Then, all of a sudden, things were so bad that without a $700 billion congressional appropriation, the whole thing would collapse.

In the wake of this change of heart on the part of our leaders, Americans found themselves bombarded with a predictable and relentless refrain: the free market economy has failed. The alleged remedies were equally predictable: more regulation, more government intervention, more spending, more money creation, and more debt. To add insult to injury, the very people who had been responsible for the policies that created the mess were posing as the wise public servants who would show us the way out. And following a now-familiar pattern, government failure would not only be blamed on anyone and everyone but the government itself, but it would also be used to justify additional grants of government power.

The truth of the matter is that intervention in the market, rather than the market economy itself, was the driving factor behind the bust.

F.A. Hayek won the Nobel Prize for his work showing how the central bank's intervention into the economy gives rise to the boom-bust cycle, making us feel prosperous until we suffer the inevitable crash. Most Americans know nothing about Hayek's theory (known as the Austrian theory of the business cycle), and are therefore easy prey for the quacks who blame the market for problems caused by the manipulation of money and credit. The artificial booms the Fed provokes, wrote economist Henry Hazlitt decades ago, must end "in a crisis and a slump, and...worse than the slump itself may be the public delusion that the slump has been caused, not by the previous inflation, but by the inherent defects of 'capitalism.'"

Although my recently released book, Meltdown explains the process in more detail, an abbreviated version of Austrian business cycle theory might run as follows:

Government-established central banks can artificially lower interest rates by increasing the supply of money (and thus the funds banks have available to lend) through the banking system. This is supposed to stimulate the economy. What it actually does is mislead investors into embarking on an investment boom that the artificially low rates seem to validate but that in fact cannot be sustained under existing economic conditions. Investments that would have correctly been assessed as unprofitable are falsely appraised as profitable, and over time the result is the squandering of countless resources in lines of investment that should never have been begun.

If lower interest rates are the result of increased saving by the public, this increase in saved resources provides the material wherewithal to see the additional investment through to completion. The situation is very different when the lower interest rates result from the Fed's creation of new money out of thin air. In that case, the lower rates do not reflect an increase in the pool of savings from which investors can draw. Fed tinkering, in other words, does not increase the real stuff in the economy. The additional investment that the lower rates encourage therefore leads the economy down a path that is not sustainable in the long run. Investment decisions are made that quantitatively and qualitatively diverge from what the economy can support. The bust must come, no matter how much new money the central bank creates in a vain attempt to stave off the inevitable day of reckoning.

The recession or depression is the necessary, if unfortunate, correction process by which the malinvestments of the boom period, having at last been brought to light, are finally liquidated. The diversion of resources into unsustainable investments out of conformity with consumer desires and resource availability comes to an end, with businesses failing and investment projects abandoned. Although painful for many people, the recession/depression phase of the cycle is not where the damage is done. The bust is the period in which the economy sloughs off the malinvestments and the capital misallocation, re- establishes the structure of production along sustainable lines, and restores itself to health. The damage is done during the boom phase, the period of false prosperity that precedes the bust. It is then that the artificial lowering of interest rates causes the squandering of capital and the initiation of unsustainable investments. It is then that resources that would genuinely have satisfied consumer demand are diverted into projects that make sense only in light of the temporary and artificial conditions of the boom.

Adding fuel to the fire of the most recent boom was the so-called Greenspan put, the unofficial policy of the Greenspan Fed that promised assistance to private firms in the event of risky investments gone bad. The Financial Times described it as the view that "when markets unravel, count on the Federal Reserve and its chairman Alan Greenspan (eventually) to come to the rescue." According to economist Antony Mueller, "Since Alan Greenspan took office, financial markets in the U.S. have operated under a quasi-official charter, which says that the central bank will protect its major actors from the risk of bankruptcy. Consequently, the reasoning emerged that when you succeed, you will earn high profits and market share, and if you should fail, the authorities will save you anyway." The Financial Times reported in 2000, in the wake of the dot-com boom, of an increasing concern that the Greenspan put was injecting into the economy "a destructive tendency toward excessively risky investment supported by hopes that the Fed will help if things go bad."

When things do go bad, pumping more money into the banking system, thereby lowering interest rates once again, only exacerbates the problem, because it encourages the continued wasteful deployment of capital in unsustainable lines that will eventually have to be abandoned anyway, and it forces healthy, wealth-generating firms to have to go on competing with bubble firms for labor and capital. When interest rates are made artificially low, they encourage the kind of investment that would normally occur only if more saved resources existed to fund them than actually do. Continuing to force interest rates down only perpetuates the allocation of capital into outlets that the economy's current resource base cannot sustain.

