Bloomberg reported that "Wall Street's largest bond-trading firms say the worst may be over for investors..." Then, General Electric's CEO, Jeffrey Immelt and famous investor George Soros both said that the crisis is "behind us" and that growth will begin again next year. Finally, analyst John Dorfman opined that the stock market would be a safe place for their money at least through the end of the year.

And now comes the big American holiday - July 4th. Investors pack their suntan lotions and head off to the beach for Independence Day. With Jaws in a cage, they had judged it safe to go into the water. But then came Thursday's news. Instead of going down as predicted, the number of job losses for June went up. Another 467,000 people became unemployed last month. The figure even surprised us; we didn't think there were that many people who still had jobs.

And so...this weekend, investors walk along the beach deep in thought. Is it safe to go back into the water...or not? They should listen carefully. That gurgling sound they hear is not mermaids singing, it is the world economy, drowning.

As we reported in this space, the feds' bailouts, boondoggles and bankers' bonus plans aren't working. At the end of last year, they predicted unemployment over 8% in 2009 - if the stimulus plan were not enacted. But it was enacted. Unemployment is at 9.5% already and it is still rising. It will be over 10% before the end of the year. Global trade is collapsing; exports from Germany and Japan are down about 40% from a year before. Prices are going down too - with a report this Wednesday that the entire Eurozone has slipped into negative inflation. And from Britain came data showing a contraction of 2.4% in the first quarter, bringing the year-to-year decline to nearly 5%. "Economy shrinks at 1930s rates," said the headline in Wednesday's Telegraph.

When we look at America's employment numbers, we feel like a school doctor. We would call the authorities, except that it was the authorities who should be arrested. After the feds got finished with them, the numbers told of a better-than-expected drop in May U.S. payrolls. The key to this uplifting news was not a genuine improvement, but new and improved techniques in torture. Water-boarded with seasonal adjustments and birth/death models, the numbers began to see jobs everywhere. As for "discouraged workers", meaning those who gave up looking because they couldn't find a job, these unfortunate souls disappeared from the jobless figures altogether.

John William's Shadow Government Statistics reports that without these twists, the numbers tell the same story they've been telling all year - unemployment is still getting worse, at about the same pace as earlier in the year. "The unadjusted annual decline in May payrolls was the worst since May 1958," says Williams. And if they were allowed to speak freely - as they did in the '30s - the figures would show real unemployment at over 20% of the workforce...or about 30 million people. That approaches Great Depression levels...and we're still only in 1930, not 1932. As for those still working, an additional 1.5 million U.S. workers have been "forced into part time work" according to the Financial Times.

Analysts compare these sharp drops in trade, prices and employment to what happened after WWII. Come 1946 and the world had little use for so many soldiers, machine guns and artillery shells. Millions of young men were 'de-mobed' and joined the unemployed. And smokestacks suddenly stopped smoking. But that was at the very beginning of 62-year period of credit expansion. Consumers had pent up demand for houses, cars, and other goods and services...and they had the wartime savings to buy them with. Even so, it took three years of adjustment after the war before the stock market began to turn up.

Now, we are at the other end of the cycle - the beginning of a major credit contraction, with no pent-up demand, no savings, and too much capacity to turn out too much stuff that too many people don't have the money to buy.

Meanwhile, housing prices are still going down in America...and with housing goes the lenders' collateral. U.S. residential property prices have fallen 33 months in a row. So many houses are "underwater" that the United States is beginning to look like the lost continent of Atlantis.

More foreclosures are coming. U.S. mortgage loans typically call for "down the road modifications" that lead homeowners into a kind of financial cul de sac with no way out except foreclosure. According to a study by T2 Partners, there are three more big waves of foreclosures still ahead - including those in 'prime" loans, home equity lines of credit, and in commercial real estate.

"When [these mortgage loans] start adjusting upward it will turn millions of homeowners into over-levered, underwater renters, and ensure housing is a dead asset class for years to come," says Mark Hanson of the Field Check Group.

