise known as printing up money. The banks, of course, will not lend…and people will not borrow. They're not fools. So, then, the Obama administration will begin pumping harder…like they do in Zimbabwe.

*** Zimbabwe just released a new bill - the 100 trillion dollar note, said to be worth about 33 US dollars yesterday. Today, it is worth about $16. Tomorrow, it will be worth about $8. Within a week or two, it will be as worthless as all the other notes the Zimbabweans have printed.

Of course, we're a long way from there. Many prices in the United States and Britain are actually falling. The feds still don't have the printing presses working properly. But they'll get the hang of it; we're sure of it.

A Zimbabwe-style inflation may seem unlikely. But is a U.S.-style inflation, circa 1970s, unrealistic? That too, was caused by policy errors, says Robert J. Samuelson. The feds were so eager to promote full employment, he writes, they caused stagflation. Consumer prices were rising at a 13.5% rate by 1980. Unemployment reached as high as 11%.

Those rates weren't the end of the world. But they were the end of an era. Stocks fell from a high in 1966 down to a low 14 years later. And bond yields went in the opposite direction. From the lows of the '50s and '60s…they were in the double digits by the early '80s. Then, of course, stocks and bonds bottomed…and a new boom began.

The average bear market in stocks takes about 15 years to reach. Looking at it from our usual happy, positive perspective, we put the beginning of the bear market in January 2000. Since then, stocks are down in real terms. If the bear market were to last 15 years, you could expect the bottom six years from now….at prices probably about half what they are today.

But never before have so many financial policymakers been so determined to prevent a correction. How? By causing inflation. Our guess is that they'll get the hang of it long before the bear market has run its course.

"Inflation could return sooner than you think," says MoneyWeek magazine. "Instead of deflation, by the end of this year we could have the beginnings of really rapid inflation," said hedge fund manager Jim Mellon, "which could get out of control, particularly in America."

"It could be a year…maybe 24 months," said an old friend yesterday. Terry Easton, who put the key question to Ben Bernanke last week, thinks Obama will follow Roosevelt's program.

"Secretly, bankers are already being advised about how to handle a bank holiday," says Terry. "There will be limits on how much money you can take out of a bank. And probably limits on what you can do with it."

There will probably be controls on trading gold .. that was one of Roosevelt's plan too. And probably a national health care program. And who knows what else.

And until they get the inflation pumps working again, look for falling prices on stocks, houses…and just about everything else. Unemployment will rise higher than almost anyone expects. The Chinese economy could implode. Fortunes will change hands…with just about everyone ending up a net loser. Businesses will go bust. Malls will be closed. Banks will be nationalized (even more than they are already).

*** It's eve of the Feast of St. Agnes tonight…looking for a husband? This is your big chance…

St. Agnes that's to lovers kind
Come ease the trouble of my mind…
- Keats

Bill Bonner
for The Daily Reckoning Australia

• Biggest Bankruptcy in Wall Street History
• Seems Everyone is Speculating on the Banks
• You Can Lead Investors to Liquidity but You Can’t Make Them Buy Stocks
• Central Banks’ New Money is Piling Up
• Obama Insists That Not Only Can We Detect Bubbles We Can Also Deflate Them

THIS COMING MAY will mark 10 years since Gordon Brown chose to sell well over half the UK's national gold reserves - some 415 tonnes all told - at what would prove rock-bottom prices.

Never mind his politics. With the Euro about to compete with the Dollar for central-bank vault space, everyone else was selling the stuff too, led by Canada, France and even the Swiss...

Never mind the nation's capital loss either, now judged above £4 billion (US$6bn). Because that's peanuts compared to the mortgage-bond losses now hitting London's commercial banks (guessed at £123bn) or next year's public sector borrowing requirement (£118bn)...

Never mind his method...announcing the sales a full two months before the first actual offer, giving the market time to dump in anticipation. And forget about Brown's rationale, too.

Almost two decades after gold's then-record top of $850 an ounce, the Nasdaq index would end the year 80% higher, discounting tech-stock earnings until A.D. 2129. Cue the FT, Economist and BusinessWeek to announce the "death of gold" as a store of value.

Because who needed gold when you had Boo.com?

But those British investors who saw life in the metal, however, have now tripled their money. Last year alone, the Gold Price in Sterling rose by 40%, beating all other investments bar the Japanese Yen and an early punt on Portsmouth winning the FA Cup.