In response to the dot-com and NASDAQ collapses and the modest recession that accompanied them in 2000 and 2001 that Alan Greenspan and the Fed chose to embark on a robust policy of inflation, an approach that culminated in lowering the federal funds rate (the rate at which banks lend to each other) to a mere one percent from June 2003 to June 2004. Already by early 2001 the Fed had begun to ease once again. That year saw no fewer than 11 rate cuts. The unsustainable dot- com boom could not, in the end, be reignited, and thank goodness - the resource misallocations in that sector were unhealthy for the economy. But the Fed's easy money and refusal to allow the recession of 2000 to take its course led to an even more perilous bubble elsewhere. That was the only recession on record in which housing starts did not decline. Not coincidentally, that was also the moment at which people began to conclude that house prices never fall, that a house is the best investment one can make, and so on. By intervening in the market then, the Fed prevented the market from making a full correction, thereby perpetuating unsustainable investment and consumption decisions. In so doing it merely postponed what it was trying to avoid, and made the crash worse when it finally came.

Fiscal stimulus, meanwhile, merely diverts resources from the productive sector in order to fund money-losing enterprises arbitrarily chosen by government. These artificial expenditures, moreover, interfere with the market's attempt to sort out genuine demand from bubble demand. "Stimulus" spending can in fact keep firms (construction companies, for example) in business that for the sake of genuine economic health need to be liquidated so their resources can be more sensibly employed in more urgently demanded lines of production.

The claim that "stimulus" spending is necessary to bring "idle resources" back into use also misfires, since it fails to consider why so many entrepreneurs - who have survived as long as they have on the market because of their skill at anticipating consumer demand - should suddenly have become, all at once, such poor forecasters that they're all saddled with idle resources.

The reason for the idle resources is, obviously, some prior act of miscalculation. And what could have created such systemic miscalculation? Could it be the Fed's artificially low interest rates, that distort entrepreneurial forecasting and encourage the wrong kind of investments at the wrong time?

Consider a restaurant owner who mistakes the temporary demand for his product deriving from the presence of the Olympics in his city with real, sustainable demand. Suppose he opens a new location to accommodate all this new demand. When the Olympics are over, he's left with idle resources - labor with nothing to do and empty restaurant space for starters. Should we want to "stimulate" these resources back into activity? Of course not. They shouldn't have been allocated this way in the first place. We should want the market, guided by the price system, to redeploy them into sensible channels.

The problem, therefore, isn't that we lack enough "spending" or "demand," and that we need government to fill in the "missing demand." The problem is that in the wake of Fed-induced misallocations of resources we wind up with structural imbalances, a mismatch between the capital structure and consumer demand. The recession is the period in which the economy repairs this mismatch by reallocating resources into lines of production that actually correspond to consumer demand. The modern preoccupation with levels of spending instead of patterns of spending obscures the most important aspects of the question.

Had the market been allowed to work before the collapse, there would have been no housing bubble and no crisis in the first place. Had the market been allowed to work when the crisis hit, recovery would have been swift - as it was in 1920-21, when an even worse depression came to a rapid end without any open-market operations by the Fed, and without any fiscal stimulus. (In fact, the federal budget was cut in half from 1920 to 1922.)

What, in short, should we do now? Exactly the opposite of what our so- called experts, who in a sane world would be forever discredited, urge upon us.

Regards,

Thomas E. Woods, Jr.
for The Daily Reckoning Australia

• How Much Worse Can the Stock Market Get? A Lot Worse
• If the US Economy is Really Following Japan Things Will Get a Lot Worse
• Unsustainable Economic Activity
• Gold Standard Doubles as the Greenspan Fed Makes Real Interest Rates Negative
• What Lies in Wait for the Global Economy

NO FOOLING! It doesn't matter which currency you earn, spend or invest, gold bullion has been the best-performing asset class bar none this decade.

That fact bears repeating, so you'll have to forgive me:

Gold has dominated the last nine years for investors, smacking everything else in the nose and pulling their ears, too.

So when finance advisors and hacks finally come to glance back at this decade, they'll see it - in fact - as the "decade of gold". Just as US tech stocks ruled the 1990s, rising 11-fold on the Nasdaq. Just as Japanese exporters owned the 1980s, up more than six times over on the Nikkei-225. Just as gold itself dominated the 1970s.

Of course, this is hardly a unique insight amongst contrarian (i.e. bloody-minded and history-guided) investors.

Hell's teeth, at least one tech-stock heretic - Bill Bonner of The Daily Reckoning - called gold the "Trade of the Decade" just as the decade began.

But even though Bill's call has come good (and come good better even than his blushes would hint), the mainstream investment industry still refuses to notice the cold, hard fact of gold's decade-beating performance.

Take the out-performance of gold for US investors, for instance. Go on - take it! Because nobody in the financial media wants to acknowledge it.

Yet this decade, only residential real estate managed to beat gold consistently (excluding costs as well as rentals), right up until granite-n-plasterboard began to flatten and crater in spring 2006.

