A survey showed that only 1 in 10 workers say his income is going up. This is the lowest reading since 1946.

Meanwhile, the news two days ago was that homebuilding took a dive in October. Work began on 11% fewer houses than the month before. On multi-family dwellings, the figures were worse - down 35%.

Why would homebuilding go down when the economy is supposedly gathering strength? Well, builders were wondering what would happen when they finished the houses. The new house tax credit was due to expire; they weren't sure the politicians would be witless enough to renew it.

They need not have worried. Give the politicos a chance to do something stupid and they will come through every time. Since the end of October, Congress passed and President Obama signed an extension of the housing credit. Until next April, at least, first time buyers will get an $8,000 credit.

You'd think that would have revived animal spirits a bit in the residential construction industry. But today's news tells us that mortgage applications are falling - even with lower interest rates.

How come interest rates are falling? Well, here again, we see the heavy hand of the feds. The "quantitative easing" has come to a halt...that is, the Fed is no longer buying US Treasury debt (it doesn't need to). But its buying of mortgage backed securities continues. That program will last until March of next year.

Still...housing is not cooperating.

This news hasn't had much impact on Wall Street. All that can be said is that investors have seemed to hesitate for the last couple of days.

Stocks fell softly yesterday, with the Dow down only 11 points. Oil stayed at $79. Gold rose to $1,141. And the euro remained at $1.49.

Investors must still believe in what The Washington Post calls a "lukewarm recovery." It is like finding a body on the street. You feel for a pulse and discover that it has not quite reached room temperature. It is tepid... Not quite alive. Not quite dead.

Too close to the quick to bury...too close to the grave to boogaloo.

Bill Bonner
for The Daily Reckoning Australia

• Housing and Unemployment Are Weaknesses in the U.S. Economy
• Most People Still Think – “You Can’t Go Wrong in Property”
• Economy Free to Recover?
• Aussie Housing Market Actually Leads the U.S. by Three Years
• Take Away Stimulus Spending and You’ve Got an Economy Entering Depression

So we're moving. And we're moving people. We're moving.

But where are we moving to? It looks like another mini-bubble. The market seemed prime for a fall in conjunction with a U.S. dollar rally. That could still happen if the U.S. employment report tomorrow is a shocker.

A negative employment will remind everyone that this recovery (if it can properly be called) that is still largely a jobless one. The process of reducing household debt is going to take years and not months if households can't grow their incomes. Real wage growth (adjusted for inflation) is pretty hard to come by in most of the Western world (unless you run a bank).

All this adds up to lower household spending ahead. How much further ahead can stock prices get of corporate profits that may never materialise? We'll see. But valuations are already stretched. Investment advisor Jeremy Grantham reckons fair value on the S&P 500 is around 860 - or 24% lower than yesterday's close at 1,066.

But whether the market breaks up or down here (something Murray has been looking out with his technicals) is up to investors. There is a huge cash position on the sidelines that's still worried to jump back into markets. For the bear to really do his work, he's got to convince these people to get into the market. The Fed is helping by making cash a wasting asset (when you figure in inflation).

Thinking out loud, then, you could make a case for new highs on the market as this cash mountain moves into equities. We saw a chart on Sunday at the opening of the conference hosted by the Gold Standard Institute which showed that the amount of cash on the sidelines exceeded the total market cap of the Wilshire 5,000 (a broad measure of the market value of all U.S. equities).

In layman's terms, it means there is more money in cash right now than there is equity in U.S. companies. Now, there is a very good reason investors are reducing their allocation to stocks. As we've said before, we think the equity premium - what people are willing to pay for stocks - is regressing to the mean. It was so high for so long because corporate cash flows in the second half of the last century benefitted so much from low interest rates and globalisation.

But even if the equity premium is collapsing, it wouldn't take a small change in that cash position to power equities much, much higher. In fact, if the investors holding that cash realise that inflation is a bigger risk than over-valued stocks, they may decide to get out of cash anyway, despite the risk of being in the market.

In any case, we are not suddenly becoming bullish. But we are suddenly thinking that the next phase of this GFC (other than the sovereign debt crisis) is to lure investors back into an equity rally. Whether they are prodded by negative real interest rates on short-term deposits, or lured by equity markets lurching ahead with the backing of the dollar carry trade, well that doesn't really matter.

It could all be moving on up.

What's really worth watching is how the commodities behave in this market. They are moving on up too. This means gold is shedding its image as a risk-aversion asset and becoming something that people want to own. Its allocation in household and institutional portfolios is going up too. And of course, trading cash for things is probably a good trade these days, no matter whose cash you have in your wallet.

We'll have to cut it short today as other deadlines press. But beware. The bear is afoot and he is making mischief. He is doing is devilish best to convince investors that he's hibernating. After all, the November to April period is usually when stocks do their best.

This year has been unusual because, thanks to the Fed, stocks had a great six months during a time when they generally don't do much. It's unnatural you might say. But so are current fiscal and monetary policy, we might say.

We might also say that there is something tawdry about insisting that modern living standards are not negotiable and must be preserved with high public sector debt. In effect, today's policy makers are saying to the future, "Our current well-being and comfort is more important than any debt you may have to repay. We refuse to live within our means because it would inconvenience us to do so. We are too lazy and selfish to recognise our financial mistakes and pay for them. We're going to leave that to you. Suckers!"

