Yesterday, the price fell another $4 – to $136. Still, of course, not far from its all-time high. But sliding...

“Oil is a bubble ready to pop,” say some analysts. “No, oil is merely responding to supply and demand,” say others.

What’s the real story?

As usual, you can count on us, here at The Daily Reckoning, to give it to you -- straight, unvarnished and unmitigated.

Trouble is, the real world always has a bend to it. Everything has a lacquer on it. And mitigations are everywhere.

In the oil market, we see both a bubble...and a useful commodity responding to economic forces. If you want to see a “pure bubble,” you have to look at something like the tulip mania in Holland or the Mississippi affair in France or the dot.com debacle in New York. These were “pure” bubbles because neither tulips, nor shares in the Mississippi company, nor dot.coms had any real economic value. Their prices were based 100% on speculation – not supply and demand. And since there was no “there there,” as Virginia Woolf might say, there was nothing left when the speculation disappeared. Their prices could go to zero, in other words.

Will the price of oil go to zero? No...not a chance. If the oil market is in a bubble, at least it is a bubble mitigated by three very important circumstances: 1) oil is perhaps the world’s most useful commodity, 2) more and more people want the stuff, 3) it is priced mostly in dollars whose value, in terms of everything else, is going down.

Normally, we can set aside the first two circumstances. Everyone knows oil is useful. Everyone knows the Chinese, the Indians and all the other foreigners are becoming addicted to it – just as Americans have been addicted for the last 50 years. These circumstances come as no surprise to anyone...and markets can sort them out. They were obvious in the oil market two years ago...they are obvious now.

Of course, even if they are obvious doesn’t mean investors have noticed. And in today’s oil market, it looks as if investors are suddenly waking up to something they should have seen a long time ago. But we suspect that the real surprise to most investors is the third circumstance. During the last 15 years – a period known as the Great Moderation – it was inflation that seemed to be taking a long nap. The band was playing loud music. Free drinks were passed around. Everyone was there – except inflation. Maybe it was out of town, some wondered. Or, maybe it was dead. Whatever happened to it, inflation was not around.

But, then the old party pooper showed up – and people began looking for their hats and saying goodbye to each other.

“US consumer prices up most in 26 years,” was yesterday’s most telling headline. Even the Wall Street Journal announced a price increase – to $2 an issue.

If you’re an oil sheik whose only asset is $100 billion worth of oil under the desert sand, you pay attention. The dollar has lost about 25% of its purchasing power – depending on how you measure it – in the last 5 years. If inflation rates just stay the same, the poor oil sheik stands to lose more than $25 billion by 2013. If he doesn’t think he’s getting a fair deal at today’s oil price, he’s likely to put a little crimp in the oil pipeline – reducing production until the price increases.

On the other hand, if the price of oil goes up enough, he’s likely to think that he should get it while the gettin’s good. Then, he would increase production – driving down the oil price.

Our guess is that the oil market has probably over-reacted to circumstances. When investors realized how much demand was increasing...they bid up prices. And when they realized how much inflation was increasing...they bid up prices further. And when speculators saw prices rising so much, they bid them up even further.

Now, oil is probably ready for a correction. Ten years ago, an ounce of gold would buy about 10 barrels of oil. Today, it buys only about 7. As is the case with oil, gold has responded to the increase in inflation rates. As to everything else, it is probably indifferent. So, if we were just adjusting the oil price to inflation, it should probably sell for about $95 a barrel.

As to the forces of supply and demand – Mr. Market would know better than we do. But Mr. Market, for all his sage experience, has a tendency to over-react. He probably over-reacted to growing, worldwide demand. Now, growth rates are declining throughout the world; he will probably over-react to that too.

So, where will the price of oil go? We wish we could tell you. It might very well sink below $100. But it will never sink as low as a busted dot.com or a crushed tulip bulb.

Even if the price of oil does drop, the U.S. has gotten the message: the time to find what will power the ‘car of the future’ is now.

