So sales of new homes in America are down 38% year-over-year and prices are at their lowest level in the last five years. The gains of the housing boom are melting away. But does it have anything to with Australia? Or are we just trying to whip you into a frenzy of despair and doom on a Friday afternoon?

Well, no. We're not trying to do that. But we are trying to suggest that the collapse of housing booms in the U.S. and the U.K. IS something that could happen here in Australia, too. It is possible. And if it's possible, it's wise to work out how it might happen and what, if anything, you can do to prepare for it.

But if the whole concept of a house price crash leading to more trouble in an economy offends you in some way, it's probably best not to read the Daily Reckoning.

Before we move on, a quick note about Jim Davidson's new letter we told you about yesterday. The odds are that the letter does indeed cater to North American investors. We're investigating and will report back. We would say that Jim's insight is worth reading even if the investment advice is not practical for Australian investors. But please note we are not far away from our own "big picture" product that DOES speak to the needs of Australian investors specifically. Stay tuned!

Now, what about stocks? The S&P 500 reversed four strong days of gains to give up 3.3%. The bad housing data and a weak durable goods orders report didn't add much to Wall Street's mood. There's one line of emotional exuberance (not thought) that revels in the idea that an $850 billion government stimulus will lead to an earnings recovery for S&P 500 firms. And then there is reality.

Australian reality is that the Reserve Bank will probably serve up another 100 basis point interest rate cut next week. You'll probably see another "stimulus" plan from the government, too. How exactly more credit and a cash binge will support asset values escapes us.

But it's possible that Australia is now in lock-step with every other central bank and government in the world, and that all monetary roads lead to Zimbabwe, where a brave but brittle paper currency has gone to its god like a soldier, to paraphrase Rudyard Kipling.

Rest in peace, Zimbabwe dollar. Robert Mugabe and Gideon Gono have blown out your brains and gutted the Zimbabwe economy. Yes, the Zim dollar has gone to that great paper currency shredder in the sky overnight. 'Twas ever thus with fiat money. Just yesterday we were discussing the fate of the Zim dollar with Swarm Trader Gabriel Andre.

This was after the lights went out in Melbourne around 3pm under stifling 40 degree heat. Your entire crew at the Old Hat Factory quickly decamped down the street to Cafe Presse, to liberate the beer at that fine establishment before it was fatally compromised by the heat.

Up on the wall behind the bar at the Cafe and in amongst the bottles of wine (the Krinklewood Francesca Rose from Broke in the Lower Hunter Valley being our favourite in these torrid conditions) are samples of paper money from all over the world, some already dead, others still dying. And right smack in the middle was a billion dollar note from Zimbabwe.

That's billion with a "b". And before yesterday, you couldn't even buy a beer with it. That's beer with a "b".

As of last night, that currency is now worth what everyone suspected: nothing. The Zimbabwean monetary authorities said last rites over the scrap of paper and declared a trinity of currencies-the U.S. dollar, the British pound, and the Botswana pula-as legal tender.

Beware!

Competitive currency valuation is a dangerous game. To be fair, Zimbabwe didn't engage in what you'd call a normal competitive currency devaluation. It simply printed so much money so quickly that prices ceased to have anything to do with reality.

That is one reason why values-all sorts of values, mind you-become so distorted during inflation. Social cohesion is strained and economic activity disintegrates as people have no reliable medium of exchange. If you can't trade, you barter, beg, bargain, or steal. Unless you're the government, in which case theft is legal (either through taxation or inflation).

In the global competitive currency devaluation sweepstakes, the United States seems to be winning at the moment, if you can call it winning. By "winning" we mean that the U.S. central bank cut its interest rates the fastest and the furthest before other central banks followed. This rate-slashing effort, along with all the fiscal measures since (TARP, US$850bn stimulus) are designed to combat the credit depression, the housing crash, and lately, rising unemployment.

