So how does she quantify "relative peace and security"? Well, one good way is to look at the value of the dollar, which would be strong if the country was a good investment, which it was, and in fact, "It had not only retained one hundred percent of its value, it had gained eleven percent. That's right. The dollar we started with in 1776 bought us eleven percent more after almost seven generations."

Then, on the "quiet 23rd of December in 1913", J.P. Morgan and buddies got Congressional quislings to pass legislation authorizing the creation of the Federal Reserve, and to which I add that the jerk Woodrow Wilson then signed it, thus going down in history as the disastrous guy who set in motion the destruction of the dollar by the Federal Reserve creating excess money and credit.

She doesn't make a point of it, but back then, the dollar was still gold, and thanks to the loathsome Federal Reserve creating the money to finance the bubbles of The Roaring Twenties that resulted in the Great Depression, the despicable Supreme Court infamously ruled in 1933 (and upheld by every traitorous Supreme Court case since then) that, contrary to what the Constitution said, the dollar did not have to be made of silver or gold, and that a paper "fiat" currency could be created, without limit, for any reason, even at a mere whim, anytime, day or night, 24/7, including holidays, not realizing that they were the idiots that REALLY destroyed the dollar! Gaahhh!

With this kind of disastrous stupidity, I dryly and humorlessly ask that you don't talk to me about any "wisdom" emanating from the Supreme Court.

I was hoping that Ms. Lilley would spontaneously pick up on the theme of "heap scorn on the Federal Reserve for creating too much money and credit out of thin air and the despicable Supreme Court for letting them."

I was going to suggest that she could, you know, maybe even put in an endorsement for the Mogambo Mindless Mob (MMM) brand of products, like the popular Mogambo Pitchfork (very effective when brandished threateningly) and the classic Mogambo Flaming Torches that will be so hard to get when the proletariat bozos start forming mindless mobs bent on revenge after so much hurting from the horrifying inflation in consumer prices, the pervasive, lingering economic depression, ruination, bankruptcy and the embarrassment of realizing that it was caused by the people we elected to Congress, who picked the people to run the Federal Reserve, which is the biggest failure one can imagine and should be immediately abolished, how Ben Bernanke, its chairman, should be turned over to me for some sessions at my new Mogambo Re- Education Center, where our muscular, trained technicians will slap the hell out of his stupid face, and the stupid faces of Congresspersons (except Ron Paul), and the stupid faces of anyone who still believes in getting, or giving, a free lunch to, or from, anyone, especially the government, which is so corrupt that it once gave smallpox-infected blankets to the American Indians, which is only marginally worse than destroying the currency of the country and makes you reflexively scream in horror every time you see the money supply go up.

Well, it does me, anyway.

Instead, she goes on that the result was that since then, "the purchasing power of a dollar has plummeted over 95%", which means that "We now pay twenty times more than J.P. Morgan did for any item." Yikes!

Suddenly, my ears pricked up as she said, "Few have written on the mechanics of getting back to sound money", which I immediately noticed makes me a genius, meaning that people should worship my gigantic brain, my wife and kids should stop calling me "idiot" and saying how much they hate me and maybe I should get a Nobel Prize.

The reason I am suddenly so enamored of my intellect is that achieving a "sound money" is the easiest thing in the world! Just stop creating more of it! That's all you need! It's simple! It is my Profound Mogambo Genius (PMG) that has solved the puzzle!

Okay, I am embarrassed that I got carried away there, and I admit that I am not very smart, and that is why I stole the whole idea from the fact that this is all the gold standard did; it prevented increases in the money supply, and the only thing that Congress had to worry about was doing smart things so that gold came into the country (increasing our money supply) and not doing something so stupid that it went someplace else better (decreasing our money supply).

But those days are all over now, and the only people who are buying gold, along with silver and oil, are the people who know what happens to an unsound, fiat currency (like the dollar) in the hands of a government composed of a bunch of socialist, commie-think yahoos (like the US Congress) that willingly deficit-spends insane amounts of money thanks to a central bank (like the Federal Reserve) creating it and a population sitting around saying, "Duh! Okay with us!" Hahaha!

We're freaking doomed!

Until next time,

The Mogambo Guru
for The Daily Reckoning Australia

• Gold in the Art of Bread Consumption
• Federal Reserve Has Destroyed the Economy
• A Government of Spendaholics
• Oil Prices Has The Mogambo Guru Sticking His Thumb in His Eye
• Greenspan and His Demented Federal Reserve Chairmanship

"What's going on? When will this be over? How bad do you think it will get? What can we do to turn this around?"

