On the other hand, we have a French friend who swears his Corvette is the most trouble-free car he's ever owned.

Who makes the best cars? We don't know. But we don't have to know...we're happy to let Mr. Market decide.

But Nancy Pelosi wants to trump Mr. Market. She wants to decide which automakers survive and which don't. Letting the automakers go bankrupt is "obviously, out of the question," says Nancy Pelosi.

Out of the question? Maybe. Obviously? Not at all.

Here at The Daily Reckoning, we know that Mr. Market is a hanging judge. When he thinks someone has done wrong, he strings them up. Right now, he's got GM and Chrysler on the gallows. But Nancy Pelosi is right; Congress is bound to come to the rescue.

We'll get back to that in a minute. First, a look at yesterday's news:

Is the market set for the long-awaited Obama Bounce? Yesterday, it wasn't clear. The Dow lost 215 points. Gold finished down almost $4. Oil was down too - to $43.

We'll just have to wait.

Meanwhile, auto execs were back in Washington. They seem to have lost their case with Mr. Market on the bench. Now, they're appealing to Congress.

But the U.S. Congress is more like a lynch mob than a judge. It doesn't think or carefully weigh the evidence. And it is certainly not blind. Instead, it reacts...like a mob...instinctively, and foolishly.

The unions don't want to see GM or Chrysler go under. They've been feeding at that trough for a long time; they don't want to stop now. The shareholders don't want to see them go down either. They've got money at stake. Nor does management...nor do any of the subcontractors, dealers, or service industries related to automobiles...or the hundreds of thousands of people they employ.

They're all "stakeholders," they say. And they're prepared to reward members of Congress who help them protect their 'stakes' and punish those who don't.

Of course, all say they believe in free enterprise...and in market economies. But all will tell you that there are special circumstances in this case. Everyone always has plenty of reasons why the rules of a free society shouldn't apply to them...at least not just now.

So, the fix will probably be in, dear reader. The Detroit Dinosaurs will be kept alive. At least for now.

But how? These hogs have big appetites. Who's going to feed them? With what?

Ah, there, dear reader...there's always a catch...a fly in the ointment...crack in the bell.... Hit the bell hard enough...and it falls apart.

There are only so many resources in the world - only so many workers...only so many tons of steel and only so many barrels of oil. In a real, free-market economy, ordinary people decide how these will be used. They vote with their money. They buy a beer, for example...and send a signal to the whole world. "Beer is what we want!" So, the hop growers get hopping...the beer truckers get trucking... and the brewers get brewing. The 'hidden hand' directs resources to where they are needed. People get what they want.

And then, along comes the U.S. Congress...in its all its majesty. We don't care what Mr. Market says, it declares, 'It is cars from Detroit that the people shall have.' And then, the money that would have gone into making beer is diverted to the auto industry. Resources follow the money. The steel delivery trucks head for the auto plants, not to the brewers. The oil that might have been used by a distillery is instead siphoned off to fire up an auto plant. The capital that might have been used to build more breweries in Anaheim is instead used to prop up old assembly plants in Detroit. And then, the consumer pays more for his beer - because the brewers didn't increase production - and more for his cars too...Detroit knows the game is rigged in its favor; why bother to cut costs?

Of course, subsidizing the domestic auto industry is just what economists have been cautioning other countries NOT to do for decades. Typically, a woebegone country in Africa or Latin America wants its own airline and its own auto industry. Its citizens could perfectly well buy their sedans on the open market...and count on the commercial airline industry to move them through the sky. But where's the prestige in that? Where are the sweetheart contracts...the bribes...the payola...the baksheesh?

A report out earlier this week criticized the Treasury Department for not having adequate controls on its $700 billion giveaway program. The money may be wasted...but at least it should be wasted according to proper procedure, said the critics.

And so the great fight against nature continues. The Bubble Epoque is over. Bailouts...bribes...boondoggles - welcome to free enterprise a la USA, circa 2008.

*** As we mentioned yesterday, today is a special day...it's what our buddy and trusted currency counselor, Chuck Butler refers to as Jobs Jamboree Friday! Yee-haw!

Early this morning, Chuck wrote this to his readers:

"The 'experts' have forecast a -335K drop in jobs for November... But, your old Pfennig writer believes that this forecast is low. I think it will be closer to -375K. The reason I say that is the employment piece of the ISM report that printed the other day and the employment index of that report showed some real serious rot on the labor vine. I read a report last night, where an economist was attempting to show how the report should read -750K. As bad as -375K is, I don't think the Bureau of Labor Statistics (BLS) would have anything to do with printing a -750K report!"