Normally, a country deliberately sells its own currency (or holds down its rate of appreciation against the currencies of its trading partners) in an effort to boost local exports. In fact, competitive currency devaluation has been the exact strategy of Asian exporters to the U.S. for, well, for the last thirty years. Keep your currency weak against the greenback and your goods are cheaper in the world's largest export market.

This vaguely mercantilist system all operated on the premise that the U.S. consumer could afford all the production of the world's factories. And he could! At least for awhile, and with the help of consumer credit, or lines of credit based on asset values (stocks and houses).

But now, that whole relationship (we think, they sweat), is broken because the credit has been cut off. Yet the rest of the world is now following U.S. monetary policy down the path of devaluation. It is exactly this simultaneous global paper currency devaluation we advised people to prepare for in the last issue of Diggers and Drillers (How to Prepare for the Coming Devaluation). And now it's here!

So how is the U.S. winning this race? Well, now that the rest of the world is slashing interest rates to zero and marching down the paper path, the U.S. dollar looks relatively more attractive. The U.S. has already taken a lot of currency debasing steps. It has a sort of first-mover advantage in destroying the purchasing power of its currency for its citizens. Expect the dollar to strengthen against other paper money, but to weaken against tangible goods like gold and oil.

And if you're worried that the U.S. has finished debasing itself, don't!

There will be more debasement to come. The U.S. has not yet begun to defile itself! The Fed is now prepared to print money to buy U.S. Treasury bonds in an attempt to bring long-term interest rates down and get the credit market going again. Yes dear reader, there is some major defilement ahead.

This raises a disturbing prospect. But since we walked down this line of inquiry, we may as well follow it to its logical conclusion: the insolvency in the financial system is a preview of the insolvency that could hit many households in America, the U.K. and Australia.

As our friend John Robb puts, it, "Here in the West, the crisis we are seeing might have started in the shadow banking sector with the collapse of subprime mortgages. However, the unexpected happened: it revealed the US/Euro middle class as insolvent and forced a shift in behaviour (towards something new). That insolvency and shift in behaviour will sink chances of economic recovery from gov't stimulus (you don't add debt in a debt driven crisis) and financial sector bailouts."

Next week, we promise to tell you more about the "something new." And it will not be nearly as gloomy. In fact, it's quite exciting.

In the meantime, the public erroneously believes that bailouts and stimuli will cure the ills of a mutli-decade addiction to credit and living beyond one's means, both personally and as a nation. Maybe that's why stock prices were up this week, as the Obama plan moved through Congress. But did you notice that gold is back up over $900?

But wait! Before we drone on about gold, a reader doth protest! Appropriating our royal we, he writes:

"We at DR are really really smart and we think gold is just great, it is really really nice stuff. In fact if we were in charge we would not go for these stimulus packages, they just stuff up the free market. Instead we would put all that money into gold, we really love it. Gold Gold Gold, we do not have gold fever, just think of what you could do with the stuff, you could buy it and hold it and lust over it and hope it goes up. Yippy. We even found someone who reckons the Bundesbank would be mad to sell it at today's prices, they should just hold it like we would, remember all those things you can do with it. It is really really nice stuff, it should go to at least 2,500, if you love it as much as we do, you would pay anything for it. It's not good fever, it is solid investment advice. We can think of just so many reasons why gold should go up, it is such remarkable stuff, I bet if I left it under my bed while I had a wet dream about it, it would just elevate all by itself. Those bloody Germans must be nuts to sell something like that."

Phillip D.

What's that? Sorry! We couldn't hear you. We had two big gold nuggets stuffed in our ears, while dining on a breakfast of gold flakes, and downing a tall glass of liquid gold. An outstanding start to the day, but a bit rich.

Yes, it's true. You can't eat gold. You might also have trouble buying a latte with it. But you shouldn't be concerned so much with gold becoming the next everyday medium of exchange in the real world. Instead, you should wonder how to preserve your net worth from falling share prices and falling house prices.

