Although I have great sympathy for the deflation crowd, given the reckless attitude of the central bankers and their ability to create debt-based money, I do not believe deflation (contraction in the supply of money and total debt) is very likely.

For sure, in this post-bubble environment, American consumer debt continues to contract, but this is being more than offset by the expansion in federal debt. Over the past year alone, federal debt in America has surged from US$9.645 trillion to US$11.813 trillion. In other words, during the past twelve months, American federal debt has risen by a shocking 24.47% and it now stands at 83.52% of GDP! Now, given the ability of the American establishment to essentially create dollars out of thin air, I have no doubt in my mind that it be able to inflate the economy. However, this will come at a huge cost and the victim will be the American currency.

In fact, the recent weakness in the US dollar is a sign that central-bank sponsored inflation has started to dominate the private-sector debt contraction in the West. Furthermore, over the past few weeks, various governments have issued US dollar-denominated debt and this suggests that the carry-trade is back in vogue. In a startling move, Germany recently announced that it plans to borrow money in US dollars!

Now, given the ongoing federal debt inflation, debasement of paper currencies, sky-high budget deficits and competitive currency devaluations, the macro-economic environment has never been better for precious metals. Yet, both gold and silver continue to frustrate the bulls by staying below the record-highs recorded in spring 2008.

So, what is going on here? Have we already seen the end of the precious metals bull-market or are we about to witness an explosive rally? Before I attempt to answer this question, I want to make it clear that even though gold failed to better its all-time high during last autumn's panic, it was the only asset, (apart from US Treasuries) which stayed relatively firm. And looking at the various markets today, gold is the only asset that is flirting with its all-time high. So, whether you like it or not, gold deserves some credit for fulfilling its role as a safe haven.

Now, unlike some of the die-hard gold bugs, I don't believe that gold is the ultimate asset to own at all times. Without a doubt, there have been times in history when gold has proven to be a lousy investment. For instance, between 1980 and 2001, the nominal price of the yellow metal fell by an astonishing 70%. This horrible price action spawned an entire generation who grew up hating gold and up until a few years ago, the vast majority considered gold a barbaric relic.

However, during other periods in history, when macro-economic uncertainty was high and inflationary expectations were running out of control, gold turned out to be a fantastic asset to own.

If my take on the macro-economic situation is valid, then we are in such a period now and gold must form a part of every investment portfolio.

You may remember that over the past year, central banks have injected trillions of dollars into the banking system and it is only a matter of time before inflationary expectations start spiraling out of control. Up until now, this 'stimulus' money hasn't permeated through the economy in the West but once money velocity picks up, prices will start rising and the investment community will become very concerned about inflation. When the deflation scare abates and people start protecting the purchasing power of their savings, capital will start to flow towards precious metals.

Long-term clients and subscribers will recall that about two years ago, I highlighted gold's tendency to rocket higher every other year. Figure 1 captures this trend perfectly and you can see that since the outset, gold's bull-market has been punctuated by lengthy consolidations and the yellow metal has surged to a new high every alternate year.

So, if gold remains in a bull-market and its trend consistency is intact, its price should surge over the following months. Conversely, if the price of gold fails to climb above its all-time high before year-end, it should start to ring alarm bells as this would open up the possibility that the bull-market may be over. Remember, certainty does not exist in the investment world and savvy investors should remain open to all outcomes.

Now, given the uncertainty in the world today and the ticking inflationary time-bomb, my view is that gold will soon embark on its north-bound journey. So, I suggest that investors hold on to gold and the related mining companies which will probably continue to perform well until next spring.

As far as silver is concerned, it has always been a high-beta play on the direction of gold. If the next up leg in gold's bull-market materialises, the price of silver will also head towards the heavens. Accordingly, investors may also want to allocate a portion of their investment portfolio to silver bullion and silver producing companies.

Regards,

Puru Saxena
for The Daily Reckoning Australia

• Gold Flourishes but Silver is the Real Precious Metal Story of Late
• Gold Falls for Four Straight Days but is the Low Price a Bad Thing?
• We are Confident the Bull Market in Gold is Not Over
• Gold and Silver!
• A Word About the Dollar’s Decline from Our Intrepid Correspondent, Byron King:

Here is a more worrisome note, though: you can't beat the market. Or at least, your actively managed superannuation fund cannot beat the market. That is the conclusion of two researchers from the Australian Prudential Regulation Authority (APRA). This is probably unwelcome news from those in the actively-managed superannuation funds business.

"On average," researchers Wilson Sy and Kevin Liu conclude," value adding from active management appears statistically to be unable to overcome higher costs associated with attempts to exploit market inefficiencies...Higher management expenses leads to poorer net investment performance of the firms."

There are at least two points worth noting in this survey, three actually. First, actively managed funds, on average, don't beat the market. Unless you know a genius manager, paying for results doesn't deliver them. Second, the underperformance (by about 0.9%) is directly attributed to the fees you pay. If you invested in a passively-managed index tracking fund, you would do just as well as the market, and not pay a cent.

But the most incriminating finding from the study is that active managers do worse in a bear market! That shouldn't be too surprising, really. Fund managers are paid to be in the market, not to be in cash. This is true even when you are better switching to a super option more heavily weighted in cash. Cash does not generation commissions!

To be fair, the study showed that half of the 115 superannuation funds beat the benchmark index (with the best fund doing 18% better). But the big question this study prompts is whether-by correctly making a few key decisions-a self-managed super investors can regularly do better than actively managed funds AND benchmark indices.

Beating most actively managed funds shouldn't be hard, we'd humbly suggest. They outperformance the index anyway, when you figure in management fees. And because the funds show a bias to shares, (these funds allocate 50% of assets to Aussie and international shares), they are likely to get clobbered when asset allocation models suggest you ought to shift to cash, fixed income, or (ahem), property.

Of course the truth of the matter is that being in the right asset class at the right time is the single-biggest determinant to how well you do as an investor. That is, you don't have to be Warren Buffet to beat the market. You just have to be in the right market at the right time. Stock selection, as much as it is touted by value investors, is simply less important than whether or not stocks as an asset class are rising.

You don't have to be a highly paid fund manager to know whether stocks are in a primary bull market. In fact, the fund managers are likely to get it wrong because they would prefer stocks to be in a bull market. It makes the job of index tracking and fee collection much easier. But the real challenge is correctly interpreting those inflection points in the market where one asset class falls out of favour (peaks out) and another, previously ignored or cheap asset (kudos to the value crew) enters into a bull market.

