Here at The Daily Reckoning, we always take the part of the humble...the despised...the oppressed...and the misbegotten.

Today, that means the rich...

Yes, dear reader, the rich are getting beaten up. Maligned. Mistreated.

Their governments all have in it for them...taxes on 'the rich' are rising. The Democrats are talking about financing the entire nation's health care system on the backs of the super-rich.

And prosecutors and politicians are targeting their salaries. No more million-dollar paydays...not with the feds looking over their shoulders. Oh...and their investment earnings are down too. The dividend yield on the stock market is scarcely 3% - try living on that, you rentiers! As for the 10-year T-note, the yield is only 3.5%.

And capital gains? Fugetaboutit. Stocks have been rallying (bouncing) since March 9th. The bounce has helped investors recover about 45% of what they lost. But, overall, there have been no gains in the stock market for more than 10 years. None. Factor in the effect of inflation and the story is worse; investors have lost about 25% to 30% of their money.

But everyone is pointing a finger at the rich - as if they were to blame for the financial debacle of the last few years. Some economists even blame the "growing inequality of incomes" as a cause of the crisis.

This is completely unfair. The rich didn't cause the problem - they merely took advantage of it as best they could. It was a time when 'financialization' was on the rise...when money made money, at least in theory. Speculation and lending paid off. Obviously, you have to have money if you're going to lend or speculate. Some of 'the rich' - those in the financial industry - cleaned up.

But come the revolution of '07-'08 and the rich lost their heads. Who lost $50 trillion in stock and real estate? It wasn't the poor. Whose derivative positions went belly up? Whose stocks went down? Whose mega McMansions got re-priced as cracker shacks?

On this last point, we have new information. The housing crisis may have begun in the subprime trailer part of town. But now it's in the older suburbs - it's the prime and super-prime homeowner whose back is to the garden wall. A third of foreclosures in the 2nd quarter were of houses financed by prime, fixed-rate mortgages. Of prime borrowers, 41% are expected to be underwater by 2011, says a forecast from Deutsche Bank - nearly three times as many as at the beginning of 2009.

And now nearly half of all jumbo mortgages are underwater. Yikes, the rich...and bourgeois classes...are up to their necks.

And now this sad report from The New York Times:

"Last year, the number of Americans with a net worth of at least $30 million dropped 24 percent, according to CapGemini and Merrill Lynch Wealth Management. Monthly income from stock dividends, which is concentrated among the affluent, has fallen more than 20 percent since last summer, the biggest such decline since the government began keeping records in 1959.

"Some of the clearest signs of the reversal of fortunes can be found in data on spending by the wealthy. An index that tracks the price of art, the Mei Moses index, has dropped 32 percent in the last six months. The New York Yankees failed to sell many of the most expensive tickets in their new stadium and had to drop the price . In one ZIP code in Vail, Colo., only five homes sold for more than $2 million in the first half of this year, down from 34 in the first half of 2007, according to MDA Dataquick. In Bronxville, an affluent New York suburb, the decline was to two, from 17, according to Coldwell Banker Residential Brokerage."

And so, we pause to wonder. What does it mean? Where does it lead? Who gives a flying fig?

At a certain level, all of this concern about who earns what...and who has what...is just so much envious claptrap. For most of us - who have enough to eat and a roof over our heads - money is just sport. We aim to win, just as we would try to win a croquet match. But what difference does it make?

We don't know. So we turn back to the game. How can we get more wealth than our neighbors?

And here...a bit of perspective...

When the Great Khans road across the heartland of Eurasia in the 13th and 14th centuries, nothing could stop them...or so it seemed. Their soldiers were practically born in the saddle. From childhood they learned how to ride, and fight...and little else. Europe's population, meanwhile, was more settled...and more soft.

But Europe was hardly the brightest bauble on the tree. The Mongols had their pick. West - to conquer Europe. South - to conquer India. Or East - to conquer China.