Members of Congress have the same questions the rest of us have. They read the same claptrap in the newspapers. They hear the same balderdash explanations from economists and federal officials. They're wondering what is really going on.

Not that we know. But they asked us anyway.

We report to you today from the banks of the Potomac. Our old friend, Congressman Ron Paul organized an off-the-record discussion with several other members of Congress. The subject was the financial meltdown...and the bailout. We were there to talk, of course, but we were more interested in listening.

"You don't understand," said a Senate functionary we met later, "these people live in Bubble World. They're protected from the real world by their staffs and by the system itself. You imagine that they would know what is going on. But they don't. They know less than we do. And they'll be the last to find out. They are so busy meeting constituents...dealing with donors...working out deals with their political parties and supporters...and feeling like big shots...they don't really have any time to study the issues. So they count on staff and party committees to tell them what to say, how to vote...and what to think."

Waiting in the corridor of the Cannon building, two men in grey suits walked by...we overheard this conversation:

"Did you vote 'no' on that last resolution? You were supposed to vote 'yes.'"

"I thought I was supposed to vote 'yes' to cutting off the argument...as far as I'm concerned we've heard enough about Nancy's problem with the CIA..."

"But that wasn't about cutting off the debate, that was just technical...about allowing them to modify the previous vote..."

"What are you talking about?"

"I don't know...I didn't think it had anything to do with stopping all this gabbing about Nancy and the CIA..."

We take it for granted that members of Congress often don't know what they are talking about. But it is shocking to realize that they often don't know what they are voting on either. And neither do the voters.

The Economist reports, for example, that the measures put before California voters in a recent plebiscite were challenged...not by the courts, but by a grammarian. She claimed they were worded it in such a way that it was impossible for a reasonably intelligent person to understand what they were supposed to mean.
Since the meeting was "off-the-record," we can't tell you who was there or what they said. We can only report what we had to say.

"Look...economies...and empires...go in cycles," we began. We thought we ought to start with the basics, since we didn't know what they thought.

"Growth...maturity...then, decline. That's just the way it is. So in order to get an idea of what lies ahead you have to figure out where you are in the cycle.

"You never know for sure, but there are tell-tale signs. The credit cycle, for example, has been on an upswing in the US since the Great Depression. First, there was in-store consumer credit as early as the '20s. There was some mortgage credit...and some margin credit for investors too. But during the '30s, the financial strain was so great that most people regretted their debt and paid it down. Or they defaulted.

"You could get a mortgage back then if you put 50% down...and paid it off in full in 3 to 5 years. And then Franklin Roosevelt set up the FHA...along with Fannie Mae. And pretty soon, you could borrow 80% of the house price and pay it off over 15 years.

"Major credit cards - MasterCard and Visa - didn't become widely used until the '60s. And then, credit began to rise more steeply. Total debt had been about 150% of GDP in the '50s and '60s...but it rose quickly after the '80s. By the 2000s, you could get a mortgage for 110% of your house price - an inflated price at that. And you could take 30 years to pay it off.

"As for credit cards, hardly a day passed when you didn't get a new one in the mail...usually with a higher debt limit. Debt rose...and rose...and rose...up to 350% of GDP. And finally, the whole debt bubble blew up.

"You have to remember that the US economy - in fact, much of the whole world economy - came to rely on more and more debt as a way to expand. At first, a fellow could borrow $1.50...he'd spend it and invest it...and it would lead to an increase in GDP of $1. But, as time when by it took more and more debt to produce more GDP. The fellow would borrow a $1.50...but then, part of it would have to be used to pay the interest on what he borrowed before. Eventually, it was taking more than $6 to produce a single ounce of GDP.

"You can see that this won't work for long. GDP is like national income. You can't have debt increasing 6 times faster than income - at least not for long.

"But remember, the US economy depended on this debt-fueled growth. Without the extra credit, the economy would slip back...which is what is happening now.

"We've reached a turning point. The financial industry has blown itself up. It realized that all those credits it had, from people who didn't have the cashflow to repay their debts, weren't worth what they were supposed to be worth. We're now on the downhill slope of the credit cycle...and most likely, the imperial cycle too.

"What everyone wants to know is how long it will take before we have a genuine recovery. And then, everyone...everyone...seems to think that the government can stir up new growth by pushing more debt onto the public...this time, public debt. And get this...the feds are now adding debt to the system at a rate four times greater than the previous record.