With incomes falling and house prices weak, consumers will miss payments, default, and cut back spending. Business earnings will decline; bankruptcies will increase. This economic undertow is treacherous. Investors should stay out of the water.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

• No Evidence of Recovery as Unemployment Getting Worse
• Eurozone Drops GDP Bombs
• No Way Today’s Economy is Going Back to What it Was Pre-2007
• The Fight Between Greed and Fear, Boom and Bust, Expansion and Contraction
• Water Usage by Big Companies

"And now nothing shall be withheld from them which they have desired to do..." I mentioned this quote several weeks ago. It comes from one of the many attempts that foolish men have made to be as God. It also brought about one of the greatest cataclysms in history. You can read the whole thing in Genesis 11.

For us, it applies heavily to the advances of government into the field of business. It only makes sense: the occupants of the White House and the Capitol have done such a good job with their budgets over the years, they just want to help everyone else (over the cliff, that is).

It began, as it always does, with just the camel's nose in the tent. A bit of money here, some bank guarantees there. But then, as the fable tells us, the rest of the camel wanted in.

The government insisted on foisting money on companies that didn't even need it. Washington's excuse? If the only companies taking the money were the ones that needed it, those companies would suffer a "stigma." But if every company took the money, even if they didn't need it, the bad ones couldn't be singled out.

We, of course, would never know the difference between the two. So much for more transparency in government. Now the companies who didn't need the money are lashing back. Having to pay 5% interest on money they didn't need to borrow is only a greater liability to already burdened companies.

But the government's fun still wasn't over. It forced out a CEO at AIG, now one at GM... and it passed a stimulus plan that required contractual bonuses be paid, then issued a 90% tax on them when the public outcry became too great.

Now Chrysler is being pressured to bring green cars to the market by none other than their new "boss," the Obama administration. Of course, they already have a green car, but the "boss" says it's too expensive for the public to afford. So, essentially, he pulled the plug on it. Frankly, I'd like to know why he thinks that Chrysler's greenie is too expensive. It certainly could not cost more than the bailout price tag they have forced each of us to shoulder. Expensive is a relative term.

Make no mistake about it, we are living in times that will likely produce great changes in the world. There is a certain theory that attempts to explain the history of the world through great cataclysmic events.

Some are occurrences in Nature; some are wrought by the folly or the genius of men. Let me say at the outset that I am a subscriber to this philosophy, so have no illusions about what I am saying.

Actually, most people who ever think about such things believe that all of existence began with a great cataclysm. You can call it the "Big Bang" - no matter if you're referring to the "Big Bang" that set the evolutionary process in motion, or the "Big Bang" of God creating the heavens and the Earth.

At some point, life came into existence - a big event in the universal process of all things. Of course, this is the point where the two theories begin to diverge from one another. Evolution has no more "Bangs" left in its bag. It is a slow and relatively even process from there on. Which is, I suppose, why it takes them billions of years to get to the point that God was able to accomplish in six days.

But for the recorded history of men, it has been one cataclysm after another, of varying sizes and types. Famines, floods, pestilence, earthquakes, volcanoes... and other natural disasters take their toll, but seem to always right themselves over time.

The follies of men, however, are a different matter.

The wonderful world of economics is no exception, and has no exemption. As I have said before, economics bears within itself the very principles by which God has made it to be governed. The Law of Supply and Demand is not dependant upon Congress. It was not invented by the whim of elected or appointed regulators. It is not governed by the United Nations, the International Monetary Fund or the European Union.

It brings to mind a letter someone once sent to Congress. Perhaps you've heard about it before. If not, please enjoy:

Senator John W. Bricker

The Senate

Washington, D.C.

Dear Senator Bricker,

In my opinion I would suggest that if the Senate and Congress would abolish that awful law of supply and demand, it would increase production. Stop hoarding for high prices as is now being done by the government and others. Push all products for sale to the markets and start competition. The law of supply and demand is a burden to the Consumer because they foot all of the bills.