They attacked Europe, but only half-heartedly. Instead, they devoted most of their efforts to India and China. Why? India and China were richer! There was more stuff to steal.

It's hard to make comparisons. But, at the time, the East was at least as rich as the West. But then, along came the Industrial Revolution and the East was left behind. People in the West learned to save...and to invest their savings in capital improvements - machines, factories, canals, railroads, mines, ships and all the other things that allow people to be more productive. This extra production made them rich. Not to put too fine a point on it, but they could make more stuff!

Then, with the ability to produce more and better stuff came the ability to produce the kind of stuff that you can kill people with. So, pretty soon, they were making machine guns. And pretty soon, the horse- mounted warrior of the steppes was as archaic and irrelevant as the Roman legions. He could still charge with great élan. He could still raise his saber and his bow...providing a rich subject for artists and poets. And he could die so well! All you had to do was to open up with your new, factory-made 50-caliber machine gun and down he went.

But what goes around comes around. Who's saving now? The Chinese save 25% of their earnings. In America, the rate is rising...from zero to five percent!

Who's building factories? Who's harnessing the industrial revolution? Who's getting rich? Who's innovating? Who's building cities?

Who's the world's biggest creditor? Who's got the biggest pile of money?

Oh, dear reader...you already know the answer...

"West will languish; Asia will lead..." says a headline in Barron's this week.

And what's this?

"China commercial property sales higher than US," says a headline at Bloomberg.

Yes, dear reader...it is the way of the world... Losers become winners. Winners become losers. Day yields to night; summer gives way to winter. Life goes on...always as it always was...but never the same.

And we leave you with that philosophical reflection...and go back to the financial world...

Bill Bonner
for The Daily Reckoning Australia

• India Can Grow for Many Years
• Feds of India Have Been Choking the Economy for Years
• In India With a Strategic Partner
• The Swiss and the Rich
• The Rich are Still Getting Richer

Of course, these new capitalists were not real capitalists. Instead, the little guys were mostly pigeons for Wall Street. Instead of really understanding and CONTROLLING the companies they owed, they bought shares in mutual funds...or owned their shares through insurance or pension funds. These collective investments left the little guys dependent on Wall Street managers - who paid themselves enormous fees and bonuses.

Of course, as long as stocks went up, the new capitalists didn't mind or notice that the financial industry took advantage of them. They completely misunderstood what they had gotten into. In their minds, capitalists made people rich...and Wall Street helped them get in on the deal.

When Francois Mitterand, socialist president of France during the '80s, realized how it worked, he was outraged; 'they make money in their sleep,' he remarked of capitalists. But that was just what most people wanted to do. So, they began to imitate the capitalists. "Buy stocks," thundered Wall Street.

And so...the little guys piled in....and stocks soared.

"Buy and Hold," the pros told them. "Stocks for the Long Run," wrote professors of finance.

Of course, some people wanted to make money faster. So 'day trading' became popular in the late '90s. The newspapers were full of stories of people who quit their jobs in order to trade stocks.

In the '80s and '90s, too, people began to believe that you could motivate workers by giving them "a piece of the upside." And the workers, too, believed they might get rich if they had a stake in their employer's company. Especially in the financial sector, 'results-based compensation' caught on. Soon, almost everyone had a piece of the upside.

The trouble was, especially in the financial sector, the upside was remarkably short-sighted. In the near-term, business managers had a huge incentive to push the upside up farther than it ought to go. Take risks? Why not! If they could increase the quarterly results they would get a bigger bonus. If, over the long term, the business were weakened...well, that would be the owners problem, wouldn't it? Managers sometimes had such a big piece of the upside there was scarcely anything left for the owners.

Everybody wanted a piece of the upside. Owners - including the new capitalists - wanted the business to prosper so their stocks would go up in price. Managers wanted high quarterly profits - so they could exercise their stock options and pay themselves big bonuses. They were all 'capitalists' - but ersatz capitalists. None had much of an interest in the long-term health of the capitalist institution itself.