Housing has since fallen so hard, it barely matches the risk-free return offered by cash since the start of the decade. Yet that risk-free return in itself stands one-third below the previous five-decade average, with the 10-year Treasury yield paying just 4.6% per annum before tax and inflation.

And as for equities, re-investing every red cent of your dividends for the last 111 months would have added only 15% to the capital value of holding the S&P index today. Sadly for buyers of the Big Double Top in US equities, however, 15% hardly makes up for the index halving in price so far this decade.

Whereas Gold Bullion...? We need to be clear: Its historic reign throughout the Noughties is much more than a matter of "Dollar Decline". The deathless, unyielding metal has beaten all other assets for investors worldwide, whether in Euros, Yen, Swiss Francs, Chinese Yuan, Indian Rupees and the erstwhile "Two-Dollar" Pound.

So, Buying Gold nine years ago now looks a very smart move. (Almost as smart as slashing interest rates to all-time historic lows, while in fact stuffing your own retirement fund with inflation-linked bonds - a trick pulled off by the Bank of England's Pension Fund, as it happens...)

But what happens next? With the decade's last summer now peeping across the horizon, is that it for Gold Investment?

Could be. After peaking just shy of 40,000 points in late 1989, the Tokyo Nikkei sank by more than four-fifths over the next 14 years, retreating towards those 2004 lows just last month. Following its spring 2000 top, the tech-heavy Nasdaq sank by three-quarters inside 31 months, reclaiming only half its peak at the bounce and standing two-thirds down in April '09.

As for gold, a little over 29 years ago it began a two-decade descent...dropping more than 70% from its infamous peak above $800 an ounce - a level breached for just two, short winter days in January 1980.

Over the previous ten years - the last decade of gold - its price had shot 17 times higher versus the Dollar. Gold ended the bell-bottomed Seventies some 13 times more valuable in terms of business assets, as well, shooting higher as the US stock market was crushed by record-high interest rates sparked by yet higher inflation.

If this is the top - or damn near it - therefore, the current decade of gold looks a poor (if not late) performer.

During the 2000s, gold has risen 5-fold in terms of equities, and gained some 250% in nominal dollars. So far, gold remains well shy of previous decade-destroying returns.

More to come in Part II...

Adrian Ash
for The Daily Reckoning Australia

• When Gold Ruled the Earth, Part II
• Gold… Selling is the Hardest Part
• Right Time for Gold Stocks
• An Investor Could Have Made a Lot of Money in the ’30s
• S&P 500 Index Total Return Was Actually Negative

We picked it up...it was Tim Geithner!

Imagine our surprise. But we explained that we were delighted to help and proceeded to outline the problem he faced and suggested a course of action. What follows is merely a recitation of our conversation:

"Tim," (we were on a first-name basis right away) "look, we know it's tough. You were called in to do an impossible job. And now everyone's taking shots at you - blaming you for the whole thing...

"As if you could have known that things would turn bad, just because every clown on the street was making multi-billion dollar mistakes...

"As if you should have said something when you were watching the crisis build from your perch at the Federal Reserve Bank of New York...

"As if you might have used your regulatory power to prevent the banks from making catastrophic speculations...

"Yes, it's all very unfair...terrible...but let's look at what's really going on and see what we can do about it.

"We need to recognize, first, that this is not just a regular recession. So you can forget the usual recession remedies - a few points off the Fed funds rate...a little counter-cyclical fiscal spending. This is much more serious.

"What we have here is a depression. It's a depression because it requires a fundamental restructuring of the international financial model. You know how it worked during the Bubble Epoch; Asians made things...Americans bought them. Asians made money; Americans spent it. Asians saved; Americans borrowed. And now the Asians have money; and Americans have debts. Not really very complicated, is it?

"Well, these programs of trying to bailout businesses...and the banks...and the economy...you can see how they are all a waste of money. All of these efforts are trying to revive the old model. They're trying to free up credit so that Americans can buy more! Now, we don't really have to explain why that won't work, do we? More debt won't do Americans any good; more IOUs from Americans won't do China any good.

"Instead, the model has to be taken apart and reconstructed. China needs to sell more to people with money - its own people, mainly. Americans need to pay down their debts before they can take up serious consumption again."

"But wait, Bill," Mr. Geithner interrupted. "Won't that cause serious disruptions? When Americans save, in order to reduce their debts, they take away the single primary source of demand for the world economy. If they don't begin buying soon, businesses all over the world will go broke. That's why I've spent so much money trying to bail out the banks. Americans have no money. So the only way they can spend is if the banks provide credit. So, we have to save the banks first...then they'll begin lending...and then the economy can begin growing again."

"Uh...no. That's not how it works. Even if you make all the banks solvent, whom are they going to lend to? Who's going to borrow? Americans have too much debt already. Right now, if they get any money, they're holding onto it...and using it to pay down their debts. They're not going to start spending just because a bank offers them a loan. They'll only want to spend money if they think inflation is returning..."