I trust you and your fellow senators and congressmen will act promptly.

Gerald V. __________

(Taken from Dear Mr. Congressman, by Juliet Lowell {New York: Duell, Sloan, and Pearce, 1948}, p. 91.)

I suppose we ought to give Gerald high marks for even knowing the term "supply and demand," since I tend to think you might be hard-pressed to find it in the vocabulary of modern high school students. I have long felt that it would be a good question for Jay Leno's "Jaywalking" segment of the Tonight Show.

At any rate, the laws of economics are established by a much Higher Power than we will ever be. And while we are at it, we should also understand that the Power is stronger than we can ever successfully contend with.

This is why, try as we might, we cannot substitute our own economic devices and have them succeed.

So let's put a finer point on all this. The value of a nation's currency is built upon the honesty behind it. Even a currency backed by gold becomes worthless if the government holding the gold cannot be trusted. While in days gone by it was easier for authorities to debase a metal and get away with it, all such obligations now are simply based on a government's willingness to part with its gold. Of course, these days it does not happen.

And while the United States has been an expert in telling other countries how to morally treat their people, we have been robbing them blind! It has gotten so bad that even the Evil Empire and the Red Menace have seen through our chicanery. We may look upon them as people less "evolved" than we are, but the jig is up. Our hypocrisy has been found out.

We have become like the man in the Biblical parable who tried to remove a speck from the eye of his friend, when he himself had a log in his own eye. "First remove the log from your own eye, and then you will see clearly to remove the speck that is from your friend's eye." Seems like pretty simple (and common-sense) advice. But in the words of newspaperman Horace Greeley, "Common sense is very uncommon."

I began this by saying that cataclysmic times are upon us. We are seeing the shaping of men and nations. We are setting the groundwork for the impoverishment of generations.

Spain fell in line with the prevailing models of economics by bailing out its first bank in a quarter of a century. And with a broad brush it painted its regional banks as "heavily exposed to property developers struggling during a deep recession."

I have told you often of the difficulties prevalent in Europe. Here is but one more piece of evidence. Authorities are planning to solve this with 2-3 billion euros - but, oddly enough, have promised up to 100 billion euros. Wow! That's a huge disparity. I believe they may think it will take more than just 2 or 3 billion.

On the same topic, European Central Bank President Jean-Claude Trichet sees more ongoing deterioration all across the Eurozone. Market forecasts believe Brussels will announce a 50-basis-point rate cut later this week. Germany, which makes up about 25% of the euro economy, is looking for an acceleration in economic deterioration.

This is a cataclysm.

Central Banks are flying blind with an instrument panel that has no configuration for the geography. The fixes they are trying will lead us to Zimbabwe (hyperinflation) or Tokyo (perpetual slump). Pick your poison.

In the meantime, I am forced to look for more overall dollar strength. The United States still possesses the deepest markets and the "deepest pockets" in the world. If other economies continue to fail, fiat currency supply and demand will favor the dollar. And by "deepest pockets," I mean they are committed to inflating their way out - and have more ability to do so than anybody else.

I know looking for dollar strength seems a little backward while they are inflating. But the truth is, ever since the credit crunch, everything has been turned on its ear. If you are new to the currency markets, say within the last couple of years or less, likely most of this action makes very little sense to you. But in these times we must remember this axiom: The market will eventually adjust to actual realities. In the meantime, it will be moved by perceived ones. As long as fear filters through the markets, the currency flows will come back to the dollar. When there are periods of vacillation between fear and risk, the currencies can swing wildly.

Regards,

Bill Jenkins
for The Daily Reckoning Australia

Editor's Note: Bill Jenkins, founder and managing editor of Master FX Options Trader, knows the Forex currency markets inside and out. After 20 years and a string of losses following other people's crack advice, Bill created his own system for cashing in on tiny currency fluctuations between the British pound and the U.S. dollar.