"They...you...are running a budget deficit of $1.8 trillion this year. Could be higher. How much in extra GDP do you get from all that extra debt? Well, that's a good question...because GDP is now going backwards. The latest numbers show output going down at a 6% rate in the US. And that's one of the world's better rates. Exporters - notably Germany and Japan - are doing much worse. GDP is falling 14% in Germany. It's going down at a 15% rate in Japan.

"So, the feds are adding trillions in new credit (debt) and getting no GDP growth from it - zero...zilch...nada. In other words debt is growing infinitely faster than GDP.

"How long can this keep going? No one knows. But one thing we do know is that the economy is not going to start up again and deliver good, old-fashioned, healthy growth. We're in the process of deleveraging. That is, we're on the downside of a credit cycle. We're getting rid of debt, not adding to it."

If we'd had today's newspaper in front of us, we would have pointed at the headlines.

"Recession Turns Malls Into Ghost Towns," says the Wall Street Journal. Malls are emptying out because they were built for a world that no longer exists. They were built for a world where people increased their debt and their consumer spending far faster than they increased their real incomes. Now that people are cutting back on spending - in order to reduce their levels of debt - they can no longer afford to go to the mall. As a business or an investment, malls have got to be bad places for your money.

"The private sector is not going to take on more debt," we continued our explanation. "People know it doesn't pay. And they've got too much already. The private sector is not going to begin a new growth period until they've paid off, worked out, defaulted on, or shirked a lot of their present debt load. We've estimated that they need to get rid of about $20 trillion worth. And that's going to take time. And a lot of painful decisions by a lot of people. Bad business, investment and spending decisions need to be recognized...and fixed. Debt needs to be reduced.

"And that's why this downturn is not going to end tomorrow."

If we'd had the mall example in front of us, we could have explained that a mall represents a kind of bubble-era investment that now needs to be restructured. After America's industrial age was over, the country found itself with empty factories and warehouses. They were mostly written off and destroyed. Some were converted - into lofts and shopping malls. Now that the retail age is over, we'll have to find new uses for malls too.

"This is going to take time," we told them...and then we took a break to listen...and eat some shrimp.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

• Statistically One Vote Doesn’t Make Any Difference
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• Markets Rise While the Economy Sinks

He's probably right. In the old days, "panics" and "depressions" ended fairly quickly...at least unemployment tended to be short-term. There were no elaborate social welfare systems then. No unemployment compensation. No food stamps or "independence" cards. People had to make do.

So, when a depression hit, wages fell quickly and people got back to work. They earned less, but the whole economy would adjust, with lower prices for everything.

There were no bailouts and no stimulus plans, either. Mistakes were corrected relatively quickly. Businesses went broke. Men were "ruined" and had to drink themselves to death.

Now, things are better. If their businesses go broke, they can go on almost as if nothing had happened... as long as they owe money to the right people. Heck, they might even get a bonus.

On Friday, the Dow dropped 122 points. What happened to the rally? Is it over already? We wait to find out.

Oil held steady at the end of the week, having risen over $50 to a high for the year. Oil's rise was entirely explained by the sinking dollar - down to $1.35 per euro on Friday.

"Dollar sell-off gathers momentum," explained one headline. "Gold soars," Bloomberg added.

Gold shot up nearly $70 an ounce on Thursday. It took a rest on Friday...but we don't think it will take a break from its epic run for long. Take advantage of this pause in the gold price and buy some now. You can still purchase the yellow metal for just a penny per ounce.

But back to the story of the 15-year depression...

Goldman says it wouldn't have lost much money if AIG had been allowed to go broke. So, don't think for a minute that it wanted the government to save AIG just so Goldman could get its $20 billion back.

The public and its paid representatives in Washington are up in arms. Reporters have been following the trail of the hundreds of billions of taxpayers' money handed over to Wall Street firms. They discovered that it went into various silk-lined pockets - notably, those of the aforementioned Goldman Sachs, foreign banks and the bankrupt firms' own executives. The politicians were shocked. Shocked! The public was outraged.

Whence cometh this outrage? Not from any matter of principle that we've been able to determine. The taxpayers don't mind robbing Peter. But they don't like it when the ill-gotten gains go into someone else. "Hey, my name is Paul and I've been out of a job for six months," they say. "Where's MY bonus?"

Congress sprang into action last week to set things right. But rather than give every Tom, Dick and Harry a big bonus, the House proposed a 90% tax on the AIG bonuses...and urged the states to take the other 10%.

The whole thing is a dangerous distraction, in our opinion. The bonus amounts are trivial in comparison to the huge amounts of the bailouts. And when the pols start taking money away from people our sympathy is with the takee, not the taker. Besides, it encourages a very bad idea: that politics, rather than a free market, should decide who gets what.