But hey, if we have gold fever, we've got plenty of company. "Combined with an aggressive fiscal policy, it is clear that the authorities are going 'all-in' to try to mitigate the near-term effects of the economic collapse," says David Einhorn, head of the Greenlight Capital hedge fund. "Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed. Our instinct is that gold will do well either way. Deflation will lead to further steps to debase the currency, while inflation speaks for itself."

The illustrious Adrian Ash at Bullionvault.com has more in a recent article quoting other voices on the Street and in the City. "I think gold is rising because of fiscal deterioration and the prospect that the US [Treasury's debt] may be downgraded," says Tom Sowanick at the $22 billion Clearbrook Financial funds in Princeton, New Jersey.

"They are printing trillions of dollars worth of currencies," agrees Robert Lutts of the $400 million Cabot Money funds in Massachusetts, also speaking to Bloomberg, "and there is no real asset behind it. So every single Dollar in my pocket is going to be worth less and less every day."

Where is it all leading? Probably to a gold bubble. "Inevitably, low interest rates lead to a gold bubble," says David North, head of asset allocation at the UK's No.1 institutional investor, Legal & General. But as all five year old children ask on the way to Grandma's, are we there yet?

Not likely. But that's your risk as a precious metals investor. Gold doesn't pay a dividend. It costs you to store it. And it can't increase its earnings. All it can do is sit there, intrinsically worth nothing, but traditionally a store of value and wealth as monetary authorities resort to trickery and fraud in their attempts to dupe the people and preserve power. But hey, if you trust these guys, don't go for the gold!

More reader mail. Is your editor a hypocrite? Or just an inconsistent imbecile who likes to refer to himself in the third person? One reader takes issue with our taking issue with Sheila Bair's scheme to blow public money on bad bank assets.

"I love your statement "How can the "fair value" price be rational while the market price is not?"

The delicious irony of this is that very nature of your business is to then tell your subscribers that the market price of this security that we're tipping you should buy or sell is not rational....the market has it all wrong and we know so. So on the one hand its suites you to assume the market price is efficient but on the other.....Mmmm

I also love the idea that someone can just join the dots to arrive at a conclusion i.e. this happened because of this and therefore if this happens and this happens and add in a dab of this all of sudden this will happen.....AND you can make money from it.

But then i spose the very nature of you business is to create what seems like a logical narrative about the future that people will associate with when logically you, me, or anyone else for the matter, have no idea about what the future holds.....never ends to amuse me!!

Regards

David

Well played Sir. We are happy to amuse you. But you are not quite right!

Why are market prices for toxic assets "rational" when stock prices for certain securities are not? There is a great debate to be had between "mark-to-model" accounting and "fair value" accounting. We will not have it here today, though.

But you can make a perfectly logical distinction between mispriced stocks and misprices mortgage-backed securities and collateralised debt obligations. What you're willing to pay for a stock depends on what you think of its future earnings prospects. While not entirely subjective, this is what accounts for the difference between buyers and sellers. They both reach different conclusions about the present value of the future earnings of a given business.

Maybe have the same knowledge about the business, the management, and its earnings history. Maybe they don't. They are both equally unaware of what the future holds. The fact that they reach different conclusions about what the future holds is what makes a market. One of them will be right. The other will not. But in both cases, it comes down to how accurate their assessment of the earnings power of the business is and whether the current price puts those earnings at a premium or a discount.

Investors in individual securities CAN have an advantage over other investors. Sometimes this advantage is informational and specialist (i.e. they know more about an industry like pharma and what drug will work). Other times, it just comes down to good old fashioned security analysis, where you can spot a dollar's worth of earnings on sale for fifty cents, or you find a company selling for something close to net tangible assets (Buffett and Graham). But the market misprices stocks all the time based on incomplete knowledge and inexact forecasts of what the future holds.