Those are the tough spots to pick. But we wonder why a professional fund manager is any better equipped to call those market tipping points than a well-informed self-managed super investor who cares more about his money than generating fee income. In fact, a well-informed investor who accumulates a variety of different perspectives and then reconciles that information with his own preferences, risk appetite, and judgment is just as likely to get the big calls right as anyone else. Probably more likely, considering he doesn't have any bias toward a particular asset class.

If you want to read the whole study, go here. For now, we'll quote two important pieces of it that show that making basic decisions about how you allocate your assets is the single-biggest factor in determining the performance of your super fund.

"It is seen that 38.5% to 66.7% of the cross-sectional annual returns of our dataset are explained by their benchmark asset allocations, depending on the period and depending on whether the comparison is gross or net of costs. Over the whole five-period, the cancellation of short-term noise leads to an R-squared of more than 95%. Our results are consistent with expectations from earlier research (Brinson et al., 1986, 1991; Ibbotson and Kaplan, 2000).

You read that right. Your super returns are determined by being in the right place at the right time. This is the quiet little secret of great investment returns. Getting them may be hard. But it's not impossible. But why is it true?

"These results have very simple explanations. It is clear that the greater are the differences in returns to different asset classes, the more asset allocation explains performance. Over the short-term, the asset return differences may be insignificant and may be swamped by other short-term effects of active management; asset return differences explain less of the cross-sectional variability. Asset allocation explains more of time variability because over time the differences in returns of different asset classes become more statistically significant."

Over the short-term, property and fixed income may look safer and better than precious metals and cash. But if bonds are in long-term bear market, if we are in a Credit Depression, and if fiat money is entering a permanent period of decline, then getting your asset allocation right now has never been more important. Perhaps, according to the reader below, you should consider cattle.

--Hi folks - enjoy the DR. Current topic is moot ... what is real wealth? Just one version of the answer - the age-old definition - comes from no other authority than the Bible:

QLD

Dan Denning
for The Daily Reckoning Australia

• Your Average Australian Super Fund
• Actively Managed Superannuation Funds Have Not Had a Stellar Few Years
• The Problem With a Well-Diversified Portfolio
• Mainstream Financial Press is Finally Catching on to Hedge Funds
• Self Managed Superannuation Funds on the Rise

But the task of today's Daily Reckoning is not to figure out where stocks are headed in the second half of the calendar year. No one knows. Our strategies are focused on energy stocks-both the conventional and highly unconventional kind. We're bearish on fixed income, a bit more bullish on cash, precious metals, and tangible assets.

What about housing? ANZ Bank published a report on the subject yesterday. Among other things, it declared that, "We expect dwelling prices to edge higher for much of the remainder of 2009 with upside risk presenting from intensification of strong fundamentals, a shift in price expectations and restoration of confidence."

Pardon?

That is some seriously tortured syntax. What does "upside risk presenting from intensification of strong fundamentals" actually mean? Does that mean there is a risk prices could go up? Blah blah blah.

On the plane to Adelaide yesterday we had a much more down to earth conversation about property with the man sitting next to us in the exit row on our Boeing 737. He was reading a story in yesterday's Australian about the new "boom in the bush."

"According to RP Data-Rismark, the national median house price of $468,819 is just $520 shy of the record set in February last year, before the global economy sank into recession. Melbourne is leading the housing recovery, with a 6.1 per cent growth in prices between January 1 and May 31 and auction clearance rates in excess of 80 per cent for the past seven weeks. Sydney recorded 5.2 per cent growth in prices over the same period."

Adelaide was not near the top of the list. And that had this passenger concerned.

"My wife and I decided to buy another property about 18 months ago. We thought the financial crisis was a good buying opportunity. You had a lot of people scared. But now, I just want to get rid of the thing. It's keeping me up at night."

"But I've heard Adelaide is a nice place to live."

"It's lovely. But I bought around $410k and already the median price is below that here. I don't care what I get now. I'd be happy with $408. I'm going to call my agent and let him know. My wife tells me I'm being silly. But I just want out. I have my pay stubs from back when I bought my first house and I have the mortgage too. I made $8,000 a year and the house was $25,000. Today, though, we need that money for retirement...I don't wanna be caught selling when everyone else is. I want out."

It sounded like he wanted out of the market.

"I get worried when people saying prices always go up. I mean there must be some evidence to show that isn't true. Wouldn't people want to know that before they took out a big mortgage...especially with interest rates. They have to go up sometime don't they?"

Your editor didn't say much because he was nodding the whole time. Choir, meet preacher.

Of course this preacher and this choir may be excommunicated from the Church of Aussie Housing. Median home values are within shouting distance of their all-time highs, thanks for the first buyer's grant. It's a disaster in the making.

Demographics, immigration, the concentration of the population in urban centres, and the much ballyhooed supply gap are all trotted out as reasons why house prices always go structurally higher in Australia. This also explains, apparently, how Aussie house prices can defy household earnings gravity.

That is, people spend much larger multiples of their income on housing here than anywhere else in the world. How is that affordable? A reversion to the mean ratio (3:1) would mean a serious correction/crash. That seems impossible and psychologically impermissible to a lot of Aussies. But once you wrap your head around the idea that, historically, house prices don't go up much faster than the rate of inflation, it begins to make sense.

There may be multi-year periods (we call them credit bubbles) when low interest rates create a boom in mortgage lending. This leads to house price inflation. But those booms always go bust.

Governments seek to avoid the bust by reigniting another round of inflation to keep household nominal wealth from utterly collapsing (or simply reverting to a more sensible mean). Hence, the Aussie government sparking a lending boom to those people in Australia with the most to lose from taking on huge mortgage at the low end of the interest rate cycle; young Aussies who are the most vulnerable workers in the job market and spend the highest percentage of their discretionary income (not much) on an asset they bought at the top of the boom.

Come to think of it, if you were deliberately trying to wipe out the financial prospects of an entire generation by saddling them with crushing debt, increasing the first buyer's grant is probably exactly what you'd do. And you'd laugh along with your banker friends.

Incidentally, two of our confirmed panelists for the Debt Summit later this month will have a lot to say about Aussie property. Stay tuned.

Finally, some reader mail. It raises a problem that's been growing in the back of our brain. Credit is not money. So what happens if the credit bubble deflates and the liquidity measures (which are not money) instituted by the Fed and other central banks never turn into new money supply. Does this invalidate our entire position on inflation, and the investment strategy that goes with it? No! More on why tomorrow.

--Dear DR,

David W.

