What if China hits the wall too? Or what if it tightens monetary policy and puts the breaks on the great credit binge, that at least partly, has led to such a strong rebound in prices for Australian exports to the Middle Kingdom?

Inflation isn't a risk in China now. It's a reality. Bloomberg reports that consumer prices rose by 2.7% in February. That's the fastest monthly growth rate in 16 months. And it eclipses the annual yield on savings deposits of 2.25%. Savers aren't beating inflation. And if they can't do that, they may as well spend the money. That could ignite a rising price cycle in China that monetary authorities want to avoid.

The logical step - if you're Vulcan - is to raise interest rates and slow things down (if you can). Or, China could do the hyper-logical thing and allow its currency to strengthen against other currencies. This would immediately increase the purchase power of Chinese savers. It would make more of Chinese growth come from domestic consumption than over-producing and exporting.

But when and how China allows its currency to strengthen is up to China. It will happen when it's in China's best interests to make it happen. Today, we'd argue, that day is a little closer - especially when the U.S. government ran its highest-ever monthly deficit in February at $220.9 billion. Who wants to buy U.S. bonds again? Just the primary dealers?

By the way, in case you were wondering, yes we were being sarcastic yesterday about jumping into the property market - at least the Aussie property market. Converting paper wealth into tangible assets does not mean you should buy those assets if they're over priced. And Aussie houses are definitely overpriced.

On the other hand, there are premier properties in the U.S. we'd have a look at. Most of these are not really cheap yet. But they are for sale. And that's a change. What does it mean?

Well first, we should say what we mean. The properties we have in mind are in our home state of Colorado. They are what you might call "prestige" properties. They're up in the mountains, zoned to prevent subdivision and numerous new neighbours, aren't far from an international airport, but give you a kind of mountain lifestyle you're after, if that's the sort of thing you're into (which we are).

What you'll notice these days is that there is a much more liquid market for those properties now. They're for sale, and they usually aren't. They come on the market once every twenty or fifty years, either at moments of great distress, or when there's a death in the family and estate taxes have to be paid.

What's going on today? Either the owners are selling because they have to (to raise cash). Or because they want to. It's time to retire now, in other words. Or, they see another big down leg in U.S. property coming and want to extract whatever value they can get now.

Mind you, if you're an investor, this certainly doesn't exclude you from being a buyer later. But it means that cashing up prior to the deflationary collapse is the best way to prepare for the collapse and buy the assets up cheaply later. Either way, we'd suggest the anecdotal evidence in the U.S. property market is that the top end is selling too.

But no, we wouldn't touch Australian residential property with a ten-foot barge pool. But see below for a very contrarian Aussie property strategy instead.

Why even bother with property when the stock market is making its biggest rally in 76 years? In New York, the S&P 500 has made a 17-month high. Granted, stocks are making higher highs on lower volumes. It's generally a sign that the rally doesn't have much breadth (or life). But isn't this just a new bull market climbing a wall of worry?

That could be the case. Our crystal ball is just as useless as the next guy's. But it's probably a mistake to buy the rally thinking stocks will make higher highs from here. This rally was driven by liquidity and bogus Fed money, not real earnings. The long-term of cash-flows that originated with the credit bubble are drying up. Investors are already paying too much for them.

That's not to say you shouldn't have a crack at predicting the future. For example, today's New York Times has a great article called "The Lithium Case". The article talks about how lithium ion batteries could replace nickel metal hydride batteries as the chief power source for hybrid and hybrid electric vehicles. Lithium ion batteries deliver nearly three times the amount of energy per pound as a nickel metal hydride battery.

The Times story goes on to list $1 billion worth of lithium projects being discussed in Argentina, Serbia, Nevada, China, Australia, Mexico, and Canada. It names the four biggest lithium producers in in Chile, the U.S. and Argentina. And it shows the difference between hard-rock lithium miners and lithium brines in places like Bolivia, which holds nearly half the world's lithium reserves.

All in all it's a great article, naming a prospective Australian stock. The problem is that the story is a year too late. Diggers and Drillers editor Alex Cowie is sitting an open position in a would-be lithium producer that's already produced triple digit gains. And that's just from the de-risking of the project. Future gains should come as the company produces lithium carbonate at a planned plant in China.

We asked Alex for a quick update and he said, "The Aussie-listed lithium stock we recommended twelve months ago was in its early stages, and has been more than busy since then. Since then it has ticked most of the milestones that take a company from adolescent to young adulthood. Mining has now started and buyers are already lining up. Mitsubishi has just signed up to buy the finished product, and others are waiting in the wings."

'As companies develop, they achieve certain goals and 'de-risk' as they do this. It is important to know where a developing company is in this process as to how much risk you take on. The chart below nicely illustrates how this influences the risk level."

Click Life Cycle chart to zoom in

"Our lithium company is in development phase, and soon to cross over into production phase. This means that we are well into the lower risk stage (green area), as most of the risk has been removed since we recommended the stock. Those investors that took on the risk have been rewarded with a big jump in the share price.

"With Diggers and Drillers stocks I like to identify where about stocks are in this process, and to offer you with stocks with different risk / reward profiles to suit different risk tolerances. There are a number of things that still need to be ticked off, so there is still some upside. Then when full production is soon achieved, investing in this company will be more about exposure to the rising lithium price. Those that invested when we tipped it last year have more than doubled their money already, but I firmly believe there is more to come."

Obviously we think Alex is on to something. But more importantly, this is what we're talking about when we refer to Black Swans. You may lose all your money. But if you're right, you definitely get rewarded for taking risk in these types of shares. We'd rather own a small portfolio of risks like this than a large diversified portfolio of blue-chip shares, where you get all the risk but none of upside leverage.

Of course, if we're right about the collapse of the shadow banking system and a sovereign debt crisis, these stocks are at risk too. This is why you should strongly consider reducing the amount of cash you have allocated to shares. Selling into market strength isn't a bad idea. Building cash position and then deploying it a small portfolio of shares and tangible assets is the next step.

There is no way we can know when the crack in the markets will come, or whether it will be a political or economic event that causes it. But it's a comin'. In the meantime, we reckon that if you built a humpy in your back yard and filled it with banked beans, bourbon and bullets; you'd outperform the All Ordinaries for the next ten years.

Not that we're a rating agency, but we'd give the Humpy Portfolio a Triple "bbb" rating (beans, bourbon, bullets). There are probably other tangible asset classes that will perform even better in a hyper-inflationary currency collapse: vodka, salt, pepper, cigarettes, petrol, and gold to name a few. Suggestions for the Humpy Portfolio are welcome. Send yours to dr@dailyreckoning.com.au

Dan Denning
for The Daily Reckoning Australia

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This rally has gone on for so long most people think it is not a rally at all, but a new bull market. Worldwide, it has taken equities up some 73%...making it one of the greatest rallies ever.

What are we to think? Are we alone in thinking it's still a trap? What happened to the problems that led to the crisis of '07-'09?

If you don't think about it too much you might think everything is fine. Stocks are up. Business profits are up. GDP is up. Housing and unemployment seem to be stabilized. What's not to like?