Turns out, the Labor Department's monthly jobs report was much worse than feared. In November, the United States shed 533,000 jobs...the biggest monthly job loss since December 1974.

"These are horrendous numbers... This is an economy that is in absolute free-fall right now. Confidence has collapsed," said Nigel Gault, chief U.S. economist at Global Insight.

Also in the jobs report was data that showed that the unemployment rate went up from 6.5% to 6.7% in October. MarketWatch points out that although this rate is (marginally) lower than the forecasted 6.8%, it is the highest unemployment rate since 1993.

*** The holiday season is going to be rough on many Americans...and in turn, retailers. In fact, Americans are turning away from what usually powers the economy out of a recession: credit cards. The Washington Post reports:

"According to an analysis by Citi Investment Research, the constriction in lending that began earlier this year points to at least a 5 percent decline in consumer spending on goods during the heart of the holiday season. A Consumer Reports survey showed more than half of shoppers intend to rely less on credit this Christmas. One retailer, Circuit City, has already blamed the meltdown in credit for sending it into bankruptcy protection last month.

"'If you're a retailer right now, you see the contraction in consumer debt as a problem,' said Jerry Welch, former chief executive of FAO Schwarz and now head of prepaid card service nFinanse. 'There's no way you can be a retailer and look out and see people being maxed out on their credit cards and think it's good for you."

Over here at The DR headquarters, we have an interesting way to provide your family with the comfortable holiday season they have become accustomed to...with a $1500 "One-Time Divided" check.

*** The South Africans we meet - black, white, or somewhere in between - are always nice, smart and hardworking. And the society they have created is dynamic, complex, and flourishing.

On the other hand, it is a society that is troubled...and, possibly, doomed.

At least, that is our impression. Crime is an ever-present problem...and a constant subject of discussion. When we arrived, a radio talk show was discussing a recent case in which robbers interrupted church services - at gunpoint - and relieved parishioners of their valuables.

No one thanked these desperadoes for what they had done - even though they made it easier for the churchgoers to get into heaven. Instead, they were roundly condemned...in recurring laments about how crime-infested South Africa has become.

The evidence of crime is everywhere. High walls and razor wire protect suburban houses. Security guards stand vigil at office parks. And along the roadsides, there are people - walking, sitting, sleeping, bicycling...all vaguely menacing, at least to someone from North America or Europe.

Is it anymore dangerous than Baltimore or Las Vegas? We don't know. But to a foreigner, it seems more dangerous.

And it seems like a culture evolving - quickly. From the domination of the Boer's and the English, South Africa has become multi-racial...and multi-cultural. All the races and cultures seem to get along fairly well. But how long can it last, we wonder? How long before the plague of democracy catches up to them, and the numerically superior black Africans realize they can vote themselves money and privileges?

Keep reading for today's essay...

Bill Bonner
for The Daily Reckoning Australia

• Cars Could be Designed by Congress
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But let us take a moment to bow our heads and offer this Prayer of Thanksgiving...

Thank you, good Lord, for everything.
We are still alive. We are still solvent.
Help us stay that way. If not both, at least the former.
Lead us not into temptation. Keep us in gold and cash until this is over.
And thank you for bringing the man called Obama to the White House...he might not be any better, but he could hardly be worse; or could he?

Okay, we've said our prayers...now, down to business...

Yesterday, the stock market continued its recovery. The Dow was up 247 points. Oil sank to $54. Gold lost $7.40 to come to rest at $811.

We have been waiting for a major rally. Perhaps it is here. But watch out. It is probably temptation coming...

Wait...this is national holiday in America. This is probably a good day to tell you:

What We Believe

Yes, dear reader, we may be cynics, scoffers and doubters here at The Daily Reckoning, but we're not nihilists. We have our beliefs. And feelings too. Really.

Here is what we think:

Financial markets are part of public life. As a consequence they follow the rules of all public spectacles. That is, they are one part rational and sensible...one part incomprehensible...and one part pure humbug. You never know exactly which part it is you're looking at.

But the markets are also moral, not mechanical. That is, they follow moral rules, such as - Thou Shalt Buy Low and Sell High...Thou Shalt Save Thy Money...Thou Shalt Not Speculate Unless Thou Knowest Exactly What Thou Art Doing.

Break those commandments...and you're on the road to money Hell. No point in tinkering with the machine. You can't 'fix' it. That's just the way it works. Financial sins are punished, one way or another.