Dan Denning
for The Daily Reckoning Australia

• American House Prices Continue to Fall While the Same Can’t Be Said About Australian House Prices
• RBA Buys $780 Million in Residential Mortgage-Backed Securities
• Aussie Housing Market Actually Leads the U.S. by Three Years
• Australian House Prices Are Severely and Seriously Unaffordable
• House Prices Down and Aussie Market Enters Second Wave of Rebound Rally

"As we have documented in recent weeks, the list of US macro series showing stable nominal levels over the past three-four months continues to increase. These include retail sales, new orders for durable goods and imports of materials and finished goods. That is not what usually happens in a debt-deflation dynamic, which cumulatively builds on itself. It appears the debt-deflation risk is being contained by extreme fiscal and monetary measures.

"Stability is better than free fall, but it is not the same as expansion, and we believe equity investors have shoved valuations high enough over the past three months that they now require signs of economic growth, not just stability, to carry equity indexes higher. We think the odds of them getting that could improve after we get past the auto production and dealer downshift later in the summer, but the rise in Treasury yields is becoming alarming.

"So from a strategic point of view, we believe equity investors want and need to see stronger economic and earnings results to drive indexes higher, while bond investors need just the opposite to calm Treasury yields down. In addition, through near-zero interest rate policy (ZIRP) and quantitative easing (QE) approaches, the Fed has been trying to push private investors into riskier asset classes while the Treasury's debt issuance calendar implies they need private investors to prefer owning Treasury bonds, which are generally not the asset of choice in an economic recovery scenario.

"In other words, we have contradictory cross currents here. If the Fed doesn't intervene to slow or halt the Treasury yield backup, there is a chance the stabilization in unit home sales will wither away. If the Fed does step up QE operations to halt the Treasury yield rise, professional investors taking the 'green toilet paper' view will continue to sell dollars and buy commodities. Down the line, that implies higher energy prices for consumers and higher input prices for manufacturers, neither of which we would consider growth-supportive developments."

Just like last week, materials and energy companies are leading the way today. The great global rebound argument is still hot, and this data point is keeping the commodity fire ablaze: China's manufacturing sector expanded for the third month in a row in May, its government reports. China's purchasing managers index registered a score of 53.1 during the month, down just a bit from April but still above the expansion/contraction score of 50.

Oil's up to a fresh seven-month high of $67 a barrel today, largely due to China's PMI number. On the other had, the dollar is still falling, giving commodities an even bigger boost. The dollar index fell right through support at 80 on Friday and has plunged another point and a half since. It's at 78.8 as we write, just off its 2009 low.

Thus, the cost of your European vacation has popped 7% since the start of May. The euro is up 9 cents over the last 30 days, to just under $1.42 as we write. The pound has followed suit, up 11 cents over the last month, to $1.62.

And could parity be around the corner for our neighbor to the north? The Canadian dollar is up to 92 cents today, its highest level since October 2008.

Gold continues to flourish, but silver has been the real precious metal story of late. The yellow metal is up about 9% over the last month, to roughly $980 today. Silver, on the other hand, shot up 29% in May, to $15.50 an ounce.

"In general," says energy and oil expert Byron King, "the precious metals are up because the big-spending politicians in Washington have no respect for the US dollar. Break out the black crepe and armbands of mourning for the US dollar.

"Specifically, silver has always been the "poor man's gold." Silver tends to lurk in the shadows of the price of gold, sort of a stepchild to the yellow metal.

"But on occasion, silver undergoes a slingshot effect. Between the basic industrial demand for electronics, plus jewelry demand ('cuz gold's getting pricey!), and now the monetary pull... silver is accelerating in a price rise that is - believe it or not - leaving gold in the dust.

"Silver could break $20 sooner than we'll see gold at $1,200, and the silver miners (my readers own several) will soar to new heights. Do you have your ticket for this ride? All aboard!!!"

Silver may continue to outperform gold. If you're a believer in historic ratios, silver still has room to rise in order to meet its average gold price ratio over the last decade.

Either that, or gold's price needs to fall. And in this environment, we'd sooner go long silver than short gold. Do you agree?

So again, we thank Ian for his contribution today as guest host and his insightful above look at the news.

Our regular commentary, such as it is...tomorrow.

Bill Bonner and Ian Mathias
for The Daily Reckoning Australia

• Gold Falls for Four Straight Days but is the Low Price a Bad Thing?
• The Price of Gold is Low – But It Won’t Stay There Forever!
• Silver and its Large Short Position
• Gold and Silver!
• Oil Prices Has The Mogambo Guru Sticking His Thumb in His Eye

Everybody who's anybody in this country, it seems, gets a permanent, pet government program, if not a large bailout. (Huh? You didn't get your program or bailout?) How long can it last? I think we're about to find out.

As Bernie Madoff might say, "Bailout, schmailout." Still, the axis of overspending leads to inflation. It's the 1970s redux. And inflation will soon rear its head and roar so loud that even the wizards of Washington will have to admit the obvious.

Actually, our betters in Washington are waking up to the issue of inflation and the decline of the dollar. Just yesterday, I received an inquiry asking if I want to appear on a nationally syndicated show that originates from Washington, D.C. (well, Alexandria, Va., to be exact). The audience is Washington people - you know the type - and their intellectual and spiritual kin in "blue spots" across the country.

Here's the exact inquiry:

"We're doing a story on hoarding behavior and I am looking for people who have taken some (or all) of their savings out of traditional investments and are now storing money as cash or in the form of physical gold or some other precious metal in a safe or secret place. I am having trouble finding anyone like this. Do any of you know of someone who fits this description, who might be willing to talk to me about it? I am looking for someone in Boston; Washington, D.C.; New York; or maybe Chicago. If anyone has any leads, please let me know!"

Oh, man! That's rich! Verbatim! Honest to God, I have not edited this inquiry by EVEN ONE WORD! These people are clueless!

The producer wants to interview gold bugs for the show. In an anthropological fashion that would do Margaret Mead proud, the subject of the story is "hoarding behavior." But the poor producer says, "I am having trouble finding anyone like this." (Like looking for a registered Republican at the Harvard Faculty Club?) And how about that request to find somebody in Boston, Washington, New York or Chicago? If you're from, say, the silver mining town of Wallace, Idaho, you need not apply.

Here was my reply: "People who've taken their savings out to buy gold and store it or hide it probably don't want to brag about it on NPR."

Remember that line from the movie Apollo 13? "Houston, we have a problem."

Wow. Do we have a problem in this country, or WHAT? It's WORSE than Apollo 13. We should be so lucky as to be in a small capsule in the cold of space heading away from Earth toward the moon with almost no oxygen or electrical power. Instead, we're watching the national currency declining and dying right before our eyes. And the opinion makers of the nation don't know anybody who owns gold. Amazing!