“The coal revolution is here,” Byron King tells us. “It's always been cheap and plentiful. Now it's going to be clean, and soon it will even be liquid. It's also going to cause a massive shift in world power. Two American companies will profit big time.”

*** The stock market seemed to delight in oil’s slippage yesterday. After weeks of falling prices and gloom on Wall Street, investors were ready for a little fun. So the Dow went up 276. Even the financials started tapping their toes.

The dollar managed a feeble improvement too; after hitting a new all-time low against the euro this week, it rose to $1.58.

And gold? Mr. Spoilsport lost $16, to end the day at $962.

Bill Bonner
The Daily Reckoning Australia

• GM Gives Up the Oscars
• The Confusing Big Picture in the Oil Market
• Has Oil Hit Its Peak Price?
• Feds Have Used the Correction to Increase Their Power and Add to Their Wealth
• Oil Contango Narrows

Those happy trends of the Great Moderation period – roughly, the 15 years before 2007 – have turned for the worse.

Globalization, for example, helped keep prices down in the United States. Americans could reach for all the imports they wanted without getting rapped on the knuckles by the usual consumer price inflation. That is, like a drunk who never gets a hangover, they could enjoy an inflationary boom without ever having to pay higher consumer prices.

Now, the screw has turned a full 180 degrees...now they can cut back...spend less...and still have to pay higher prices! The world was such a benign, forgiving place before 2007. Now it has turned wicked.

Let’s begin our exploration of this nasty turn of events by looking at the oil market.

We are out of oil; at $130, we regard it as too speculative. But that doesn’t mean that the oil bubble is going to burst anytime soon...or that the real price of oil won’t be even higher 10 years from now than it is today.

The Big Picture in the oil market is one of the most confusing and complex we have ever seen. It is like a painting by Hieronymus Bosch, where there is so much going on you can’t quite tell what it all means.

On the one hand, there is the background of supply and demand. Even here, the picture is not a clear one. Oil supplies seem to be running out. Of the world’s 60 top oil producers, 54 report declining output. Indonesia announced yesterday that its production had slipped so much, it was no longer an exporter; the country had to withdraw from OPEC, since it has become an oil importer.

On the other hand, Brazil has recently reported huge new finds. New technologies offer ways to get more oil out of existing fields. And more and more alternatives to petroleum are being developed. Brazil is also the world’s leading producer of biofuels, mostly from sugar cane, and is ramping up production as fast as it can. Solar power is hot.

As for oil itself, there is only so much available...and many experts believe the maximum annual extraction level – Peak Oil – is coming up soon. From that point onward, the world will just have to make do with tighter supplies and higher prices.

Looking at the demand side, we see the opposite picture – a curve rising from here to eternity. A few years ago, millions...maybe billions...of the world’s people lived almost without fossil fuel of any sort. They tilled rice paddies, for example, with water buffalo, cooked their meals on a wood fire, and traveled on bicycles. Now they’re moving to the city, living in apartments heated by oil, eating commercial food grown with plenty of petroleum-based inputs, working in heated, energy-absorbing factories, riding on automobiles and buses, and buying things that take energy to make and energy (usually oil) to deliver.

It used to be a sure thing that if the United States had a recession, oil consumption – and energy prices – would go down. But in the last year, oil consumption in the United States has gone down 1.3% – even as the price of it soared. How is that possible? It is partly explained by that giant sucking sound coming from the emerging markets, the BRICs (Brazil, Russia, India and China) and the Middle East. These countries are all using a lot more energy – partly because they are getting a lot richer, and partly because they tend to keep internal energy prices low (which helps explain why they are growing so fast). Both China and India have refused to allow their large oil companies to raise domestic prices in line with world market prices, encouraging greater consumption. In the BRIC nations, oil use went up 4% during the last 12 months.