It's not very nice. It's not very moral. But it is what it is. And right now, it gives you the chance to prepare your portfolio for the consequences of bad policy (fiscal, monetary, climate...take your pick!) More on all of it next week. Until then!

Dan Denning
for The Daily Reckoning Australia

• Australian Recession in the Works? Ask the Sharemarket
• Negative Equity Becoming the Norm in U.S.A.
• Largest Spike in U.S. Wholesale I/S Since 80s Recession
• Societe General Warns of Freddie Kruger Style Global Recession
• A Possible Holocaust in U.S. Bonds

That same house sold again this April. Once again the entire neighbourhood went through the house to have a look and while it had been kept up, nothing extra had been added. It was the same, except that this time the property sold for $1.7 million. In four years property prices, at least so far as this particular property was concerned, had risen by forty percent.

There has subsequently been quite a bit of action in selling houses on our street but the most astonishing moment was last week. This was a house that had not been touched for fifty years. To say that it had "original features" only underscores what a derelict mess it was.

And the price: it went for over $1.4 million with four bidders going beyond the $1.2 million level and two going above 1.4.

That this totally astonished all of us in the street is to put our reaction as mildly as possible. That it depressed my son who was trying to think how he would ever be able to buy a house for himself was perfectly understandable. This is an economy with property prices gone mad.

The man who bought the house had just sold up in a more expensive suburb and was locating down, pocketing a net million along the way, although probably half of that will be sunk into renovations. The seller has netted for himself more than a million relative to the price he paid, and was for him on a property he had rented out and not lived in himself. This is, for him, all money in the bank.

And that's the point. It is all money in the bank. There is, according to the press, a difference of opinion between Treasury and the Reserve Bank over interest rates and their proper direction. Treasury cannot see what the rush to raise rates is all about. The economy has barely touched bottom, assuming that it even has. So far as Treasury is concerned, it is madness to be raising rates already when recovery has not truly even begun.

But then there's the RBA. What it sees are house prices rising again and an inflation already becoming entrenched. While the "headline" movement in the CPI was a quite moderate 1.3% across the year, the "underlying" rate the Bank relies on rose by 3.8%, well outside its band of 2-3% per annum over the course of the cycle. And even the headline measure showed an increase of 1.0% for the quarter which of itself is worry enough.

Inflation and What to Do About It

That the economy, particularly the private sector, is still generally moribund is likely. That there is a long way to go before we return to the kinds of momentum we would prefer seems about right. That raising rates right now will slow the economy and delay a return to stronger levels of private sector activity seems almost unanswerable. Yet, with all this liquidity sloshing around, what is a central bank to do?

What makes it worse is that the very aim of the government seems to be to push the private sector out of the way. This is not like an inadvertent error by the Prime Minister to have raised the level of public spending in a panic and therefore to have crowded the private sector out. This seems more deliberate than that, and is in keeping with the notions put forward by the PM in his economically challenged article published in The Monthly at the start of the year in February. At the time, he wrote:

"The magnitude of the crisis and its impact across the world means that minor tweakings of long-established orthodoxies will not do. Two unassailable truths have already been established: that financial markets are not always self-correcting or self-regulating, and that government (nationally and internationally) can never abdicate responsibility for maintaining economic stability. These two truths in themselves destroy new-liberalism's claims to any continuing ideological legitimacy, because they remove the foundations on which the entire neo-liberal system is constructed."

Neo-liberalism, you see, means leaving production decisions to the market to be made by profit-making firms which are trying to work out what consumers would like to buy. This the Prime Minister will not permit given these apparently "unassailable truths". It is his judgement that is going to matter and come what may, he is determined to have the government absorb our national savings for his own purposes rather than for our own.

In a depressing assessment reported in The Australian this week we were told that "the nation's key economic advisory body [the Productivity Commission] says the government has not 'universally applied' its own promise to subject all major infrastructure spending to detailed and transparent cost-benefit analysis." Listed were $66 billion worth of projects that the government does not know, and apparently does not care, whether the money being spent will be repaid in revenues ultimately earned.

I therefore want the RBA to raise rates and keep on raising rates because that may be the only way we are finally going to convince the Prime Minister there are costs to the approach he is taking. Whether raising rates will prevent inflation from taking off is hard to say. It might put a brake on wage movements which are the main feedstock of the inflation process, but governments are the worst industrial relations negotiators so I wouldn't count on them.

But what I am looking for is recognition within the government that they cannot keep pushing their own expenditures upward, crowd out the private sector, and hope to generate real growth. Is there no one within the Government who actually does understand how prosperity comes about? From how they have so far behaved, it really doesn't look that way from here.

The Government is counting on your ignorance to get away with literally destroying billions of dollars of our wealth. If these projects do not repay their costs, they will just make us poorer.

But they will create jobs. And they will lead to a rise in the recorded level of GDP. That other jobs in the private sector will not be created, and that we will actually end up with a lower standard of living because of this tremendous level of public waste, is just how it is.

I now meet people all the time who tell me we had to do something about the Global Financial Crisis. OK I say. Pay the higher interest rates and taxes and be done with it. Such nobility I think! Such self sacrifice! Such idiocy!

These latest expenditures are not being done in the heat of a crisis. They are a matter of deliberate policy. That we let governments direct so much of our resource base to ends of their own choosing is unfortunate. But if we as a community do not know any better, that is just how it is going to be.