A real capitalist is eager to cut his labor costs. If hourly wages rose too high...he'd want to move to a lower-cost production center. And if the managers asked for too much - he'd fire them and get new ones.

But neither the working stiffs nor the suits shared the owners' interest in cutting labor costs and preparing for the future. While European automakers shifted much of their production to lower-cost countries...GM continued to make cars in the United States of America. Its unionized, stock-owning, voting employees wouldn't allow it to move. And when it needed to invest in new tools and equipment in order to make autos for the 21st century - suppressing earnings in the short term in order to make the company stronger later on - its bonus- seeking, option-driven managers wouldn't permit it.

Lesson: Let the managers manage. Let the workers work. Let the capitalists grub for money. And let the politicians lie and steal. Each to his own métier.

If you're wondering what that means in today's world, you're not alone. We're wondering too.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Obama Has Business Plan for the Car Industry
• Capitalism and Capitalists
• The “Consumer Economy” Was Always a Mockery
• Normally Small Businesses Lead the Economy Out of Recession
• A Country of Madoffs

And now, it's broke. And even politicians think they know how to run an auto company. Just read the papers. "Obama insists on changes," says one headline.

Normally, the politicos should hold their tongues...and let an industry's owners run their businesses. Alas, as of a few days ago, the politicians ARE the owners.

Here's a question:

When the government takes a majority stake in the auto business you know you are:

A) In a bad dream

B) In a bad way

C) In a bad country

D) In France

Correct answer: well, we we're not in France. But as for the rest, it could be any of them...or all of the above.

Here's an easier question. Who will the U.S. government put on the board of directors of General Motors?

A) A political hack

B) An industry hack

C) A far-sighted maverick who will shake up the business and put it on the road to growth and prosperity

If you answered "C" - you are from another planet. There is a reason neither governments, nor workers should own businesses. In the following, roundabout way, we explain why...

But first, a bit of news. As far as we can tell, the bear market rally is still on. The Dow rose 44 points on Friday. Oil closed at $53. The dollar is still sinking. And gold lost $3 to end the day's trading at $888.

Thirty-two banks have shut down so far this year in the United States. Little, mismanaged banks go broke. But big, mismanaged banks get federal money. With these subsidies and bailouts, the big banks get larger...and live to foul-up another day.

Poor Warren Buffett seemed a little discouraged at his annual shareholders' fest in Omaha. He must be nearing the end of his career. And consumers just aren't buying as much furniture, cola, and candy as they used to, he told the faithful. Berkshire Hathaway's profits were 10% below those of last year.

Swine flu seems to be disappearing from the front pages. Has it gone the way of Y2K and terrorism? Has another great disaster been averted? Might be too early to tell...

Oh you doomers and gloomers, cheer up! There's always some other disaster waiting for a headline. How about this? The Seattle Times looks at Las Vegas and sees what it calls "the next global crisis." After 10 years of drought, Las Vegas is running out of water.

The city fathers are thinking of all sorts of solutions - except, of course, for the obvious and effective one. They're planning on huge pipelines...hundreds of miles long...and sucking water out of aquifers millions of years old. But, according to the paper, Las Vegas charges only about a tenth as much for its water as Atlanta does. The simple solution is to let free enterprise provide water...so that it could be priced correctly.

Colleague Chris Mayer has been following the water crisis story since the introduction of his newsletter, Mayer's Special Situations, in 2006.

"Water is not just a problem in Las Vegas. The lack of sources for fresh water is a problem facing much of the American West, though the problem is particularly acute there and in the state of Nevada generally. Nevada is the most arid state in the union," says Chris.

"The tight water supply has implications all over the West. In Arizona, you can't build a residential development unless you find a 'designated assured water supply' that can sustain that development for 100 years. I could go on and on about this kind of thing. Suffice it to say, the American West faces a water crisis."