But moral lessons - as opposed to mechanical knowledge - are cyclical, rather than cumulative. One generation learns. The next forgets. That's why the biggest market trends tend to follow great, long cycles - approximately generational in length. In 1929, for example, stocks hit a generational high. They didn't recover until 1954 - 25 years later. They reached a peak in 1966...and then declined until 1982. They didn't reach another major peak until 2000 - 34 years later.

We all know what has happened since. The market tried to correct in 2001-2002, but the feds wouldn't let it. They inflated the biggest bubble of credit and speculation in history...

...that bubble has just burst.

What now? Well, we can expect a long period of regret, reorganizing and repentance. It takes time to undo mistakes. It takes time to learn. It takes time to correct the errors of a 25-year bull market.

If the real top of the bull market cycle came in 2000, we will probably see the next peak around 2025. Meanwhile, there is a dark valley to cross.

But wait...there's more.

Because while the private economy is reluctantly owning up to its mistakes...going into rehab...making amends...rebuilding balance sheets....and promising never to do such stupid things again...

...our leaders are doing all they can to stop the learning process.

"Here's $800 billion," was yesterday's temptation. "Go out and have a good time."

"Rescue, Part 2" is how the International Herald Tribune describes it. The plan itself has two features. In the first, the feds will spend $200 billion to buy up loans made to consumers and small business. In the second, another $600 billion will be offered to the mortgage industry.

Our colleagues at contrarianprofits.com describe the program:

"It's an $800 billion slush fund aimed at loosening credit for homebuyers, consumers and small businesses.

"And it may get bigger...

"Treasury Secretary Hank Paulson has left the door open for more funds. He says, "The facility may be expanded over time and eligible asset classes may be expanded later."

"Why doesn't this come as a surprise?

"So there is still no telling how much more money the government will throw at this crisis. But our back-of-the-envelope calculations puts the running total at over $8 trillion."

The Washington Post sums it up beautifully. "A year ago, the central bank had assets of $868 billion, of which about 90 percent was in Treasuries. Last week, it had assets of $2.2 trillion on its books, of which 22 percent was in Treasuries."

How this will end, we don't really know.

But we know this: You can't pump $8 trillion in funny money into the economy and not expect consequences."

Meanwhile, the Europeans don't want to be left behind:

"The European Commission urged EU governments Wednesday to jointly combat the economic slowdown with euro200 billion (US$256.22 billion) in spending and tax cuts to boost growth and consumer and business confidence.

"If fully enacted, its two-year ``European Economic Recovery Plan'' would see the 27 EU governments spend 1.5 percent of the bloc's gross domestic product to halt the slowdown that has already pushed some European nations into recession."

But let's not get distracted by the details. The markets are teaching people a lesson. The feds don't like it. They want people to believe that the economy is a mechanical system...that they just need to find the right screws to turn...and the right levers to pull.

Since the "machine" is visibly slowing down, these simpletons think they can get it going again. Just add more fuel!

Of course, as we saw in 2001-2007, the feds can certainly have a big effect on the economy. Their "economy as a machine" theory often seems to work. In fact, practically everyone believes it will work. They just argue about which screw to turn...and who should do the screwing.

The Keynesians say you turn the screw marked "fiscal policy." When private spending slumps, just replace it with government spending. Pretty simple, no? But when the feds turned that screw - arguably, too far - in the '60s and '70s, it didn't seem to work. Instead, they got stagflation.

So, Milton Friedman pointed to the lever marked "monetary policy." Give that a pull, he said. It will make sure that the economy always has just the right amount of credit at just the right price. So, Maggie Thatcher and Ronald Reagan both pulled on the monetary policy lever. And Alan Greenspan swore by it. He yanked it so hard in the recession of 2001-2002, the handle practically broke off. Milton Friedman was still alive at the time and actually approved of Greenspan's handiwork, saying that he had 'spared the economy a worse recession,' or words to that effect.

Now the machine has broken down again. It has thrown itself into reverse; the 3rd quarter showed an absolute decline in US output - and it's speeding up in the wrong direction! And now the terrified feds are 'pulling out all the stops.' Which means they using both Keynes and Friedman, and every other tool they can get their hands on.

But the real problem is this: the "economy as a machine" theory is much too simple. No theory, said the philosopher Godel, is ever complete. In science, each one is a stepping stone, towards a fuller and more complete theory. Even theories that take you in the wrong direction are useful - at least in science. They are eliminated...and discarded, so science can take a new direction.