Dr. Steven Kates
for The Daily Reckoning Australia

• Why I Would Have Raised the Interest Rates
• The Problem With Artificially Low Interest Rates
• Gold Standard Doubles as the Greenspan Fed Makes Real Interest Rates Negative
• BRIC – Brazil, Russia, India and China Suffer High Rates of Inflation
• Falling Interest Rates and Increasingly Accessible Credit

There are some pretty big issues we left hanging with yesterday's DR. Are the Western Welfare States (the U.S., Japan, and EU nations) really going bankrupt? Things were headed that way before the credit crisis began. If Rogoff and Ferguson are right and the GFC is becoming a sovereign debt crisis, it will worsen an already bad situation.

How bad? We'll show you three of the charts we showed the folks in Canberra on Sunday. This is the condensed version of a forty-five minute presentation. So we'll have to leave out the colour commentary. And we're pleased to offer another contribution from Dr. Steve Kates on how government policy is destroying public wealth.

But first, check out the chart below from the 2008 annual budget audit by the U.S. Government Accountability Office. It shows that the U.S. government must roll over $3.4 trillion in debt over the next four years. This $3.4 trillion does not include any additional borrowing that may be required for other government programs (wars, healthcare, wars, school lunches).

What's the big deal? $3.4 trillion is a small number by today's standards, isn't it? Not exactly.

The chart shows how incredibly interest-rate sensitive U.S. government borrowing now is. Not only is it a big ask to ask the world's creditors to continue funding such large deficits (there are only so many savings available to borrow, after all), but the interest expense on that debt is likely to go up as the fiscal position of America deteriorates.

And if America can't find anyone willing to finance its deficits, what then? Well, the luxury of issuing debts in the currency you also print is that you can print money to pay for them. Technically, you can never become insolvent when you enjoy this privilege. The Fed, for example, can create new money to buy debt issued by the Treasury, funding deficits ad infinitum.

But this monetisation of the debt is another way of saying that international creditors are no longer willing to pick up America's spending tab. They will be betting against the American economy, not on it. Even if the Fed takes the unusual step of moving out further along on the yield curve to set interest rates (and keep the bond vigilantes from sending yields to the moon) this is a clear signal to owners of dollar-denominated assets and holders of dollar currency reserves to get out.

Another scenario to watch for is when creditors begin asking the U.S. to issue debts in currencies other than its own (Yuan, Euros). That would be something. In the meantime, they will look to lessen their dollar reserves.

That may not be such an orderly process. And the urgency to get out of the greenback and into something better will only pick up pace as it becomes clear the politicians in America (along with the Fed) are not likely to suddenly rediscover fiscal prudence.

You never know. The Fed may assert its independence and baulk at more quantitative easing. But we wouldn't count on it. And we reckon tangible assets and possibly emerging market equities would be the biggest beneficiaries of capital flows out of the dollar...and into anything else.

The next chart is for you, Paul Krugman. Krugman, among others, continues to insist that larger public sector deficits are necessary if the Western world is to avoid a Japanese-style deflationary "Lost Decade." He claims the government must increase spending as households and businesses deleverage and reduce debts.

Advocates of this idea claim that public sector deficits, as a percentage of GDP, have no real limits. And the example they cite is Japan. As you can see from the chart below, Japan's debt to GDP ratio is nearing 200%. America's isn't even half of that yet (it's about 98%, or $13 trillion). If Japan can finance a deficit at 200% of GDP, then why are we worried that U.S. deficits half that size would threaten interest rates or the dollar?

First off, it's worth pointing out that high public sector-debt-to GDP ratios haven't worked in Japan, if by work you mean pave the way to a stable recovery. Advocates might say-as advocates of the stimulus here in Australia often say-that the public spending made things less worse. But the opposite is true. It's made things more bad!

Or just worse, if you prefer. We mean that the public spending has done two things, neither of which is productive, and both of which, in fact, waste capital and resources. First, public sector spending to prop up financial firms with dodgy assets prevents the needed reckoning in asset prices that would produce market clearing prices for commercial and residential real estate. You get zombie banks and a zombie economy and zombie house prices.

Secondly, there's no indication that all the infrastructure spending in Japan has produced any kind of lasting growth for the economy. It may have built some great roads and bridges. But we wonder if it solved any of the underlying problems? What' more, the capital and resources that went into those projects was directed by political considerations and not available for the private sector, which could have put them to some use at least designed to produce a return on the capital.

The underlying problem which deficit spending does not solve is compounded by demographics. Japan's government is hoping that continued borrowing can be financed at low rates by pensioners who will be cashing out of their pensions but seeking safety. However, we suspect that Japanese pensioners will begin to consume their savings as they downsize their lives into their twilight years (which tend to last much longer in Japan, as the number of Japanese centenarians shows).

That means interest on Japanese bonds-which already one fifth of the Japanese budget-will consume even more of the nation's resources, if the older population clams up with its money. And like in the U.S., you'll see the government borrowing more and more of every new yen spent, with more of that borrowed yen going to pay a previous creditor. That's bordering on Ponzidom.

Japan has been able to run a higher-than-average public debt-to-GDP ratio because it has had such a high personal savings rates. This kept borrowing costs low for the government. But we'd expect that to change soon. A debt-to-GDP ratio of 200% will be very difficult to finance in the world as it is-much less in a world where those rates begin to rise and when Japanese savers begin to consume their savings.