So is it too late to buy?

Well, global Gold Mining supply, which peaked in 2003, fell yet again last year. Growth from China (now the world's No.1 producer) was more than offset by declining ore grades, shrinking margins and energy instability in South Africa, where annual output has halved from a decade ago.

Thanks to the financial crisis, meantime, junior gold miners - always a high-risk proposition - continue struggling for finance, and many are mothballing young projects. The last true "elephant" find came more than two decades ago at Peru's Yanacocha. And all this while, the industry continues to miss a "lost generation" of geologists, mine engineers and metallurgy experts whose mathematical skills earned them far more in the City of London than hard-hats could pay.

On the other side of the trade, gold investment demand leapt in 2008 as the financial crisis deepened, with a significant shift (particularly by high-net worth individuals) from paper certificates and derivative schemes to owning physical metal outright.

Why? Because amid the banking collapse and stock-market wipe-out, holding a high-value asset - free from the risk of default - only became more attractive. The apparent threat of "deflation" may only make gold more attractive again. Because a deflation of wages and prices in fact makes credit-default the investor's No.1 terror.

Whereas the obverse risk...the threat of soaring inflation? We'll get to that in a moment.

At the retail end of the market, a surge in Gold Coin demand came as the dollar-price first slid from its peak of $1,032 per ounce in March - the top not coincidentally reached when Bear Stearns collapsed into the warm, tax-funded arms of a takeover by J.P.Morgan. And then, as the dollar-gold price began to struggle - and even while the gold futures market shrank by one-half (shrunken by hedge funds and other leveraged speculators having their credit lines pulled by the ailing investment banks) - the surging bid for physical gold caught refineries and mints napping once more.

Shortages continue worldwide today, with new buyers now having to wait six to eight weeks for delivery. The premiums charged on retail products have jumped accordingly, averaging 6% and above in the US and Europe. Yet jewellery buying in the key markets of India and south-east Asia also remained strong in the back-half of last year, slipping back only to 2006 levels despite the month-on-month records in Rupee gold prices.

Scrap supplies from Middle East owners meantime dried up in the summer, exacerbating the shortage of ready material for fresh investment supplies. Yes, scrap supplies picked up (and strongly) in the back-half of '08. But gold sales from central banks meantime sank to a 10-year low, as "prudence" - the watchword used (without irony) by Gordon Brown when he first came to power - made a shock return to official policy, if only in central-bank reserves management.

You see, the fifteen members of the Central Bank Gold Agreement (CBGA) sold a mere 357 tonnes of the stuff in the year-to-Sept. 2008...almost 30% below their agreed ceiling. World No.2 gold hoarder the German Bundesbank even went as far as to publically refuse a call to help balance the country's federal accounts by selling gold from its vaults, restating instead gold's key role in building "confidence and stability" in official currency.

It's tough to sell gold when banks are collapsing and depression looms. Even Gordon Brown might guess that today. Sadly for cash savers, however, interest-rate policy now wants to annihilate both "confidence and stability" in all government paper. And looking ahead to Gold in 2009, last year's collapse of official interest rates worldwide - down to an average nudging 1.0% for cash savers in the G7 top economies - might prove a tough hangover to shake.

So what next?

Well, if gold only gains during inflation, then that's what we must have been suffering since the "Brown bottom" of 10 years ago - an inflation in house prices, consumer debt and credit derivatives that finally burst into the consumer price data in 2008. The Gold Price in Sterling, for instance, has since returned 13% per year on average. Bank of England base rate, in contrast, has held just 1.9% above inflation on average - less than half the level of real returns paid during the 1980s and '90s.

Now as 2009 begins, real interest rates have been slashed well below zero in the UK, Japan, Switzerland, Taiwan and United States...and it's here you'll find the one common factor between this decade's bull market in gold and the 20-fold rise of the Seventies. Because low returns paid to cash remove the one big disincentive to using gold to store wealth: the fact that it doesn't pay you an income.

Nor do US Dollars, Japanese Yen or British Pounds today. Can the Eurozone's bank deposit rates be far behind?

If the race is on to pay zero to cash savers, then ever-more cash savers might want to reach the finish line first...and jump straight into that non-paying, non-defaulting investment asset - the same asset which Gordon Brown thought had no further use back in May '99:

Physical gold bullion.

Adrian Ash
for The Daily Reckoning Australia

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