"Well, Ben is working on that..."

"And maybe he'll eventually succeed. But it doesn't matter. The old model - where the Chinese lend us money so we can buy their products - is broken. It can't be fixed. Because the more Bernanke causes inflation...the less the Chinese want U.S. dollar assets...meaning, the less they want to lend to us. And if Bernanke doesn't cause inflation, Americans won't want to part with their money. So, they'll buy fewer Chinese products - and China will have less money to lend back to us. We're trapped in both directions. Forget it."

"Well...what's the solution then? I'm new to this job. I've got to do something..."

"Tim, get a grip on yourself. There isn't really anything you can do. Capitalism has to do its work. It's got to destroy the businesses and the investments that were built up on the false promises of the Bubble Epoch. The faster it does it, the better. A number of banks need to go broke...and a lot of big businesses, too. You can try to hold it off with taxpayers' money...but you're just making the whole process of restructuring longer, and more expensive, than it needs to be.

"Tim, have faith. Let it be. Give capitalism a chance."

"I can't do that. I'd be fired."

"Maybe...but at least you'd go out with a little dignity.

"Wait...how about this...? Take your case directly to the American people. Go on TV for 10 minutes at a time, once a week. Each week, explain to them what is going on. Gain their confidence by telling them the truth about what went wrong, and about why the bailouts don't work.

"Then announce a program of Dynamic Restructuring. Drag a few bankers and businessmen into a public square and have them beheaded. Force Wall Street employees to go to re-education camps, where they will be taught how to do simple math. Tell the auto industry to come up with a prototype with five wheels, in order to give a boost to the tire manufacturers. Tell the nation that the national language is changing to Swedish - because the economy there seems to work better. Start a campaign to encourage tourism from Europe by making the nation more authentic and different. Getting people to dress in buckskin outfits like Native Americans. Then, get all those people who are living in tents because of the crisis to switch to teepees..."

"Sounds crazy..."

"Well...of course, it IS crazy. Completely ineffective too. But at least it wouldn't be harmful. It's just meant to distract the yahoos while capitalism does its work."

"Good thinking...I'll get right on it."

No matter how much sense we try to talk into Mr. Geithner and whoever else may call our hotline looking for advice, the money for these bailouts have already been spent...and it came directly out of your pocket, as an American taxpayer.

Now, we turn to Addison and Ian in Baltimore for more news....

"Stocks just finished their first positive month in since August," writes Addison in today's issue of The 5 Min. Forecast.

"On March 11th, by order of the commander, we took down the Crash Flag. The rally had begun just two days before. After yesterday's 1.2% gain, a healthy rebound from Monday's selloff, the Dow ended March with a 7.7% gain - one of the best March performances since 1928, second only to March 2002.

"For the month, the S&P 500 and NASDAQ fared even better."

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

And back to Bill, with more thoughts...

The rally seemed finished on Monday. Yesterday, we weren't so sure. The Dow rose 86 points. Oil is holding at $49. The euro has fallen to $1.32. And gold has dropped to $918.

"Cramer calls the bottom," says a headline. Jim Cramer says its time to BUY! If we're not at the bottom now, he says, we're only a couple percentage points away.

We doubt he is right. The Dow will probably fall to 3,000 before we're finished - so it has a long ways to go.

And the economy is still weakening. Seven states now have jobless rates higher than 10%. And housing prices are not only falling - they're falling faster than ever. In January, according to Case-Shiller, prices fell 19% from a year before, the highest rate ever recorded. Overall, house prices are down 26% from their highs.

"Russia backs return to gold standard," says another headline. Enemies of the dollar system are joining forces. The Chinese, the Russians...the Europeans... Pretty soon, they will be irresistible.

But probably not before Bernanke's efforts to produce inflation bear a surprising and bitter fruit.

Our Dollar Crash Flag remains up.

And finally, a question from a dear reader:

"Back in the '70s Jerome Smith claimed we were exporting our inflation to foreign countries and it was the reason that gold did not rise. Could this be the reason why gold is not rising in price above $1000 now in the U.S.A.?"

During the '80s, '90s and '00s, the United States exported dollars. Those dollars caused a huge inflation - in asset prices. That was the major source of hot air for the Bubble Epoch.

In the present time, the Bubble has burst. The United States inflates the money supply... but now, the money goes right into bank vaults, drawers and cashboxes. The worldwide financial meltdown has eliminated about $50 trillion of nominal wealth globally. Even if the feds have put back in $14 trillion - in various forms, little of it actually reaching peoples' pockets - it is a small and futile gesture, compared to what has been lost.

So, no...the United States is no longer exporting inflation. At least, not yet. Right now, it has no inflation to export. And when it attempts more monetary inflation on a grander scale, it risks having to re- import all those dollars it once exported.