The recovery is a done deal as far as most people see it. The rescue efforts, initiated by the feds, were a big success...or so they believe. It has been 12 months since the bottom...and the world still has not ended. Everything is back to normal...isn't it?

The problem in '07-'09 was that too many people owed too much money.

And what has happened to change that? The net level of indebtedness in the US has actually gone up since '07!

Huh? How's that? We're in a de-leveraging phase, aren't we?

Well...yes...but only in the private sector. The feds are still adding debt.

Let's look at the private sector first. There, we find unemployment still around 10%. Adult males in their prime working years, however, have fewer jobs than ever before. One figure we saw shows that only 4 out of 5 of them are working.

That is just the beginning of the problem for these fellows. They're getting fewer college degrees, compared to women, than ever before. They're earning less money too - again, compared to women. Fewer are the chief breadwinners in their households. And fewer are even in a household at all - more are alone.

Let's not get distracted by the suffering of the masculine part of the population...

..we're looking at what is going on in the broader economy. Is it healthy and growing? Or is the stock market just a honey trap...a bear market trap for the unwary investor?

The private sector is de-leveraging. Not only is the unemployment rate high, the typical family also lost a lot of money when its house went down in price. And since the typical householder is also in his 40s or 50s, he has to consider his retirement and how he's going to fund it.

Stocks? While they've bounced back nicely, the stock market is still well below its highs...and still in a losing position over the last ten years. A 73% gain sounds nice, but it would take a 100% gain to recover the losses of the '07-'09 bear market.

Houses? One out of four mortgaged houses is still underwater. In some new developments, the figure is as high as one out of two. And there is little likelihood that the owners will be high and dry anytime soon. People no longer expect to retire on the gains from their houses.

This leaves the middle-aged householder without much choice. He has to save money. Remember, the boom of the 2003-2007 period was caused by dis-saving. Now, a higher savings rate will mean less spending for many, many years. This is a fundamental and important change of direction for the economy. It will restrict business growth and restrain profit growth too.

So, is it possible to slough off the crisis and return to business as usual? Nope. Not possible. You can pretend that things are back to normal. You can act as if they are back to normal. You can invest as though they are back to normal. But you can also lose your money.

But they're not normal at all. They're different. The 1982 to 2007 period was...mostly...a boom time, caused by rapid increases in debt, asset prices, and consumer spending. The next period is...mostly...a bust time - when asset prices, private debt, and consumer spending go down.

Sooner or later, but probably sooner, the stock market will realize it. Our Crash Alert flag - tattered and faded - is still flying.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

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Investors could learn a few things from the cockroach.

For one, the cockroach teaches a great lesson in survival. As author Richard Bookstaber points out: "Its defense mechanism is limited to moving away from slight puffs of air, puffs that might signal an approaching predator."

So simple and so crude - yet so very effective. The cockroach is hard to kill and fit for any environment. In markets, we also have cockroaches. One of the types would be the holding company with lots of cash, little debt and a few different businesses in its charge. These things are hard to kill. They have also often done quite well for investors over their long histories, as Berkshire Hathaway (NYSE:BRK.A), ITT (NYSE:ITT), Loews Corp (NYSE:L), Seaboard (AMEX:SEB) and others have shown.

One up-and-comer that has caught my attention is Griffon Corp (NYSE:GFF). The company operates in three different business lines: radars, plastics and garage doors. Let's look at each of these businesses. Then we'll see how we can pick up shares today for a deep discount to the value of the sum of its parts.

"Telephonics" is Griffon's radar and communications business. It makes, for example, weather radar and search radar for military and civilian applications. It also makes air traffic control systems. It has its talons deep in the market, and you can find Griffon systems on all manner of military aircraft - everything from the C-130 Hercules to the AH-64A Apache helicopter. Its biggest customer is the US military. But it also counts Boeing, Lockheed Martin and the like as customers.

It's a good business with a bright future. The trend toward more surveillance of borders, for example, increases demand for Griffon products. Ditto the trend toward more unmanned aircraft. The technology is also adaptable to civilian applications. Griffon has built, for example, 20 air traffic control systems in China over the last 20 years. And there are more requests for proposals out there, including a big one in Hong Kong.

This is the best of the three businesses, in my view, and one that ought to be able to grow in low double digits even in a challenging economic environment. The second business is called Clopay Plastics. This operation makes films and plastics used in diapers and a variety of medical and industrial uses. Procter & Gamble is a big customer, along with Kimberly-Clark, 3M and Johnson & Johnson. Clopay Plastics is a good business - profitable, steady and entrenched.

The last business is Clopay Building Products, which essentially makes garage doors. As you know what's happened to the housing market, I probably don't need to tell you what happened here. This business has been losing money. However, management has done a good job turning this business around. It closed plants. It got rid of the installation business. As a result, it actually eked out an operating profit last quarter.

This brings up why I think this stock is a buy now. Griffon is in the midst of a big turnaround, one that is already taking shape. New management came in last year when Ron Kramer became CEO. He was the president of Wynn Resorts and before that a managing director at investment banking firm Dresdner Kleinwort Wasserstein. He's brought in a new CFO, the former CFO of International Flavor and Fragrances. He also brought in a new accounting guy from Dover Corp. and new tax guy from Citi. The team is loaded with acquisition-related and strategic experience. One of their top priorities is to put Griffon's balance sheet to work.

And they've got a lot to play with here. Griffon has lots of cash to do a deal - $320 million in cash against only $180 million in debt. On the most recent conference call, Kramer says they've passed on a lot of deals. But this is one way this team could create value, by picking up an asset on the cheap in this market.

Until then, the turnaround continues apace. As Kramer pointed out on a recent conference call: "We are confident that each business is now positioned to operate well even if conditions remain challenging. In the year ahead, we believe that each business will generate significant growth and operating profits and continue to generate cash." I believe him, but the stock market doesn't.

On the conference call, Kramer remarked, "It is clear that at least for the moment investors seem to think that Griffon is worth something decidedly less than what we believe the businesses to be worth." The market is still looking backward on Griffon, on the trends of the past four years, as earnings per share fell from $1.65 per share to 39 cents in the fiscal year just ended, Sept. 30, 2009.

At $13.15 a share, Griffon trades for slightly more than its book value of $11.50 per share. For fiscal year 2009, it generated $50 million in free cash flow in what was clearly a transitional year. Nonetheless, the stock goes for only 15 times that depressed free cash flow number. I would estimate a private buyer would pay around $18 per share on a sum-of-the-parts basis, as is. Better results as the turnaround continues will up that number significantly.

Finally, officers and directors, a group of 16 people, own 28% of the stock. They have every incentive to unlock the value that they clearly see. In this highly fragile economy, I'll take the cockroaches of the investment world.

Griffon is a very rugged cockroach.

Chris Mayer
for The Daily Reckoning Australia

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If that's not the sort of discussion that interests you, you might want to go take a powder or read a good book. These are murky waters we're wading through. So we'll do our best to clear them up for you. But it's probably going to take two days. Today, we'll look at the case against deflation. Tomorrow, we'll look at what it means for Australia.

