What was America's Golden Age?

It is much too soon to write the history of America's decline and fall. Still, that doesn't stop us from guessing.

We would name the period between the fall of the Berlin Wall and the fall of Lehman Bros - a period of only 19 years - as the peak of US power and wealth. Of course, Americans were dreaming during those years. The dreams were the usual imperial sort - that the US Empire was such a benefit to the rest of the world that the foreigners would support it indefinitely. Rome didn't take any chances; it forced its conquered nations to render tribute...slaves...gold...and wheat. The American empire depended on trade...and the dollar. As long as the United States had a commercial advantage, the empire was profitable. But as the 20th century aged, so did the US economy. Its competitors - notably Germany and Japan - had a big advantage. They had been bombed out in the '40s. They could build anew. America's trade advantage slipped away...and then its trade balance went negative in the mid- '80s. It has been getting more negative almost every year.

The trade losses shrank after the fall of the House of Lehman. Americans cut back. But today we get news that the trade deficit has just grown more than in any month in the last 10 years. Have Americans suddenly become big spenders again? Probably not. But we'll have to wait for another explanation; we don't have one.

No account of America's glory years - roughly the period between the reign of George Bush I and that of his son, George Bush II - would be complete without mention of the events that happened on this day eight years ago. A small group of terrorists pulled off an amazing coup - bringing down two of America's iconic buildings, right in the heart of New York City...and on primetime TV! Historians might be tempted to use this event as a milestone, marking the end of the period of maximum happiness in the United States of America. We caution against it. It was only later that it became apparent that the US reaction to the terrorist incident was suicidal. The nation desperately needed to bring its ambitions back in line with its means. It needed to save and invest in new factories and new infrastructure. Instead, it wasted trillions fighting phantoms and nobodies. But as far as anyone knew, US influence, prestige and power remained near its zenith throughout the wars on terror and Iraq.

The fall of Lehman changed things. Then it was obvious that not only was America vulnerable, she was an enemy to herself. She had diddle- daddled during the glory years, dawdling with the lion cubs that would grow up and maul her. Now, in the period we are living through, she attempts to go back to sleep and rerun her balmy dreams. That is what "recovery" is all about - a return to the land of nod and nonsense...in which people think they can actually become wealthier by squandering money they don't have on things they don't need.

Fortunately, as near as we can tell, most private citizens are now awake. A report at the beginning of this week showed that they repaid debt at a rate four times faster than economists projected. Savings rates are rising. Spending is falling. People are doing what they should do - they're cutting back.

But the feds continue their efforts to sabotage the correction and destroy the empire. They have already blown-up the budget - with $9 trillion in deficits expected over the next 10 years. Now, they're working on the dollar.

Yesterday, the dollar fell to $1.45 per euro. Gold remained just below the $1,000 an ounce mark. And the Dow rose 80 points.

Stock market investors seem to be looking forward to another big bull market. But with the economy deteriorating, they are probably just dreaming, too. Median household income fell 3.6% over the last 12 months. Of course, that's just what you'd expect in a correction. But it's not what the feds were hoping for. So, they're pulling out all the stops to try to turn it around. Most important, they're pulling out the stop that keeps the dollar from rolling down the hill.

But the dollar will eventually come tumbling down...and those who are holding gold are going to be sitting pretty. Gold is, after all, the ultimate store of wealth.

The empire sinks into the mud. Yes, this is the downhill period...the slide into corruption...the period in which Juvenal complained that Romans were only interested in 'bread and circuses.'

When you are on the board of a decent corporation, for example, if you have a direct financial interest in a matter under consideration you're expected to 'declare an interest' and absent yourself from the vote. But in a mature democracy, the most self-interested citizens are those most likely to vote. Currently, about 20 million people work for government. About 45 million receive Social Security benefits. About 34 million depend on food stamps.

(People who count on the government to feed them, warned Jefferson, "will soon want bread." That doesn't seem to worry many people. But at least the state of Maryland has an Orwellian sense of humor about it. People who depend on government for food are given "Independence" cards.)

That's 99 million people who have a direct interest in expanding government outlays...with some overlap, of course. And it doesn't mean that every person receiving a Social Security check is going to back the feds. But it doesn't count all the millions more who get subsidies, bailouts, welfare payments (often masquerading as tax credits), government contracts, and so forth, either.

Well, how many people does it take to win a national election? Obama won with 63 million votes.

The dollar's weakness hasn't been missed by it biggest foreign holder - China.

Reported earlier this week in the Telegraph:

"'We hope there will be a change in monetary policy as soon as they have positive growth again,' said Cheng Siwei...talking about America.

"'If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,' he said.

"China's reserves are more than - $2 trillion, the world's largest.

"Mr. Siwei continued: 'Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets,' he added."

Then, two days ago, in came a report that China is going to issue bonds of its own - in yuan.

This news is a shot across the bow of America's imperial currency. It signals that China is moving into position to eventually challenge the greenback. Investors will have another alternative to the dollar...another bond issued by another government and backed by another economy...maybe one that is on the way up, rather than on the way down.

Meanwhile, Americans grow poorer. Bloomberg reports:

"'The decline in incomes we're seeing certainly has implications for consumer spending, particularly post-housing bubble when families can't tap into home equity through loans,' said Heather Boushey, a senior economist at the Center for American Progress, a research organization headed by John Podesta, a leader of the Obama administration transition team.

"The poverty rate is likely to keep rising through 2012, even after the recession ends, adding to pressure on the Obama administration to enact a second economic stimulus package, said Isabel Sawhill, a senior fellow at the Brookings Institution in Washington, a policy research group.

"'We will likely have not only a jobless recovery but also a poverty- ridden recovery,' Sawhill said. 'The stimulus money is going to go away long before the poverty rate peaks.'"

How can a consumer economy grow when its consumers are becoming poorer? We take up that question below...

Bill Bonner
for The Daily Reckoning Australia

• America’s Decline as a Great Empire
• Economy Has to Grow at 1% to Stay Even With Population Growth
• America, An Empire You Can Trust?
• The Rise in the Dollar Doesn’t Have Everyone Convinced
• China and its Trade

It's back to business. No more long lunches. No more afternoons painting windows. No more soirees in the evening.

We return to our lonely métier - chronicling the decline and fall of the US economy...and the Anglo-American empire too....

Two bits of news signal the scale of this trend. But first, here's one two-bit piece of news: the Dow lost 185 points yesterday. Could this mark the beginning of the end for the rally? Yes, it could. Should you be out of US stocks? Yes, you should.

But let's turn back to our 'decline and fall' chronicles...

From Florida, comes news of the first drop in population in 60 years. "Unemployment is soaring," reports USA Today. "Florida is second to California on foreclosures."

Yes, dear reader, there is trouble in the sand states...

Florida lost a net 58,000 people this year...for the first time since the 1940s.