The next thing you know, they're going to be telling us which businesses succeed and which fail. Wait a minute...they're already doing that!

Which is why Ron Paul thinks we're going to have a depression that lasts longer than most marriages. When markets are allowed to work, they often make mistakes - especially when government is fixing interest rates. Periods of growth are punctuated by crises - including sharp breaks in business activity and bouts of 'creative destruction.' Like forest fires, these episodic conflagrations burn off the dead wood, permitting new growth.

But when government allocates capital and resources, it is almost always a soggy disaster from beginning to end. The dead wood never gets cleared away. Instead, it is protected...propped up...leaving the new shoots to struggle in the shade. Not much growth, in other words.

We repeat: there were only two examples of major depressions in the last century. Both came after a huge run-up in debt. And both were met with programs that economists should be ashamed of - bailouts, stimulus, loans, props, safety nets and hooks. In both cases - the '30s in the United States and the '90s in Japan - the depressions continued, on and off, for many years. WWII brought an end to the first one - 12 years after it began. The second one continues - nearly 20 years after the crash of the Tokyo stock market.

And now we have a third one...and this time the feds are determined to beat it. What's their strategy? More firepower! What's their secret weapon? QE, or quantitative easing, which is actual monetary inflation caused by buying debt directly from the government.

Will it work? Will Geithner/Bernanke succeed where others failed? Will economists finally master depressions...and find a way to get "creative" without the destruction?

Ah...we think we know the answer. But in the meantime, we're enjoying the show...

And now we turn to our friends in Charm City, to see what they have for us today...

"Commodities ain't dead yet!" declared Chris Mayer, lending the editorial team at The 5 Min. Forecast a hand. "People ask me if the price spike in 2008 was a bubble. My gut says it wasn't. Overlay the 1966-1980 commodity bull market on our own and you see an interesting picture:

"While the 2008 sell-off was much steeper than what happened in the 1970s, it's not out of line with historical experience. The biggest rally in commodity prices could still be ahead of us.

"If you go back even further and look at the 1929 crash and its aftermath, you get a similar picture. Commodities tanked after the crash. Take corn, for example, which lost nearly 80% of its value from its peak in 1929 to its low in 1932. Yet by '37, corn put in a new high. It was 20% higher than the 1929 peak. Put another way, the price of corn rose fivefold from the bottom - and this during the Great Depression!

"Commodities still have legs, especially with the Fed playing loose with the dollar. The action this past week was just a prelude. Expect the world of useful commodities to hold value better than the dollar. Not only the headline-grabbing oil price, but also food prices. The retail price of food rose about 6% last year. I'd expect we'll see food prices - and other commodity prices - rise again this year."

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

Back to Bill, reporting from merry old England...

What is quantitative easing? It is hocus-pocus. It is a scam. It is based on the broadest, most obvious lie: that you can create money 'out of thin air.'

Why are the feds - in Britain, Switzerland and the United States - doing it? We leave the Swiss to their own peculiar circumstances. In Britain and America, the feds have pushed central bank lending rates about as far down as they'll go. And both governments have begun the usual sort of bailout efforts. What else can they do but inflate the money supply?

Will it work? It depends on what you mean. In a sense, it is already working. The feds have shown the world that they are serious about inflating their countries' money supplies. Investors have bought gold and sold the dollar and the pound. If they can inflate the currency, they cause debts denominated in the currency to evaporate. During the boom phase, Americans and Brits spent money they didn't have and ran up debts they can't pay. The economy can't grow until those debts are reckoned with. Inflation will reduce them. Of course, if it gets out of hand, it will destroy the entire world financial system.

*** "The pump doesn't work..."

Elizabeth might have been talking about quantitative easing. As it turned out, she was about to provide another reason why real estate can be such a bad investment. In Normandy, we have a small farm with about 30 cows. A pump pulls water from a spring and runs it out to the watering troughs. But the pump overheated and burned up. This happened in October. So, a plumber was called. He installed a new pump. That one burned up too.

Elizabeth tells the rest of the story:

"I was losing confidence in the plumber. But what did I know? Then, he put in another pump in December, and that one froze. That was not his fault, he said, because we had not insulated the pump house...so I had to buy another pump. Well, after about a month that one froze too, even after he had supposedly insulated around it.