In economics, no theory is ever discarded. Instead, they are merely recycled as market conditions change. "Markets make opinions," say the oldtimers. In a boom, it is the free market theories everyone wants. "Leave the market alone...it will take care of itself," they say. But in a bust, the cry goes up: "Help!"

For the moment, Mr. Market's correction still dominates the economy. One way or another, it will continue for many years. But the Feds are turning the screws and pulling on the levers. Keynes is in fashion...for the present. But Friedman is still around too. Between the lot of them, they ought to be able to do some spectacular damage

But there is plenty of room for surprises...and more mischief from the feds. At some point, we presume the feds will succumb to the lure of the printing press. By some accounts, they already have. Then, we'll really see some excitement.

So, enjoy your Thanksgiving turkey...and stay tuned.

*** Frugalista. It's the latest thing, dear reader. Just as we predicted, being thrifty has become fashionable again...so fashionable they even have a word for it: frugalista. It means someone who doesn't like to spend money but it nevertheless very stylish.

Spending money is soooo 2007...appearing rich is soooo passé.....having a big car, a big house, a big bank account is soooo, like, yesterday.

Chic poverty. Coming soon, to neighborhoods near you.

Bill Bonner
for The Daily Reckoning Australia

• The Fed Will Cut Rates Today
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• How Much Worse Can the Stock Market Get? A Lot Worse

But as pretty as it was...and as much as we looked forward to our dinner...we walked along with our head down. It's the end of the world as we know it...and we don't feel so good.

Why? Because this correction is beginning to hurt.

On Monday, we put out the word that the Morgan Stanley index showed a worldwide loss of equity value of some $30 trillion. By Wednesday, we got an update: another $2 trillion had been lost. And yesterday, once again, the Dow went down hard - another 445 points were lost. This brings the index down to 7,552...another day like that and it will have wiped out all the gains of the last six years. The low for 2002 was 7,286. It looks like we'll get there soon.

That will mean that Mr. Market will have corrected the entire 21st century rally. You'll remember, we thought the bear market began in January 2000. Stocks fell. Then, in October 2002 began a uptrend that most people took for a new bull market. We figured it was just a bear market rally - a trap for unwary investors. But it lasted so long and took stock prices so high that even we had trouble sticking to our story.

Now we see we were right. Almost all the gains made by investors in this century have now been corrected.

Dan Denning sends us over this chart:

Goldilocks and the 4 Bears

But what next? Will Mr. Market stop there? It doesn't look like it. We've never seen him so angry...and never seen him so determined to do damage. It looks to us as though he wants to correct a lot more than just the bear market rally...

....maybe he's going to correct the entire bull market run that began in 1982. If so, you can expect the Dow to sink down to about 3,000 (adjusting the '82 level to inflation).

...maybe he's going to spank the baby boomers. They didn't save. They were reckless and spendthrift. They've lived such charmed lives; they were born just after the last Great Calamity - the period of 1914-1945. But now it looks like they are in for a correction...correcting their foolish habits and silly ideas. In other words, it looks like the boomers are going to sweat - for the first time in their lives.

...maybe he's going to correct the entire post-'71 funny money system, taking the dollar down a peg so it's no longer the world's only reserve currency.

...or maybe he's going to correct something even bigger. A "correction" is an episode - inevitable, but rare - in which mistakes are identified and put right. But there's another way of looking at it...it's a period when things regress to the mean...when they go back to normal...when they return to where they 'ought' to be.

Well, it's not 'normal' for the price of oil, for example, to shoot up from barely $30 to nearly $150 in the space of a couple years. Now, we're seeing the oil price come down to more normal levels. Yesterday, oil dropped below $50. This morning, in Asian trading, it is below $49. It is regressing to the mean. It might even "overshoot" to get there.

It may not be 'normal' either for a man in Detroit to earn $35 an hour while a man in Shanghai earns only $1.50. Both men's work should be worth about the same thing. And for most of human history, there was probably little difference. In the 18th century, for example, economists believe that a fellow had about the same standard of living, whether he lived in Delhi, Detroit or Dongguan. Then began an anomaly. Detroit took off. Thereafter, people in Europe...or of European descent...earned far more than the 'wogs.'

Naturally, the Europeans developed a certain sense of superiority.

"What separates civilized men from barbarians?" the French have been known to jest. "The Mediterranean!"

*** Now, it's the Europeans and Americans who are on the wrong side of the Mediterranean. They have a big disadvantage: their costs are too high. Just look at Detroit. Its labor is too expensive. It has too many legacy costs. It operates with too much overhead...too many lawyers and bureaucrats...too much staff...too many expenses and impediments that its competitors in China don't have.