Finally, what about Europe? Our argument here is simple: Europe's monetary union is going to come unstuck. Why? Europe has one interest rate for twelve different economies. That does not leave national governments with the flexibility to print money and inflate away political problems. This will be intolerable, the monetary union will break up.

The sign to watch for is a spike in the yields on euro-denominated debt. As the chart below (from Stratfor) shows, earlier this year bond yields did in fact begin to widen. Germany Bunds have the most stable rates, as Germany has traditionally the most stable fiscal and monetary policies in Europe (they did not go hog wild for stimulus).

But for Spain, Ireland, Greece, Portugal, Italy and Austria (whose banks lent large for real estate in Eastern Europe), another round of falling asset values really would show that the GFC has become a sovereign debt crisis. And will Germany bail out these nations? Can it afford to?

We don't know the answer to those questions. But it is worth pointing out that by assuming or guaranteeing the liabilities of the financial sector, national governments have also assumed the risk. And the bond markets will be left to decide how to price this risk.

How it ends is anyone's guess. But our take is that the Super Cycle in fiat money is at its peak. And as it unwinds, it's going to take national governments and their financing model with it. They will be forced to adopt a new model and take a new form to survive.

This means a great deal of political and economic upheaval. It's no coincidence that the last time the world faced such monetary upheaval was when it went off the gold standard and straight into essentially thirty two years of military and economic conflict (1913-1945). If the world is about to become that disordered again, you'll need a plan to deal with it.

Dan Denning
for The Daily Reckoning Australia

• Japan and its Economy Did Not Have Secret to Everlasting Success
• Government Debt
• U.S. Treasury Auctioning Off $81 Billion in New Debt
• Zero Percent Interest Rate Didn’t Work for the Japanese
• AIG to Receive $85 Billion Loan from Fed

The Guv also said he would not be too timid about raising interest rates. He believes the threat [of global financial calamity] has passed and that the bigger threat may well be inflation. That kind of tough talk sent the Aussie dollar right up to over 92 cents against the greenback. If it weren't late fall, now might be the perfect time to take a trip to America and see how cheap things really are.

But it is a bit surprising that a Central banker would say he's not sure there WILL be another shock to the world's financial system. The last twenty years show a history of regular shocks. The economic models of economists suggest these shocks are 100-year or even 500-year events. But they just keep happening!

The Peso Crisis...the Asian Crisis...the Russian bond crisis which led to the fall of Long Term Capital Management...Bear Stearns...Iceland...Northern Rock...the entire GFC...nope! None of those could ever happen again. Especially in a world that's reducing debt where asset markets are now undervalued and house prices have dramatically corrected and banks have recapitalised.

Well, that's the story that Stevens probably believes. But you know our view. There's a lot more bad debt out there posing as assets. There are more credit write downs. Banks have a boatload of commercial real estate and residential housing assets and a thin slice of equity capital supporting them. There is still a lot of leverage in the financial system. And that leverage exposes banks to losses.

For example, today's AFR cites research from the International Monetary Fund and concludes that Aussie banks could lose as much as two percent of total loans outstanding if corporate and household defaults increase. And gee, that's not likely at all when interest rates rise quickly, is it?

According to the AFR, the IMF report does conclude Aussie banks are "very sound", but they could lose $33 billion from rising defaults. We're not sure what default rate the report assumed, but we reckon it was probably too low. Nearly everyone in the financial establishment underestimated the depth of the crisis last time, too.

The other threat is that that Aussie banks source 30% of their loan funding from international credit markets, according to the IMF. Australia's short-term external debt is about $400 billion this year, according to the AFR. Is that really a threat?

It doesn't seem like one right now. Interest rates are rising and the Aussie dollar looks like it's headed to parity against the USD. This makes Australia a popular destination for international capital flows. After all, you have heaps of foreign investors pouring in to buy Australian property. The place is a capital nirvana!

But yes, it is vulnerability. For one, it means growth in the Australian economy is not sourced from domestic savings but from borrowed foreign money, which must later be repaid. Second, it means that the income and rent from Australia's capital stock (houses, property, shares, and bonds) may not be making Australians rich or even staying in Australia.

Granted, if the Boomers are selling their houses to Chinese investors in order to finance a comfortable retirement, it should work out well for the Boomers. But their children may be renting from Chinese landlords for a long time to come. And no, we're not blaming the Chinese for this at all. It's a great move for Chinese investors. But it may not be such a great development in the capital structure of Australia.

But at the moment, you wouldn't get that sense that rising public debts and the transfer of ownership of Australia's capital assets are any worry whatsoever. Sure haven't seen much of it in the papers or on the TV shows. It's like everyone's forgotten that the more integrated the world's financial markets have become, the more they've tended toward instability. Or everyone believes whatever was wrong before has been fixed now.

One person who had his wagon fixed yesterday was Bank of America CEO Ken Lewis. America's new pay tsar (the U.S. Treasury Special Master for Compensation, Kenneth Feinberg) stripped Lewis of his 2009 salary. Don't cry for Lewis just yet. His retirement package will leave him with between US$70 and US$120 million.

But why is there even a pay master to begin with? Isn't that the job of boards of directors and shareholders? Could government charades to regulate the corporate sector get any more cosmetic? Coming soon, a pay master for your job.