• Only Thing Rising Faster than Demand for Government Debt is Supply of It
• Dollar’s Demise Has Started a Chain Reaction in Currency and Commodity Markets
• US Dollar As Reserve Currency Not Working Very Well
• A Gold Standard, Without Gold
• Demand for Credit is Growing Less Fast

This messy kind of accident has happened to me before, and which is why I now cleverly use somebody else's desk and computer whenever I eat something while "working" or downloading porn on the computer.

Anyway, I instantly liked the guy! He seems to be, like I always am, bewailing the fact that we economists are getting a really bad rap because of all the idiots in the world who also call themselves "economists", with the important distinction between us and them that that they have taken over the schools, the governments and the media to spread their stinking, lunatic, neo-Keynesian econometric bastard offspring "theory of economics", full of one ridiculous assumption after another, upon which they built an enormous, glittering edifice of Pure Economic Crapola (PEC).

Like what? Well, like "the consumption function" which is at the root of the whole theory, which is that when you get a dollar of income, you spend some and you save some.

I know what you are thinking; you are thinking, "These guys get paid for knowing THAT? Hahaha!"

Well, there is more, as the mysterious, necromantic arts of economics comes in to determine, as a constant - with an astonishing precision out to three decimal places! - exactly HOW much you spend and how much you save of each dollar! Hahaha!

And then they say, "That's not complicated enough! Let's adjust it for, ummm, the 'wealth effect', which is the phenomenon that when you make a lot of money or you have a lot of money, you spend a little more and save a little less!"

If it stopped there, it would be mildly interesting and make for good fodder for a barroom argument with other drunken sots, but these moronic Modern Economist Establishment weenies thought that they had finally found a computer program, full of equations and countless variables, that could reliably guide monetary policy to maintain the value of the dollar and prevent the business cycle while creating excess money and credit to maintain a boom of governmental deficit-spending and rampant indebtedness! Hahahaha! Morons!

And yet, trust me when I tell you that it will get you nowhere to stand outside the Federal Reserve Building in Washington, D.C. and helpfully yell out, "Hey! In case you ain't heard, you Fed guys and all your stupid incestuous friends are morons if you think that your stupid econometric equations can possibly, possibly, possibly work, which can be easily proved if you just get up off of your fat, worthless butts and look at the ruinous, Depression-like conditions you produced! The purchasing power of the dollar is now crapola, while the top two industries in America are government spending and trading financial securities back forth between ourselves!"

If you have any time left before the security guards arrive and make you go away, try telling them, "Now the sheer suffocating size and expense of the federal, state and local governments in America are truly gargantuan, thanks to your stupid incompetence and sheer stupidity in actually believing such a ridiculous theory of benign consequences from such enormous expansion of money and credit!!!"

The three exclamation points are an indication that your voice should be at maximum volume at this point for optimal impact, as I can hear police sirens approaching.

Mr. Steil is not amused at our antics, and continues, "on the other hand, we call for trillion dollar stimulus plan on the basis of little more than citing John Maynard Keynes" which "gives us special license to talk economics without knowing any." Hahaha! Exactly right! Well put!

And like the guy who wears a T-shirt that proudly proclaims "I am not a gynecologist, but I'll take a look" the results of having economic poseurs and idiots at the Federal Reserve inflict their idiotic econometric theories upon us have been Disastrously, Ruinously Bad (DARB).

Which brings up, as you knew it would, a Powerful Mogambo Suggestion (PMS) to buy gold, silver and oil to protect yourself from insane monetary policies of the Federal Reserve and the insane fiscal policies of Congress, and maybe make a pile of devalued dollars in the process, too!

Whee! This investing stuff is easy!

Until next time,

The Mogambo Guru
for The Daily Reckoning Australia

• Modern Economic Theory
• Special Drawing Rights Used as the World’s Reserve Currency?
• Wounded Wolves on the Financial Prairie
• Central Bank Creates Excessive Amounts of Money to Expand Government Spending
• Discussing the Scale of the Global Economic Crisis