You're right that we have no idea what the future holds. Nobody does, or can! But you can read what we think will happen every day right here in this space. Maybe we're right. Maybe we're wrong. Either way, the share tips we make in our paid publications are based on a world-view, security analysis, and reflect our synthesis of the two. At least it's transparent. And if you don't like it, you don't have to buy it!

Securities backed by housing values don't have any earnings variability. They don't have any earnings at all, in fact. They derive their value based on house prices, and house prices are falling as foreclosures rise and the credit bubble deflates. Bair wants to pay "fair value" for the securities because her real goal is to transfer taxpayer money to bank balance sheets to shore up capital while excising the non-performing, decomposing mortgage assets to the public sector.

We are against this on principle.

But if you want to use logic, we'd say her method of price discovery is "inductive." She begins with a particular goal (recapitalise banks and quarantine the sludge at a "bad bank") and arrives at a general conclusion: we must pay fair value!

Our approach to investment is deductive: begin with general observations to arrive at a particular conclusion i.e. look for businesses that increase earnings quickly, have solid balance sheets, and where you can measure management's historic performance with shareholder capital, or, in the case of small cap companies, you position yourself to profit from rapid earnings growth that may happen (your risk is that it doesn't.)

In any case, we'd say the main difference is that Bair's estimate of "fair value" isn't strictly wrong because it's at odds with the market price. It's wrong because she's not buying the assets as an investor. She's buying them as a regulator and policy maker, and she's using other people's money. Her motivation it's rational or logical, it's political. That alone should make you suspicious, if not deeply sceptical.

That's it for the week. Thanks for bearing with us. There are some questions about the sustainability of global growth that we never got to in this space. But the answers to those questions-at least our attempt at answers-belong in the category of "things that suggest there is a lot of money to be made in the next ten years." More on them next week. Until then!

Dan Denning
for The Daily Reckoning Australia

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ON PROPERTY

"Have been trying to get my head around this for over a year as I my only real investment is in a small commercial property and of course my very small home.

"You would have to assume that Australia will follow the rest of the world's asset deflation but here in Melbourne, we have a severe housing shortage which could keep the prices from falling too far. I have read that in the US there is an oversupply of housing which has contributed to the fall in values. I don't know about the UK though. You had one horrific story in The Daily Reckoning about a house in Ireland falling to 25% of its value in one year!

"Personally, I have factored in a 30% to 40% drop in Melbourne house prices but I am unsure about small commercial properties. Because the rent is comparatively low on the very small properties there is usually someone around who will give it a go. Considering that my commercial property is a recording studio whose clients never have any money anyway, it might not be so bad.

"Then again, when there is no money to borrow, it doesn't matter what you think the property is worth does it? And with talk of the credit crunch returning to the 'dark days of 2008' there might not be any money to borrow.

"I actually don't mind at all if values fall up to 40% because my friends and family who do not yet own a property might have a chance to buy and let's face it, the prices were totally out of control anyway.
Regards,

Nick
Caulfield South, Vic.

"I was recently in Noosa, one of the higher end property markets in Queensland. My wife and I stayed with a friend who is a real estate agent. We looked at several properties. One waterfront property that we liked was on the market for $1.495 mn ... and it was by far the best value among what we saw. The owners had been realistic and reduced the asking price to somewhere near the market.

However, subsequently I learned that of 13 prestige properties that went to auction later that week, NOT ONE sold. Needless to say, it will take a lot lower price than $1.495 mn to get me remotely interested in the property I looked at.

The agent suggests $1.35 mn. I don't think so. Standing aside is the best thing to do right now if you ask me.

My view is that the fate of Australian residential property market will be determined by the employment figures.

Tim

1. Residential property will only collapse if there are more sellers than buyers.

2. If prices start falling, people will only sell if they NEED to.

3. People will only NEED to sell their house if they can't afford their repayments.

4. Anyone with an existing mortgage and an existing job will be paying less on their repayments now than a year ago because of significant and continuing interest rate cuts.