"And then, when they stopped freezing, they began burning up again. That pump house must be like the moon. It is either way too hot or way too cold. I told him that I was going to look for another plumber. We've got to have water for the cattle. When the pump isn't working, poor Nicholas has to go around with a big tank of water behind the tractor and fill all the troughs himself. And he told me that if we don't get this water problem fixed soon, he was going to quit. I think he's just about had enough. So, I was going to switch to another plumber, but this fellow insisted he knew what he was doing so he came and installed yet another pump last week. Nicholas looked at it and told me that it wouldn't work. It was apparently a submersible pump. It was supposed to go down in the well. So, naturally, without the water around it to keep it cool, it burned up immediately.

"I asked Nicholas about the plumber. He said he knew Mr. Thierry. Apparently, he inherited the business from his father. But Nicolas told me his father was not really a plumber. He sold washing machines. And he said that he bought a washing machine from the father and it broke down almost immediately. He thought it was installed badly. He thinks the son is continuing the family tradition of incompetence.

"After the submersible pump burned up, the plumber told me it was our fault all along because there was a leak in our water line, so the pump was sucking air - causing it to burn up.

"I told him that I wasn't really buying a pump from him...or paying him to install the pump. I just wanted water. It was up to him to make sure he had the right pump and that it was installed correctly.

"After all this, you'd think he'd give up. I told him to take his pump out, but he got mad and came back and installed yet another pump - this is unbelievable - and brought about a mile of big plastic pipe, which he ran out to the spring, in order to be sure there was no leak. And he put the thing together and left...sure that he had solved the problem.

"But Nicholas just called to tell me that the pump had stopped working."

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

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• Price of Water Rises in China
• Water Usage by Big Companies
• Barack Obama and His Nobel Peace Prize
• Great Depression Survival Guide, Part II

Ah yes, the future. What does it hold? Well, apparently more lay-offs and CEO pay rises. Judging by Sol Trujillo's $20 million goodbye handshake and the actions of the board at Pacific Brands (giving themselves raises while sacking workers) it looks like there are some people out there doing their level best to run the good name of their corporation into the grounds.

Don't they know that's bad for business?

Kevin Rudd is headed over to America next month to speak with Barrack Obama about climate change, the global financial system, and others ways to save the world and improve on human nature. Perhaps he might ask him if America's US$1.75 trillion annual deficit for next year should cause global investors to worry about America's credit quality.

Again from Eric, "The cost of buying a five-year credit default swap (CDS) to insure against the possible default of U.S. Treasury bonds reached 100 basis points for the first time yesterday. In English, the price of insuring $10,000,000 worth of Treasury bonds for five years now costs $100,000 - up from just $5,000 one year ago."

We've said before it's nearly impossible to default on your debt when you can print the money to pay it back. But what this normally does is send interest rates up on new short-term borrowing, of which there is a lot lately in America.

Keep in mind, the Obama budget includes about US$3.5 trillion in Federal spending, much of it to be financed with short-term borrowing. In fact, this week the U.S. Treasury is selling $94 billion in debt. The Treasury is even bringing an old-friend back from the dead. The seven-year Treasury note (which had been discontinued in 1993) will be reissued beginning with an auction of $22 billion worth today.

Can you see how government borrowing needs begin to crowd out lending to the private sector? Can you see also how we are speeding into an era where more of national cash flows are redirected to central governments for redistribution and/or the service of interest payments to foreign lenders? Can you see how directing national cash flow toward wealth re-distribution does not lead to more capital formation and wealth generation?

Ron Paul is still the only man in Washington who can see all this. He made a great point the other day that no one wanted to listen to. Credit is not capital, he told Ben Bernanke. You can't recapitalise the banking system by printing new money or extending credit.

Credit comes from available savings. That's why a high savings rate is essential the formation of future capital. We're not making it up. It's even the first sentence of the Treasury White Paper on the Capital Assistance Program.

"The financial system plays the critical role of channelling funds from savers in the economy to the investors with the ideas and ability to turn those funds into productive economic resources," the paper begins. This is exactly how recessions prepare the way for the future boom. As households reduce consumption they increase savings.

Banks can become solvent again by retaining earnings (cutting dividends like ANZ did earlier this week) and increasing their depository base (and, of course, writing down bad investments and making more prudent loans). Or, the bad banks go belly up and the good banks are able to come in and scoop up the remaining assets.

Losers fail. Winners win. Or, as Rothbard puts it, an increase in savings reflects an increased desire for cash from consumers. This is actually good for banks in the long run. But we won't run on and on about it below, although we've provided a fuller quotation for you below.

Incidentally, as we expected last week, the gold price (in U.S. and Aussie dollars) has given up some of its ground after streaking ahead. But we wouldn't be too worried.