Why would that be? We'll take a guess. Florida is a state where people go to retire. It is where people go when they stop producing and begin consuming. The major industry in the state was housing...building houses for consumers!

But now, the turn has come. Fewer people have money to consume. And those who do are keeping their money in their pockets. We even saw a report in The Wall Street Journal that people are cutting their own hair to save money. They're also staying put, rather than moving to Florida. So Florida needs fewer new houses...and fewer people to build them.

Second, from national income statistics comes a report that the typical US household has less discretionary spending than at any time in the last 50 years. Why? Americans have no money to spend because they already spent it! Now they're paying the price. And it will take years - maybe 10 years, maybe longer - before they've paid down their debts to more comfortable levels. In the meantime, they are poorer than they've been since the Eisenhower years.

Keeping it simple: Our view is that there is a major transition underway. There will be no genuine recovery, not now...not never. That is not to say the world economy is doomed to perpetual darkness and misery. Not at all. What it's doomed to is a long period of adjustment...with high unemployment, on-again, off-again recession, and desperate efforts by the feds to return to the good old days of the bubble years.

But there's no going back. It was as if the economy was playing a game of Russian roulette...and then the pistol went off - the debt bubble blew up. Once the bullet left the chamber, the game was over. Recovery? Forget about it. The old economy isn't going to bounce back; it's dead.

Still, just because a thing is hopeless doesn't make it unpopular. The feds are fighting the correction every step of the way. They're propping up brain-dead companies...and keeping zombie banks going by feeding them the blood of taxpayers. It's ghoulish...it's a very scary movie!

Unfortunately, the ghouls vote! And everywhere the feds look there's a campaign contributor or a lobbyist or a voter...and they all want the A-positive blood of taxpayers. They look to the feds for a transfusion in order to keep living in the style to which they've become accustomed...

Just what you'd expect, in other words. And with so much debt in the system, the feds are desperate to raise inflation levels. They must increase the CPI to persuade consumers to spend money rather than save it. Otherwise, the nation risks falling into a deflation trap - the very thing Ben Bernanke has pledged to avoid. So they'll continue going down that road - towards inflation - until they finally get there. And they'll keep pressing harder and harder on the monetary accelerator until they finally run into a tree. Again, just what you'd expect.

So, where's the surprise? We're on the road to destruction; that's clear. But it may be a much longer road than most people expect.

Ambrose Evans-Pritchard in London's Telegraph:

"'The current financial crisis is unlike any others,' says the Bank for International Settlements. Lasting damage has been done. The 'cumulative output loss' is likely to reach 20pc of GDP in the major economies.

"The message is the same at the International Monetary Fund. 'The world is not in a run of the mill recession. The crisis has left deep scars. In advanced countries, the financial systems are partly dysfunctional,' said Olivier Blanchard, the Fund's chief economist.

"It has certainly alarmed US retail tycoon Howard Davidowitz. 'As a country we are out of control, we're in a death spiral,' he said.

"Jeff Wenniger from Harris Private Bank says an army of baby-boomers have seen their old age plans shattered by the housing bust. Their nightmare is here. They will have to spend less, and save more. 'Generational destruction of a society's balance sheet will not rectify itself in a matter of months.'

"'How about a quarter century?'"

Bill Bonner
for The Daily Reckoning Australia

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This is the shift we've been talking about for months. The great credit expansion of 1945-2007 is over. Now cometh the great credit contraction.

During the bubble years, more and more credit produced less and less real prosperity. It was as if you were borrowing more and more, to invest in your business or merely to increase your standard of living, but your income didn't rise fast enough to keep up with the interest payments.

In 2005, Americans saved nothing. Not even aluminum foil or string. Now, the savings rate is approaching 5% of disposable income - a big turnaround.

We know from logic and experience that saving money - not spending it - is the key to getting wealthier. Saving money gives you capital. And it's capital accumulation - in the form of factories, roads, ships, buildings, machines...and raw savings - that gives people the ability to produce more. It may take a man with a shovel a whole day to dig a decent grave. Give him capital - in the form of a backhoe - and he can bury everyone in town. That's why capitalism works. It rewards the fellow who saves his money.

Yet every yahoo economist in the year of our Lord 2009 takes news of rising savings rates like the death of Michael Jackson. If households don't consume, they reason, how can a consumer economy grow?

The problem is that you can't really grow an economy by borrowing and spending.

Recent history proves it. Despite the biggest splurge of borrowing and spending in history, the US consumer economy barely grew at all.

"In the five years to December 2007," reports Grant's Interest Rate Observer, "America's credit market debt climbed by nearly 57%, to $18 trillion. However, in the same half-decade, nominal GDP was up by only $3.3 trillion."

For every five dollars people borrowed, they only increased their incomes by $1. Imagine that the borrowing had an average effective interest rate of 10% (credit card debt can be much more expensive). At that rate half of the additional income earned between 2002 and 2007 had to be used just to pay the interest.

This was not the kind of growth that was likely to last. In fact, it didn't. The whole thing came crashing down in '07 and '08. And now, the consumer has had a cup of coffee. He's looked at himself in the mirror. He's sorted through his pile of bills. And he's made up his mind: that's enough of that!

"The ratio of cash held by households as compared with assets has been rising sharply," says James Saft in The New York Times.

"Companies, households and banks all want to pay down debt and...prefer to hold cash rather than assets, partly because the outlook for those assets is poor and partly because after a decade of excess, everyone now looks a bit over-extended.

"This is exactly what happened in Japan during its lost decade, when a balance sheet recession, one characterized by the paying down of debt and liquidations of assets, was self-reinforcing and very difficult to stem."

And now this from David Rosenberg:

"The ultimate question is where all this cash is going to be deployed, and we believe it will ultimately be diverted toward debt repayment."

Let's see. We can figure this out from the numbers above. American consumers must have added about $7 trillion in extra debt during the Bubble Epoque, 2002-2007. Now, instead of buying things, they use their money to pay it down. The average household has about $43,000 worth of income. Let's keep the math simple by saying there are 100 million households in the United States...and that they save 5% of their income. And let's say they use every penny of savings to pay down debt. Hey...it will only take about 30 years to pay it off! Get ready for a long, long slump.

Bill Bonner
for The Daily Reckoning Australia

• Consumer Spending Rises
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• Why I Would Have Raised the Interest Rates
• Bill Bonner Back in the USA

"A surprisingly bleak forecast for the world economy pushed stocks to their biggest loss in two months."

That's not something we've said, that's straight from the Associated Press. It's based on research released by the World Bank.

Considering the fairly poor record of any government endorsed institution to predict the current economic downturn, we're almost tempted to think we should view this as a reason to become bullish on the global economy.

But we won't just yet.

If you fancy reading the full report from the World Bank, you can do so by clicking here. It's 167 pages of pure delight.