Maybe the increase in water prices would discourage people from planting Georgia-style grass lawns in the Nevada desert. Or maybe it would discourage people from moving to Las Vegas in the first place. But that's the thing with capitalism; it doesn't take people where they want to go...it takes them where they ought to be. That's also why people hate free enterprise so much. Where they ought to be is, often, where they least want to go. In the present example, people think they have a right to water - practically for free. They think there's a 'water clause' in the Constitution that says government is supposed to provide them as much water as they want at a price they can afford.

Most things work better when they are run by private enterprises. Too bad. Free enterprise is out of style. The days of privatizing are over. Now, everyone wants the government to take charge.

What a turnaround from a few years ago - when people thought they could solve practically every problem by privatizing it. And then, the voters would buy shares in the newly privatized companies...and we'd all get rich!

"For water, the really bad stuff hasn't happened - yet," says Chris. "As investors, it's a good place to be for a long time."

Bill Bonner
for The Daily Reckoning Australia

• Water Usage by Big Companies
• Denmark, Spain, the U.K. and Ireland Have Begun to Register Falling Housing Prices
• Obama Has Business Plan for the Car Industry
• The Trade of the Century
• Best Investment Opportunities Emerge from Water, Agriculture, Gold and Energy

As near as we can tell, the financial world conveniently remained on hold while we were gone. As of Sunday night, little had changed. Gold, stocks...economists...politicians - they're all about where we left them. That is to say, the bear market rally on Wall Street continued. The feds continued to pervert the economy with their bailouts. Economists continued to call a spade a petunia. And politicians and commentators continued to blab and bluster about nothing.

But yesterday, the rally on Wall Street got smacked in the chops. The Dow fell 289 points. Oil dropped to $45. Investors were selling stocks - mostly financials - and turning to the dollar and gold for safety. The dollar rose to $1.29 per euro. Gold returned to $887.

The most important fact still sits like an alien spaceship on the White House lawn - so monstrous and dumbfounding that people don't know what to make of it...so they simply ignore it. The U.S. government is spending $13 trillion - nearly an entire year's output - to 'fix' the problems caused by the worldwide financial meltdown. Of course, they can't actually fix anything. Companies that are losing money are still going to be losing money. Investors are still going to take losses on stocks and bonds that were overpriced. Bad debts are still bad. Bad investments are still bad. A kiss is still a kiss. A smile is still a smile. Time goes by just like it always did.

But this $13 trillion of extra spending is bound to have some big effect. What?

A Financial Times article, written by one of Obama's advisors, makes a guess:

"The unprecedented explosion of the US fiscal deficit raises the spectre of high future inflation. According to the Congressional Budget Office, the president's budget implies a fiscal deficit of 13 per cent of gross domestic product in 2009 and nearly 10 per cent in 2010. Even with a strong economic recovery, the ratio of government debt to GDP would double to 80 per cent in the next 10 years.

"...the potential inflationary danger is that the large US fiscal deficit will lead to an increase in the supply of money. This inevitably happens in developing countries that do not have the ability to issue interest-bearing debt and must therefore finance their deficits by printing money. In contrast, when deficits do not lead to an increased supply of money, the evidence shows that they do not cause sustained price increases.

"But now the large US fiscal deficits are being accompanied by rapid increases in the money supply and by even more ominous increases in commercial bank reserves that could later be converted into faster money growth. The broad money supply (M2) is already increasing at an annual rate of nearly 15 per cent. The excess reserves of the banking system have ballooned from less than $3bn a year ago to more than $700bn (€536bn, £474bn) now.

"The deep recession means that there is no immediate risk of inflation. The aggregate demand for labour and goods and services is much less than the potential supply. But when the economy begins to recover, the Fed will have to reduce the excessive stock of money and, more critically, prevent the large volume of excess reserves in the banks from causing an inflationary explosion of money and credit."