One last quote for the day from Eric Fry on the matter, "The credit crisis does not study technical charts or read investor sentiment indicators. It does what it does. And what the credit crisis does best is destroy credit-based enterprises...and reward the buyers of non- credit-based assets like gold."

Huzzah.

Still with us? Good! How about a quick revisit of the "baseline" and "more adverse" assumptions that are embedded in the CAP plan (son of TARP) released yesterday by the U.S. Treasury. The table listing the assumptions is below. But let's give you the analysis first: crrraaaaaazzzzy!

After reading it, you'll be more convinced than ever that falling stock and house prices this year are going to be followed by a blizzard of paper money that will send inflation soaring.

Government Assumptions That Guarantee Inflationary Disaster Ahead

Source: http://www.fdic.gov/news/news/press/2009/pr09025a.pdf

How about some analysis? First, the GDP assumptions are for-at worst-a 3.3% contraction this year and a recovery in 2010. It's probably more realistic to expect a GDP contraction of between 5 and 10% this year (based on the cliff diving GDPs of Asia and Europe) and a smaller contraction of 2-5% in 2010. Although either could be much worse, as the fourth quarter GDP figure in the U.S. was already a little fishy to begin with.

Second, the unemployment projections appear to have been generated on Planet Fantastic, where the laws of gravity and reality do not apply. Has anyone generating these U.S. statistics taken a look at the economy lately?

Or are these statistics pure propaganda and fabrication, designed to obscure from ordinary Americans (and Westerners) everywhere that real wages have been fallen for thirty years and will continue to do so as global production shifts to low-wage labour markets?

"Hello? Is this the Department of Economic Doublespeak? Oh, I'm sorry, I didn't realise I'd dialled the Ministry of Untruth. Double plus un-good. Goodbye!"

Finally, how is it no one in the media picked up on the fact that the Treasury's "baseline" forecast is for an 18% decline in house prices over the next two years (under rosy assumptions about GDP growth and unemployment)? Or that the "more adverse" forecast has house prices falling 29% in the next twenty four months?

And here's a question...how could house prices fall and unemployment continue to rise without having a further massively negative effect on bank loan books?

If TARP and CAP are designed to shore up bank capital by taking some a snapshot of how banks will perform under certain scenarios, then the plans are almost certain to fail if those scenarios fail to account for increased default and foreclosure rates in residential and commercial real estate that would come in the next two years (not to mention poor performance in securitised credit cards, student loans, and auto loans...all of which would deteriorate as unemployment rises.)

And how is simply raising taxes and transferring money to the newly unemployed going to solve this again?

All we can think of now is a supernova. In the rush to repair the broken financial system (which was broken by the explosion in credit and the enormous misallocations and distortions it caused) liberals and conservatives and professional politicians of every stripe (without brains or spines) are launching every conceivable spending plan they can think of. Their goal is to tag the culpable private sector for all the blame, shift the burden for losses on to the public balance sheet and future generations, and replace the private sector with the government as the prime mover of economic life in the modern world.

Or have we missed something?

A supernova, of course, is the death of a star. It unleashes a giant amount of light, heat, energy, and radiation in one brilliantly beautiful moment of destruction. But let's not forget it's a moment of death, as pretty as it might be.

Perhaps that's where we're headed. Instead of seeing a recession as the method of re-establishing the efficient allocation of an economy's resources and capital, the banksters and pollies are going to give us an even bigger global system of paper, as Ron Paul suggests.

With the dollar-standard in tatters, the only place left to go in the artificial evolution of paper money is a global fiat standard on top of the dollar standard. We have no idea what it would look like. But you can bet there are some other folks who've been thinking long and hard about it and are more than willing to use the current crisis as an excuse to inflict it upon you.

On a lighter note, what if we are neither human, nor dancer, but singer? We ran across a story about a whistling orang-utan. You don't see that every day, do you?

It's possible that the first organised sounds by human beings were not words but songs. Or, that we sang before we spoke. In which case, today's Daily Reckoning could be reduced to the following: Aiyeeeeeeee!

Finally, the last (and longish) word from Rothbard on why booms require busts.

"The 'boom,' then, is actually a period of wasteful mal-investment. It is the time when errors are made, due to bank credit's tampering with the free market. The 'crisis' arrives then the consumers come to re-establish their desired proportions.

"The 'depression' [ed. note, Rothbard uses the word 'depression' in place of 'recession'] is actually the process by which the economy adjusts to the wastes and errors of the boom, and re-establishes the efficient service of consumer desires.