The World Bank is clearly in a difficult position. It needs to lay on the sauce to highlight how bad things are - so it can get increased funding - yet compliment its paymasters (governments) on the:

"[A]mbitious unilateral and multilateral actions, both conventional and unconventional, governments have drawn on monetary policy, fiscal stimulus, and guarantee programs to shore up the banking industry, which lay at the epicenter of the crisis."

All of which "are beginning to have a positive impact on financial markets."

They are certainly having an impact. Whether it is positive is another matter.

In fact, based on the story on the front page of today's Australian Financial Review (AFR), the seeds for a further slump appear to have not only been sowed, but are being nicely watered in as well.

The AFR tells us:

"Business stocks up on stimulus-package tax breaks."

The story goes on to say, "Businesses are pulling forward capital expenditure to take advantage of the Rudd government's $3.7 billion tax break for investment in new plant, equipment and motor vehicles before the end of the financial year."

Conventional wisdom, ie, the wisdom of the mainstream press, is that this is good. They'll tell us it's a good sign for the economy. They'll tell us that business is seeing the 'green shoots' of recovery. Just like they have done about rising bond yields - more on that below.

They'll also tell us this will be good when the consumer is ready to spend again next year.

We don't have a problem with predictions. We're prone to make the odd one or two as well. But we do have a problem when the entire basis of the prediction stems entirely from arbitrary and non market-driven government aid.

Let's look at the facts. Why are these businesses bringing forward capital expenditure? They are doing so for one reason only - for a tax break. There is little difference between a business and an individual making an investment purely due to a tax break.

They are both destined to end in tears, unless there is a genuine economic or financial reason for the investment. As you know, we're not a fan of taxation. But we also know that governments have no intention of lowering the tax burden. Any tax cut today, is a tax increase tomorrow.

The AFR points out Caltex is bringing forward "$9 million of pump supply and installation at its service stations." For what reason? "before July 1, when the 30 per cent investment allowance for large businesses winds back to 10 per cent."

But as Money Morning reader Andy asked yesterday on the subject of government spending, "isn't this consistent with one of the aims of government - to smooth out the cycles - by creating jobs in a recession, and restricting job growth in a boom?"

The simple answer to that is, that's what governments will tell you they do. Hence the clamour to get all the stimulus packages approved, so that government could "fill the gap" left by the private sector, and to be seen to be doing something.

What they forget to add is that it's the policies of government and central bankers that cause the problems in the first place - I guess you could argue it's only right they try and fix it! Except they just end up making it worse.

As we've stated before, government incentives and tax breaks only succeed in misallocating resources at precisely the wrong time. Currently the economy is trying to shrink. It has experienced a boom and therefore it must shrink.

Any attempts to stand in the way of this merely prolong the effects of the downturn and makes it worse.

If we use the example of Caltex above, we can assume they already had plans to invest in "pump supply and installation" at its service stations. Based on its revenues and profitability and budgeting we'll assume it had previously planned to do this sometime later than July 1st.

Perhaps much later.

However, the incentive of a government subsidy has caused Caltex to bring that expenditure forward. Possibly forward to a time when they hadn't considered it to be economic.

The government incentive changes that. We can assume therefore that Caltex is taking on extra risk by doing so. Instead of basing its decision on profitability, it is basing the decision on getting a tax break.

If we amplify this same example across the entire economy, there will be thousands of businesses contemplating exactly the same thing. They will splurge on capital goods now, just because the market is being distorted with the tax break.

Of course no-one's forcing them to do it. But that's where the fear of losing out comes in. If Business A doesn't invest now, he'll fear that his competitor - Business B - will do so, and potentially gain at Business A's expense if the economy does pick up.

Normally a business would make the judgment to invest based on expected profitability of the investment - sometimes they get it right and sometimes they get it wrong.

The real danger now is that money is being borrowed and profits spent in the hope that the increased capital expenditure will pay off next year as demand rises from business and consumer customers.

The only problem is that if all the spending is taking place now, who will be left to spend next year? Especially as the costs of these expenditures have to be built into the product price.

What happens if spending doesn't pick up? Because businesses have brought forward all their investment to today. Don't forget, there are still forecasts for unemployment in Australia to rise above 7.5% - some have even forecast closer to 10%. Companies are laying off staff, and corporate and government borrowing must still be repaid.

And it doesn't help matters when bond yields continue to rise, as you can see from an update to the Aussie Bond Yield Curve we've been publishing recently...

Interests rates are moving higher and therefore the cost to business and consumers is moving higher. That's when the impact of inflation really starts to bite.

So, far from government stepping in to smooth out the business cycle, it actually steps in to contribute to the booms and busts and damage the economy further.

Based on the reaction of the markets in recent weeks, the rose-tinted glasses worn by those who believed in a strong economy next year are starting to become a little more tarnished.

Kris Sayce
for The Daily Reckoning Australia

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Hoover Dam is perhaps the most iconic of all of these efforts. Although environmentalists might argue, in terms of its benefits such as electricity generation and water supply for agriculture and eventually urban use, it is about as useful and worthwhile a public work as anyone could ever hope for. When it was completed, it was the world's largest electric-power generation facility and the world's largest concrete structure.

Planning for Hoover Dam began in 1922, and was overseen by Herbert Hoover himself. Construction on the project was approved by Congress in December 1928 - long before the economic problems emerged. It was, in contemporary terms, as close to a "shovel-ready" project as you'd find. The initial appropriation for construction was made in July 1930.

The project officially began in September 1930. The contract for construction was awarded to a joint venture of six private companies in March, 1931. The first thing they had to do was to make a small city for the workers who would be working on the project. Boulder City was occupied in the spring of 1932. Roughly 16,000 workers were part of the construction, and many brought their families to live in Boulder City.

Initial construction on the dam project itself began with the upper cofferdam in September 1932. Construction was completed in March 1936. It was considered a great accomplishment to complete such an ambitious project so quickly.

As a result of these spending programs, the Federal budget ballooned enormously. In 1929, the government had $3.862 billion of tax revenue, and spent $3.127 billion, enjoying a surplus of $734 million. In 1932, the government spent $4.659 billion, a 49% increase despite the "deflationary" environment.

In 1931, the government had its first deficit in eleven years, of $462 million. Perhaps this, and the spending commitments upcoming, is why Hoover pushed through an enormous tax hike in April 1932, which was enacted in June of that year. The top income tax rate in the U.S. rose to 63%, from 25% previously. Inheritance taxes were doubled, corporate tax rates rose, and a long list of excise taxes were imposed. It was predicted to raise $1.1 billion in new revenue, in an effort to close the budget deficit.

The tax didn't help the economy much, however, and revenues remained weak. In 1932, revenue had collapsed to $1.924 billion, and were only $1.997 billion in 1933. The budget deficit exploded to $2.735 billion in 1932 and $2.602 billion in 1933.