Well, the producer could always go find somebody in Dubai. Because from that distant desert kingdom comes word that the Dubai Multi Commodities Centre (DMCC) has finished building a state-of-the-art precious metals vault, with world-class tracking and security systems. Think Fort Knox, but in the desert and without the trees and pretty landscaping we see in the hills of Kentucky.

You want "hoarding behavior"? The new vault will become the home for the exchange-traded fund (ETF) of Dubai Gold Securities. Also, "It's a natural home for the central banks in the region to store their gold in Dubai, rather than in London, where they have typically held their gold," said a Dubai-based gold dealer INTL Commodities DMCC's CEO Jeffrey Rhodes. Yep. "Natural home." (Margaret Mead, call your office!)

A DMCC official stated that the new vault will be used to store precious metals associated with precious metal-based ETFs that are on the drawing boards and scheduled for launch later in 2009. This can only add to worldwide demand for gold and silver, especially from the traditionally gold-friendly Middle East.

OK, so here's the bottom line. When the American people realize that the dollar is in for another round of inflation, they're going to look for a way out. When people envision the future decline in their purchasing power, we'll see a rush for the monetary exits. It'll be the "Gold Panic" of 2009, or 2010 or 2011... Whichever year gets the naming rights.

When the reality sinks in, people will flock in droves to physical precious metals (yeah, try to get some!), as well as mining shares. I'm old enough to remember the last time it happened, in the 1970s and early 1980s. And I've studied enough history to know it won't be pretty.

So beat the gold rush! Hoard now!

Until next we meet,

Byron W. King
for The Daily Reckoning Australia

• From the Gold Pan… Inflation, Deflation and Precious Metals
• The Precious Metals Gang Gathers
• Arab Wealth Pours Back into Dubai
• Feds’ Attempt to Bail Out Consumers with Tax Rebates
• Gold and Silver!

U.S. stocks headed lower early on Friday and liked it so much they kept on going. Investors can't be reassured about President Obama's plan to reduce the deficit AND increase spending. Does anyone take these kinds of plans seriously anymore?

Meanwhile, a curtain of debt threatens to divide Europe in two again, according to World Bank President Robert Zoellick. Well, he didn't put it exactly that way. But he did say that if Eastern European banks do not get US$154 billion in recapitalisation funds from their neighbours in the West, the "crisis" would get worse.

Which crisis? Good question. There are so many to pick from these days. But in all seriousness, what do Gordon Brown, Angela Merkel, and Nicolas Sarkozy think they can do? Europe's banks have made bad loans in emerging markets, especially Eastern Europe. Europe's governments already have high public debt to GDP ratios. And in some places like Ireland, Spain, and the U.K. house prices are crashing.

It's looking more and more like the euro crash will come before the dollar crash. Or maybe they'll crash together. Gordon Brown hinted at something bigger and better than just a few major world currencies. He pointed out that nothing anyone's done has really worked yet. So obviously, more will have to be done.

"These are testing times," he said, while not pointing out that the test is largely being failed by policy makers who keep trying the same two things. "We've seen the biggest global fiscal stimulus that has ever been done. We've seen the biggest interest rate cut the world has ever had. Today we decided that we need to do even more than that by working together."

Cut interest rates? Check! Rush out government checks to people who don't pay taxes so they can spend money that's not theirs? Check! Even more? Uh...we'll check on that and get back to you.

Markets are clearly not convinced anyone in government knows what's going on or can fix it. Nouriel Roubini says the U.S. is in the third or fourth inning of the crisis. For you non-baseball fans, that means it's not even halfway over. If the U.S. adds another $4 to $5 trillion in debt over Obama's administration, Roubini reckons the credit rating of the United States government is going down.

No wonder Hillary Clinton was over in China asking the Chinese to please buy American bonds. It's a pretty sad state of affairs when the American Secretary of State has to go begging for money abroad. But hey, that's life as a debtor.

She told a Shanghai TV station, "'I certainly do think that the Chinese government and central bank are making a smart decision by continuing to invest in Treasury bonds. It's a safe investment. The United States has a well-deserved financial reputation."

Yes. You can say that again.

In response to all of this, gold is getting awfully popular. In Aussie dollars, the gold price has rocketed over $1,500. In the U.S., gold broke US$1,000 on Friday. It couldn't hold the line. But now its supporters are looking at $1,500 as the next strategic objective.

We wouldn't disagree. But judging by the number of gold-related headlines flooding our in-box, it's getting to be a pretty popular trade, at least in the newsletter industry. The newsletter industry is not exactly main stream. And of course it's the thundering herd that's going to send gold stocks much higher as bullion prices rise. But it still wouldn't surprise us to see a correction.

Who knows though? Maybe we are watching the governments of the world stumble their way toward depression. At no point since the crisis began have they been able to suggest a remedy that markets liked or restored confidence. Not that we envy them confronting the massive mal-investments of a multi-trillion dollar global credit bubble.

But did it occur to anyone that the best thing to do is nothing? Let the banks fail. Let the businesses fail. Of course it's going to cause massive chaos, job losses, and insolvency. But isn't that where we're headed anyway?

Doing nothing is a kind of action. And doing nothing is something that governments haven't tried yet. They should try doing nothing to see how it goes. The result could be surprising. And it certainly won't cost A$42 billion or US$787.

This argument will never carry the day. We are surely headed toward more and bigger programs, more and bigger bank failures, and more and bigger moves in precious metals. On that point, gold shares have lagged bullion. But we'd expect once the gold mania really gets going with the mainstream, the shares we'll take off. That's what we're planning for in Diggers and Drillers.

The other good but disturbing news is the amount of play LNG is getting in the press. Another glowing report surfaced in this weekend's Financial Review. LNG is emerging as Asia's favourite carbon-friendly fuel. This is good for Woodside Petroleum (ASX:WPL). But it's the developing LNG industry in Queensland that has all the foreign energy firms circling the local waters. Kris Sayce has been all over the story in the Australian Small Cap Investigator for a few months now.

The hot temperatures and strong winds have returned to Melbourne today. For all our readers in eastern Victoria, be safe. Until tomorrow.

Dan Denning
for The Daily Reckoning Australia

• Fall in Commodity Prices Will Reduce Inflationary Forces
• Europe Faces Day of Reckoning in Emerging Market Debt
• U.S. Government Must Roll Over $3.4 Trillion in Debt Over Next Four Years
• Downfall of the American Consumer
• Roubini Says Recession Will Continue Through End of Year

Well, that does it for us here at The Daily Reckoning . If Greenspan is in favor of it, we're against it. No one man bears more responsibility for the present worldwide financial crisis and coming depression that Alan Greenspan.