In other words, when the world finally takes fright over the declining value of the dollar...the green paper is likely to come pouring forth from vaults and mattresses all over the planet. People will be eager to get rid of it, triggering a big drop in the dollar's value - almost overnight.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• China Reduces Holdings of Treasury Securities
• If Americans Do Not Return to Work, There Is No Recovery
• From Bubble Watch to Bust Watch
• World Economy Has Never Been in a Fix Like This
• China Was the Maker and the United States Was the Taker

U.S. stocks ignored the backward-looking GDP and concentrated on the present-looking bond market data. Yesterday we mentioned that ten-year yields in the U.S. were up as the U.S. government sold a boatload of debt. Well, ten-year yields fell today by about five basis points to 2.74%.

Maybe investors were relieved that the auction of US$24 billion in seven-year notes went off without a hitch. It's always good to know your creditors haven't cut you off yet-especially when you need to borrow another $2 trillion. It's no wonder the Dow rallied 174 points and the NASDAQ climbed into positive territory for the year.

Here in Australia there is a bevy of interesting news to digest. At the top of the list is the fact that BHP raised $4.36 billion in the European bond market this week after raising $4.64 billion in the U.S. bond market last week. Credit crunch? What credit crunch?

Now that it doesn't have to borrow heavily to finance the cancelled takeover bid for Rio Tinto, BHP can turn its eyes on other prey. It appears to be doing just that. Why else would it build its cash position by tapping the bond market? And who is it after?

Hmm. Maybe the Foreign Investment Review Board knows something we don't. That is, maybe the China Minmetals bid for OZ Minerals is not as urgent as it appears if there are other, more local bidders for OZ.

But who knows about specifics? All we know is that BHP had relatively little difficulty growing its balance sheet in the last two weeks. We also know that the big fish buy the little fish in the consolidation phase of the resource cycle. BHP is a big fish.

So this action is telling us that at some level (even though commodity demand hasn't recovered and prices for bulk commodities are falling) we may have reached a turning point in the resource market. Even if the recovery is slow, you'd expect BHP, China Inc., and other cashed up players to be on the hunt for good projects they can buy at rock bottom prices.

And then there's oil. It was up nearly three percent yesterday in New York to close at $54.34. As recently as February 18th, you could get a barrel of West Texas Intermediate crude for $34.67. It's gone up 56% since then (79% if go back to Christmas Eve-eve, when oil bottomed at $30.28).

Oil Futures Curve Shows Traders Are Betting on Higher Prices

Click to enlarge

Source: Bloomberg.com

For the last month we've been watching the futures market and the contango there. Contango is where the futures price exceeds the spot price. It looks to us like traders are betting oil prices are going to go much higher later this year.

Maybe OPEC production cuts will kick in at just the moment demand begins to recover. Or maybe, as we've speculated, the oil price crash virtually guarantees a supply deficit in 2010, and traders are going long now as the price bottoms. That's a lot of maybes.

What we know for a fact is that at one point, the December 2011 futures contract was trading much, much higher than the spot price. It was a "super contango." The contango has since narrowed since with the rally in the spot price. But if the oil trade is back on, oil stocks are certainly worth a look. In fact, the bigger energy stocks in Australia have already rallied more than 20% from their lows.

The Australian Office of Financial Management is getting into the spirit of things. Its director Neil Hyden says Australia's federal debt outstanding could quadruple in the coming years to over $200 billion. Before you complain, just remember you can't bribe voters with handouts unless you have some money. And if you don't have a surplus to waste, then you'd better start hitting up foreign lenders.

Borrow and spend! Borrow and spend! It's the wave of the future!

But who to borrow from? Here's an idea. Why not China!

The Courier-Mail reports that the biggest investor in all the debt Australia is floating to pay for the stimulus is none other than the People's Republic of China. "Market insiders believe China is buying 15 to 20 per cent of the $2 billion in Treasury securities being issued every week. This would make China the single biggest lender to Australia, although details of who owns the bonds are cloaked in secrecy. The program, authorised by Treasurer Wayne Swan, will leave Australia with a debt bill approaching $200 billion."

"Trust me. I'm a banker. Housing is fine."

It's not all bad news. The Reserve Bank released its latest Financial Stability Review yesterday. The organisation is content that Australia's housing market isn't in for big trouble, especially if interest rates remain low. As it controls short-term rates, the Reserve Bank has some say in this matter.

It was painful, but we reviewed what the bank said...and found it wanting. There were a few charts that showed a rising trend for non-performing loans and higher mortgage stress. We'll get to those in a minute. But have a look at what the bank said about the Aussie housing market. We'll quote and comment in between quotes.

"Overall, the Australian housing market has held up better than those in many other countries over the past year. Nationwide indices show a decline in house prices in Australia of around 4 per cent since their peak in March 2008, compared with declines from their peaks of around 10 to 25 per cent in the United States (depending on the measure used) and almost 20 per cent in the United Kingdom. In Australia, the recent weakness has been most evident at the top end of the market, with prices in less expensive suburbs broadly unchanged over the latter part of 2008, after having declined over the previous year."