All good debates begin with a proper definition of terms. Rather than defining deflation in our own way, we'll leave it up to one of its most consistent and articulate (and accurate) advocates, Robert Prechter. He's written about it for years. But for a short course on what he's predicting and why, check out this video.

In the video Prechter says, "The next big phase [in the cycle] is a credit implosion where people who are debtors are going to be scrambling for dollars to pay off their debts and the creditors are going to be dunning the debtors to pay them back....The scramble will be for dollars not for things."

The investment outcome of Prechter's scenario is bullish for the U.S. dollar and U.S. Treasury bills, where he says, "the chances of default are low." Prechter's argument is based on the idea - which we happen to believe - that the U.S. Federal Reserve is unable to prevent falling asset values. This would lead, by Prechter's reckoning, to falling stock, commodity, and real estate values.

All of that seems right to us so far. The deflationary argument depends on the collapse of both the shadow AND the real (deposit taking) banking system. The shadow banking system is the murky world of credit, securitisation, and derivatives which currently supports and/or holds some $600 trillion in assets. Yes that's trillion with a T.

Most of these are interest rate and credit derivatives. As we learned in the last two years, the big risk here is to institutions which owe and own these obligations amongst one another. In our view, the degree of interconnectedness among these obligations (they still aren't unwound) still makes the entire global financial system vulnerable to a systemic shock and/or total collapse.

It nearly happened last time with Lehman and frankly not much has changed since. A good old interest rate spike that's not in anyone's model might be the sort of thing that precipitates the next crisis. After all, that's the way these things generally begin.

You could make the argument that it shouldn't really matter to the real economy if a bunch of global institutions find out they can't settle their obligations to one another. Why not just forget the whole mess and start other? After all, most of these derivatives are just insurance policies of some sort. Can't we just cancel the policy?

Probably not. These positions are held in conjunction with myriad leveraged bets on the direction of other asset prices. They are hedges. No one is going to walk away from them. But more importantly, the connection between the shadow banking system and the real banking system is much more substantial than you might first imagine.

So much of today's funding, financing, and lending is done by the shadow banking system through securitisation and money markets and income and mortgage trusts. The real economy is tied to the shadow banking system in just the way that you are tied to your own shadow. And the real, deposit taking, depostior (taxpayer)-insured banking system is not much better off.

For example, my colleague Porter Stansberry reported today that in the U.S., 7.1% of commercial real estate loans are more than 90 days overdue. The FDIC reckons that over 700 U.S. regional and local banks are "danger" banks. The reason is that these banks own mostly commercial real estate. It's their main asset. And unlike their money-centre big brothers on Wall Street, these banks aren't going to be recapitalised or bailed out at taxpayer expense.

Students of the Great Depression will know that widespread bank failures led to a contraction in the money supply. Banks, more than the central bank, are the engine of money and credit growth in a fiat money system. Take away several hundred banks, and you get lenders not making loans. Money supply shrinks. Cash and Treasuries gain in value.

In fact, when you couple the wounded regional banks in the U.S., who are massively exposed to one dangerous asset class, with the potential collapse of the shadow banking system from another interest rate/liquidity/solvency shock, you begin to wonder how deflation is avoidable at all in the near future.

We have a laboured three-part answer. We're going to lay it on you now. It begins with the destruction of the shadow banking system. It accelerates with the paralysis of the regular banking system. And it concludes with deliberate devaluation of the currency via monetary and fiscal policy to make up for a completely destroyed credit system.

It's easier than it sounds.

Granted, it probably sounds absurd that you can have a $600 trillion wipe-out in the shadow banking system and have inflation. But there are two points to make here. First, it's hardly believable that an institutional panic and bank run in the shadow banking system (what happened last time) would actually boost confidence by individuals and consumers in the overall banking system.

True, it might increase people's preference for liquidity and cash. Stocks, real estate, and bonds would fall. But another swift collapse in the shadow banking system would be a hammer blow to already fragile confidence in our financial system, including the value of paper money itself.

But a more technical response is that as the shadow banking system is unable to finance economic activity and speculation, either that activity goes away (a Greater Depression) or someone else tries to fill the gap. We'll assume for the moment the regular banks won't do it. That leaves the government.

And in fact, that is what you had in the U.S. following the last crisis. You got an alphabet soup of Fed-backed programs to provide all sorts of credit...to students, to money markets, to car companies, to corporations. This list grows longer by the day. And what it means is that the only provider of credit in a post-shadow banking world is the public sector: the Fed and the Treasury.

Whether these are loan guarantees or outright loans or the purchase of securitised mortgages (Fannie and Freddie) it amounts to the same thing: a huge transfer and burden to the public sector balance sheet. Whether it's monetisation or guarantees that add to Federal liabilities, both are dollar bearish. The transfer to the public sector then, results both in destruction of asset values and inflation in the currency.

But wait! You can't have inflation if there's no one to make loans and use the money multiplier to turn growth in the monetary base into new Federal Reserve Notes. That is, if the shadow banking system collapses, won't this lead to the same no-risk paralysis with the big banks that has led to their holding trillions of dollars in excess reserves with Central Banks?

Why yes, it will. But this also argues for inflation. Here we're going out on a limb. But what we're arguing is that as the private sector is less able or willing to dole out credit into the economy, we're entering a world where the government is going to bypass the middleman and do the job itself.

This happens in three ways. First, the government can buy securitised assets to fund non-bank lenders. The AOFM does this in Australia to support housing prices and non-bank lending to first home buyers. It's done in the State at a much more comprehensive level. In effect, the entire American mortgage market has been nationalised with the government guaranteeing and buying trillions in mortgages.

This is the future. More nationalisation of key lending institutions. If the private sector won't do it, the Feds will. But at great cost. Each new loan guarantee weakens the public balance sheet and the currency. Thus the retreat of the banks from credit creation hastens the day where fiscal and monetary policy are forced to be more transparently absurd and redistributive.

The second way in which the government becomes a lender is through extended unemployment benefits. The dole. In some States, it's possible to receive 99 weeks of unemployment benefits. This doesn't mean dole bludging has become a full time job. But it does mean that the structural changes to Western labour markets wreaked by globalisation are wage deflationary.

To us, this means a larger regular expenditure on the unemployed. The U.S. is headed the way of Europe, with higher structural unemployment. Whether it can afford to pay for this while fighting two wars, spending a $1 trillion expanding health care coverage, and preparing for an increase in entitlement payments...well you do the math.

The net result of the increased burden on the public sector in supporting private incomes is a weaker currency. It always comes back to that. And it's true for the Euro, the Yen, and the Dollar. It's true, in fact, for all paper money. This is why we believe the end of the super cycle in paper money is bullish for precious metals (not deflationary).

The third way in which the government bypasses the traditional banking sector to get money into the hot little hands of consumers has already been suggested by Ben Bernanke: via helicopter. And this really is the greatest argument against the deflationary theory.