The Fed's job is to take the punchbowl away when the party gets too wild, said former Fed chairman William McChesney Martin. Greenspan did no such thing. As soon as the party began to quiet down and people began fumbling for their car keys, Greenspan added more rum to the punch and turned up the music. By the time the credit cops finally shut it down, people were dancing on tabletops all over the world.

And now, poor Mr. Obama has to deal with the headaches.

Yesterday, the Dow held steady. But the Dow is a bit of a fraud anyway. Failing stocks are routinely removed. In the present case, financial stocks slipped below $10 and were taken out of the index. Result: the index does not measure real world results.

Elsewhere in the financial news, oil traded at $37 at close of business yesterday. The dollar rose - to $1.25 per euro. And gold added another $10, to bring it to $978.

Gold looks a bit stretched. It could be ready for another pull back. But the bull market in gold is unlikely to end anytime soon.

What is odd is that while gold goes up, so does the dollar. And so do U.S. Treasury bonds. It is as if investors couldn't make up their minds. They bid up the price of U.S. Treasuries...and bid up the price of anti-Treasuries at the same time. What gives?

On the right side of their brains, they figure that U.S. Treasury bonds are the only place you can put your money and be sure of getting it back. Stocks are a disaster. Bonds - except for U.S. Treasuries - are too risky; heck, even England could go broke.

Commodities? We've seen what can happen there...just look at oil! Even gold could easily take a 20% haircut. That's why U.S. Treasury bonds are the place to be.

But wait... the left side of the brain is sending a message too. Buy gold, it says; something fishy is going on in the Treasury bond market, it tells us. How it is possible that the feds can borrow trillions of dollars without causing interest rates to rise? How can they increase the quantity of something so much...without lowering its quality? Where's the point of diminishing returns?

One question leads to another one: 'How are they going to pay this money back?' the left side wants to know.

The more the left side thinks about it, the more it doesn't understand what is going on. Let's see...the biggest spendthrift on the planet issues trillions more in IOUs...with no obvious way to pay back the money...

...and let's see...this same spendthrift actually has the right to pay off its IOUs with more IOUs that it prints up itself....

...and it actually WANTS to make its IOUs less valuable...so that people won't hold on to them. It wants people to spend its IOUs on goods and services...as fast as possible...in order to "get the economy moving again."

'What am I missing here?' asks the left side of the brain of no one in particular.

"The rest of the world has queued up to lend America as much money as it might wish to borrow in order to get its consumers to spend again," writes Spengler in the Asia Times . "It won't work, but that is another matter..."

Spengler is a clever guy. Unfortunately, many of his thoughts are unworthy of a clever man.

"A fearful world is buying trillions of dollars of securities from the US Treasury," he continues. "Of all the cash flows in the world, nothing is more reliable than the tax revenues of the American state, the longest-lasting government on Earth presiding over the world's largest economy."

Yes, and General Motors was the world's most successful automobile company - until it wasn't. The fearful world is buying Treasuries, but not because the tax revenues of the American state are so reliable; they're buying Treasuries because the United States is the only substantial debtor in the world that can make good on its debts with money of its own making. Tax revenues in the United States are falling sharply. Already, they're far short of what is necessary to cover America's public expenses. That's why both Republican and Democratic administrations have run deficits - real deficits - since the Nixon administration. And it's why the United States is now the largest Ponzi scheme in the world. The only way to pay off the old lenders is to bring in new ones - or run the printing press. That's all lenders have to worry about - inflation. And for the moment, prices are going down. They'll keep going down too - until they go up.

*** President Obama has come up with another plan - for $75 billion, he's going to try to prevent foreclosures. It was determined a half century ago that home ownership was a good thing. Since then, the government has bent the rules in favor of the homeowner - with artificially low mortgage rates...and substantial tax benefits. As an unforeseen consequence, the feds helped create the biggest mortgage-backed credit bubble in history. Not only that, they changed to geography of America - with vast suburbs stretching out in all directions, rather than cheaper and more efficient tightly packed apartment buildings.

Now, Obama compounds the mistake...

When he signed the $787 billion bailout bill on Tuesday, he warned the nation that we're not at the end of our troubles. "Nor does it constitute all of what we are going to have to do to turn our economy around," he said. "But today does mark the beginning of the end.''

Maybe so. But it feels like the beginning of the middle to us. We've had the initial shock. We've had a small rebound. Now, we're ready for the second phase. In this stage, we ought to have a better rebound...but also another big leg down. Stocks are still selling for 15-18 times earnings (which are falling fast). They need to get down to 5-8 times earnings. That will bring the Dow down to around 5,000, or lower. This could take a long time. We're in a depression, remember. And in depressions economies need to be restructured, not just refreshed.

In the '30s, none of the bailouts and stimulus packages of the Roosevelt Administration did any real good. At the end of the decade, the economy was about where it was when the decade began - with 11 million people still unemployed. And the poor Japanese have been waiting 19 years to get to the beginning of the end of their restructuring crisis. They probably would have gotten to it years ago, were it not for the diligent efforts of Japanese politicians. Instead of letting the banks fail, they bailed them out and propped them up. Result: an on-again, off-again depression that has lasted longer than most marriages.

*** Our intrepid correspondent, Byron King, offers some more insight:

"Congress collects a lot of funds through taxes. But not nearly enough to pay for all the spending. It's not even close. So will Congress raise taxes? And do it during a recession? I don't think so. Herbert Hoover tried that in 1930. Didn't work too well.

"What about the federal government borrowing? OK, it borrows a lot. But can it borrow even more? Trillions of dollars? From whom? Who has an extra trillion dollars lying around that they want to loan the U.S.? Will China and the oil-exporting nations continue to buy up U.S. Treasury paper? If so, with what? Chinese exports are down. Oil income is way down as well. (Oil is selling at $34 per barrel today.) So good luck with borrowing.

"That leaves the U.S. government with only one choice. The U.S. is about to embark on the greatest currency-creating binge in modern history (excluding that of Zimbabwe, perhaps.) A lot of that trillion dollars is going to come right out of nothing. The Fed is just going to monetize the debt. So we'll have new dollars chasing the same amount of goods. That's the basic definition of inflation.

"The bottom line is you need to own precious metals. Own gold. How much? For now, the more, the better. Own coins, if you can get 'em. Own bullion, if you can get it. Own shares in good miners with reserves in the ground while you can buy 'em. Just get some gold."