5. So the only way that repayments will become unaffordable will be if you lose your job.

6. Keep your job, keep your house.

7. Therefore, if employment figures stay reasonably good, housing market won't collapse.

But, if it does collapse, I think I have a pretty secure job and I am more than happy to pick up some reasonably priced property when everyone else defaults.

Simon C.

On the length of the Daily Reckoning

Hi just to let you know that some of us enjoy your emails as they are please don't change them, for me they cut out a lot of the noise and get as near to the truth as possible they also get me thinking about the financial future more clearly.

Also keep the humour up the remarks are bang on everybody running around like Mr. Magoo, one thing this credit situation has taught me is that there are only a handful of people who know what they are talking about.

Share forum ay maybe they don't want to hear what you're saying, now options forum that might be different! Just to finish with maybe you could call it a Mr. Creosotes Barfatorium depression or bubble do you think we've had the after dinner mint yet!

Regards Terry.

Hi,

I think one of the best moves I made in 2008 (albeit late in the year) was to subscribe to Daily Reckoning.

I get the information the media in Australia seems reluctant to supply. People I speak to don't seem to believe that, economically, we're in deep shit. How can so many people have their heads so deep in the sand without choking. It amazes me, but then I never did think that highly of the general populace.

The Daily Reckoning keeps me up to date with the world situation and I usually get a laugh out of a couple of jibes sprinkled through the doom.

Great work and thanks

Jane (BB)

Mr. Denning

I'm dropping you a line to compliment you on your publication. I pay for a lot of more expensive stuff like Gavekal and Gartman but the Daily Reckoning is the only thing I actually read every day. I came by the Daily Reckoning after reading a book I found on my brother's shelf a couple of yrs ago now called The Bull Hunter. I thought you articulated the commodity bull story particularly well and I wished that I had read the book much closer to its initial publication. I was pleased to find that when I'd looked you up you'd been true to your words at the end of that book and moved to Australia.

Subsequently, the disaster in structured credit hit and I've found your writing pretty useful in difficult markets. I manage a $600m credit portfolio, mainly in HY bonds and derivatives and leveraged loans so I've been in the middle of the turmoil since June 2007. I started selling loans pretty aggressively in July but it was hard to avoid losses. The shift in supply and demand in leveraged loans was unprecedented in any market I think. With 70% of loans bought and held by CLOs and 70% of CLOs funded by AAA that turned off instantly when the banks blew up the illiquid tranches by creating and selling the very liquid ABX index.

The blow in basis between CDS and cash that occurred this year and is ongoing was another challenge for leveraged funds like my own as you could easily lose a lot of money even when calling markets right directionally. Still it helps to have an idea of which what broader investors are thinking and especially this year the meaning and possible consequences of actions and events and for that the Daily Reckoning has been pretty good. I was a bit surprised by the apology a few weeks ago for getting the decoupling call wrong. Firstly, because an apology from commentators is unusual, they mostly pretend it didn't happen and emphasis the occasional thing they get right. But secondly, because I thought at one point at least you made a very timely call on commodity stocks. Soon after the market started pricing the economy into commodities the Daily Reckoning said something like if you own the commodities stocks in 6mths you'll feel like an idiot, if you own them in 12 mths you'll feel like killing yourself. That's how I remember it anyway.

On markets now, maybe because I'm too close to some of the problems but I'm more negative than seems to be the consensus. In fact, I think I could have done a pretty good keynote speech at your recent Doomer's Ball (if I wasn't fairly inarticulate and scared of public speaking that is !!). I don't think the extent of the future decline in corporate earnings is yet appreciated by equity markets. Credit markets are pricing in a much more dire scenario with the xover cds index implying 50% default within 5 yrs and HY bonds implying around 70pc defaults.