In one sense, Bernanke was right. The Fed can create an infinite amount of digital dollars. It can expand its balance sheet infinitely too. It can buy assets directly. It can buy gold mines. It can probably create a market that securitises future consumer wages and pays you now for them. You literally mortgage your wage-earning future (or perhaps you get an early pay out on your social security).

The only real restrictions on the Fed's ability to create money are rising bond yields (market discipline on currency mismanagement) and political interference. On the first issue, the Fed has some covering fire. Global investors have to own something. And right now they prefer the dollar. Unless the Fed does something radical and reckless, it can expand its role in providing credit directly to the real economy without doing huge damage to the dollar...mostly because there are so few other good options.

Obviously we think gold is a good option. But for nations like China with trillions locked up in dollar-denominated assets, what options are there?

You could argue that the U.S. Congress and the President would not allow the wilful debasement of the currency via an expanded Fed role in direct lending. But we think just the opposite. Those ass-clowns will be begging for it.

When commercial real estate blows up regional banks, we predict you'll see the President declare victory in Iraq and Afghanistan within months, bring the boys home, and cut defence spending by 30%. The money will pour into new lending and "jobs" programs to support the economy. Fiscal and monetary policy will work hand in glove to pump funny government money directly into the consumer economy. The only result there can be is hyperinflation.

So, it's possible - likely even - that you're going to see across the board falls in stocks, real estate, bonds, and commodities....AND inflation. Whether we got the proper sequence right, we're not sure. But the combination of a shattered shadow banking system, a paralysed banking system, and a terrified government certainly do add up to massive inflation.

Tomorrow, is this just an American tragedy? Or is Australia at risk too? And quite obviously, what should you do?

Dan Denning
for The Daily Reckoning Australia

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The Aussie market finished up Thursday with the 5th day of gains in a row. It's a nice little run. But is it a bull market? If it is, it would contradict everything we've said about everything, and make us look very foolish (although not for the first time).

Here in the States everyone is keen to see the non-farm payrolls report. It comes out on Friday. Anecdotal evidence (what people say) suggests that the employment situation here is still pretty bad. But government statistics can say pretty much whatever you want them to say.

If you're looking for the internals of the market, try breadth. That is, if you want to judge how intrinsically strong a rally is, look at how broad it is. Is it just concentrated to a few of the big stocks (banks and basic material, for example). Or are all stocks marching up in lock stop on higher earnings and higher valuations. Is the equity premium visible?

Take a look at the chart below. It's the advance-decline index on the New York Stock Exchange from early 2007 unto today. The scale of the chart is less important than the trend. The index tracks the difference between advancing and declining issues on any given day. When there are more advancers than decliner, the index is bullish. When there are more decliners than advancers, it's bearish.

If you're trying to use the A/D ratio as a predictor of what's next (and who isn't?) then what does it really tell you? The chart above shows you that market breadth started to deteriorate months ahead of the actual high in the Dow Jones (which came later that year in October.) The June-July revelations that two Bear Stearns funds were in trouble accelerated the deterioration.

The March 2009 low in the A/D ratio more or less coincided with the low in the index. There wasn't any advance warning from the index. That's likely because the March lows were reversed by the active (and perhaps direct) support of the Federal Reserve via interest rates and a program of Treasury bond buying.

Whether the Fed worked a way, via its primary dealers, to get stocks moving too (another word is 'manipulation') is an interesting but ultimately unanswerable question. The important point here is that nothing in the fundamental mechanics of the market indicated a reversal. It was an external event.

And what about now? The A/D ratio is going up, up, and away. It could be that corporate cash positions are solid, the employment market won't get worse, and that the end is in sight for the U.S. housing market. Some combination of these factors could explain the steady advance of stocks since last march. But maybe not.

Our guess is that this is simply evidence of the Fed's Great Reflation (see Marc Faber's March Gloom, Boom, and Doom Report). All the new money created by the Fed, and the new lines off credit made available to U.S. financial institutions, made its way into the stock market by force off habit. It was easy to borrow and there was only one sensible place to put it: stocks.

But is that still the best trade going now?

No.

Your best bet, as we've been saying all along, is to retire now. Gradually liquidate your stock portfolio and pare it down. People are buying stocks now because it's what they've always done and what they're still told to do. But as a wealth survival strategy, the stock market is a death trap.

You should, by our reckoning, own a small portfolio of stocks leveraged to positive Black Swans (low probability but high magnitude events that drive a share price higher...like the discovery of a new ore body or the development of a new drug). These are the sort entrepreneurial ventures that will create new wealth. A portfolio of these business experiments is like a call option on the world we'll live in after governments have gone bankrupt and lost the ability to perpetuate the follies of the previous credit bubble.

But for now, the public sector campaign to bail out the plutocrats in the private sector is in full force. And in the meantime, the public sector in Europe is trying to save itself. Markets in Europe have reacted with contented indifference to the affair in Greece. Has anything important happened there?

Well, the Greek government presented a plan to cut spending by $6.8 billion. If effected, it will reduce the deficit-to-GDP ratio from 12.7% to 8.7% in the next year, which is pretty ambitious. The Greeks plan to do two things: raise revenue and cut spending.

The Greeks will raise taxes on fuel, tobacco, and sales taxes. And if the communist unions don't derail the plan, bonus payments to public sector servants will be cut by 30% and wages will be frozen for civil servants.

If Greece is having a fiscal crisis, why is anyone in the government getting a bonus payment at all?

The Greeks have $20 billion in sovereign debt maturing in April and May of this year. The negotiations between the Greeks and the rest of Europe are trundling along. But to what end? The Germans refuse to pony up for a bail out. But will the EU sacrifice Greece to save the Euro as a currency?

Nobody knows. But our main point today is that you should not think Greece has gone away. It's true that since February, the cost of insuring sovereign governments against default has fallen. According to the folks at Bespoke Investment Group, only Vietnam, Argentina, and Egypt have seen wider credit default swap spreads in the last two months.

So we have a pause in the crisis-think. Markets rally on reflationary monetary and fiscal policy. But the underlying structure of the fiscal welfare/warfare state is badly damaged. This is still an excellent time to reduce your exposure to stocks and add, on the dips, your exposure to precious metals and precious metals equities (in full knowledge that even gold stocks are going to decline on another general decline in stocks).

It's probably not just stocks you should re-think, though. Last week we mentioned that fund manager Colonial First State (owned by the Commonwealth Bank) has told investors in its Mortgage Income Fund that it could be as long as four years before they get their money back. The average age of the 17,000 investors in the fund is 74 years old.

Redemptions in the $850 million fund were frozen not long after the Federal government guaranteed bank deposits. High-yield mortgage trusts are not bank accounts. Investors and pensioners who treated them like high-yield bank accounts - because that's how they were sold - were suddenly not generating needed income on precious savings. And now the savings are locked up.

But it wasn't just the government guarantee that pummeled the mortgage and property funds. It was the underlying securities. On February 9th, Colonial announced it would wind down the Mortgage Income Fund because the bad debts on some of the underlying property loans were, "too big to manage." It has another $1 billion of pensioner savings locked up in similar funds.