No comment. So far so good.

"While further softness in the Australian housing market is possible, the market does not appear to have the same vulnerabilities that have been evident in some other countries. Importantly, the adjustment in the housing market - after a number of years of very large price gains - started at the end of 2003 and thus was well advanced before the onset of the current financial crisis."

Prices have fallen gently so far. But prices are set at the margin. An increase in the number of sellers (boomers cashing out to finance retirement) can accelerate the decline.

"Reflecting this, the ratio of house prices to household income has declined noticeably from its peak in late 2003. While this ratio remains higher than was the case in previous decades, this is at least partly explained by a number of structural factors, including the transition to an environment of lower inflation and thus lower nominal interest rates. In addition, Australia did not see the very marked decline in mortgage lending standards that occurred in other countries, particularly the United States, and the related negative impact on house prices resulting from a surge in loan foreclosures and a large amount of housing stock coming onto the market."

Warning! Now entering Absurdistan! As the chart below shows the noticeable decline in the ratio of house prices to household income is still noticeably high (and higher than most other markets in the world). Claiming that this is explained by a structural factor like "an environment of lower nominal interest rates" seems to suggest that interest rates stay low forever. They'll rise again. It is true, probably, that you never saw a descent to U.S. lending standards. But that hasn't prevented an increase in the number of people falling behind on their mortgage, as you'll see in a moment.

House Prices Still Five Times Income

"Also differentiating the housing market in Australia from that of the United States is that the demand for new housing in Australia has outstripped net new additions to the housing stock over much of the past decade, suggesting there is substantial underlying excess demand for housing. Finally, housing affordability has increased considerably over recent months as interest rates have fallen, with the cost of borrowing now similar to rental payments in some situations, after many years when renting was much cheaper than buying."

See reader comment below on the secret stash of investor housing that may come on the market to meet "excess demand." And really...housing affordability has increased because access to credit and grants has increased? Isn't that what happens in credit bubbles? Prices as credit floods the market. Is this really housing become more affordable or is it just credit giving the illusion of home ownership?

There's been a rise in non-performing loans. It is still, however, small percentage of bank loan books. Arrears are up, especially for loans made by non-traditional lenders. And there's this as well from the RBA, "Across all housing loans in Australia, it is estimated that around 20,000 borrowers were 90 or more days behind on their mortgage repayments in December 2008, compared with an estimate of 13 000 the previous December."

Hmm. A 53% increase in the number of borrowers who are 90 days or more behind on their mortgage payment? Maybe this is why some are predicting that 30,000 homes will be repossessed by December. That seems a bit exaggerated, even by our standards. But if unemployment rises even more...

Shall we call it a week then? Let's! We'll leave you with a few more reader e-mails.

Hi Dan

It seems that the price of housing is a very sensitive subject I guess that's because over the last few years a lot of people have been acquiring investment properties with a belief that houses will always go up. I can't understand what the frenzy is, houses fell in price from the peak in the 80s through to the low in the 90s I know first-hand. I had to sell for a loss 7 years later in Brisbane. So I can't understand why people refuse to accept the business cycle. Over the last few years I know many people who have purchased investment properties. But I don't know any first home buyers, to me it seems because property became a bubble it was easier for investors to raise the capital than it was for first home buyers.

So investors could snap up properties faster than first home buyers could save for a deposit, which means the pool of available houses is getting smaller that first home buyers have to choose from so prices are forced up. If investors decided to sell their multiple houses that they have purchased in the last five years there would be plenty of houses available for first home buyers.

The housing bubble is only the result of investors being able to get access to credit easier than 1st home buyers. Houses will fall again like they did in the 90s especially as unemployment increases. I can't understand why people find this cycle hard to accept or maybe it's a case of people being too heavily mortgaged so they come up with any reason to justify that they made the right decision. I tell you hope will not stop prices from falling.

Glenn D

And more.

Read your page with interest this morning and I have a suggestion.......... Australia has a history going back nearly two centuries of selling primary products overseas and then buying back the finished goods at high prices......... Could we not suggest a deal where we have the Chinese pay a part of the amount in developing Manufacturing facilities in Oz in joint ventures; with these reverting to Oz ownership after a certain time........ For thirty years now we've seen the decline of Australian manufacturing and I just thought that this, or a variation on this theme could be a way to stimulate growth in Australia instead of using OZ as a big quarry until it's exhausted and we become a third world country. The Chinese need our minerals etc. There couldn't be a better time to help turn our economy around and start making dependable products instead of throwaway stuff that just makes the local tip a huge industry.

Cheers,

George

And finally this.