John Maynard Keynes once argued that, in a depression, it would be worthwhile to pay workers to dig holes, and to pay other workers to fill them up. But how is this different than paying workers to do absolutely nothing? The main advantages appear to be psychological. "Workers" maintain a better morality and work ethic, and are less likely to revolt, than "welfare recipients." And, they can be counted as "employed," while a welfare recipient might remain "unemployed" until they actually found something productive to do in the economy.

We can see that it is not so easy to just "push money into an economy" via public works projects. The more useful they are, the more likely it is that they will take years of planning and construction. If the goal is to supposedly avoid some sort of downward spiral over the next six months, it is more likely that the funds will end up directed into something more like Keynes' hole-digging exercise.

Thus, we can see that, when short-term "stimulus" becomes the focus, the effect is more likely to be short-term welfare. There is nothing particularly wrong with welfare in a depression. Better than having people dying in the streets. But, increased welfare spending isn't much of an economic program in itself.

In retrospect, Hoover Dam was probably a worthwhile project. It produced something of value, and kept 16,000 workers busy over the 1931-1935 period, the worst part of the Depression. However, one effect of this aggressive deficit spending was an eventual rise in tax rates, which did additional economic harm. Roosevelt continued along the same path: spending soared up to $9.468 billion in 1940, and tax rates soared higher as well, with the top rate hitting 81% in 1940 (and 94% in 1945).

Politicians always like to spend other peoples' money, so it is no surprise that they - always and everywhere - flock around those economic advisors that tell them that enormous spending projects are the key to resolving economic difficulties. Nor is it a surprise that economists are quick to tell people what they want to hear. If you're going to be wrong all the time, you might as well be popular, well-paid, and wrong. Economics being what it is, you can always argue later that you were wrong because "people didn't do enough."

These ideas were solidified in a book written by John Maynard Keynes and published in 1936. Since governments had already been hard at work at "stimulus" for a half-decade or more already by that point, you could say that the book was a how-to guide for economists to justify policies that were already popular.

When you get past the cloud of nonsense surrounding "stimulus spending," with its output gaps, multipliers and so forth, it seems to me that government spending during a recession accomplishes roughly what it does during any other time. Mostly, it is a big waste of money, but it might keep some people employed and maybe you'll even be left with something useful afterwards. I would suggest a decent rail system, at least as good as that of France. Since we're spending trillions anyway, how about as good as the U.S. had in 1910? That would be, I argue, the least bad of all possible boondoggles.

Regards,

Nathan Lewis
for The Daily Reckoning Australia

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"There is no magic bullet for this economic crisis," said he.

Then, (will wonders never cease!) he actually seemed to draw forth an insight:

"We are going to have to live with a lot more uncertainty for a lot longer than our generation has ever experienced."

Whoa. That's like, deep.

We'll get back to Friedman in a moment...and to why a real depression is arriving...

First, a quick look at the headlines:

"Americans saving more, spending less," sets the tempo of the times.

On Friday, the Dow lost 148 points. But gold gained $20. The ratio of gold to the Dow tells us that either stocks have much further to fall...or gold has much further to increase. We're looking for a ratio of one to one. At its peak in 2000, you needed 43 ounces of gold to buy the Dow stocks. Now you need only about 10. Still a way to go. Most likely, the Dow will fall ...and meet the price of gold on the way up...at about 3,000.

"America's love affair with malls is on the rocks," says a report.

And talk about deflation! India, which is now producing $2,000 cars, announced a project to build laptop computers that will sell for 20 bucks.

But let's get back to Friedman. What happened to him? Did he drop the hair dryer in the bathtub...and give himself a jolt? Suddenly, he's saying something that is modest and sensible.

But Friedman's brush with intelligence lasted only three paragraphs. Then, it's back to the old simpleton Friedman...with a solution to every crisis...and a fix for every problem his last solution caused:

"The fact that there's no single pill doesn't mean there's nothing to be done. We need a stimulus big enough to create more jobs. We need to remove toxic assets from bank balance sheets. We nee the US Treasury to close the insolvent banks, merge the weak ones and strengthen the healthy few. And we need to do each one right."

Good luck on that, Tom. These people doing all these wonderful things are the very same people who didn't notice that anything was the financial sector in the first place. Mr. Geithner was right there at the New York Fed, hobnobbing with the masters of the universe, dining with the captains of the financial industry, nodding in approval as the biggest bamboozle in history was put over on investors and the public.

And even if Geithner were a genius who had warned us about excesses on Wall Street, he still wouldn't be the fixer Friedman imagines.

You can fix a recession with this kind of tinkering. But you can't fix a depression. And what we face now is a depression.

*** Yes, dear reader, the picture is becoming clearer and clearer. It is not very different from what we expected...but it is drawing closer. We see more detail. Like an asteroid that is on course to destroy the earth, it is getting close enough so we can make out the hills...the craters...and the dusty plains...

Many thanks to David Rosenberg, an economist at Merrill Lynch, for training his telescope on this rock from Hell.

He notices two disturbing features.

First, it is not a recession; it is a Depression. While there's no precise difference between the two, a depression is regarded as more severe...and NOT susceptible to normal government fixes. Typically, a downturn is met with lower interest rates and higher government spending. These twin missiles of increased consumer credit and higher deficits blast the asteroid smithereens before it reaches earth.

But as we have opined many times, this time it's different. We have a real, structural Depression on our hands...caused by too much debt. When people get in this situation, they can't spend more - even if someone offers them more credit on easier terms.

"People make a very conscious decision not to by, and that kind of decision is not reversed quickly," said an analyst to the New York Times.

How much debt is too much? Well, private debt is usually about 80% of GDP. Now, it's about 140% of GDP. That's about $6 trillion of debt that needs to be paid off...or written off. And that's after $1 trillion of write-offs in 2007 & 2008.

There are only three ways to attack this debt: inflation, liquidation, or boondogglization. Friedman...and practically all mainstream economists and politicians...favor the third choice. A little of this...a little of that...and something for everyone...

"In order to pass a piece of legislation," explained a Democrat from New York, "items are added that are necessary to secure the votes."

The International Herald Tribune tells a bit of what has been put into the Obama plan:

"...there is $54 billion in the bill in the House of Representatives for new forms of "American energy," a phrase with an air of nationalism, along with a series of 'Buy America" requirements of dubious legality under trade treaties; $141 billion for education; $24 billion for lowering health care costs; and $6 billion for broadband service..." etc. etc.

Colleague Porter Stansberry adds this assessment:

"Congress wants you to believe we can dig ourselves out of the financial crisis by spending $400 million to research global warming, $650 million to convert analog TVs to digital, $7 billion to 'modernize' federal buildings, and $20 billion on food stamps, etc. According to the Wall Street Journal , 'only $90 billion out of $825 billion, or about 12 cents of every $1, is for something that can plausibly be considered a growth stimulus.'"

We don't doubt that all this corruption is well-meant. Heck, who doesn't want to blow up this Depression Asteroid before it hits us? But boondogglization won't work. Because it doesn't solve the real problem - the debt. It merely moves debt from the private sector to the public sector; overall, debt actually increases.