Now without knowing the composition of assets in the other funds, it would be hasty to say that mortgage funds in general are lousy investments. However we're inclined to think just that. But more importantly, there's a point here about having your money locked up in large pools of capital these days.

These large pools of capital - mortgage funds, property funds, super funds, 401(k) plans in the States - are extremely attractive to people who need capital. Call it "captive capital." Banks covet it because it keeps them cashed up when facing declining asset values in commercial and residential property.

Governments covet the capital even more. It's a ready source of funding for government deficits. If you can compel banks to buy government bonds (via credit requirements), or if you can compel savers to own government bonds for "safety" and "annuity" reasons, then you can force people to fund your deficits. That means you may not have to cut spending so deeply that you lose an election because of it.

So what should you expect and what should you prepare for? Higher taxes are a given. "Nutter expected to tax sugary drinks, set trash fee," reports a Philadelphia newspaper. The Nutter in this case, quite appropriately, refers to the Mayor. He's taxing fizzy drinks and garbage to raise extra money for the city. At the city and state level, you can expect a lot more of these creative ways to finance spending - along with cuts in services.

This is part and parcel of the over-reach of the Welfare state. If the U.S. Warfare State has over-reached in Iraq and Afghanistan, it's been over-reaching domestically for years with programs paid for out of an empty pocket. The same is true in Europe, Japan, and increasingly, in Australia.

Some places are better off than others. Australia has a relatively smaller public sector debt burden. But the country overall, if you look at the net foreign debt, owes its prosperity to foreign lenders. You can expect the strain on public sector finances to only increase in the coming years.

All of that suggests, to us anyway, that you should re-think your reliance on traditional income and savings vehicles. Look for changes to be made that make it harder for you to get at your money. Or, if you can withdraw it from certain accounts and schemes, you will do so at a massive penalty. Governments need capital. And when they can't compel you to use yours to finance their spending, they are going to get at least a pound of flesh if you choose to remove your money from the system.

What should you do instead?

As we said above, a small portfolio of stocks - business projects leveraged to very high returns - is nearly the only good reason to stay in stocks. The other good reason is that as governments monetize debts and confidence in paper money fails, stocks may beat inflation a lot better than cash. The rally of the last year is evidence of that.

Next week, when we get back to Australia, we'll take on the main objection to all of this: deflation. That argument is simple. As the global debt burden becomes too heavy, it will crush asset values, leading to falling asset prices across the board, including precious metals. We have too many objections to this to list here. But stay tuned next week. Until then!

Dan Denning
for The Daily Reckoning Australia

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"I think, therefore I am," said Rene Descartes. How did he know he thought? And what if he thought he wasn't? Would he not be? He should have tried following the stock market! It would have improved his philosophy. "I think I think," he would have emended his famous quotation. "But maybe I don't..."

Yesterday morning we were uncertain about the direction of the stock market. By evening, we weren't so sure... We thought the markets were headed down. But yesterday's strong showing puts our hypothesis in doubt.

Why should stocks go down? Because they're-priced for a strong recovery. But we're not getting a strong recovery. We're not getting any recovery at all. Investors were bound to notice, sooner or later.

A new index of the trucking industry - based on how often they fuel up their big rigs - fell 37% in January, from a big rise in December. Neither unemployment nor housing show any sign of real improvement.

Greece is on the edge of default. China sits on the Great Wall like Humpty Dumpty...threatening to fall off at any moment.

And yet...there is still no big sell-off in the stock market. Why?

Our old friends Mary Anne and Pam Aden recently suggested that this market was like the period in the '70s when a bear market had already begun - years before - but which was marked by a couple of major rallies. The rallies lasted about 17 months each. And each time, the Dow approached its previous high.

Hmmm...maybe they're right. This rally could go all the way to the summer.

Let's put the all-time high of the US stock market at January 2000. The Dow had gone up about 11 times since its low in 1982. Then came the bear market. First, the Dow got whacked in 2001. And the government came in with the largest stimulus package the world had ever seen. That brought about a rally...a large rally...that took the Dow over 14,000 - well over the previous high. Even so, if you adjust the Dow for inflation it made no real progress. And then, in 2007, the Dow got whacked again. This brought the Dow down below 7,000, reaching its low point last March. Since then, stocks have been rebounding.

A typical bounce - if anything is typical - takes a few months and recovers about half of what was lost. This bounce is typical in that it recovered about half of what was lost. But it has gone on for much longer - like the big bounces of the '70s.

How did the '70s period end? Inflation increased and the Dow sank. It didn't hit its final low until August 1982. But at that point, stocks were undeniably cheap. You could buy the Dow for about 5 times earnings.

Will we relive the '70s?

Passing through the airport in Washington, we noticed a bar. It was named "Harry's Bar" or something like that. What caught our eye was the décor. It had beige stone on the walls...greens and browns...and sleek wood paneling. Just like the '70s...

And then, we noticed. Elizabeth had on a new outfit. There was something familiar about it. A flouncy sweater...jeans flared out at the pant leg...

"Yes, the '70s are back in style," she explained.

Some would say that Barack Obama is another throwback - to Jimmy Carter. He seems indecisive...and aloof from the people. He seems destined to be a one-term president too.

The politicos in Washington regard Carter as a failure. Yet, to us, he is still a hero. He was the only presidential candidate your editor ever voted for. And he turned out to be one of America's greatest presidents. He didn't push the nation to war or to bankruptcy. He left Washington and the nation more or less as he found them. What more can you ask for?

But Mr. Obama is no Jimmy Carter. On Obama's watch the nation will take on about $5 trillion in extra debt. While Carter left the nation in no worse condition than it was when he took over the helm in 1977, Obama will leave it much worse off.

Of course, his idea that energy conservation was the "moral equivalent of war" was silly. But at least it was mostly harmless.

Besides, Jimmy Carter displayed enormous personal courage. First, he did a remarkable thing - he actually cancelled a pay raise for the military. Then, in 1979, Carter was fishing in Plains, GA, when his presidential boat was attacked by a giant, mad 'swamp rabbit' that tried to board without permission. Alone and unarmed, the president beat off the invader with an oar.

As far as we know, no other president has been similarly threatened...and none has shown Carter's sangfroid under attack.

Back to the '70s?

Probably not. The '70s period was marked by stagflation, following the Johnson Administration's big spending and Nixon's elimination of the gold backing for the dollar. The CPI reached as high as 14% at one point. And Paul Volcker - a Carter appointee - fought it seriously...driving yields on the 10-year T-note up to 18% at one point. This was co-incident with a severe recession, and it got the job done. It turned around the bond market, the stock market, and the economy. The stage was set for an 18-year boom.

Today, inflation is not the immediate threat. Deflation is still the proximate problem. Here in England, inflation rates are going up. The papers whine that Britain's middle-class is caught in a vise - between rising living costs and a punky economy. And sooner or later, inflation will be a major problem again - for Britain and America. Pundits argue about whether it will be sooner or later.