CDS after outperforming most of this year, was moving wider quickly in November and December suggesting problems for corporate credits are just beginning not ending. Even utility cds is blowing up now. Spanish utility Endesa was rumoured to be acquiring recently and the CDS blew out from about 250bps to 580bps, making any acquisition nearly impossible to fund. This did not used to be the case as banks would fund where they wanted, ignoring cds levels.

However now banks use cds as spread as minimums, and, in several cases in the US, have linked future funding levels directly to cds. Corporate funding costs will go higher and higher, thought at least the banks will make more money and rebuild capital.

Maybe the credit markets are just two negative but increasingly the most bearish predictions are coming true. Commodity chemicals are first out of the block. Two of the big four global chems trade in European credit markets. Ineos and Basell. It was reported last week that Ineos EBITDA dropped to zero in October. That was from LTM EBITDA of around E1.7b I think last time I checked. Ineos issued the biggest HY Bond in Europe, about E1.7b, it now trades at 15cents. Last night Basell filed in the US that is was pushed back fees on its bridge loan and has appointed advisors to restructure its debt. Both these companies have too much debt (although Ineos was only 3.5x levered coming into this) but still operations are falling apart and yet the listed chems are chilled. Trading up mostly.
The problems with Ineos and Basell also highlight the global destruction of wealth. Radcliff who owns Ineos is still touted as one of the richest men in Britain.

I don't know his circumstances but am guessing most of wealth is in Ineos equity that now worthless. Blavatnik, the Russian who owns Basel through Access Industries is one of world's richest men in theory. Early this year he apparently put in place a $900m overdraft at Basell to fund oil inventories as oil spiked. That sort of money doesn't seem to be forthcoming now, just a few months later. Andrew Forest was Australia's richest man, we know how that's been diluted. (I met Andrew Forest over here when he raised the $ bonds, was amazed at his ambition and persistence after failing with his last project). I come from NZ myself. The richest guy there is assumed to be Graeme Hart. However, he seems to have 3 main assets. SIG in Switzerland that he paid 7x EBITDA for at top of mkt and bonds now traded 38cents.

Carter Holt Harvey that he also leveraged up (and a company I remember as reliably a dog ever since I was a kid), the debt there trades at about 50cents. And the bottle top business he bought, was it from Alcoa, around the top of the market also. Not sure how much equity value left in any of these, at least on today's market prices. When you add in Princes going broke in the Middle East and Russian Oligarchs asking for bailouts, there doesn't seem to be much cash around anymore at the rich sponsor level.

I guess the lack of cash is pretty obvious. Just the fact that Hedge Funds, at least fixed income hedge funds like myself, can no longer get any leverage from the prime brokers must take a lot of potential investment out. The fact that banks still talk about selling 100b's more assets is obviously a problem. And the fact that there are still housing markets like Australia and NZ that are blatantly the wrong price is an accident still waiting to happen.

Maybe this stuff is all just too obvious and the bear market rally will be big as everyone seems to expect. For me though, I think another new year crash. That takes the ASX down another 20pc and then I'll be signing up for Diggers and Drillers and picking up some cheap commodity stocks. Nice.

Anyway, thanks very much for your entertaining and informative commentary this year and good luck for the next.

Regards
MV

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Let's start with the news in China. The central bank there cut one-year interest rates by over one percent to 5.58%. The rate cut is on top of the US$586 spending plan unveiled earlier in the month. Chinese factories, especially in Guangdong province, are being shuttered by owners in the face of much slower demand for consumer goods from America. Workers are idle, and not happy.

Now the problems get thorny for China's central planners. GDP is still forecast to grow at 5.5% in 2009. But remember China is in the midst of one of the great population migrations in human history. Millions of farmers have left the countryside for work in the cities. China's economy must crank out new jobs at the rate of 7% a year for those relocated people, or face the unpleasant side effects.

What are those side effects? Well, unemployment is the obvious one. But it's really the social instability generated from millions of unemployed with no viable economic options. No jobs in the city? Too bad. No jobs in the country? Too bad.