There is about $6 trillion worth of debt that needs to be eliminated before the economy can begin to grow again. Liquidation would do it - quickly and painfully. People would get what they had coming. The U.S. dollar-based system would collapse. Everyone would learn a lesson and be better off for it.

But that could happen only over the dead bodies of Ben Bernanke and other key policy makers. Which is our preferred approach. But we are in a tiny minority. Everyone else believes that somehow some hocus-pocus will get us out of this mess without pain or suffering.

Let's "get all the right people into the room and close the door and put a solution up on the wall," said Jamie Dimon of JPMorgan Chase.

Eventually, the solution these simpletons are going to look at is the only one that will really work: inflation. Overt. Shameless. Explicit inflation.

Eventually, when their boondoggling is clearly not working...and when unemployment is over 12%...they will turn to Gideon Gono and ask for his help.

When? We'll take up that issue tomorrow...as the Daily Reckoning continues!

*** Our daughter, Maria, began her US television career during the Super Bowl. You see her for about a second.

Tough business, acting. You spend three years in acting school...you try out for hundreds of parts...and you get a little gig in a commercial, without a single line.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• US Economy is Some 11 Million Jobs Short of Full Employment
• Thomas L. Friedman Trying to Reassure Americans
• 2009 Federal Deficit Could Go As High As $2 Trillion
• America’s Debt Woes
• Ben Bernanke is a Victim of the Trade

We saw yesterday that the chattering classes are moving towards inflation. Rising prices are no longer seen as evil; they are good.

Of course, it takes time to overcome well-established taboos, prejudices and good sense. But every day, the talkers are on the TV stations...the writers are in the newspapers and magazines...and the blowhard economists are in parliaments worldwide.

"Inflation is good," they say.

We're ready to do "whatever it takes" to get prices rising again, says the new U.S. Treasury Secretary, Tim Geithner.

What will it take? Economists and policymakers debate...but gradually a consensus is taking shape: it takes inflation!

The Dow fell 227 point yesterday. Gold rose $25 - it's back over $900.

Records were broken. New houses didn't sell in December - at a record pace. Consumer confidence fell to a record low. And the number of people getting jobless benefits rose to a record high.

Kodak said it was letting 3.5 to 4.5 thousand people go. Sprint cut 8,000. Corning axed 4,900. Unemployment is up in every state, reports the Wall Street Journal.

And the airline industry said it lost $5 billion last year.

There is a report at CNN about a woman who lost her $80,000 a year job and then couldn't find anything nearly as good. She's earning less than a quarter that amount, working at some make-do employment. "I never imagined in a million years," that something like this could happen to me, she said.

Little by little, the gravity of the situation is sinking in. The economy is weakening. But government is strengthening. Money, power...and hopes for the future...are flowing in its direction.

Yesterday was a day of strikes throughout France. Elizabeth reports

"I got to Paris on the train. The metro wasn't running...or at least, that's what it said on the sign. So, I stood in line for about an hour to get a taxi. Then, the taxi got caught up in a traffic jam and it took another hour to get home.

"As usual, the unions were protesting all sorts of things. They each have their own complaint. But they becoming very active... They see that capitalism has been weakened, and its leaders are confused, so they're moving to the attack. They think they have an opportunity to get more privileges...more benefits... And they're probably right."

Yes, dear reader, capitalists have been whacked so hard they are dizzy. They wobble on their pins... slur their words and speak incoherently. The world improvers see their chance. They're moving in with their rabbit punches and haymakers. They hope to wallop the rich hard... "squeeze them until the pips squeak," as a British Labor prime minister once put it.

Yesterday, President Obama, seeing Wall Street on the mat, walked over and gave it the boot.

The $18 billion in bonuses, paid out on to Wall Street honchos last year, were "shameful," said he. It was the "height of irresponsibility" to take so much capital out of the system when it was losing money, he pointed out.

Of course, he's right. It was certainly irresponsible. And the Wall Street crowd deserves the boot, no doubt about it. But it's a shame no one mentioned it in 2006 or 2007 - not even Mr. Obama - when the bonuses and the irresponsibility were even higher. In 2006, the bonuses rose to $62 billion...as the street sold trillions worth of CDOs, MBSs, and other unmentionables.

But that's just the way it works. As we keep saying, the 'innocent fraud' of the market is OUT. Armed robbery is IN.

Government - in the hands of the world improvers - doesn't flimflam investors like Dick Fuld and Hank Paulson did. Instead, it creates a Bernie Madoff fraud - a pyramid scheme that even the Egyptians would envy. And, unlike Wall Street, Washington takes money from people even without asking...like a convenience store stick-up man without the stocking on his head.

And now - in the confusion of the credit crisis - their hour has come round at last...the politicians and world improvers are coming out swinging, grappling, kicking - getting all the power and money they can, while the getting's good.
*** While the capitalist system is de-leveraging, the public sector is leveraging. First, the government is taking debt away from the private sector banks and investment houses...moving it onto its own books. Second, it is borrowing like there's no tomorrow. (Leading us to humbly predict that there are relatively fewer tomorrows than yesterdays for the dollar-based international monetary system.)

David Leonhardt, writing in the New York Times, announces:

"Once governments finally decide to use the enormous resources at their disposal, they have typically been able to shock an economy back to life. They can put to work the people, money and equipment sitting idle, until the private sector is willing to begin using them again. The prescription developed almost a century ago by John Maynard Keynes does appear to work."

Not to us it doesn't. But that won't stop Leonhardt, Obama, Frank, Pelosi, Bernanke - or anyone else. Leonhardt goes on to cite economist Mancur Olson, who noticed that things change in a crisis. The bigger the crisis, the more they tend to change.

Leonhardt completely misses Olson's point. Olson explained how losing WWII actually helped the Germans and Japanese. They were able to restructure their governments and their economies; they became the two most successful economies of the 2nd half of the 20th century. The New York Times columnist thinks this happened because they fixed the system. He thinks that's what Olson was talking about. Leonhardt even entitles his article, "The Big Fix." And he uses it to urge the Obama administration to put into place such big 'fixes' as a new system of national health care...and a better, national system of education.

But Olson wasn't talking about fixes at all. The Germans did not fix their system. Neither did the Japanese. Instead, WWII fixed them both. Their industry and their government were destroyed - by bombs, artillery, tanks and aircraft. Olson noticed what comes after destruction: Renaissance.

America is a long way from that. Its politicians and opinion mongers - such as Leonhardt - are still in their bunkers...still directing what is left of their troops. Still raising money. Still taxing. Still spending. Still fixing. They hope to save the system, not rebuild on the ruins.

Here at The Daily Reckoning, we believe their fixes actually make the situation worse...and hasten the day when the whole thing collapses.
*** "I'm not optimistic about the global economy," says our old friend, Marc Faber. "The next Madoff case - the next Ponzi scheme - is the U.S. government. It will go bust. It is only a question of time."