We don't know. But our guess - and it is only a guess - is that the process of deflation, deleveraging, and depression has only just begun. The problems - too much debt, too many bad investments, too much money badly allocated - that existed before the crisis of '07-'09 have not been corrected. There are still millions of people in houses that they can't afford. There are still millions of mortgages for more than the houses are worth. There are still trillions of dollars at risk...still waiting to be worked out, written off, or inflated away.

The major contribution of the Bush/Obama administrations has been to add to these credit mistakes with trillions more in federal debt. That, too, will have to be reckoned with. But now there is Ben Bernanke at the Fed, not Paul Volcker. Now we are dealing with deflation (we think), not inflation. And now we have total official US debt 10 times as great as it was when Carter left office...and 3 times as much in terms of GDP.

What can we expect? Well, here's one thing we feel fairly sure of: ahead lies a crisis much worse that the recession/bear market of the early '80s.

What is wrong with these New York Times columnists? David Brooks is a smarter version of Thomas Friedman...which is to say, he is more thoughtful. But his thoughts seem to run into similar dead ends. He notes that more men in America are finding it difficult to be the breadwinners of their families. Women now get more college degrees than men. And women typically work in industries that are not suffering as much as construction and manufacturing, where men work. Result: men are out of work and out of money. And who wants to marry a man with no work and no money? So, men end up being lonely too.

Naturally, Brooks has a solution: "we need to redefine masculinity, creating an image that encourages teenage boys to stay in school and older men to pursue service jobs."

That's right. "We" need to do that.

And this too: "somebody has to provide institutions for unaffiliated 24-year-olds."

Don't worry. Someone will. Someone will give them black shirts. And set them to marching in the streets, beating up 'class enemies.' Someone will do something...and make the situation worse.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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It doesn't quite have the same ring as the first line of the Aussie national anthem, does it? But even though the country is younger (and perhaps freer) than many other countries, it might not quite feel the same way about itself after reading parts of the government's latest Intergenerational Report, released yesterday. You can find it here.

The burden of today's Daily Reckoning is to figure out what's going to happen when Australia's millions of baby boomers retire. From the looks of it, the stock market will crash, government finances will be stressed, and the economy is going to slow. None of that sounds very promising. But let's take a quick look to see what the best financial survival strategy is.

First though, a short look at the markets. The RBA comes out with its new interest rate decision. It's going to be spun as a positive no matter what it decides. Higher rates mean the economy is growing and it's bullish for the dollar! No change means the housing market will recover and new buyers could step in again. The market is up strongly today - mostly because it got ganked in January, falling 6.23% for the month.

One more side note. We've said all along that thousands of young Australians would come to resent the government for encouraging them, via grants, to get into the house market when prices were high and interest rates were low. It was in invitation to years of debt slavery to the big banks, sweetened with some "free" money the government borrowed in the bond market (which will also have to be repaid.

Young buyers are always at more risk of encountering mortgage stress. They are more likely to lose a job in this economy. And they tend to have less discretionary income. And today we read from Nick Gardner in the Sunday Telegraph that, "Almost half the first-home buyers lured into the market by the Rudd government's $14,000 grant are struggling to meet their mortgage repayments and many are already in arrears on their loans.

"Thousands of young homebuyers are using credit cards or other loans to meet obligations, while those in 'severe stress' are missing payments. Just weeks after the grant was officially withdrawn, a survey of more than 26,000 borrowers conducted by Fujitsu Consulting revealed that 45 per cent of first-home owners who entered the market during the past 18 months are now experiencing 'mortgage stress' or 'severe mortgage stress'".

Perhaps this is why the Prime Minister is telling everyone that re-election is not a lock. Young voters favoured Labour over issues like Climate Change, an apology, and non-pocketbook issues. Now that their pocket books have been cleanly picked, they may vote a bit differently. We'll see.

But today's episode of the DR deals with the "weight of money" argument. That argument is that the share market will make higher highs as long as compulsory super directs baby boomer funds into Australian equities. The question is, what happens to the market and the economy when the boomers shift their weight from saving and investing to consuming their retirement incomes?

Yesterday we mentioned the long-expected move to increase compulsory super from 9% of wages to 13%. But there's no guarantee this money would go to support equities. Instead, we expect a back-door transfer to pay for Australia's increasing old age and health care liabilities. It's a point made yesterday in the Intergenerational report.

The problem for Australia, like in all the Western world is that the population is ageing. You have fewer and fewer workers supporting more and more retirees. Those retirees are also drawing down their stock-market based savings vehicles. Their demand for benefits and income is increasing but their liquidating their asset portfolios to meet that demand.

This transfers the burden of national retirement from the stock market to the government. But as the government itself showed yesterday, the numbers don't add up. The ageing of the boomers leads to increased national spending on healthcare as percentage of Australian GDP. As you case see from the chart below, health, aged pensions, and aged care all expected to up as a percentage of government spending and GDP

To pay those bills, you need more tax payers and higher taxes. Or you need more productivity. That's what the government is counting on. It hopes that increases it output per hour by Aussie workers will deliver higher GDP growth and thus higher government tax receipts. But even so, the government itself projects a growing "fiscal gap", shown below as the annual Federal deficit as a percentage of GDP.

Granted, this fiscal gap isn't as bad as it is in other places like Japan and the United States. Japan's government deficits are even more pronounced, and its demographic math even more dismal. The U.S. is also in its own kind of "reality gap" in which expectations of government by the population far exceed what America can afford. The new Obama budget projects $3.8 trillion in spending a $1.4 trillion deficit. There isn't much in the way of spending cuts to programs what are considered "non-discretionary (defence, social security, Medicaid, Medicare).

You could say America itself has a kind of national "mortgage stress." The future has been mortgage for a higher standard of living today. But it was a national prosperity built on debt. It's all falling down. About the only good news is that Obama's dollar-busting budget may drive higher asset prices for gold, energy, and other commodities.

But Australia and Australian investors face a slow motion fiscal trap. The country receives a big boost from trade income with China and the rest of the commodity consuming world. The government can fund its deficits at reasonable interest rates for now. But what yesterday's report set up was a fight between two generations.

The Boomers will slowly liquidate share portfolios to meet rising health care expenses. And what they cannot pay out of pocket, you'd expect them to vote themselves. It's an effective strategy for shifting the retirement burden from the private sector to the public. We have no doubt that Super Funds will be compelled to own government bonds. And the government will sell bonds in order to finance its spending obligations to the Boomers.

But where does this leave the share market and the economy? Can the country really increase output per person and grow its way out of the fiscal gap? The highest paid and largest employing industries are financial services and resources. Are the Boomers going to migrate to those jobs?

Will you have 70-year old coal miners working in Queensland? What kind of work can an ageing population reasonably be expected to do? There are more questions to answer. But we're up against our daily deadline so we'll have to leave them until tomorrow.

Dan Denning
for The Daily Reckoning Australia

• Baby Boomers Are Ill-Prepared for Retirement
• Baby Boomers Face Early Retirement With No Money Saved
• Bernanke Calls U.S. Economic Recovery “Nascent”
• Bond Scam Perpetrated by Money-grubbing Government
• Baby Boomers Figure They Will Have to Work Longer than Expected

The real economy is not La La Land, mind you. By that mean we mean extractive industries that dig and drill the earth for real assets. That is not frivolous. It's pretty serious. But the stock and housing markets...