But how come investors didn’t see it coming? A man of 30 may be unprepared to die in a train wreck; but a man of 90 typically has a Last Will & Testament. These trends in demand and supply are well known...and they happen slowly. How could investors miss them? How come the price of oil stayed so low for so long? How come it more than doubled since the beginning of ’07...and went up more in the last 6 months than the entire oil price prior to 2005?

*** Let’s look again at this remarkable tableau of the oil market. In addition to the supply and demand pictures, there is a lot more going on. Over on the side are the central bankers – led by Ben Bernanke and the U.S. Fed. What are they doing? Let us look hard...oh yes, they seem to be printing money! Yes, the Fed – the guardian of America’s financial integrity – is lending money at 2% below the official inflation rate (probably more like 6% below the real inflation rate). And it is permitting the supply of money to increase at an estimated 16% annual rate. Remember, when the supply of money increases faster than the supply of goods and services (GDP), prices rise. With GDP flat or barely rising at all, a 16% increase in money supply represents a huge inflationary push.

And look! Prices are rising, just as they should. Want proof? Just drive to a filling station...or go to the grocery store. As reported in this space, the ingredients for a typical Memorial Day cookout rose by double digits in the last 12 months.

And look at this. Over on the other side...what’s this? A group of vigilantes!

Yes, dear reader, they’re back...the vigilantes...ready to mount up and ride out whenever they think the Fed is being too inflationary. Back in the ‘70s and ‘80s the vigilantes won their spurs in the bond market. As soon as they saw the money supply figures creeping up on them, the vigilantes strapped on their guns and shot the bond market to pieces. Bond prices fell...forcing up yields....and thereby forcing the authorities to back off. It was bond market vigilantes who convinced the feds that the jig was up in the late ‘70s. They still had the power to inflate the money supply as they had during the ‘60s. But they couldn’t get away with it anymore. When the vigilantes dumped bonds and drove up interest rates, the economy went into such a slump, it just wasn’t worth it.

We’d been wondering what happened to the vigilantes. The feds have been increasing the money supply twice, three times...and now infinitely...faster than GDP growth. How come the vigilantes let them get away with it? How come the bond market didn’t crash? Why did they still buy bonds...didn’t they know they were going to lose money?

We still don’t know the answer. Maybe the vigilantes have grown old and too tired to strap on their six-shooters... maybe they’ve gotten Alzheimers and no longer know how things work.

But lo and behold...here they are again – in the oil market! They’ve found a new way to bring some financial discipline and monetary rectitude to the feds.

The sharp upward move in oil began at just about the same time the Fed began printing more currency, bailing out investment firms, and cutting its key rate. The supply and demand situation hadn’t changed; but the monetary situation had – and the vigilantes saw it. Rather than sell bonds...they bought oil!

Higher oil prices, of course, depress economic activity. They, along with falling house prices, are the two things pushing the United States into a slump. Usually, a slowdown would bring pain...but some relief too. Prices, notably the price of oil, would fall. But now globalization – which had been such a delight during all those years of the Great Moderation – kicks us in the derriere. Americans are forced to cut back on energy use. But the foreigners take up the slack...and then some. The oil price refuses to fall.

And the feds try to make up for it by cutting rates and increasing the money supply. They’re desperate to try to get the party going again. But then along come the crude oil vigilantes. In just seconds, they’ve pulled the plug on the amplifier and turned off the beer machine. Oil goes higher, and the economy sinks further.

Bill Bonner
The Daily Reckoning Australia

• The Rising Price of Oil Has Done Less Damage in Europe Than in America
• Geithner’s Trip to China Was, At Best, a Draw
• Happy Birthday Subprime Crisis, Oil Price up 96%
• Inflation or Deflation?
• Consumer Prices for the Essentials are Skyrocketing

Earlier this week, NYMEX crude oil futures, in un-lady like fashion, bolted to an intra-day high of US$127.27. It capped an exuberant dash which saw oil gain over 8% in six trading days, 30% since the beginning of the year, and 100% in the last twelve months. It’s just the sort of thing you’d expect from a ten-year old.