Dan Denning
for The Daily Reckoning Australia

• Aussie Banks Addicted to Foreign Borrowing
• Aussie Banks are Scrambling to Raise Their Tier 1 Capital Ratios
• Bank for International Settlements Report Looks at Origins of Credit Crisis
• Stress Testing the Banks
• Gold, the Aussie Dollar, the Greenback and You

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dan Denning
for The Daily Reckoning Australia

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

Uncertainty...chaos...bad decision making. This is what makes individual planning so hard in a world with fiat money. The supply of money (and thus the value) is always changing. Economic decisions that made sense with interest rates at one level make a lot less sense with interest rates at a different level. Mis-calculations are made. Good investments go bad.

Will the Reserve Bank's decision to raise interest rates for the first time in 19 months expose people who didn't plan for it? Of course it will. The housing sector is where we'll find out. And you already know what we think, don't you?

We think the Federal government behaved shamefully by suckering first home buyers in with free cash when interest rates were historically low. Now that rates have begun moving up, the most marginal buyers will begin feeling the pinch. And what will happen to house prices?

As far as stocks go, there might be an even bigger rates-related story playing out. The RBA becomes the first G-20 central bank to lift rates. Whether it's stupid or prescient no one knows. But we have to consider the possibility that it could ignite a reversal of the trend in global bond yields. Yields on government and corporate debt could be headed higher now.

Mind you we don't think the Fed will be raising short-term rates in America any time soon. It would crush what little chance there is for a recovery in U.S. housing. But on the longer end of the yield curve (the part the Fed does not control), investors might begin sending interest rates up and bond prices down. Relatively speaking, this makes stocks a lot more attractive.

Maybe that's why stocks in New York rallied over night. And maybe that's why Aussie stocks were up after yesterday's announcement and are up again this morning. It could also be that investors are buying the "recovery has begun" story, which would be goofy but possible. But for whatever reason, stocks are suddenly looking a lot more compelling than bonds.

But let us not forget gold. And how could we? It's so shiny. Gold hit an all time high of $1,040 yesterday. It won't make a new high in inflation-adjusted terms until it clears US$2,000. But the question on everyone's mind is whether gold is going to make higher highs from here...or corrects.

The case for the correction is simple. Check out the chart below. It's the commitment of traders report from the New York futures market. You can see from the figures at the bottom that both the number and the percentage of large speculators who are bullish is at record levels. That alone would dictate some short-term trading caution.

Click to enlarge

What's more, the emergence of the gold exchange traded funds (ETFs) has put a huge portion of the gold market in a very small number of hands. If the ETFs sell...who will they sell to? Or more succinctly, a lot of the gold demand is coming from a few institutions. If other institutions (central banks and sovereign wealth funds) don't pick up the slack, there will be more sellers than buyers and prices will fall.

But not so fast says the world of geopolitics. Gold could go much higher if the world's entire monetary order (or disorder) shifts away from the U.S. dollar. And that's just what the Independent's Robert Fisk wrote yesterday in an article that set the internet all a-twitter. He called it, "The demise of the dollar."

Fisk wrote that, "Gulf Arabs are planning -- along with China, Russia, Japan and France -- to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Cooperation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar...The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold."

Well then, that changes everything. In this role, gold becomes a hedge against devaluation in the U.S. dollar. It's not so much a hedge against inflation (a systematic increase in the supply of dollars printed to hold up the U.S. banking sector and finance a grasping Federal government) as it is a move to protect assets against a sudden dollar collapse.

Granted, in the ho hum developed Western world we live in, currencies simply don't suddenly collapse. They erode over time. And one fine day you find your purchasing power is not what it used to be.

But in emerging markets, basket case economies with massive fiscal imbalances do have sudden currency crises. FT writer and economist Willem Buiter calls them "sudden stops." And then, if you're an American or a Brit, he makes the somewhat terrifying point that these two developed economies have all the characteristics of an emerging market basket case economy.

Buiter writes that, "The only element of a classical emerging market crisis that is missing from the US and UK experiences since August 2007 is the 'sudden stop' - the cessation of capital inflows to both the private and public sectors. . . . But that should not be taken for granted, even for the US with its extra protection layer from the status of the US dollar as the world's leading reserve currency. A large fiscal stimulus from a government without fiscal credibility could be the trigger for a 'sudden stop'."

One important aspect of these "sudden stops" is that they are almost never events you would choose to participate in. But you have to anyway, or monetary events overtake your investment portfolio. This is why these episodes in monetary history are so chaotic. And it's why-if we're entering one of those episodes now (or at least the most unstable period of it as we move from one reserve currency to a basket of currencies)-the price swings in asset markets are going to be impressively volatile.

All that said, the move up in the Aussie cash rate has sent the Aussie dollar higher. Thus, the Aussie gold price went down overnight, not up. It could be that in the short term, the migration of global capital flows out of the USD favours Aussie equities more than gold (from an Australian perspective).

So about that 5,000 on the All Ordinaries....Does it now look a lot more likely given the events of the last 24 hours? Or are we on the cusp of a significant correction to the rally of the last six months? More on that tomorrow from the trading nebula.

And by the way, has there ever been a better time to figure out what gold is really all about? These are serious and far reaching issues. It's high time for a serious and far-reaching discussion of them. If that sort of thing interests you, make sure you read about the upcoming gold conference in Canberra early next month. You can read more about it here.