When will the U.S. government go bust? When the weight of all the fixes finally crushes it. That is when the last bubble of the entire bubble cycle finally explodes - when the government itself is de-leveraged...when U.S. Treasury bonds crash...and the dollar comes down.

What do you do to protect yourself? There aren't too many choices. Because you never know when or how it will happen.

"Gold functions as a protection against your central bank doing stupid things," says Felix Zulauf.

"One day the price of gold will be higher than the Dow Jones," adds Faber.

Faber, in Barron's makes a couple other suggestions:

Short the Treasury bond market, using the Pro-Shares Ultra-short Lehman 20+ Yr. ETF. It moves twice as much, inverse to the long Treasury market.

Buy Gabriel Resources. It's a Canadian company that could "go ballistic," says Faber, when the mining sector takes off.

Keep reading for today's essay,

Bill Bonner
for The Daily Reckoning Australia

• After the Bailout of Wall Street, Everybody Wants Cash
• Wall Street Snubs Obama
• Ranting Against Free markets and Wall Street
• Biggest Bankruptcy in Wall Street History
• Bailout on Wall Street Has Left the Door Open for Other Industries

We're talking about inflation.

First a word of caution. Everything that MUST happen DOES happen. But it doesn't always happen when and how you think it should. We warned about the coming end of the Bubble Epoque for 10 years before it actually happened. Now, we're warning about inflation coming. Readers may draw their own conclusions.

"In a world of debt and deflation," writes Crispin Odey in the Financial Times, "inflation is our friend."

The Financial Times is required reading among policy makers. They read it to find out about the latest fashions in their trade. In a matter of days, they are wearing the season's new styles themselves.

The world's financial authorities have a duty to maintain the integrity of the financial system...which means, maintaining the value of the currency. Those that lived through the '70s have a horror of inflation. They feel they must fight against it...protect against it...and keep an eye out for it. Yet, in front of them is the worst financial crisis since the Great Depression...

Bloomberg reports that 236,000 houses were foreclosed in 2008. In California, house prices are already down 42% from their peak...and still falling.

And just yesterday, Boeing lost its first order for 787 Dreamliner...and announced that it would have to let 10,000 workers go. Starbucks said it would turn 6,700 of its people loose. And the International Labor Organization in Geneva estimated that as many as 50 million people worldwide could lose their jobs "if the situation continues to deteriorate."

The situation is continuing to deteriorate. "There's not a moment to spare," says President Obama. We have to fix things.

But how?

There are only three choices, says Martin Wolf in the Financial Times. Liquidation. Inflation. Or Boondogglization.

Here at The Daily Reckoning , we'll take the first solution. Let the chips fall where they may...clear the market...and then get on with things.

"To choose that option must be insane," says Wolf. Ooooh... Well, we're not going to be provoked by that kind of low-bred name calling. We'll take the high road: sticks and stones will break our bones, but words will never hurt us. Wait...why not...Mr. Wolf is a moron!

He - and most of the 'responsible' commentators - like the third solution, a devil's pudding of sugar-coated carrots and wet-noodle sticks including Keynesian spending, bailouts, massive infrastructure projects, giveaways, new regulations, new programs...a little of this...a little of that...adding trillions in public debt and hoping that the economy grows its way out of it. In the confusion of the crisis, you can also expect the Obama government to sneak in a total overhaul of the nation's health care system...and maybe its education system too.

So far, boondogglization is the policy the feds have favored. It's as though a liquor truck had over-turned in a bad neighborhood. Within minutes, people are out in the street grabbing every unbroken bottle.

In Mr. Obama's relief plan, for example, there are free drinks for almost everyone. Wall Street financiers. Bankers. Homeowners. Builders. Steelmakers. The House of Representatives - guardians of the nation's purse - took a hard look at it...red-penciled $6 billion out of $825 billion...and let it pass.

But little by little...day by day...the policy makers are being drawn towards the second solution: inflation. Boondoggles aren't enough. Borrowing and taxing alone won't do it. A dollar borrowed or taxed merely transfers it from the hands of the person who earned it to the hands of someone who didn't. What the system needs is new money. More money. Money that isn't stolen or defrauded from someone else. And economists are beginning to realize it.

*** The opinion mongers are softening up the world's head. Inflation is not such a bad thing, they keep saying. A little inflation will, in fact, be a good thing. Crispin Odey's analysis is closer to our own than most others. The problem, he says, is not credit; it's debt. The authorities may be able to increase credit by throwing money to the banks; but people who are deeply in debt are still bad credit risks.

Martin Wolf, at the Financial Times , outlines the size of the debt problem:

"Let us start with some facts. The ratio of US public and private debt to gross domestic product reached 358% in the 3rd quarter of 2008. This was much the highest in US history. The previous peak of 300% was reached in 1933, during the Great Depression.

"Nearly all of this debt is private. That reached an all-time high of 294% of GCP in 2007, a rise of 105 percentage points over the previous decade.

"Particularly remarkable is the composition of the increased debt. In the early 1930s, most US private debt was owed by non-financial companies, so balance sheet deflation occurred in companies, as was also the case in Japan in the 1990s. This time, however, the big increase in debt was in the financial and household sectors.

"Over the past three decades the debt of the US financial sector grew six times faster than nominal GDP. The consequent increases in its scale and leverage explain why, at the peak, the financial sector allegedly generated 40% of US corporate profits....

"Household debt - most of based on rising housing values - rose from 66% of US GDP in '97 to 100% in '07"

What to do with all this debt?

"If central banks and governments are aggressive enough, they can generate inflation which will lower the debt burden," Wolf writes. "But they will imperil - if not terminate the experiment with un-backed fiat (or man-made) money that started in 1971."

Yes...exactly...that is what we expect.

"The world's total outstanding debts have to be reduced," continues Mr. Odey, clearheadedly. "Our populations and companies need the means and the time to pay them off. These means are profits and pay rises."

Not much the feds can do about profits and pay rises - at least not directly. But the last part of Odey's formula sounds like a winner to us:

"The other thing we need is inflation...

"Inflation will allow debt to reduce day by day. Price rises will make companies going concerns, earning their way back to profit. Pay rises will enable households and consumers to pay down what they owe while saving more and spending some. And inflation allows interest rates to rise but still remain negative in real terms. It is healthier that people receive an annual pay rise than take out an extra annual loan - as they have been doing since 2000. This package will allow markets to breathe again."

Inflation is coming back into style. Count on it.

*** We promised an interview with the master. Forget Keynes. Forget Friedman. The economist that everyone should be paying attention to is Gideon Gono.

Inflation is coming back in style. And Gideon Gono is its star. While other central bankers flounder, he's proven that you can have inflation...and have it more abundantly than you want.