And so now, the Chinese are proposing to buy GM! Can you believe it? What was good for GM was supposed to be good for America - at least, it was in GM's heyday. But now they're talking about selling the whole U.S. auto industry to communists. Here at The Daily Reckoning we're having a serious case of irony overload... We read the headline news...and we just don't know what to make of it.

But yesterday evening...walking along the quai...we had a thought. What if Mr. Market intends to correct the entire European advantage? What if he intends to correct the entire Industrial Revolution...bringing the developed world's GDP/person more into line with those in China and India? Maybe he intends to unhinge the sky again? Maybe we will see all five stages of collapse - financial, economic, political, social and cultural...and maybe some hurricanes and a major epidemic too!

But we're not going to worry about it. That is all in the future...perhaps the distant future. Let's get back to what is happening right now.

The feds are now in full inflation mode. They're cranking out as much cash as they can. But as much as they create new money - Mr. Market destroys it faster.

And what will happen today? Who knows...? But yesterday probably took another $1 trillion out of the financial world's stuffing...

A Reuters report tells us that it will take a lot more than Paulson has left to fix what it wrong with Wall Street. Financial institutions need between $1 trillion and $1.2 trillion to repair their balance sheets, says an analyst.

Remember, it's a "balance sheet recession," not a standard business cycle recession. Companies, governments, consumers, investors - we're all desperate for cash to rebuild our balance sheets. We need to pay down debt and build up savings.

And given the size of the holes we have to fill, you can expect some big loads of sand, rocks and gravel coming from the world's central banks. In fact, one report we got this week tells us that the size of the campaign - in dollar terms - is already over $4 trillion...or more than the cost of WWII.

*** Joblessness is near a 26-year high, says a Bloomberg report. Lost your job on Wall Street? Need retraining for a new career? Learn to say, "Would you like fries with that?"

Yes, it's the "New Frugality," says the Associated Press:

"It is a whole reassessment of values," said Candace Corlett, president of the consulting firm WSL Strategic Retail. "We've just been shopping until we drop and consuming and buying it all, and replenishing before things wear out. People are learning again to say 'No, not today.'"

"The trend is evident in where cash registers are ringing, and where they are not."

*** A federal judge has just ordered the Pentagon to release two of its Guantanamo prisoners. The conservative judge was supposed to be friendly to the Bush administration, but even he could find no justification for holding the two men.

Which sounds to us like another charge that will eventually be brought against Dubyah and his Hole in the Head gang - unlawful imprisonment.

Bill Bonner
for The Daily Reckoning Australia

• Detroit Wants Bailout
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Then, shares rallied nearly 5.7% for the rest of the day. The All Ords closed up 54 points on the day. But from the intraday low to the close, it was more like 186 points. Now that's what we call a bounce back!

Maybe Mr. Market had a few martinis for lunch and came back in a reckless mood. We know the feeling. Or maybe he just needed a stiff drink to give him the courage to say that scariest of words these days, "buy."

Source: www.yahoo.com

Others too courage too. At much-maligned, forever-falling Oz Minerals (ASX:OZL), new CEO Andrew Michelmore told the market he was buying $30k worth of shares. Director Barry Cusack said he was in for $100k. The insider buying was enough to engineer a 25% turnaround on the day, with the stock closing up nearly 13%.

Whatever the cause was, we came in the control room at the Old Hat Factory this morning around 7am and found Swarm Trader Gabriel Andre already at work. It looks like the rally triggered a host of signals. But will it continue?

It's been a tough market to trade. There's no real momentum. No one really knows what's going on. One day, you're up three percent. The next, down four.

The Dow started its Friday bounce back work a little later than the ASX did. It didn't begin its late-afternoon run until 1pm in New York. But when it finished, it had climbed 494 points above the open, for a daily gain of 6.54%.

The Dow Bounces Back

Who knows why these things happen? The story making the rounds in the papers is that traders "cheered" the news that Tim Geithner, President of the New York Fed, would be Barrack Obama's new Treasury Secretary. He'd replace "Bazooka" Hank Paulson.

No word on Geithner is as good for Goldman as Paulson. But he has been one of the three big wheels behind the various bailout plans engineered by the Wall Street/Treasury Axis. He's a known known, as Donald Rumsfeld might say. And since we're going with the Roman metaphor, we'd say Geithner has been Caesar to Ben Bernanke's Pompey and Paulson's Crassus.