Dan Denning
for The Daily Reckoning Australia

• Gold, the Aussie Dollar, the Greenback and You
• AUD Price of Gold a Measure of Gold’s Strength Against Other Currencies
• Price of Gold Communicates U.S. Monetary and Fiscal Policy is Lousy
• Australia’s Currency and its Economy Will Benefit from China’s Stimulus Package
• Gold and Oil are Acting as Though They Expect Higher Rates of Inflation

And on to today...Shouldn't this be an interesting week? "Markets have gone up too much, too soon, too fast," says Nouriel Roubini. The ASX 200 fell nearly 100 points on Friday, or 2.11%. This echoed the previous day's trading in New York.

Friday wasn't so bad on the Dow. But the jobs report released by the U.S. Department of Labor showed 263,000 lost jobs in America and an official unemployment rate of 9.8%.

That rate is undoubtedly much higher, once you figure in people who've given up looking for work but are no longer included in the survey. In fact, the "U-6" figure kept by the Department measures labour "underutilisation" in the economy. And according to that figure, U.S. unemployment is at 17%, nearly twice the figure quoted on Friday.

There have been jobless recoveries from recession before. But you still have to wonder how there can be such a big difference between the stark news in the job market and the behaviour of the stock market. True, economists will tell you that jobs are the last thing to recover from a recession. Businesses don't hire until they are sure everything is in the clear.

And we are often told that stocks lead the economy. The market has priced in a recovery which the labor market will confirm...eventually. At least that's the conventional wisdom. It's reassuring.

But the unconventional wisdom is probably more correct. The unconventional wisdom is that low interest rates (near zero in the U.S.) have driven people out of cash and forced them into higher-yielding and often speculative assets. The biggest obvious beneficiaries of low rates and credit facilities has been financial sector stocks themselves (and presumably their options-laden directors).

The question this week is whether there is any momentum left in that trade. Can easy central bank policies keep stocks going higher? Or has the trade exhausted itself? And if it has, what happens next?

Well, one answer is that you may again see a mini-rally in the U.S. dollar and a fall in common stocks and commodities (oil and gold especially). We'd expect this to a cyclical dollar rally. In the bigger picture (a secular trend) the dollar is toast. But markets do not move in linear fashion. They give and they take. And the dollar may be due.

If we do get a greenback rally, this may pave the way for a higher Aussie gold price. The strength of the Aussie dollar has capped the gold price here in Australia. But we reckon you may get a nice move in the Aussie gold price if the greenback rallies. The question is whether U.S. dollar strength takes gold down too, neutralising the benefit of the weaker Aussie.

How do you sort out the relationship between two currencies, one commodity, and many stocks? It all sounds complicated. That's why we've added another mind to the trading desk here at Daily Reckoning Australia headquarters on Fitzroy Street. Murray Dawes is at the helm of the trading desk today. We'll keep you posted on what he has to say.

One question we'll have for him: what the heck should investors do with Woodside Petroleum (ASX:WPL)? Dow Jones newswires is reporting that over the weekend, Federal Resources and Energy Minister Martin Ferguson awarded permits to explore ten new off-shore oil and gas blocks in the Carnarvon Basin off the Northwest coast of Australia.

Woodside is one of the firms that won a permit. Ferguson said that, "The additional investment in Australia's offshore petroleum exploration sector not only offers exciting potential for petroleum discovery but will ultimately help to further develop our petroleum resource and underpin our security of energy supply,"

The security of Australia's energy supply is exactly the issue our special situations analyst Mike Graham took up in his research about Australia's oil industry. You can find that complete report here. The findings may surprise you.

With respect to Woodside, there are not too many better blue-chip energy stocks in Australia. Unlike the smaller explorers though, the blue chips are valued differently. Adding to their reserves is crucial, so that the company is not inexorably depleting its assets. But the energy blue chips like Woodside are well known by analysts and they are well-traded by institutions.

This, in our mind, makes Woodside a perfect candidate for a Slipstream trade. That is, if we were a full time trader, we'd be looking for a pattern in the stock chart to see where key levels of support and resistance were. But since we don't run the trading desk, we'll ask Murray and see what he says.

Today's thought of the day from John Robb at Global Guerrillas, "The American 'kleptocracy' has run out of steam due to too much debt and is already in the midst of a perpetual depression. Why? The US middle class -- faithful to the cult religion of free markets even while being taken for all they are worth via a 35 year process of substituting debt accumulation for income gains -- is financially broken. If this is even remotely true: is the US headed for Privatopia and the viral spread of Global Guerrillas?"

Substitute "Australia" for "America" and it makes just as much sense, doesn't it?

Dan Denning
for The Daily Reckoning Australia

• Looking at WPL and Oil Side by Side
• Apparently More Debt is Now Acceptable in Australia
• Commodities Tell Us the World Won’t Stop Turning in a Financial Crisis
• Oil Prices Under $70
• The Future of the Australian Resource Market, Two Ways the Boom Could End

On 21 September I provided testimony to the Senate Economics References Committee on the damage done by the government's "stimulus" package. The submission was broken into five separate sections.