While there may a short-term pullback in the gold price, Byron believes that in the long-term, our favorite yellow metal is going to go to the moon...all the way to $2000 an ounce. If you haven't already, you're going to want to pad your portfolio with this precious metal. Find out how here .

*** On the other hand, our old friend Mark Hulbert notes that whenever investment advisors become this positive about gold the yellow metal usually goes down.

*** "Dad, this is the best house we've ever had...why would you want to sell it?"

We were sitting on the verandah last night, having dinner. Beneath us, the waves slapped against the rocks. In front of us, a long, wide beach curved around toward green hills. There are a few lights from the condominia in the distance. Above them, the stars began to sparkle in the sky and the moon lit up the ocean like an old newsreel.

To bring you further into the picture, dear reader, this is a house that we built about five years ago. At the time, we thought we might want to retire here. Property prices were rising so rapidly, we saw little risk. Besides, your editor can't help himself. Some men play golf; he works on houses. He's been at it for the last 40 years; at this stage he can't stop.

The house he built in Nicaragua is probably his best work. He didn't build it with his owns hands. "That's probably why," his wife would say. She is no fan of his handiwork. As a carpenter, she thinks he makes a good plumber. As a plumber, she would recommend him as an economist.

But with the help of a good architect and a good crew of workmen, the house went up and now is a delight. It has aged gracefully...and now looks like it has been here forever.

The idea was to build a new house on the beach that reflected the elegance and charm of Nicaragua's colonial past. And so it does. Columns, porches, arches, solid wood doors, shutters, cement tiles - all are recreated from elements found in Granada, one of the oldest cities in the country.

Unlike our other houses, this one is coherent. The whole place was done in one style...at one time...with one design. In France, for example, we have an old house, which was built, rebuilt, remodeled, expanded, reduced and redesigned a number of times over the centuries. To the architectural variety we added our furniture moved over from Maryland...ancestral portraits...sideboards that belonged to our great-grandmothers...and chairs found at a local junk shop.

We still have our house in Maryland too. It is rented out to a carpenter. We built it in the '90s...before we had enough money to build a proper house. Your editor did much of the work himself - including the wood parquet that he made from trees on the farm.

"It shows," says Elizabeth.

It is not a bad house. But it certainly wouldn't be mistaken for an elegant one.

People get attached to houses. That is why we have so many of them. We can't seem to sell them. One is an architectural gem. Another is where the children grew up. Still another is "our family home." And the last of them we keep only because we can't sell it; like one of Elizabeth's broken-down horses, we keep it because no one else will take it.

But each house is a glutton. It eats money. Time. Energy. Attention. Whoever thought houses would be good investments must not have known anything about investments. Or houses. Or women.

"Look," we said to Elizabeth, "we've got to get rid of these houses. They're costing us money. And in the spirit of the worldwide financial meltdown, we have to cut back."

"Are you kidding? They're not worth that much. Besides, the houses are solid. They're not going away. We enjoy them. We can use them. And we can leave them to our children. Not like those gold mining stocks you bought...or those Indian stocks; they lost half their value in just a couple of weeks. They could be worthless tomorrow, for all we know. I'd rather hold onto the houses and sell those stocks."

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• The World Economy is Re-examining Itself
• How Will the United States Finance the Biggest Deficit of All Time?
• The United States Matters Less and Less to the Oil Market
• Housing Market is Becoming More Affordable but That’s Not Necessarily a Good Thing
• Paying More Than 3 Times as Much for Gold

Yes, the Inauguration was historic in many ways. It was definitely a blend of many things. There was classic Americana, with the Stars and Stripes snapping in the stiff breezes. There was the Army's Old Guard unit marching to fife and drum, along with respectful references to George Washington and the Founding Fathers. Then there were elements of modern culture. We saw the now elderly veterans of the 1960s Civil Rights movement, as well as the more youthful proponents of hard environmentalism whose chief focus is climate change. There was even a "Green Inaugural Ball."

So we saw the old and the new. I think that's a key theme of this administration. How much of each? That's the big question. So stand by.

Meanwhile, what else can we discern about the incoming Obama administration? I had a long talk with an old friend who is a self-described "rabid Democrat." Let me rephrase that. He's a rabid Democrat in the way that Pittsburgh Steelers team owner Dan Rooney is a rabid football partisan. This friend of mine loves his Democratic Party. Just as Mr. Rooney wants his Steelers to win the Super Bowl, this guy's focus in life is for his political tribe to do what's right for the country. This friend of mine is also privy to the inner circles of Democratic politics. He's just plain plugged in. He's on a first-name basis with many on Team Obama.

So what's on Obama's plate? "Well, the first thing the new group has to do is stabilize the banking system," he told me. "Things are still precarious with the banks. Liabilities exceed assets by a large margin. We will probably see more bank failures - small and even some large banks. That would hurt worldwide investor confidence and lead the stock markets down. We could test the old lows of last fall."

This Democrat insider then got into other issues. "The housing crunch still has more rope to hang out, as well. A lot of the problem is isolated in a few states and regions of states - California, Arizona, southern Florida, the New York City metropolitan area, Massachusetts and a few other places. But it affects a lot of people. We're dealing with populous, overbuilt places. We are also on the cusp of a lot of failures of government entities, from localities and school districts to counties. We're going to have a lot of municipal bond defaults. We're going to see municipal bankruptcies. Some large states are insolvent. California can't meet payroll."

And there's more from this guy. "The next big wave will be that consumer spending dries up. This will lead to a failure of retail businesses all over the country. It's going to be a huge unwinding. We spent the past 25 years spending more than we could afford. Now we as a nation have to pay some big bills. It's time to save. It's a good thing, in the big scheme, for people to save. But it's going to put a lot of pain into the retail sector of the economy. We've overbuilt retail, and everything that goes with it. Too many stores. Too many buildings. Too much inventory. Too much shipping capacity. Too many containerships unloading too much stuff made in China and elsewhere. And a lot of people are going to lose jobs. I mean a lot of people. Everywhere."

Here's more from the Democrat insider. "The next two years are going to stink for the economy. Obama will face one financial crisis after another. He's going to hate Wall Street. He's going to hate bankers. Every time he turns around, the money people are going to be screwing him. He'll try to fix one problem, and five more problems will spring up like weeds. ('Only five?' I asked.)