Of course the first Triumvirate coincided with the beginning of the end of the Roman Republic. It was never official. Just three men calling the shots from behind the scenes.

But it certainly marked the beginning of the Empire and dictatorship. Crassus was one of Rome's richest men. He'd put down the slave rebellion led by Spartacus in 74 BC (still one of Kirk Douglass' best performances, if you ask us). But he died fighting the Parthians at the edge of Empire at the Battle of Carrahae in 53 BC.

Pompey lasted longer. He gained fame in Rome after defeating pirates in the Mediterranean in 67 BC. He formed an alliance with Julius Caesar in 59 BC and cemented in by marrying Caesar's daughter Julia.

But when Caesar famously crossed the Rubicon in 49 BC and brought his armies into Italy for Civil War, he put Pompey on the run. Caesar chased Pompey all over Italy for a bit, eventually defeating him in battle and driving him to Egypt, where he was promptly assassinated by his own friends and beheaded.

Tough place, ancient Rome.

But back to the modern world. There are no financial Rubicons left to cross that we can see. They've all been crossed already. And we believe they all lead to inflation in 2009. The New York Times Reports that Senator Charles Schumer wants the new stimulus plan to be around US$700 billion. That would match the TARP, providing some classical symmetry.

Gold must've noticed. It was up forty three bucks on Sunday. In the spot market, gold's back over $800. By the way, Australian gold production fell by 8% in the third quarter, according to Bloomberg. Australia is the world's third largest gold producer. But high production costs are biting.

In the bigger picture, gold traders and investors realise that the Great Fiscal Stimulation of 2009 is being prepared as we speak. President-elect Obama is conversing with his fiscal and monetary generals. He is marshalling his armies of inflation to go forth and multiply the money supply.

If gold investors are right (and we think they are), the upcoming war on deflation should unleash the epic inflation we've all (except for Bob Prechter and Marty Weiss) expected.

Obama and his Consuls Geithner, Summers, and Bernanke are preparing the public for operation GFS 2009. "We now risk falling into a deflationary spiral that could increase our massive debt even further," the President-elect told Americans in a speech this weekend.

He's right. The rising value of cash (in a deflation) makes debt harder to pay back (especially when you plan on adding so much more). That's why all governments everywhere prefer the policy of soft, slow-motion inflation. Obama does not represent change here. Just more of the same borrowing and spending we've had for years.

Inflation gradually erodes the value of accumulated debts by allowing you to pay them off in an increasingly weaker currency. If you're having trouble with that idea, think about this way. Say you borrowed $1,000 twenty years ago. Twenty years ago, $1,000 had more purchasing power than it does today. If you inflate steadily enough, it gets easier to pay back your accumulated debts. $1,000 ain't what it used to be.

The United States also enjoys the luxury of paying off its debts in a currency it prints. So inflating the debt away is easier than, say, defaulting on it because you don't have enough of the currency in which the debt is denominated. There is no reason to default, in fact, when you can print the currency in which your debts are owed.

This is why we increasingly think inflation is coming. Up until now, the best laid plans of Paulson and his team have been focused on recapitalising banks and keeping the financial system from imploding. Deflating financial assets have chewed up that new capital, and prevented it from becoming new lending in the economy.

But the next step is the reflation of household balance sheets. Wall Street got its bailout. Now it's Main Street's turn.

Already, Obama's team has indicated it will let the Bush tax cuts expire naturally in 2011, rather than repealing them now. Expect an expanded foreclosure mitigation effort too. And eventually, a new government-backed refinancing plan will be floated to try and put a floor under U.S. house prices.

Yep. 2009 is shaping up to be quite the year if you love big spending government with big plans. Yet here in Australia, the government seems scared to follow Obama's lead and go into deficit to "get things going." The unemployment rate will have to go higher, or house prices will have to fall further, before the Australian public demands more rate cuts and deficit spending (rather than resisting the latter).

Here are a few problems to think about until tomorrow. First, if you're a large owner of U.S. dollars and a major creditor to the U.S. government, and you see that the U.S. won't default on its debt but instead, inflate it away, what do you? What policy levers can you pull to exert influence on your debtor?

Second, what happens to the world's stock of available savings when governments start hoovering it all up to be used as fiscal stimulus? Does it crowd out private investment, leading to fewer new jobs, and a prolonged crisis? In other words, is the big government push to "fight the crisis" actually setting it up to be much longer and more painful than it otherwise might? More on this tomorrow...

Dan Denning
for The Daily Reckoning Australia

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