1. The state of the national economy where it was demonstrated that the Australian economy has been and is in recession. Even using the "technical definition", the actions of the Government have not prevented the economy from entering recession.
2. The impossibility of quantifying the effect of the stimulus showing that conclusions based on projections from a Keynesian model cannot be used to demonstrate that the economy would have been worse off had no Keynesian stimulus been applied. To think that a Keynesian model can substantiate any Keynesian claim when the economy continues to flounder is merely circular reasoning and based on no serious evidence.
3. The harm done by the stimulus which includes:
   • noting that there is no justification for the introduction of a stimulus other than its effects on employment whose effects have been minimal at best
   • the distortions in the structure of production which occur as a result of the stimulus which directs the economy into unproductive activities
   • the loss in real economic growth because the stimulus measures have competed resources way from productive enterprises
   • a loss in long-term economic growth which will depress the rise in real incomes and lower living standards
   • the effect on interest rates which have remained higher than they otherwise would have been and will rise sooner than they otherwise needed to have done
   • the effect on future taxation which will need to rise by prodigious amounts if the debts that have been taken on are to be repaid
   • the potential effect on inflation which may become an important medium-term economic issue as the recovery gathers some momentum.
4. The fundamental structural flaws in Keynesian economic theory which wrongly argues that increases in public spending and budget deficits are capable of generating economic growth even when the money spent is spent on producing goods whose value is far below their costs of production.
5. A discussion of the theory of the cycle where it was noted that economies are subject to alternating periods of growth and periods of recession. The panic that greeted the downturn both here and elsewhere were massively disproportionate to the actual dimensions of the problems, even assuming that a stimulus package was the right approach, which it isn't.

The full submission runs to 27 pages, but I will just note a couple of the specifics raised. The first of these is to point out that the economy has not only been in recession, but using the ABS-preferred trend data, the downturn even matches the definition of a "technical" recession by having contracted in two consecutive quarters.

The movement in the September quarter 2008 was negligible but unquestionably negative. In the December quarter 2008 the fall was somewhat larger but again negative. Thus using even the "technical" definition, on the best measure we have of the movements in GDP, the economy contracted for two consecutive quarters.

But it should not matter whether there were actually two consecutive quarters of falling GDP for us to declare that the Australian economy is in recession. If across a four quarter period, the growth rate has been 0.3%, then the economy is in recession. To pretend otherwise is simply to deny a reality that really cannot be denied.

The phenomenal fall in the level of national saving is also quite disturbing. Savings have diminished to half the level they were at a year before. In the June quarter 2009, there was a fall of one-third in just that period alone.

Moreover, in June 2009, the saving ratio has descended into negative territory, being recorded at -0.4. The notion that the stimulus has been tucked away into additional savings is belied by these figures.

The notion that was always at the core of the Keynesian model, that recessions are due to over-saving, is clearly nonsense. But without that bit of cover for the actions taken, where is the theoretical justification for spending money and deficit finance.

The Keynesian model, for those who have not studied economics, argued that recessions were caused by too much saving relative to the willingness of investors to invest. The Government was then required to make up the difference by increasing its own expenditures to soak those savings up.

The data, however, do not indicate any such problem. If there is a problem, it lies with not enough saving which makes the Government's pursuit of our accumulated saving through its expenditure package even more difficult to justify. It is not hard to see when one looks at these figures why the RBA is itching to raise rates as soon as possible. It is why rates are rising already with or without the cover provided by the RBA. The potential for an inflationary spiral is not low.

I also pointed out to the Committee that the cost per job saved has been in the vicinity of one and a half million dollars each, based on the assumption that had there been no stimulus, the unemployment rate would have risen to around 6.1% (and here I am giving the stimulus the benefit of the doubt).

But to give you an easy access to the orders of magnitude involved in such immense levels of spending, I will just point out that we have spent $43 billion on the stimulus, for which there is real reason to believe we will not get a single dollar of economic return for the money spent. In times past the words we used to refer to a figures such as 43 billion was to say 43,000 millions. If we have created a net addition of 43,000 jobs for $43,000 million, then each of those additional jobs would have come with a price tag of around $1,000,000 each.

It's all very well to say that something had to be done. It is something else again to say that we have to spend one million dollars for each additional job saved. It would not have made good economic sense at one tenth the cost, but this is totally beyond reason.

We have poured four percent of our national output into projects that cannot generate in any possible way an increased productivity that allows the debt created to be repaid from the projects themselves. It is all just a dead weight cost.

I will finish with something that was picked up from my testimony by the AAP which I did not even know I had said it until I read it. "The use of Keynesian economics has been on of the great catastrophes for economic theory in the West". Just how true this is I fear we are all about to find out.

Dr. Steven Kates
for The Daily Reckoning Australia

• Why I Would Have Raised the Interest Rates
• Australia Might Avoid the Technical Definition of Recession
• Australia’s Currency and its Economy Will Benefit from China’s Stimulus Package
• Economists Agreed the Stimulus Was Working and the Recession Was Coming to an End
• Government Preparing Another Stimulus

Thus sang one of the characters in an operetta by Jacques Offenbach. But that was in the mid-19th century.

But hey...what goes around...

Guess what happened last year? According to a study from Boston Consulting Group, the only area of the world that got richer last year was Latin America...led by Brazil!

The rest of the world got poorer by 11%, according to BCG. Down in the rum and sun zone, on the other hand, they got 3% richer.

So maybe our investments in South and Central America will turn out all right after all.

Meanwhile, back in the developed world...what's going on? There are two main schools of thought. Ours. And theirs.

Who's right? You decide.

'They' say, 'The crisis is over.' We can thank our lucky stars - and the feds.

Now, we're getting back to 'normal'...or maybe a 'new normal,' with lower growth rates than before. Janet Yellen, San Francisco Fed governor, says the recovery will be 'tepid.' Others say it will be weak...soft...drawn out.