Here is an astonishing fact: on December 10th, 1998 the spot price for a barrel of West Texas Intermediate crude was exactly ten U.S. dollars and ninety eight U.S. cents. Nearly ten years and one thousand and sixty two percent later, it is time to ask some impolite questions about oil.

Impolite questions are not always obvious questions, though. The obvious question is to ask how high oil can go. Arjun Mutri and his team at Goldman Sachs have told us a disruption in supply could send oil to another “super spike” over US$200. Two years ago, the “super spike” was supposed top out at $100. Maybe it will be US$500 two years from now.

It is easy to keep raising the figure, but is probably more useful to ask a different question. The important investment question is not how high oil can go from here. The impolite but important investment question is where future global oil production will come from at all.

The answer, according to a new report from UBS, lies with just eight oil companies, one of which investors can’t even buy. Below, I’ll look at where future production may come from, who stands to profit the most, what investors can do now, and three “Black Swan” possibilities for the oil market that no one has prepared for.

Why Are Oil Prices So High?

An obvious question on the lips of anyone who buys petrol is, “Why are oil prices so high?” Consumers trained in the ways of the free market—and used to cheap clothes and electronics made in China—are right to ask the question.

In a fully-functioning free market, rising demand tends to attract rising supply. The reason?
Profit.

When a market is imbalanced and demand exceeds supply, prices rise. At that point, opportunistic new producers tend to rush in and grab some of the profits by brining on new supply. Prices fall and, for awhile anyway, equilibrium is restored.

That’s how it works in textbooks. That is not how it’s been working in the real world. According to the International Energy Agency, world oil demand has increased in each of the last three years, from 84.9 million barrels per day in 2006, to 86mbbl/day in 2007, to this year’s rate of 87.2mbbl/day. The IEA’s most recent forecast calls for global demand of 87.8mbpd for the rest of this year.

In response to this increase in global demand, OPEC oil production promptly declined by 265kbpd in February (the latest period for which official figures are available) to around 32mpbd. Not exactly helpful. And latest survey from Platts predicts a March decline in production of 347kbpd from the February figure. This brings average OPEC production below 30mbpd for the month.

This past weekend, U.S. President George Bush travelled to the Kingdom of Saudi Arabia, politely requesting the Saudis increase oil production to bring down gas prices in America. The Saudis demurred, and told the President oil production was more than sufficient to meet global demand.

OPEC blames the oil price on the weak U.S. dollar, but admits prices could go higher still. OPEC President Chakib Khelil explained the situation to journalists in late May, saying:

The prices are high due to the fact of the recession in the United States and the economic crisis which has touched several countries, a situation which has an effect on the devaluation of the dollar, and therefore each time the dollar falls one percent, the price of the barrel rises by $4, and of course vice versa.

In other words, OPEC blames the oil price on the sliding U.S. dollar and not inadequate supply. Khelil added that, “If this (the dollar) strengthens by 10 percent, it is probable that (oil) prices will fall by 40 percent.” At today’s prices, that would put a barrel of crude at US$76.

Froth vs. Fundamentals

If you can say with assurance why oil prices are US$127, you are more assured than most. OPEC believes oil strength is really just U.S. dollar weakness. A stronger dollar means lower oil prices, and probably lower commodity prices in general. There are other theories that seek to explain the high oil price, including a “fear premium,” oil as an inflation hedge, and pure speculation by professional traders.

But there are three other possibilities to consider. Exploring them gives us a clue about where oil prices are headed and where future production might come from. These possibilities are:

1. OPEC won’t increase production because it doesn’t want to
2. OPEC can’t increase production
3. Non-OPEC countries cannot increase production enough to bring prices down

It is impossible to answer the first question. Oil producers, from OPEC to large multi-nationals, plan with long time horizons. They view oil markets as cyclical and do not base capital expenditure plans on pie-in-the-sky price forecasts. They are reluctant to recognise and respond to what your editor (among others) believes is a structural revaluation in global energy prices (not a cyclical bubble).