If that was a bit hard to follow, here is our friend, Ron Paul, with a more succinct explanation:

"When I talk to many teenagers, [and] grade schoolers, they seem to have no problem comprehending the fact that if you just create a lot of money, it'll be like monopoly money and it won't have value," he told the I.O.U.S.A. crew when they sat down with him for an interview for the film.

"Governments do that for all kinds of reasons, especially to enhance political power to fight wars we shouldn't be fighting or to be passing welfare programs that aren't deserved. When you print that money, the value of that dollar has to go down and then one of the consequences of inflating the money will be higher prices. But there are a lot of other problems with inflating, it causes financial bubbles and it causes a lot of economic distortions and unemployment - but inflation is very simple. When governments create new money out of thin air, you have inflation."

Inflation? When? How much?

No one can say.

Maybe not for a long time. But when it comes...it will take our breath away. That's why we urge you to protect yourself and your money while you can. Especially now, with just shy of $11 trillion in debt already piled up... another $8.5 trillion already committed to the bailouts... and $3.6 trillion more in new spending on the table.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• U.S. Government Must Roll Over $3.4 Trillion in Debt Over Next Four Years
• Fed Willing to Print Money to Buy More Bonds to Keep U.S. Interest Low
• Only Thing Rising Faster than Demand for Government Debt is Supply of It
• Federal Government Making Taxpayers Pay Taxes for Nothing
• The Percentage of the U.S. Economy Devoted to Consumer Spending Went Up and Up

"The Treasury has proposed a $500,000 cap on executive compensation... Many of you have complained that you will lose your top talent. Are those the same people that helped lose your banks billions?"

Oh, you jokers at the NYT . Touché!

Yes, it's "open season" on bankers. And check the new dictionary. The word 'banker' has become synonymous with "reptile" or "scalawag." Drivers will soon be using it on the street. "F**** banker!" they will yell to the car that cuts them off. "Scumbag Millionaires," the Sun called them.

English bankers got slapped around on Monday. Then, on Wednesday, it was the Americans' turn. They were summoned to Washington by Congressman Barney Frank; be prepared for a "public flogging," the New York Times warned them.

In Paris, meanwhile, the bankers tried to stay ahead of the lynch mob by proposing to cut their own bonuses.

Everybody wants to kick the bankers when they are on the ground. Heck, we'd do it too...but the crowd around them is so thick; we can't get a boot in edgewise. Besides, there are bigger charlatans still standing. After all, bankers were just doing their jobs - separating fools from their money. What about those who were supposed to be protecting the fools?

But we are in a depression. And everyone has to play his part. The politicians feign moral outrage. The bankers feign contrition. The spectators feign to know what was going on and have a good time. It's a show with a subplot, we think. In the interest of seditious mischief, here we undertake to deconstruct it.

First we begin with a critic's remark: this is a well-rehearsed storyline. When the losers are unhorsed, they are almost always spat upon. Louis 16th's severed head was held up and subjected to "atrocious and indecent gestures"...Mussolini was hung on a lamp post. The bankers seem to be getting off easy.

Now, a comparison: the farce of '09 is nothing compared to the great show put on following the '29 crash. The weakness of the present spectacle is the cast. The chief American protagonist - Barney Frank - is no match for his role model, Ferdinand Pecora. Pecora was "the most brilliant lawyer of Italian extraction in the US," said the TIME magazine report of March 6, 1933. He "finished public schools at 12. At 18, after loping through his brother's law books, he was managing clerk of a law firm. Even on the most complex cases (which he, tireless, likes best) he never needs notes, never forgets a word of testimony once it is on the record... At 47, his black eyes flash, his black hair bristles."

But then, the victims are no match for Charles Edwin Mitchell either. "Billion Dollar Charlie" earned more than a million dollars in '29, when a million dollars was still real money. Senator Carter Glass said that he "more than 50 other men is responsible for this stock crash." But, as TIME reported, "neither the directors nor any other Manhattan banker knew anyone who, they believed, could do an equally good job of carrying the bank safely through storm and strife. That he has done the job, Ferdinand Pecora would be the last to deny. The statement of National City Bank [Mitchell's] was, on Dec. 31, 1932, the envy of nearly every bank in the US."