"The slowest recovery since 1945," says a Bloomberg report.

It may be slow, they say, but it's sure. The stock market proves it.

Stocks are up 65% worldwide, with the United States a laggard...stocks in the US are up barely 40%. The Dow rose 21 points yesterday - still a long way to go to get to the 50% rebound mark, at 10,300.

Gold closed down, but still over $1,000. And the dollar continued falling - reaching $1.46 per euro.

In our view, there is no recovery. None. All of the improvement in the economy can be traced directly to bailouts. None of it - not a single penny - is organic, natural or durable. When the subsidies for new cars goes away, for example, so do auto sales.

We wrote a book, Financial Reckoning Day with Addison Wiggin, in 2003. In it, we predicted that the United States would follow Japan into a long slump. We thought it would begin after the tech crash of 2000. We were wrong about that. But it seems to be beginning now. And the government, predictably, is doing the same things the Japanese government did - despite Bernanke's assurances that he won't allow the country to fall into the Japanese deflation trap.

One thing the Japanese did was to reduce interest rates...practically giving away money to anyone who would borrow it. But Japanese consumers didn't want to borrow; they wanted to save. They had speculated on the bubble and lost money. Then, with retirement approaching they wanted to replenish their savings and rebuild their balance sheets.

So, the Japanese government put out money...and it was taken up by speculators, not by the real economy. The speculators borrowed yen, at very low interest rates, and then reinvested the money in go-go sectors elsewhere - such as the US dotcom bubble. The yen became the world's "financing currency." If you wanted to build a factory in China or speculate on Argentine bonds, you could begin by borrowing cheap money from Japan. Thus, Japan contributed to a huge boom all over the world. But not in Japan. The land of the rising sun never seemed to get up in the morning. Property investors lost 80% of their money. Stock market investors lost as much. Even now, nearly 20 years later, they're still 75% down.

And now, along comes the United States of America with super-low lending rates. But who's borrowing? Not the moms and pops of Middle America. They don't have anything to borrow against. And the banks won't lend to them. The banks need money for themselves. Besides, everybody knows the average household in America is losing income.

What's more, mom and pop don't want to borrow. They've been through 10 years of losing money on Wall Street. Stocks are no higher now than they were a decade ago. And their houses - on whose rising prices they had counted for their retirements - have gone down 20-40%. And they're still going down.

The poor moms and pops can't seem to get a break. They're now desperately saving for retirement - at the worst possible moment, when jobs are scarce and wages are falling. But what else can they do?

So, the feds push money into the economy, but it's hot money. It's money that speculators use to place bets on gold...or on Brazilian bonds...or on oil exploration companies. The money never ends up in consumers' hands. It never bids for consumer goods. It never pushes up consumer prices.

As in Japan during the '90s, America's hot money may go all over the globe. It may turn the entire world into a casino. But it won't bring about a real recovery...

..if cheap money from the government were all it took to bring prosperity, Zimbabwe would be richer than Switzerland. Obviously, it doesn't work that way.

But here's the shocker. While we know easy money policies don't create prosperity, you may be surprised to learn that they don't necessarily cause inflation either. In other words, government may be incompetent, even at what it does best.

So, why is gold rising?

Ah...we were afraid you were going to ask. We've been doing a lot of thinking about it. Partly because our Family Office partners are smart people who ask smart questions. And partly because we're wondering what to do with our own gold. Buy? Sell? Do nothing?

We spent half the night drinking and meditating on the subject. Finally, we're not sure we had a clearer idea...but at least we were able to sleep.

We've already unveiled the idea to you. The feds can cause speculation in gold; but they can't easily cause consumer price inflation. As explained above, they can get cash into the hands of speculators, but not into the hands of consumers. Not in the middle of a major consumer retrenchment.

The Roosevelt Administration was faced with the same problem. But back then, gold and the dollar were linked. Roosevelt could devalue the dollar by edict. The Japanese couldn't do that. Nor can the Obama Administration.

In a deflationary credit cycle, you may only be able to cause consumer price inflation by resorting to extraordinary Zimbabwe-style money printing. You can drop money from helicopters, as Ben Benanke promised. But as Zimbabwe demonstrated, that cure is far worse than the disease it is mean to heal.

All of that said...gold can rise...partly because people are betting on it as an antidote to inflation (not realizing that consumer price inflation may be a long way off)...and partly for other reasons.

Lately, one of those other reasons may be heavy buying by the Chinese. The Middle Kingdom wants to diversify out of the dollar. It also has a central bank with very little in gold reserves. What better to do than to diversify out of the dollar by adding gold to its central bank reserves? Word on the street is that it is buying steadily.

The Chinese have made a number of announcements on the subject. We don't really know who's in charge there, so we don't know whose comments to weight most heavily. One Chinese official has said that the government is buying gold and intends to buy more. Another says they will buy "when people don't expect it." Another says the Chinese expect gold to go to $3,000 an ounce.

The Chinese have the money and the motive. They alone could move the price of gold to $3,000 if they wanted to. And maybe they do.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Zero Percent Interest Rate Didn’t Work for the Japanese
• Recession for the Japanese Economy Once Again
• Gold is More Like a Religion or a Political Position
• The Rising Price of Oil Has Done Less Damage in Europe Than in America
• Japan and its Economy Did Not Have Secret to Everlasting Success