The stock market has opened lower today. Wall Street was only down mildly on Friday. But Aussie stocks are on tenterhooks this morning. The RBA meets tomorrow to decide whether to increase interest rates a third time in a row. The economist money is on a cash rate hike of 25 basis points. That would bring short-term rates to 4%.

Meanwhile, conflicting data is coming out of the housing market. Imagine that. Data from the Australian Finance Group shows that borrowing fell to a five-year low in December. AFG reported a 19% fall in mortgage activity. It was the lowest figure in any one month since 2005. And according to AFG's data, first home buyers as a percentage of new mortgages fell by half from the same time last year. They were just 13% of the market in the AFG survey.

Part of the falling mortgage demand is explained by rising rates. Part is explained by the expiration of the first home buyer's grant. And part is the expectation of rising rates. All three conspired for a huge surge in prices in the December quarter which ran out of steam in the last month.

The result was that median December prices were quite high. The Real Estate Institute of Victoria reports that Victoria's quarterly median price was $540,500. It was just over $405,000 in the March quarter. The Institute said the difference is explained by more sales to first home buyers in March (at lower prices) compared to more sales to more established buyers at higher prices in December.

That's the property ladder, isn't it? Investors sell starter homes to the newbies and turn around move on up. The question now is, with credit getting tighter and all that first home buyer demand having been brought forward, where is the new demand going to come from? Oh that's right...immigration!

We have our doubts about how long all this can last, even with government support. But no point in beating a dead drum here.

We're still about six weeks away from last year's March 9th bear market lows. The big issue for investors at the moment is whether this is a buyable correction or a path to new lows. The bulls are hoping this dip below 5,000 on the All Ordinaries and the ASX/200 is just a pause on the way to bigger and bullier things to come.

The bears, your editor included, think the March lows will be retested and taken out. We just don't know when. For the record, we did say on January 15th we thought it was the best time in a long time to reduce your allocation to stocks and liquidate some positions. The All Ords is down 6.75% since that.

Our old friend Marc Faber thinks there is more pain ahead for stocks. He told Bloomberg that he thinks the S&P 500 could drop 20% from its 15-month highs. He says profit and growth expectations are overdone in the U.S. and stocks are expensive.

The picture here in Australia is a bit murkier. Stocks are definitely expensive. But the press is again referring to Australia as a "miracle economy." And with inflation up and GDP positive, the mood is pretty good. Whether that will translate into higher stock prices is another matter.

One way to guarantee that stock prices go higher - and that profits at financial firms are high - is to increase the mandatory contribution to super annuation. That's just what the government should do, says the Investment and Financial Services Association!

IFSA says compulsory super contributions should be increased from nine percent of your earnings to twelve percent. This will prevent a "disaster for retirement savings" says IFSA director John Brogden. He says Australians face a collective $700 billion "shortfall" between what they'll have to retire and what they need.

Last we checked, retirement was something you did privately, not collectively. Thus, whether you have a shortfall or not depends on your own wealth game plan. Nonetheless, you could see this coming a mile away.

It's being done for your own good, of course. But day by day and step by step, your money is less your own and more the government's and the financial industry's. No doubt some of this new super money will buy Aussie stocks. But you can bet some of it's going to buy government bonds too, to fund Australia's deficits. Yep, definitely time for a survival strategy.

Dan Denning
for The Daily Reckoning Australia

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According to theory, the markets know more than any single investor, analyst or economist. In theory, the markets know everything there is to know. In theory, the markets are always right.

But what the heck? This is the same stock market that signaled clear sailing ahead ten years ago. Soon after, equities hit an iceberg. They sank for the next decade.

Here at The Daily Reckoning, we had our own views. At the beginning of the '00s, we told readers to sell their stocks. We were right. The stock market was wrong. Heh heh.

So, who ya gonna trust now? The stock market... Or, The Daily Reckoning?

Who knows... Maybe we're wrong this time, but we see another 10 years of trouble coming. Two years ago, the credit cycle peaked out. After half a century of adding debt, the private sector had had enough. Borrowing turned down. Last November, it registered its 10th month in a row of declines, something that had never happened since they began keeping records after WWII.

Consumer spending has held up surprisingly well. But with credit contracting and unemployment high and rising, it can't continue.

Small businesses create jobs. But who wants to take the risk of funding a small business now? Not the banks. And the capital markets are closed off to small businesses. You have to have a big business - preferably one that is dying... Then, you can get all the money you want from Wall Street and the feds.

Since the downturn began two years ago, 7.5 million jobs have been lost. There is no sign that they will be found anytime soon. Jobless people do not spend a lot of money. Ergo, you can't really expect an economic surge until people get jobs.

When will that happen? Possibly years from now...maybe 2...maybe 5...maybe 10...

Yes, dear reader, we are in a depression. It is a period of adjustment...of correction...of de-leveraging...of paying down debt. And there's not much the feds can do about it - except disguise it...delay it...and make it worse.

The government can spend money. The government can inflate the currency. But it's neither government spending nor inflation of the currency that makes an economy healthy. If inflating the currency could make an economy prosper, where did Zimbabwe go wrong? And if government spending could boost an economy, what did Cuba do wrong? Or Venezuela? The two-bit, banana republic economies are almost all burdened by too much government stimulus. The feds tax too much, spend too much, borrow too much and inflate too much. Instead of doing their jobs - enforcing property rights, protecting people from crime, and staying out of the way - they meddle and spend. The president gets a fancy house and lots of security guards. And the economy rots.

Of course, we could be wrong about what is happening in the US. But our guess is that the stock market is wrong instead. Stock market investors anticipate a return to 'normal.' But the normal they're looking at is a very unusual credit bubble that blew up and can't be mended. The real normal is what we're getting. And the real normal is a world where bad stuff happens. Investors make mistakes. Markets make mistakes. Often, they are misled by their own financial authorities, such as Ben Bernanke. The US Fed chief meddles in the economy and distorts the picture. Investors look, but get the wrong idea.

Our guess is that stock market investors are seeing the distorted picture caused by the feds' meddling...not the real picture. They look. They see low interest rates. They see stimulus. They see a stock market that seemed so friendly and so rewarding for so long that they can't imagine anything else. They see a government taking action...and making things better. They read Thomas Friedman and think the 'political class' can fix whatever problems it encounters.

But in the real world, the political class is a life-threatening parasite. Allow it to grow large enough and the host - the private economy - will shrivel up and die.

And in the real normal world, markets go up...and then they go down. We are in one of those periods of decline. We are in a depression, with a growing, parasitic political class. This phase won't end any time soon.

Gary Shilling is probably right. He says to buy Treasury bonds and the dollar. They're both probably going up this year.

Why? Because we are in a depression. And when investors finally realize it they will seek safety. They will buy US Treasury bonds, raising prices and lowering yields. Those Treasury bonds are in dollars, by the way. Investors will want dollars.