But this institutional skepticism about how long high oil prices can last does not account for the slump in this year’s production. OPEC’s production has fallen this year because of continued disruptions in Nigeria (see table below). Rebels in the Niger River Delta have reminded us all of how vulnerable the global energy system is to systematic sabotage. But excluding Nigeria, the rest of OPEC is running at near capacity.

That leaves the last two options. Prices send production signals. Either OPEC and non-OPEC producer are ignoring those signals—or they can’t respond to them in order to boost supply and take advantage of the high prices. And if OPEC is unable to increase supply now, how will it be able do so twenty years from now, when demand is much higher?

This presents global oil users (and producers) with a big problem, a problem that can be seen in the form of a chart which falls into seldom-used research category of “science fiction fantasy.” The chart shows that the IEA expects global production of liquid fuels to reach 117 million barrels of oil and oil equivalent by 2017. That “oil equivalent” includes ‘unconventional hydrocarbons’ like biofuels, oil shale, and tar sands.

If you do the maths, that means global oil production will have to increase by 37%, from 86mbpd today to 117.7mbpd by 2017. If you wish to express it in numbers, that means the world needs another 32mbpd of production—in addition to maintaining current production—to meet the IEA’s projected demand in 2017.

Or simpler still, the world needs another OPEC!

If only world oil production could increase with a simple act of mitosis. But OPEC is not a biological creature, programmed to replicate itself automatically. It is a political creature facing the physical realities of finding and producing more oil.

That doesn’t seem to bother the IEA. In last year’s World Energy Outlook, the Agency said OPEC could account for the entire needed increase in global oil production if starts spending the money now. The IEA forecast’s OPEC oil production of over 61mbpd by 2030.

Also predicted are the discovery of the lost city of El Dorado, the return of the gold standard to the global economy, and a Chicago Cubs victory in the World Series of baseball. [ed. Note : the Cubs have not won baseball’s top price since 1908]

Dan Denning
The Daily Reckoning Australia

• Higher Oil Prices, the New Normal
• BHP Billiton: The Oil Company That is Not an Oil Company
• Where Will Future Oil Production Come From and How Can Investors Profit Today? Part 2
• Oil Prices Has The Mogambo Guru Sticking His Thumb in His Eye
• No Spike in Oil Price Following IEA “Third Oil Shock” Announcement

You'll recall, dear reader, some time ago we guessed that the feds' efforts to keep consumers consuming were essentially inflationary...and that the inflation they caused would tend to go more into gold and oil than into economic growth or asset prices.

Since then, the price of oil has shot up over $100. Yesterday, it hit a new record at over $126, before falling back to $124. Gold, meanwhile, has traded above $1,000 - and now is correcting in the mid-800s.

This is already a major adjustment. It comes along with a major adjustment in the purchasing power of the dollar, generally. Americans' global purchasing power has been cut in half. The value of their assets - on the world market - are only half what they were during the Clinton years. And the value of their most precious asset - their time - has also been greatly reduced.

This is why you see so many Europeans in the United States...America is a cheap place to visit. It's also why U.S. export industries are reviving; the country has become a low-cost producer for many things; it is now a place where richer nations can consider outsource production.

All of this has gone almost 'according to plan' - that is, it is pretty much what we guessed would happen.

But now, we have to ask: are these adjustments enough?

You're expecting us to say 'no,' aren't you? Instead, our answer is 'maybe.'

In the case of America's 50% pay cut, (the U.S. dollar is only worth about half as much as it was compared to other major currencies) we think it should do the trick. Now comes a long period in which people come to realize it and begin living not quite as large as before. They lose their houses. They cut back on their spending. They relearn an old word - thrift - and find they like it. They downsize their lives - with smaller houses, smaller cars, and littler expectations. The economy goes into a long slump - as 70 million people, facing retirement, begin to save money.