Gono, if you haven't heard of him, is Robert Mugabe's right hand man. And Robert Mugabe is the number one man in Zimbabwe, an African country with a real 'riches to rags' story. It was one of the wealthiest and safest countries in Africa when it was run by Ian Smith in the '70s. But the meddlers and world-improvers couldn't leave well enough alone. They helped put Mugabe in power. Since then, the place has gone to Hell.

Gideon Gono, 47 years old, lives in a 47-bedroom mansion in Harare. He says he doesn't drink, only sleeps 4 hours a night, and runs regularly. He is known as "Mr. Inflation" for his Olympian efforts to increase the country's money supply. He does this the old fashioned way - by printing pieces of paper will lots of zeros on them. Newsweek Magazine seems to have found him in a talkative mood:

Asked what he thought of the worldwide credit crash, he replied:

"I sit back and see the world today crying over the recent credit crunch, becoming hysterical about something which has not even lasted for a year, and I have been living with it for 10 years. My country has had to go for the past decade without credit... Out of the necessity to exist, to ensure my people survive, I had to find myself printing money. I found myself doing extraordinary things that aren't in the textbooks. Then the IMF asked the US to please print money. I began to see the whole world now in a mode of practicing what they have been saying I should not."

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Treading on Gideon Gono
• Fed Will “Monetize the Debt”
• Contradiction in the Balance of Economic Forces
• In Gono We Trust
• Why the Oil Price Will Correct Itself

Copper is up. Yields are up. Silver is up. The dollar is down to $1.31 per euro. Why?

We don't know. But everyone seems to have a cure for what ails the world economy. All the treatments are dangerous. But only one is effective; unfortunately, it also - most likely -- fatal. The only sure protection? You guessed it, gold.

For nearly 10 years, we kept a lonely vigil. We watched...we waited...we guffawed...

What were we waiting for? The bubble economy of 2002-2007 had all the appearance of a happy, healthy financial system. Trouble was, it was having far too much fun. People can't party that hard without getting sick. We waited for them to start throwing up.

Now, there are so many sick people around you have to watch where you step...

Today brings news of more illness.

"More woe as 72,500 jobs axed in one day," is the lead line in the Financial Times .

As expected, the New Year is brought the collywobbles. The financial crisis of 2008 is becoming the economic crisis of 2009.

The euro area is in its deepest slump ever in its 10-year history... The economy of Europe is expected to decline 1.9% this year.

The woe is most acute on the periphery. Spain, Ireland, Portugal, Greece - the countries that most benefited from low euro-land interest rates are those that suffer most from tightening credit. At the center, France and Germany are still in relatively good shape. But the periphery states are finding it harder to finance their deficits...and, with the limits on deficit spending imposed by the Maastricht Treaty, they have no way to spend their way out of recession (assuming that would actually work).

And out in the North Atlantic, problems caused by the financial crisis have become so severe that mobs are forming in the streets...inducing the president of the country, Geir Haarde, to resign.

Back in the USA, the government is still at work, but the working stiffs are rapidly running out of work to do. Caterpillar said it was cutting 20,000 jobs. Pfizer said it could do without 19,000. Sprint Nextel lopped off 8,000 people from its payroll. And Home Depot said sales were so slow it sent 7,000 of its employees home.

And this headline from the Wall Street Journal :

"IBM payroll cuts may be deeper than anticipated."

Bloomberg reports that last year saw the biggest drop in house prices in the United States since they began keeping records...and probably since the Great Depression. The typical house lost 15% of its value in 2008.

Oh woe...oh woe...

But, fear not... every sentient meddler on the planet is offering advice...and solutions. More below...

*** Over in the Financial Times , the editorial staff tells the Obama Administration what it should do: "stop fretting over currency and press China to spend more."

On the facing page, a pair of economists insist that government must recapitalize the banks, but must do it in a smarter way:

"The most politically robust solution is for the government to acquire not voting stock, but warrants - the option to buy such stock. These warrants would convert to commons stock when sold, and a Resolution Trust Corporation-type structure could manage the disposal of these controlling stakes into the hands of private equity investors."

Even commentators who are usually sensible have given in to the urge to public service. Can you blame them? They see a problem...they want to fix it. Many of the leading fixers, of course, are either on the Obama payroll already...or angling for a job.

Other improvers are taking the mountain air at Davos... Maybe the altitude will help them think more clearly...and help them come up with solutions to the problem they clearly don't understand.

Aside from a couple of economists - Roubini and Shiller - who are trying to explain to the group how market cycles work, none of the movers and shakers now jiggling the Alps or helping Team Obama saw the problem coming. None has any idea how an economy actually functions. None has a clue how to make it work better. In fact, almost all of them played some role - great or small - in CAUSING the crisis...either by omission or commission. Some were regulators who misled the public into thinking there were cops on the beat. Others worked on Wall Street. (Only recently, when they heard the police sirens, did they take the stockings off their faces and dump their pistols in the trash bins.)

Jonathan Weil:

"Almost half the people on Obama's economic advisory board have held fiduciary positions at companies that, to one degree or another, either fried their financial statements, helped send the world into an economic tailspin, or both."

But that doesn't stop them from wanting to put things right. And the only fix they can imagine just happens to be a fix which, by pure coincidence of course, gives more power and money to the fixers. Yes, dear, dear reader...

...now, people are retching all over the place. We're no longer waiting for them to get sick. We're not on Bubble Watch any more. Now, we're on Quack Watch...waiting to see how the quacks put them out of their misery.

At every level, the politicians are getting out their black bags and taking command of the situation. In California, for example, two cities aren't waiting for the Obama ambulance to arrive on the scene. They're giving mouth-to-mouth themselves. The WSJ reports:

"Victorville, a desert town on the main highway between Las Vegas and Los Angeles, recently approved a $200,000 loan to Victorville Motors, a 40-year-old family-owned dealer in the town's auto park."

So you see, dear reader, you don't need bankers or capitalists to allocate capital. Any city councilman can do it. Yes, of course, the hacks will err...they will allocate capital stupidly and counterproductively. But not necessarily worse than the bankers have done recently...

What they won't be able to do is to take a year off the calendar. We will never party like it was 2006, again. At least, not in our lifetimes...

Included in the Wall Street Journal this morning is an editorial, commenting on the Obama resuscitation plan. The emergency plan includes hundreds of billions for various projects designed to get the economy's heart beating again. Trouble is, most of these projects don't begin until after 2010. Infrastructure spending, for example, takes time. You don't begin building a bridge tomorrow. First, you have to draw up plans...have engineering studies...and so forth. In other words, the patient is going to be a dried up corpse before the medicine takes effect.

The British newspaper, The Guardian , is also catching on to why the quacks won't be able to cure what ails the world economy:

"In the 1960s and 1970s, total debt [in the US] was rising at roughly the same rate as nominal GDP. By 2000-2007, total debt was rising almost twice as fast as output, with the rapid issuance all coming from the private sector, as well as state and local governments.