The present Chinese government is a vicious military dictatorship. It is utterly corrupt and without morals or scruples. It treats its own people as medieval serfs. China has a prison population of around 60 million people, which is used as slave labour. No country in the world can compete with their manufactures, and hence workers in Australia and all developed countries lose their jobs. Do we really want to get into bed with such a monster? Our own little Mandarin monster, The Krudd [ed. note, Australian Prime Minister Kevin Rudd], a notorious Sinophile, thinks so. I wonder what's in it for him. Has Therese been given permission to set up employment agencies in China?

Phillip D.

Dan Denning
for The Daily Reckoning Australia

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Poor Warren. He's down to his last $25 billion. And Bill Gates can barely hold his head up; his pile has shrunk to barely $18 billion.

And do a Google search of "AIG outrage" and you will get 621,000 hits.

Alas, being rich isn't as easy or as much fun as it used to be.

The rally paused yesterday. The Dow lost 7 points. It could be over. More likely, it will run for a few months. Gradually, people will come to think that this is the real thing. They'll begin to imagine that it is 2003 all over again. Of course, it's not...this market has nothing in common with the Great Rebound of 2003-2007. (More below...)

Oil traded at $47 yesterday; it is slipping toward the $50 level. And the dollar is slipping around too - it is losing ground against the euro, now trading at $1.29/$. But it is mostly steady against gold, which seems to like the $900-$950 range...for now. We have a feeling it's going to go much, much higher before all this is over.

AIG is today's main story. Everyone is appalled, outraged...or apoplectic about it. First, we under-reported the amount in bonuses paid out. The real amount is $450 million, says the Wall Street Journal...and one member of Congress charges that many bonuses were disguised as other things...and that the real total is more like $1 billion.

The average lumpenvoter has no idea how bailouts work. He was willing to believe that giving Wall Street hundreds of billions in taxpayer money would somehow make his house go up in price, but now that he sees how it really operates, he is ticked off about it. He may not understand macroeconomics, but he knows chicanery when he sees it.

Under pressure, AIG revealed what it did with the bailout money. It came as no shock to us to discover Goldman Sachs at the top of the list of recipients. Goldman's main man was in the room with the feds - the only representative of Wall Street - when the decision was made to rescue AIG. What's more, the feds' main man at the time - Hank Paulson - also used to be the top honcho at Goldman. So the fix was in. The government gave money to AIG and AIG gave it to a long list of speculators - including Goldman.

This seems perfectly natural to us. If we'd been in on the fix we would have steered some of the loot our way. But the politicians are feigning shock and horror. Senator Grassley even said AIG management should "resign or commit suicide." He later calmed down and said he didn't mean it.

But we would have simply edited his remarks, giving the schmucks at AIG a last chance to exit with honor: "Resign AND commit suicide, in that order."

Barney Frank added that "maybe it's time to fire some people." Why not? The feds own 80% of the insurance giant now. Go ahead; fire all the people you want. That's about the only pleasure a real capitalist has left to him. Reach out...and fire someone today!

Elsewhere in the news, the economy continues to deteriorate. Industrial production fell 1.4% in February. And credit card defaults are at a 20- year high.

Misters Smoot and Hawley seem to still be on the federal payroll. The news this morning is that they began a trade war with Mexico and the Mexicans have already retaliated. That's all we know about it...

But back to the tribulations of the rich...

First, Mr. Market is downsizing fortunes - fast. In the last 12 months, the average rich person has probably lost half his wealth. Not only did he own millions worth of stocks and real estate...he was also among the privileged few to get into good deals on derivatives, SIVs, hedge funds and private equity. Many of those complicated and conflicted assets have been wiped out completely. Or, maybe he was unlucky enough to count Bernie Madoff as a friend.

Second, what Mr. Market doesn't take, Mr. Politician is looking at. All over the world, plans are afoot to increase his taxes...and close down his tax havens. President Obama has already revealed his plans to soak the rich. Every other group will come out even...or better...from Obama's tax proposals. But the rich are going to be saturated...marinated...soaked to the bone.

And third, the poor rich guy has become a pariah. He doesn't get invited to charity events anymore - or even to join the guys after work for a beer. Europeans have always distrusted rich people. But in America, a rich man used to be respected - just because he was rich. People asked his opinion on politics...on fashion...on art. He was presumed to be an authority on all things and was generally treated with respect...even deference.

But now rich are seen as chumps, losers, incompetents and malefactors. Even Americans look at rich people and think they must be either stupid or corrupt.

"Le secret des grandes fortunes sans cause apparente est un crime oubli , parce qu' il a t proprement fait." said Balzac. Which has been paraphrased to "Behind every great fortune lies a great crime." Of course, he was referring to France, where it is has probably always been true. Money is dirty in France. But in America, money was supposed to be clean...innocent...honest and forthright. The richest man in town always sat in the front pew in church and stood for election to local office.