In the case of gold, our guess is "probably not." Gold has still not come near the inflation-adjusted peak it set 28 years ago. Considering all that has happened during those years, we bet that there is another peak to come - even higher than the last. In 1980, the United States still had the residual financial integrity to stand up to inflation. Paul Volcker could push the yield on the 10-year Treasury note up to 16%; he caused a recession, but not a revolution. Most importantly, he protected the dollar. We don't see any Volcker around now...and we don't see how anyone - even Paul Volcker himself - could "pull a Volcker" now.

The country has twice as much debt per person. It has a hugely negative current account. It has the biggest government deficit ever (think what would happen to it in a real recession...the deficit would go to $1 trillion). No, we don't think gold is in danger of a sudden attack of monetary propriety. Instead, we think the gold bull market has much further to go - probably above $2,500 an ounce, before the dollar-based financial system collapses completely.

But it is oil we set out to reckon with today. And what we reckon is that oil is getting close to its near term peak. If we were holding major positions in oil, we would sell them.

Here's why. While gold is nowhere near its record high - oil is above it. In today's money, the top price ever paid for a barrel of oil, until recently, was only about $79. Today, oil seems to be headed to twice that level. And a few experts think it will go much higher. Goldman's oil expert predicts $200 oil.

But why should it go so high? For all the talk about China's insatiable demand, it is still true that prices and demand must worth themselves out. When the price goes up, people grumble...but they use less. We filled our tank in France last weekend. The total price came to more than $150. We had been thinking about driving down to the South of France next weekend. Instead, maybe we'll take the train...the trip would have cost us more than $300 in gasoline alone.

Everything happens at the margin, said a dead economist. Americans alone probably drive millions of marginal miles - to places they really don't really need to go...when they don't really have to be there. At over $3.50 - they'll drive less. Already, the Financial Times reports that U.S. demand is falling more than expected.

There's so much shifting sand in the oil market - usage, new discoveries, distilling capacity, storage facilities, OPEC policy, inflation, drilling technology, emerging market developments, the dollar, U.S. economic growth - its impossible to know how big the dunes will get. But oil demand - and prices - should generally stay in line with GDP. The more growth, the more oil. Plus, if you measure GDP and oil in dollars you eliminate both inflation and currency depreciation as variables. Well, at $100, reports Martin Wolf in the Financial Times , "the annual value of world oil output would be close to $3,000 bn. That is 5% of world gross product. The only previous years in which it was higher than that were 1979 to 1982."

Those were not good years to enter the oil business. The price subsequently collapsed.

Yes, you could make a lot of money in oil...many people already have. But sure as fleas come with stray cats, success leads to excess. As the price rises, more and more people imagine that it will keep going up. Some take measures to avoid using it. Some find substitutes. Some increase production. Markets still work, in other words. Every bubble eventually finds its pin. The day can't be too far off when the price of oil will fall back under $100.

Bill Bonner
The Daily Reckoning Australia

• Why the Bull Market in Commodities Isn’t Over
• No Spike in Oil Price Following IEA “Third Oil Shock” Announcement
• Has Oil Hit Its Peak Price?
• Bank’s Inflation Projections Will Not Return to the 2 Per Cent Target Figure Until Early 2010
• Fed’s Aggressive Attempts to Put More Money and Credit in Circulation and the Asset Bubbles

The United States matters less and less to the oil market – but is still very important, of course.

We have guessed that the United States of America is a sell. Its money, its paper, its property, its labor, its stocks, its industries, its debt – sell them all.

We don't mind saying so...still, we don't like to hear the foreigners say it. A man may have noticed the swelling with his own eyes; still he doesn't like to hear a stranger say his wife is getting fat. So when the Financial Times comes out with an article saying the same thing, it sticks in our craw.