"The adjustment process consists in rapid liquidation of the wasteful investments. Some of this will be abandoned altogether (like the Western ghost towns constructed in the boom of 1816-1818 and deserted during the panic of 1819); others will be shifted to other uses. Always the principle will be not to mourn past errors, but to make the most efficient use of the existing stock of capital.

"In sum, the free market tends to satisfy voluntarily-expressed consumer desires with maximum efficiency, and this includes the public's relative desires for present and future consumption. The inflationary boom hobbles this efficiency, and distorts the structure of production, which no longer serves consumers properly.

"The crisis signals the end of this inflationary distortion, and the depression is the process by which the economy returns to the efficient service of consumers. In short, and this is a highly important point to grasp, the depression is the 'recovery' process, and the end of the depression heralds the return to normal and optimum efficiency.

"The depression, then, far from being an evil scourge, is the necessary and beneficial return of the economy to normal after the distortions imposed by the boom. The boom then requires a bust."

Some people don't want a return to normal. Bankers don't want it because it means a lot of them would be out of business for good. Investors in credit-backed bonds don't want it because it means taking losses. And politicians certainly don't want it because the sense of continual crisis is the perfect mechanism for the relentless expansion of government power in private life.

The only who want things to be normal are normal people. And they are stuck right now living on Planet Death Star; a spaceship captained and crewed by a bunch of morons who will be the financial death of us all. Or are we just whistling a bizarre Dixie?

Dan Denning
for The Daily Reckoning Australia

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"There were several stages. From the inception of the Federal Reserve System in 1913 to 1933, the Central Bank established itself as the official dollar manager. By 1933, Americans could no longer own gold, thus removing restraint on the Federal Reserve to inflate for war and welfare.

"By 1945, further restraints were removed by creating the Bretton-Woods Monetary System making the dollar the reserve currency of the world. This system lasted up until 1971. During the period between 1945 and 1971, some restraints on the Fed remained in place. Foreigners, but not Americans, could convert dollars to gold at $35 an ounce. Due to the excessive dollars being created, that system came to an end in 1971.

"It's the post Bretton-Woods system that was responsible for globalizing inflation and markets and for generating a gigantic worldwide dollar bubble. That bubble is now bursting, and we're seeing what it's like to suffer the consequences of the many previous economic errors.

"Ironically in these past 35 years, we have benefited from this very flawed system. Because the world accepted dollars as if they were gold, we only had to counterfeit more dollars, spend them overseas (indirectly encouraging our jobs to go overseas as well) and enjoy unearned prosperity. Those who took our dollars and gave us goods and services were only too anxious to loan those dollars back to us. This allowed us to export our inflation and delay the consequences we now are starting to see.

"But it was never destined to last, and now we have to pay the piper. Our huge foreign debt must be paid or liquidated. Our entitlements are coming due just as the world has become more reluctant to hold dollars. The consequence of that decision is price inflation in this country - and that's what we are witnessing today. Already price inflation overseas is even higher than here at home as a consequence of foreign central bank's willingness to monetize our debt.

"Printing dollars over long periods of time may not immediately push prices up - yet in time it always does. Now we're seeing catch-up for past inflating of the monetary supply. As bad as it is today with $4 a gallon gasoline, this is just the beginning. It's a gross distraction to hound away at 'drill, drill, drill' as a solution to the dollar crisis and high gasoline prices. It's okay to let the market increase supplies and drill, but that issue is a gross distraction from the sins of deficits and Federal Reserve monetary shenanigans.

"This bubble is different and bigger for another reason. The central banks of the world secretly collude to centrally plan the world economy. I'm convinced that agreements among central banks to 'monetize' U.S. debt these past 15 years have existed, although secretly and out of the reach of any oversight of anyone - especially the U.S. Congress that doesn't care, or just flat doesn't understand. As this 'gift' to us comes to an end, our problems worsen. The central banks and the various governments are very powerful, but eventually the markets overwhelm when the people who get stuck holding the bag (of bad dollars) catch on and spend the dollars into the economy with emotional zeal, thus igniting inflationary fever.

"This time - since there are so many dollars and so many countries involved - the Fed has been able to 'paper' over every approaching crisis for the past 15 years, especially with Alan Greenspan as Chairman of the Federal Reserve Board, which has allowed the bubble to become history's greatest.

"The mistakes made with excessive credit at artificially low rates are huge, and the market is demanding a correction. This involves excessive debt, misdirected investments, over-investments, and all the other problems caused by the government when spending the money they should never have had. Foreign militarism, welfare handouts and $80 trillion entitlement promises are all coming to an end. We don't have the money or the wealth-creating capacity to catch up and care for all the needs that now exist because we rejected the market economy, sound money, self reliance and the principles of liberty."