But come the depression and even the rich suffer. And unlike the starving urchins, unlucky widows and innocent orphans, no one cries a tear for the rich. Here at The Daily Reckoning we always take the side of the underdog...and always support the lost cause. So when we think of the rich...those darling people with their Italian suits...German cars...and Swiss bank accounts...our cheek gets a little moist. For we - and we alone - still admire and respect the rich. Of course, the rich are human beings too - just like the rest of us. And yes, dear reader...we still despise them as much as anyone else. When it comes to intelligence or moral rectitude, they are probably no better than the lower classes, though probably no worse. But we still admire and respect their money. Their money is no better either - but they have more of it.

Now over to Baltimore, where Addison at The 5 Min. Forecast gives a St. Patty's Day look at the Emerald Isle:

"What's the difference between Iceland and Ireland? 'one letter and six months,' or so goes a joke making its way around the Internet," writes Addison.

"Aye, on this St. Patty's day the Emerald Isle is suffering the mother of all hangovers; the embodiment of a boom gone bust.

"With official unemployment now over 10%, GDP shrinking at a 6.5% clip, a proper housing crash and a 10% federal budget shortfall, Ireland has seen it's glory days crumble into one of the Eurozone's most beaten down economies.

"Ratings agencies are on the verge of downgrading Ireland's sovereign debt, which will assuredly make the whole matter even grimmer.

"The opening joke is so pointed," Addison continues, "Irish Finance Minister Brian Lenihan is now on a global PR tour to help rekindle the world's love of shamrocks and Guinness. Despite Lenihan's denials, many expect the IMF to swoop in and become Ireland's banker of last resort."

Addison writes every day for The 5 Min Forecast, an executive series e- letter that provides a quick and dirty analysis of daily economic and financial developments - in five minutes or less.

Back to Bill in Paris...

It's NOT 2003. Just in case you had any doubts.

You remember 2003? After a phony recession in '01-'02 came a phony boom in '03-'07. Stocks had driven into a ditch following the crash of the NASDAQ. The Dow had fallen down to about 7500. And then, when it looked like they were going nowhere for a long time...along came Alan Greenspan's friendly towing service. In a jiffy, he winched the economy back onto the road...and it was soon flying along at the fastest speeds every recorded. The Dow went all the way to 14,000 and beyond...before crashing into a stone wall.

And now the financial media is on "bottom watch." No, we're not talking about the kind of bottom watching you do on a Brazilian beach...we're talking about looking for the end of this bear market.

"Are stocks and oil bottoming," asks a headline at Seeking Alpha.

"How will we know..." when we hit the bottom? Asks the New York Times.

The answer: we will know when we no longer want to know.

For the moment, we believe we are beginning a classic rebound. The news seems to have turned positive...along with the weather. It's sunny and warm in Europe this morning. And investors are focusing on the positive.

"IMF poised to print billions in global quantitative easing," says a headline in London's Telegraph.

All over the world, the feds are working the pumps. And investors are watching their little boats begin to rock. If history is any guide, this rebound will recover 20% to 50% of what was lost. Then, the bottom - so recently spotted and revered - will fall out.

This is not 2003. In 2003, there was no collapse of the financial sector...banks didn't fail...major companies didn't face bankruptcy...consumer spending didn't fall...house prices didn't collapse...savings rates didn't go up...capitalism wasn't called into question...there were no tax rebates...there were no bailouts...not even a stimulus plan (though the feds did spend much more money...and the Fed did cut rates to 1%).

This time it's different. This is not a recession. Not even a phony recession. It's a very real Depression with a capital D...and all that goes with it - including whole industries that go broke, a credit crunch, a big drop in consumer spending, a huge political shift toward socialism, interest rates at zero, falling prices, and widespread bankruptcies - both of households and companies.

In 2003, a quick cut in interest rates - along with a boost in federal spending - produced a fast turnaround. Within months, prices were rising again. Consumers didn't even pause...they kept spending and borrowing all the time. This time, the world has never seen stimulus efforts of such huge magnitude - and still no real uptick. This time, consumers are running scared...they're losing their jobs and closing their wallets. This is the real thing. It won't end quickly...or easily.

Here's a calculation for you. The amount of excess debt in the United States is about $20 trillion. That's the difference between the usual level debt - about 150% of GDP - and today's level - about 350%. That $20 trillion in surplus debt probably has to disappear before a true growth cycle can begin again. The best way is simply to let nature take her course. Much of it would be written off in a few months. But the feds won't let that happen. They're doing all they can to prevent assets from getting marked down...and to prevent debt from getting written off. So far, they've committed $11.7 trillion to the fight against debt deflation.

So instead of writing it off, it will have to paid off...or ultimately, inflated off.

Currently savings rates have risen from zero to about 3% of GDP. That's about $420 billion per year put to paying down the debt. Let's see, at that rate, how long will it take to erase the $20 trillion in excess debt? Hmm....about 47 years!

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

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