It makes you wonder whether the project of concentrating large populations in urban areas promotes instability, or whether it makes people easier to control. For the stability and legitimacy of national governments, it's an important question. Can they effectively govern AND deliver basic services to large cities?

On the one hand, getting food and water and energy to mega cities is a massive logistics challenge. Then there is the matter of policing those areas. Throw in some protests by the unemployed and you see how fragile urban economies/living spaces might actually be in the future, and how sensitive to numerous disruptions (violent and non-violent alike).

On the other hand, with big arterial roads that can be closed down and road blocks set up at key nodes in road networks, cities become more like vast outdoor prisons in times of crisis. Nobody gets in and nobody gets out without the proper papers.

Sadly, we believe events like those in Mumbai today accelerate us toward a global future where urban travel is permission-based, monitored by electronic surveillance (i.e. the GPS in your car also becomes a visa/passport which can be switched on and off by the authorities).

But that is all down the road. What's around the corner for China's economy and what does it mean for Australia? It means 2009 is shaping up to be a year in which governments pull out all the stops to keep the wheels of commerce greased and rolling.

"China's Chinalco hints at Rio Tinto buy," reports today's Australian. This comes after Rio's biggest fall on the Aussie share-market in 21 years. You'd think at these low prices Rio would be a screaming buy. But there's that little matter of debt.

No discussion of debt is complete without a check up on the United States of America, where consumer spending fell by 1% October, durable goods orders fell, and new home sales fell 5.3% for the month and 40% year-over-year, while prices are down 7% in the last twelve months.

That is the bad economic news. The stock market ignored all that and charged ahead. The S&P has had its biggest four-day run since 1933. It's now up 18% since November 20th. How about that for a bounceback?

The local market is weighed down by the worst-performing sector of 2008, basic materials. But that has not stopped it from opening up by almost three percent. Kevin Rudd's admission that a "temporary" fiscal deficit might be necessary could be contributing to the rally. Here's a hint though we doubt it will be temporary. And the conditions that have prompted it, though unique in their own way, have the same fundamental causes as previous crack up busts.

In fact, it's tempting to say that no one has ever seen a world crisis quite like this. Massive government bailouts...falling house prices...huge debt-to-GDP ratios...the inability of States to prevent terrorism within their own borders...an interconnected world-wide financial and economic crisis. Is it all new?

No. That part of it, the interconnected part, IS new. But the basic tension in today's world is not new. It's good old fashioned human nature and power politics. You could even say we are entering a new feudal period in world history. Whether it's a New Middle Ages or a New Dark Age is something time will have to sort out.

What's clear to us is that the politically powerful are using their influence to arrange government interference on their behalf. The financially weak are paying the price. Bankruptcies in the financial sector are prevented, partly so that rather than liquidating the mal-investment of the phony boom, debtors can be left on the hook and creditors (who get Federal money) will still receive interest payments from consumers.

Western capitalism, as Michael Hudson suggests, has been hijacked Wall Street-Washington oligarchs. Financial institutions are insulated from the free-market consequences of their credit orgy (failure and bankruptcy) by government bailouts. The Fed and the Treasury have stepped into keep Wall Street's asset values high, and transfer the liabilities to the public balance sheet, income-earning taxpayers will pay the bill for the next fifty years (if it's ever repaid at all).

Class-warfare...the 80-20 rule...human nature...it can go by many names. It's not new. And the world has always been interconnected. It's just today, the speed with which information is transmitted (and with which capital responds to the new information) is much greater than before.

It's a 24/7 great economic race to sort out the important stories from the noise, figure out what it means, and then, what to do (if anything). What it seems to be producing, however, is record confusion. For investors, that means a preference for cash and gold...while the smoke clears to see how the global financial landscape will really change.

Dan Denning
for The Daily Reckoning Australia

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