Until tomorrow,

Bill Bonner
The Daily Reckoning Australia

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"It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest," is how he put it.

The genius of Reagan and Thatcher was that they allowed capitalism, more or less, to show its stuff. Arthur Laffer doodled the essential insight on a napkin: let people keep more of what they earn... and they'll earn more. Lowering marginal tax rates would increase gross tax receipts, he prophesied. Ronald Reagan simplified: just "get big guv'mint out of the way," and everything else will take care of itself.

The result was a boom the likes of which the world had never seen.

Barclays Equity Gilt study, which the bank has been publishing for the last 53 years, takes a long view of the performance of British stocks and finds that for nearly 100 years - from 1899 to 1985 - U.K. stocks actually lost investors money. Compared to retail prices, the real return on equities over that entire period was negative. But in the 20 years following, share prices - in real terms - more than doubled.

In America, the capitalists' stock rose even more. The Dow index went up more than 1,000% from '82 to 2000.

Nor was this boom confined to the Anglo-Saxon economies. The Russians wised up fast, knocked down the wall, renounced communism and cut tax rates down to a third of the level in Britain. The Chinese kept their government but changed their creed: 'To get rich is glorious,' said Deng Shao Ping. The Indians dropped the "license raj" and got down to business. The whole world bustled and boomed.

But into this Eden of capitalism slithered a serpent. And the snake teased and tempted all who would listen. "Spend... leverage... speculate," he hissed. To the marginal householder he said: don't be a fool; borrow... buy a bigger house... it will only go up in value. To the marginal lender, he said: don't bother verifying income or checking financial statements; you can sell the debt to Wall Street. To the speculators, the financial engineers, and the genius banks, hedge funds and investment houses he whispered: make some dodgy loans... go for risky, high yield investments; if you get in trouble, there's always the government to bail you out.

Capitalism was just doing what it was supposed to do. Success leads to excess... and then to failure. But the juice in the credit system quickly dried up. The British bank, Northern Rock (LON: NRK), for example, was worth 5.3 billion pounds last year. At the moment it was nationalized on Sunday, it was worth only 375 million - a loss of 93%. The market in complex derivatives worldwide seized up... in 2008 new issues declined 97% from the year before. Wall Street bonuses fell. Country house prices slipped.

So, it came to pass that investors, bankers, and homeowners had eaten of the forbidden fruit. And suddenly, they looked at each other and realized that they were buck-naked. They should have been ashamed of themselves. Instead, they looked around for a chump.

Then, of course, the financial titans who had showed no interest in sharing their profits and bonuses... became exceptionally generous with their losses. And the captains of their government, too, saw their opportunity when the rock began to roll. Saving Northern Rock would have staggered Sisyphus. But the U.K. government rushed in boldly where angels Richard Branson and the bank's own management had trod so cautiously.

"It is the right thing to do," said the Chancellor of the Exchequer, Mr. Darling, putting principle ahead of personal safety. "We are acting on behalf of the public," he went on, hinting that taxpayers might even come out ahead, as if the government hacks had outsmarted the speculators and bankers, and would sell Northern Rock back to investors at a profit.

'Capitalism doesn't work,' said the sore losers and whiners. 'It favors the rich,' said the envious. "It needs to be controlled," said those who wanted their own fat fingers on the knobs and levers.

Only one candidate for America's highest office is a friend to capitalism - Dr. Ron Paul. Many people have never heard of him. To the voters, he is incomprehensible. To the press he is invisible. Winning candidates do not favor capitalism for a simple reason. Who benefits from the rough and tumble of real capitalism? Nobody in particular.

Whose company will win the race for better technology? Which hedge fund will bet right on the direction of bond prices? Who will win the contest to make more money? Nobody knows. Particular groups vote for their particular interests now, while the real beneficiaries of capitalism - the unborn, the untested, and the unimagined - don't vote at all.

The baker, for example, wants his own costs controlled and the bakery across the street put out of business. The factory owner wants the borders sealed against foreign imports. And the working man thinks he should have his job as a matter of right. What they all want is protection from capitalism... from the future... and from the unknown. Everyone wants a softer cushion under his derriere and he'll vote for the politician who offers it to him most convincingly. And almost every voter wants to stop free markets from doing what they do best: separating fools from their money. Now, at least in the case of Northern Rock, the government will have to do it.

Bill Bonner
The Daily Reckoning Australia

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