At least the FT is nice enough to use a euphemism. Instead of seeing the United States on its knees, it sees the "end of unipolarity." As we all know, when the Soviet Union threw in the towel in 1989, the US was the world's undisputed hegemon. America was on top of the world – with no real competition. It was a "unipolar" world, as the FT would put it. The stock market boomed. The dollar rose. America's chest swelled with homegrown pride and the entire world's credit. And by the late '90s, President Clinton summed it up: "things couldn't get better," he said.

He was right. They couldn't. So, they got worse.

No nation can stay on top of the world forever. But when you have no competition, you can't rely on others to bring you down; you have to find ways to destroy yourself. For that job, America found just the men it needed just when it needed them most – Alan Greenspan and George W. Bush. What these two men accomplished is probably one of the greatest feats in human history. They took the richest, most powerful country the world has ever seen and, in the space of only five years, practically ruined it.

First, says the FT article, the soaring price of oil had the effect of transferring trillions of dollars from the biggest oil user – the United States – to the oil producers, notably the Arab states and its former enemy, Russia.

Second, the federal government went from a budget surplus over $100 billion in 2000 to some of the largest government deficits ever recorded. Those, along with huge current account deficits equal to 6% of GDP, changed the United States from a chooser into a beggar – heavily reliant on foreign money.

The FT doesn't mention it, but America's spending spree had another important effect – it lit a fire under its new commercial rivals. Americans spent absurdly – which caused the Chinese to build factories, learn skills, and pile up a mountain of U.S. dollars.

Professor Paul Kennedy practically foretold all this when he noted that super-powers tended to "over-reach." But even he couldn't imagine how much of this over-reach would be caused by so few people in such a short period of time. Alan Greenspan reached for the stars in the early 2000s. His emergency-level Fed rates triggered an explosion of spending, borrowing and leveraging...which has now blown up in our faces.

And the Bush Administration took on a war that has proved to be costly beyond anyone's imagination. The total price of the war may come to $1 trillion or more – at a time when the United States already needs to borrow $2 billion per day.

Obviously, more prudent, more cautious leaders would have prevented these catastrophes. They would have read history...reduced expenses...raised interest rates...pulled back the troops...and saved money. But sensible leaders do not make history. Fools do. People reach for glory. Then, they over-reach.

"Oh, look," said Elizabeth on yesterday's walk about. "This Piazza Navona is built around what used to be Emperor Diocletian's stadium. I don't know anything about Diocletian..."

"The only thing I know," we replied, "was that Diocletian prefigured Richard Nixon by about 19 centuries."

"What do you mean?"

"Diocletian was faced with high rates of inflation. He imposed price controls as a way of trying to control prices. Of course, they didn't work. They never do. But Richard Nixon probably never read the history of Diocletian's price controls. Otherwise, he wouldn't have done such a stupid thing."

George W. Bush and Alan Greenspan, too, may have long arms...but they are short on history. Still, the pair seems to have worked a turnaround that history will record as one of the greatest ever.

After being on top of the world so recently, now...the United States slips and slides. The banks are in trouble...homeowners are in trouble...and the economy is in such trouble that the feds are now considering new emergency measures to rescue it.

From California comes word that foreclosures are running 327% ahead of last year. Drivers are cutting back on gasoline use – for the first time in U.S. history they have to compete with the Chinese for every gallon. They're "feeling squeezed," says an AP report.

Americans now earn less than the French. How long will it be before they earn less than the Chinese? How long before Washington melts into the Potomac?

Bill Bonner
The Daily Reckoning Australia

• Obama faces huge challenges
• The United States: The Largest Ponzi Scheme in the World
• Alan Greenspan Bears Blame for Intensity of Financial Crisis
• Where is the Committee to Save the World?
• Gold Standard Doubles as the Greenspan Fed Makes Real Interest Rates Negative