Still, the depression was on and Mitchell was damned for it. By 1933, he was out of a job. And now Jamie Dimon, Lord Stevenson, Andy Hornby, John Mack, Vikram Pandit, and Sir Fred Goodwin are in the dock.

'Yes, we have erred and strayed like lost sheep,' the bankers chant. "We are profoundly, and I think I would say unreservedly, sorry..." said Lord Stevenson, formerly of HBOS, on Tuesday. But "UK bankers find sorry is not enough," judged a headline on Wednesday morning. "I want groveling," wrote an opinionist to the LA Times . "I want show-trial sweating and stammering. I want their nine-figure bonus checks endorsed over to the rest of us...I want blood..."

Be careful not to over-act, is our advice. Viewers might catch on. In London, the Guardian announced its own 12 questions to put to the bankers, including "why should profits be private, but losses be socialized?" Uh...that is a good question, but it is put to the wrong person. Why the bankers would want to offload their mistakes is a question even a Guardian reader could answer. Why else would they humiliate themselves publicly? Why would not a one of them dare show any fight? The pols control the money now; the bankers know it.

The question is better put to the inquisitor than to his victim. Why would the government wish to take on the losses? There, the answer is fairly easy too - power. Besides, it's not their money; it belongs to the same mouth-breathing yahoos who are enjoying the show. In fact, we have other questions we'd like to put to Barney Frank, John McFall and the rest of these sanctimonious meddlers: How many of you jackasses went short the financial sector? And if you're so smart, why didn't you warn the public about the housing bubble and the toxic asset meltdown? If your committees...and your armies of regulators at the SEC, FHA, FDIC, FSA or other agencies...could do nothing to prevent the crisis, what good are they? And how cometh it to be that the biggest financial fraud of all time took place right under your own employees' noses?

So you see, dear reader, how deliciously the plot turns? In the bubble years, the bankers ripped off the public...pretending to make them rich, of course...while the regulators looked the other way. Now, the politicians create a distraction, pretending to punish the bankers, while together they pick the public's pocket for $3 or $4 trillion more. The bankers are judged guilty; but the audience hangs.

Enjoy your weekend,

Bill Bonner
for The Daily Reckoning Australia

• Is There Any Wonder Americans’ Hate Bankers?
• Bankers Admit Faults in Congress
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• Everyone is Getting Tough on Bankers
• Parasites and Chiselers Who Benefit from the Bailout

"I don't get it..." said a French businessman over lunch on Friday. "In fact, I don't think any of us get it. You've got a guy - the governor of New York - who hires a prostitute. He gets caught and has to resign. But the President of the United States lied to the American people and started a war in which thousands have died...a war that is so expensive it threatens to bankrupt the entire nation. How come he doesn't have to resign? Strange system."

We tried to explain. Getting caught with a prostitute is an unpardonable diversion. Starting a war is what politicians are supposed to do.

"You have to understand," we began, "that getting a call girl is a simple, understandable act. To most Americans, it's a sin. They don't want an elected official who does things like that. They want him taking care of their problems, not his own tawdry whims and desires.

"The war in Iraq is a very different thing. Was it a mistake...was it a lie? We don't really know the details. It's complex. Maybe it was in the national interest...or people thought it was. We don't know if it was a good idea or not. You can't know things like that.

"Besides, people come to believe what they need to believe in order to play their roles in history. The people of a great empire have to believe that sending their armies all over the world is worth the cost. Europeans are very much against war...and afraid of it. They've had their imperial ambitions...and the inevitable disasters that follow. But Americans are not. Most have no regret about the war in Iraq except they wish it had gone better. And the argument among America's politicians is not about whether it was right or wrong, but about whether it was pursued effectively."

Until tomorrow,

Bill Bonner
The Daily Reckoning

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