"The coming financial issues will test the ability of the legislative branch to act with integrity in the face of a media-driven clamor. States will be lining up to borrow money from the feds just to pay unemployment compensation, let alone to fund Medicaid and road maintenance. It will test the legal system as well. Expect more petty crime and a lot more bankruptcy. But fewer people will get divorced. Who can afford that anymore?

"And think about the foreign policy issues that the financial crises will cause. Just think in terms that when U.S. prosperity declines, it takes the world down with it. The economic contraction is going to set some societies back by decades. Will people take that lying down? Or will they riot in the streets and burn down the capitol building? Expect a rash of failed states. We'll be surprised at some of the names that fall off the map. Wow, we might look back and wish for the days when the world hated us just because we invaded Iraq. Now they'll blame us for stealing their future.

"The Republicans will make political hay out of it. Unless they are totally incompetent, which you can't rule out. Democrats will probably lose seats in the House and Senate in the 2010 elections, as well as in state legislatures and governorships. But Obama will be working his own game of building consensus. He's from a new generation of politician. He's not nearly as in-your-face confrontational as the Democrats of the 1960s and 1970s era, the Kennedys and Waxmans and Barney Franks. Obama will build coalitions out of whomever he can get on board. You might not like him on issues like gun control or abortion, but you'll deal with him on tax cuts and energy investment."

So where do we go from here? Well, here's my post-Inaugural advice. Build up some cash reserves. Got that? Hold Cash! Cash in the mattress. Cash in the bank. Certificates of deposit. Don't try to get too fancy. Just save some cash where you can get hold of it in case you need it pronto.

Next, buy precious metals like gold and silver. Bullion coins or bars are my favorites. But it never hurts to buy a few quality numismatic coins as well. Don't get spooked out of precious metals if we see a price dip in the near to medium term. The dollar is in serious trouble, and eventually the precious metals will come back. Precious metals are a way of preserving your purchasing power over the long term.

As for stocks, in the near future, we could see some severe market declines. Initially, this might look like large trading spikes up and down. Unless you are a serious trader, be careful about trying to "play" the swings. Don't be afraid to sell any stock that makes you nervous. You have to be able to sleep at night.

Until next we meet,

Byron W. King
for The Daily Reckoning Australia

• Gold Falls for Four Straight Days but is the Low Price a Bad Thing?
• Gold and Silver!
• Obama Modifies His Views on Abortion and Child Rape
• A Word About the Dollar’s Decline from Our Intrepid Correspondent, Byron King:
• Everyone is Busily Debasing Their Currency

So what's ahead in 2009? Let us turn to the world's reserve currency and the last great bubble of the Bubble Epoch for answers.

First up, a U.S. dollar crash. Or should we say another U.S. dollar crash? In 2008, the dollar managed to trim some of its losses over the last five years. But with U.S. President elect Obama telling the world America will have trillion dollar deficits "for years to come," the greenback has an unprotected flank.

That flank is the bond market. With the supply of dollars and dollar-denominated debt set to explode, you'd expect the appetite for U.S. bonds to fall. And yesterday, it began to do just that. In December, 30-year U.S. bond yields were hovering at 2.51%. By the close of yesterday's action, they were above 3%.

Everyone and everyone's dog (and everyone's dog's feline foes) is calling for the popping of the bond bubble. Every fibre of our contrarian nature says to go against the crowd. After all, it seemed fairly obvious that the Nasdaq was in a bubble when tech stocks were selling at average price-to-earnings ratios of 100. And then the ratio doubled!

The point? A real bubble worthy of the name exceeds your expectations and just keeps going up. This prompts us to conduct a brief thought experiment. What could keep the Treasury bond bubble rising? Fed buying!

That's right. We know the Fed is trying to bridge the gap between government bond yields and mortgage rates. The Fed wants to make it easier for Americans to refinance into lower-rate mortgages, and thus heal the mortal weeping wound at the heart of the American economy. So it's been hacking away at the short-end of the yield curve, trying to bring mortgage rates down by proxy.

It follows that if ten-year and thirty-year yields start creeping up in response to the increase in the monetary base, the Fed will kick into action and become a buyer of U.S. government securities. Now we know what you might be thinking. At least we know what that makes US think.

When the Treasury issues bonds, it's borrowing money from the world's savers. That crowds out private investment, but is not really money printing. True, it steals from future income and sends interest and principal payments to bondholders outside the U.S. But that is a kind of monetary time travel, rather than monetary alchemy.

If the Fed, on the other hand, moves to keep a lid on Treasury yields by buying them in the open market, it will likely do so with money in wishes into existence. There's no place like credit! And don't think this will go unnoticed by the precious metals gang loitering on the corner, and its leader, Gold.

Analysts at Societe General predict an average gold price of US$650 for this year. That seems stupidly low to us. But gold has given ground the last three sessions in the face of a slightly stronger U.S. dollar, so maybe the financial institutions are right and 5,000 years of monetary history are wrong.

Or maybe not! Here's a prediction for you: gold and its precious metals brothers in arms (silver, platinum, and palladium) will absolutely ambush the dollar this year if things keep playing out the way they are.

Others agree. Former Bank of England policy maker Willem Buieter writes on his blog that, "There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place."

We recall reading in a journal or paper last year that learning actually produces pleasure in the human brain. This must be nature's way of helping is survive, by turning learning into a pleasurable experience. Buieter is right. Investors learn quickly, pleasure or not. When the risk of ignorance is insolvency, it pays to learn quickly.

And if all else fails, you can simply pay attention to what the Fed said in its December meeting notes. Not that we put too much stock in the central bank's forecasting (missing the credit bubble and later, the bust). But the Fed is telling us what it thinks will happen, and that indicates what it will probably do (hint: print money like mad!).

In the meeting notes made public yesterday in New York, Fed officials said that, "Real GDP was projected to decline for 2009 as a whole and to rise at a pace slightly above the rate of potential growth in 2010. Amid the weaker outlook for economic activity over the next year, the unemployment rate was likely to rise significantly into 2010, to a level higher than projected at the time of the October 28-29 FOMC meeting."

Got that? Economy...shrinking...unemployment...not shrinking.

Inn other words, the Fed fears a deep, deep, deep recession in 2009. It is also hyping up the fear of a deflationary spiral in order to pre-emptively justify its inflationary (if unorthodox) policy measures. Thus always the Keynesians.

A world that could use more savings and thrift, and the increase in purchasing power that comes when people choose cash over consumption, is going to be kicked into poverty and submission by fiscal and monetary policy. The government will spend. It will ask you to spend. And it will borrow to spend...all under the illusion that spending creates wealth.