"This created a dangerous interdependence between GDP growth (which could only be sustained by massive borrowing and rapid increases in the volume of debt) and the debt stock (which could only be serviced if the economy continued its swift and uninterrupted expansion).

"The resulting debt was only sustainable so long as economic conditions remained extremely favourable. The sheer volume of private-sector obligations the economy was carrying implied an increasing vulnerability to any shock that changed the terms on which financing was available, or altered the underlying GDP cash flows...

"From this perspective, it is clear many of the existing policies being pursued in the United States and the United Kingdom will not resolve the crisis because they do not lower the debt ratio.

"In particular, having governments buy distressed assets from the banks, or provide loan guarantees, is not an effective solution. It does not reduce the volume of debt, or force recognition of losses. It merely re-denominates private sector obligations to be met by households and firms as public ones to be met by the taxpayer. "

We have suggested another way to look at this, several times. The WSJ further explains:

"...the money from this spending boom has to come from somewhere, which means it is removed from the private sector as higher taxes or borrowing. For every $1 the government 'injects,' it must take $1 away from someone else - either in taxes or by issuing a bond."

The Journal , not to be left out of the orgy of civic spirit, favors a different kind of medicine: tax cuts. Permanent cuts in marginal rates, it says, are the best solution.

We never met a tax cut we didn't like. But we don't see how it solves the essential problem: whether the feds spend the dollar, or the taxpayers...it's still just a dollar.

But everybody's got some patent medicine he wants to try. The most potent elixir is the one from the central bank of the US, the Fed. In fact, it's the only one that works. The Fed has cut rates to the lowest level in 95 years...

"What will the Fed do next?" asks CNBC.

"Since it can't lower rates any more," answers the WSJ, "it has begun effectively to print money in an attempt to bolster the economy."

This is where it gets interesting. We're not on Bubble Watch now...we're on Quack Watch...looking to see how much damage the fixers do. We bring the binoculars up to our eyes...and look at the printing presses. And what do we see? Gold.

*** Have you noticed? Bernie Madoff bears a striking resemblance to George Washington. And so goes the nation...from the man who couldn't tell a lie, to the man who couldn't tell the truth.

*** Gold is moving again. It's up 15% in the last 2 weeks and 34% from its October low. What's going on? While almost every analyst expects a deflationary slump...gold is acting as if inflation were in the headlines.

What has bothered us is that so many people expect inflation...and a rising gold price. Where's the surprise, we wondered.

We could only think of two. One - that deflation goes deeper and remains longer than expected...pushing the gold price down and discouraging the gold speculators. Two - that inflation arrives quickly...and violently - before investors have a chance to unload their government bonds, or buy gold.

Which will it be?

Until tomorrow,

Bill Bonner

for The Daily Reckoning Australia

• A Nation of Patsies…in a World of Hurt
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Even more horrifically, I have seen other people calculating that the budget deficit will range upwards to $2 trillion, and maybe more. Maybe much more!

I say this because I thought I had become a hardened veteran of the government and the Federal Reserve acting like morons, and I had bravely resigned myself to the collapse that such idiocy deserved. As a result, I had a swagger in my step and a sneer in my voice to prove it, but now, this prospect of a multi-trillion dollar budget deficit caused me to have a little "accident" in my pants at the news that the federal budget, which was already scheduled to be $3 trillion before any of this stuff happened, is now going to have a deficit of trillions of dollars, all in an economy that is only about $13 trillion! Gaaaahhhh! I am freaking out here!

I keep thinking to myself that this is so Freaking Much Money (FMM) that it would only cost $2 trillion to give $10,000 in cash to every one of the 200 million adults in the whole damned country! Gaaahhhhh!

I seem to remember, and police reports confirm, that this horrific news sent me screaming into the night, shouting not only, "Gaaaahhhh!" but also, "We're freaking doomed, you morons! Buy gold and protect yourselves from Mother Nature's Backlash (MNB) against your constantly acting stupid by electing spendthrift, promise-them-everything morons to government office, who have allowed the Federal Reserve to create so much money and credit to accommodate government deficit-spending that that government has now spent you into debtor's hell to support a government So Freaking Huge (SFH) that the total of government spending constitutes half - half! - of all spending in the freaking country! Half!"

Somewhere around 52nd Avenue I am heard saying, "And you have spent yourself to a debtor's hell as well, you morons, by buying your own debt to fund your own stupid retirement plans, which is akin to trying to make money by eating one's own, ummm, poop, you morons!!"

Fortunately, I calmed down before the police could actually arrive and catch me in the act of disturbing the peace or actually making threats against my neighbor who is so stupid that he will not buy gold, no matter what I do, or even shut up long enough to listen to me when I am trying to politely explain to him what a moron he is for not doing as I tell him.

And the reason that I calmed down was because I suddenly thought to myself, "Whoa! I sure as hell could use $10,000 for myself, and a nice $20,000 for being married; filing jointly for a wad of lovely, lovely cash would be lovely, too!"

And then, as another benefit of giving money to people, I thought of older people who've had their damned grown children move "back home" to live with them, all crammed into the one house, sometimes dragging their kids along; but if you kick them out to live in their stupid car like they deserve, even offering to let them use the garden hose outback to clean up, everybody yells at me and calls me names, like I did something wrong!

But with a $20,000 windfall between them, you would feel vindicated, and indeed righteous, to kick them the hell out of your house! "Get lost, parasites!" Hahahaha! Sweet!

But apparently the "shocking" quality of this $1.186 trillion budget deficit has given the CBO a sudden clairvoyance, because they figure that the budget deficit will, somehow (they don't explain how, or why), "decline to $703 billion in FY10", which I mention only because I thought I could turn it into some scathing sarcasm of some kind before I lost interest in it, but, then again, a $703 billion budget deficit is still nothing to sneeze at!

Even so, the article goes on, "The CBO report almost certainly understates the severity of the nation's fiscal woes", because. "For example, the CBO report does not account for the emerging fiscal stimulus bill that may cost more than $800 billion over two years" which brings us up to a budget deficit of $1.98 trillion!

And while you are gasping for breath at the horror of it all, it certainly does not even take into account the inevitable hundreds of billions of dollars in "supplemental appropriations" that Congress routinely authorizes all year, every year, and which in the last 12 months amounted to more than an incredible $1.4 trillion dollars of additional public debt, and which now stands at the unbelievable sum of $10.635 trillion, in an economy that is only $13 trillion, where now these weenies are proposing to borrow and spend another $2 trillion freaking dollars! Gaaahhh! We are so freaking doomed!

Those who are paranoid enough, smart enough or lucky enough to be sitting on piles of gold, silver and oil are no doubt sitting cool right about now, while those who are not similarly paranoid enough or well-stocked with gold, silver and oil must be going freaking nuts and their hearts are hammering boom, boom, boom as they watch their own destruction approaching.

And as a guy who has some of all three, I say, "Whee! This investing stuff is easy!"

The Mogambo Guru
for The Daily Reckoning Australia

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