But only real increases in productivity create real wealth. If spending were the easiest way to get rich, why...we'd all be rich! Of course, paper money doesn't make you rich either. And many people are beginning to get that in 2009. Watch that precious metals gang on the corner. They're looking like they're ready to make a move any day now.

Dan Denning
for The Daily Reckoning Australia

• DMCC and their Precious Metals Vault
• From the Gold Pan… Inflation, Deflation and Precious Metals
• Gold Flourishes but Silver is the Real Precious Metal Story of Late
• Central Bankers Encourage Debt Booms That Become Debt Bombs
• Hyperinflation and the Dollar’s Monetary Destiny

But U.S. investors shrugged off the employment news. The rally continued...it has gone on for a month. The Dow rose again yesterday; this time it was up 298 points to 8,934. If the rally retraces 50% of the losses, it will make it all the way to 11,000. So, this trend probably has a way to go.

Oil rose too - back up to $43. And gold shot up $17 to $769.

Commodities, stocks, precious metals - almost everything was up yesterday.

One important exception: Treasury bonds. The yield on ten-year T-notes rose to 2.76%...leading Bloomberg to report:

"Treasuries fall as US to sell more securities than expected."

Watch those Treasury yields. Along with the dollar, they are going to tell the tale of the NEXT big bubble - the LAST big bubble of the whole Bubble Epoque - a bubble in public debt.

All over the world, the feds are desperately trying to inflate their currencies. People want money. People need money. And they need to spend money.

From the United States this morning comes news that a record one in ten homeowners is either in arrears on his mortgage or already in foreclosure. And everyday brings more dudes without paychecks. With no savings...and no jobs...people are squeezed hard. They can't spend; they can't even keep up with their mortgage payments.

So, the simpleton feds are giving people more cash and credit.

As everyone knows, what got them in trouble in the boom years was spending and borrowing. So what do the Feds do? They borrow and spend more! Altogether, they're putting up more than $10 trillion to try to reflate the world economy.

Where do they get that kind of money? First, they borrow it. Then, they print it. So far, borrowing has been easy. Because, while asset prices are falling, investors lend to government in order to protect their money. And with consumers not spending, prices fall - so there is no consumer price inflation to worry about.

In fact, food and energy - key components of consumer prices, though not of the core CPI - are actually falling. And when prices fall, consumers have an incentive NOT to spend, because they will be able to get what they want at lower prices in the future. That's when a recession gets to be serious; it's what happened in Japan. And there's not much the feds can do about it, because they can't push their lending rates below zero. So, the feds are sweating deflation - not inflation. They want to avoid it in the worst possible way.

What's the worst possible way to avoid deflation? Print money. 'Governments can always avoid deflation,' says Ben Bernanke - but only if they're reckless enough to risk runaway inflation. 'And you can really make a mess of things,' Gideon Gono might add, if he had any idea of what he was doing to Zimbabwe.

And it can happen suddenly. There are huge piles of cash - in T-bills, in money-market funds, in foreign central vaults waiting out the crisis. At present, the owners of this cash are more worried about deflation than inflation. But at some point - maybe in 2009...probably in 2010 - that will change. Borrowing and lending money will prove ineffective. Real inflation - otherwise known as the kind of money that comes from trees - will be the only option left. Eventually, the feds will get the hang of it...inflation will soar...investors will dump dollars and T-bonds...and the last bubble, in government debt, will blow up.

*** "The great inflation continues," says Strategic Short Report's Dan Amoss.

"By inflation, I'm not referring to rising prices. I mean the creation of new fiat money and government credit amid this environment of fear and money hoarding. Lately, banks have hoarded excess reserves at the Fed, so this new money and credit is a long way from influencing consumer prices. But this condition is not likely to last much longer, and may be a function of banks wanting to report the cleanest possible balance sheets at year-end."

"The latest inflation initiative was leaked earlier this week from the Treasury Dept. Treasury clearly wants lower mortgage rates and will work in concert with the Fed to force them lower. It has not been officially announced, but sources hint that Treasury might use Fannie and Freddie to bring down 30-year fixed mortgage rates to the 4.5% range.

"Many commentators note that government-imposed price floors for mortgage securities are no way to solve a problem rooted in a debt bubble. I agree, but I expect it to happen anyway, with the consequence of extreme dollar debasement.

"So despite their current lack of popularity, I expect inflation hedges, including gold and oil, to rebound strongly in the coming months."

*** Our world tour continues. We've left the smells of Mumbai - spice, sweat and smoke - for the clean comforts of Melbourne, Australia.

But everywhere we go, there we are. We carry our doom and gloom with us, along with our toothbrush.

"Australia is no different," says a colleague. "People lent money too freely and spent it too readily. House prices soared. Debt went a little crazy. But Australia is more like South Africa than like India. It's a resource economy...so we went bust later...when the commodity bubble blew up. And when we went bust, we went bust hard. These commodity producers are down even more than the NASDAQ or the Dow. And now unemployment is rising. It was as high as 15% in the early '90s, the last time there was a slump in Oz."

But don't worry, dear reader. The feds "Down Under" are taking action. They've promised to send out a check - to qualifying parents - for $1,000 per child. Senior citizens will get $1,400.

Why the giveaways? Don't be so thick, dear reader; it's the worldwide financial crisis. The feds can get away with anything.

Sending out checks is a simple way of "reliquifying" the economy. Especially if you send the checks to poor people. They spend the money.

"TVs and hookers," says Dan Denning. "They're both bound to go up..."

Sending money to people probably works better than bailing out Wall Street. If what you're trying to do is to encourage people to spend, the best thing to do is to put as much money in as many hands as possible. If the government wanted, it could send everyone a $10,000 check...or even a $100,000 check. Of course, the bigger the check, the more obvious the scam.

Nobody bothers to think about it - especially not in a crisis - but if they spared a minute to reflect on it, they would notice that it is nothing more than fraud and grand larceny. In order to put money in some people's hands, they have to take it out of other people's pockets. Or, just print it up. Either way, resources are stolen and redistributed. The rightful owners of the money get less of what they wanted. The beneficiaries - whether they are Wall Street's insiders...or single mothers in the Outback - get more.

*** Sign of the times: a headline on the web this morning: "How to look gorgeous - on the cheap!"

Until tomorrow,

Bill Bonner
The Daily Reckoning Australia

• Where Do the Feds Get Any Money?
• Deleveraging Will Give Us a Bout of ’30s-Style Deflation
• A Battle Between a Natural Market correction and an Artificial Attempt to Avoid it
• The Feds Are Counting on Fannie and Freddie to End the Nation’s Housing Misery
• Deflation is on the March