There are two main emotions that drive investors - fear and greed. Lately, greed drives them to buy emerging markets, stocks generally, and commodities. Fear drives them to dump all their risky investments and head for cover. They believe cover is found in the dollar and in US Treasury bonds - traditionally, the world's safest credits.

"Ireland has changed so much," said a colleague at last night's dinner. He was speaking early in the evening. Later, we went to Henry Downs' place...where the #9 whisky is as smooth as a baby's derriere. We can't remember what happened after that.

"The Irish had big families. Everyone had five or six children. We were a big exporter of people. People were our major export. And of course, the world is full of mics and paddies. America, Canada, Australia, New Zealand...but there are also a lot of Irish in Argentina.

"Birth control was illegal. I remember when I was 16...I had a friend who wanted to sleep with his girlfriend. Since I was tall and looked older he asked me to go into a pharmacy and buy condoms. It was so awkward. I waited until there were no other customers in the shop. Then, I went in....trying to make my voice lower than it really was...and asked the middle aged woman behind the counter for condoms. It was so embarrassing. It's a wonder people had sex at all."

"People in Ireland are still funny about sex," said another Irish colleague. "My boyfriend and I 'lived in sin' before we got married. Everybody knew it. But 'living in sin' was not just a joke. People thought it was a real sin. They didn't really mind it, but they expected us to pretend we weren't sinning. So when my parents would visit we had to pretend we had separate bedrooms...even though it was obvious we were sleeping together.

"But nowadays, it's different. Now couples only have one or two children."

Regards,

Bill Bonner
for The Daily Reckoning Australia

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The stock market registered a gain of 53 points on the Dow yesterday. Gold saw a modest gain too.

And the White House came right out and with a straight face said it had saved 2 million jobs. How do you like that? More than 7 million jobs have disappeared in the correction so far. But the total would have been more than 9 million, had it not been for the feds.

Let's see, $700 billion worth of stimulus spending... hey, that's $350,000 per job. But every dollar of deficit is actually 'stimulus spending.' At that rate, each job cost about $800,000. And what about all the Fed's pump priming? What about all the loan guarantees and toxic asset purchases... and bailouts of the auto industry, AIG, the banks, mortgage holders, Fannie and Freddie... etc. etc? That's all stimulating too, isn't it? The total is said to be around $13 trillion, putting the cost at $65 million for each job saved.

Of course, it's all hooey... all nonsense... all balderdash.

It makes sense to 'save' a job if and only if the job didn't need saving. In other words, the jobs that are worth doing are worth saving... but they don't need saving. Why? Because a job that is worth doing is a job people will pay for. And if they won't... or can't... it's NOT worth doing.

Otherwise, the feds could have 100% employment... just as they did in the Soviet Union. Give everybody a job. What the heck, give everybody two jobs! But it only really does any good if the jobs are productive. And how can you know if they're productive or not? You have to wait for Mr. Market to tell you. If a job is productive, people will pay for it. If not, well... the job is cut and/or the business goes bust.

Mr. Market never gets a say on government jobs, however. That's why the feds can say any fool thing they want.

Washington, DC is full of government bureaucrats who earn 30% to 50% more than people in the private sector. In the private sector Mr. Market puts his thumb up or his thumb down. The job is saved. Or the job is cut. But here in the federal city his thumbs are in his pockets.

For example, every day, we drive by the NIH - National Institute of Health. Thousands of cars go in and out every day. The NIH was set up in 1930. It had 140 employees, which seems like more than enough. Today, it has 18,442. The same sort of employee inflation happens at every government level on practically every government project. You set up an agency or a commission. Then, you can't get rid of it. As the saying goes, 'nothing is more eternal than a temporary government agency.'

But are Americans any healthier thanks to the NIH's 18,000 + employees? No one knows.

And that's just the NIH... where employees might conceivably be doing something worthwhile. Just for fun we went to the A-Z Index of US Government Departments and Agencies and copied some of the list. This is just the beginning of the As:

• Administration for Children and Families (ACF)
• Administration for Native Americans
• Administration on Aging (AoA)
• Administration on Developmental Disabilities
• Administrative Committee of the Federal Register
• Administrative Office of the US Courts
• Advisory Council on Historic Preservation
• African Development Foundation
• Agency for Healthcare Research and Quality (AHRQ)
• Agency for International Development
• Agency for Toxic Substances and Disease Registry
• Agricultural Marketing Service
• Agricultural Research Service
• Agriculture Department (USDA)
• Air Force
• Alabama Home Page
• Alabama State, County, and City Websites
• Alaska Home Page
• Alaska State, County, and City Websites
• Alcohol, Tobacco, Firearms, and Explosives Bureau (Justice)
• Alcohol and Tobacco Tax and Trade Bureau (Treasury)
• American Battle Monuments Commission
• American Samoa Home Page
• AMTRAK (National Railroad Passenger Corporation)
• Animal and Plant Health Inspection Service
• Appalachian Regional Commission
• Architect of the Capitol
• Architectural and Transportation Barriers Compliance Board (Access Board)
• Archives (National Archives and Records Administration)
• Arctic Research Commission
• Arthritis and Musculoskeletal Interagency Coordinating Committee
• Atlantic Fleet Forces Command

Would we be worse off if half of these people were sent home? Probably not.

But what are we ranting about? The Daily Reckoning is about money, right? It's not about politics...

But... whoa... now politics and economics are mighty cozy with one another. A growing part of GDP comes directly from the federal government. Already, there is now more government spending than there is private investment.

And many mainstream economists are calling on the government to spend more money to fight the downturn... and 'save jobs.' They don't bother to think about whether the jobs are worth saving or not. And they don't seem to care that government spending is not the same as private spending. As the feds take over, the economy changes shape. It becomes less and less a free-market, productive, wealth enhancing economy. Instead, it becomes more and more of a centrally-planned, unproductive, wealth destroying one.

It becomes Sovietized, in other words... like Venezuela.

The poor Venezuelans. But that's the problem with democracy. Everyone gets what the majority of voters deserve. They voted for Chavez. Now, they have to pay for it.

The lawfully elected (insofar as these things are ever lawful) government of Venezuela cut the value of its currency in half. That was only a week or so ago. Then, there was "chaos" in the streets, according to press reports. "Inflation fear grips nation," says The Washington Post story.

In response, Venezuelans are on a buying spree.

"What can the citizen do, but conclude that his money is best spent on a toaster [that] he really doesn't need," said the mayor of Caracas.

Señor Chavez has only done what Señor Bernanke and Señor Geithner have done, too. They have all so confused the situation that ordinary people have no way of knowing what to think...and no way of protecting themselves, other than by doing something stupid.

But wait...there's more...

Now, the press is reporting that Caracas faces "rolling blackouts."

Well, isn't that just like dunderheaded government? Energy rich Venezuela is running out of juice. Good work, central planners!

How long will it be before New York runs out of power, too? Or Los Angeles? We don't know...but give the feds a chance. They'll make a mess of things; count on it.

"How come Mexicans are doing all the work?" asked Edward innocently.

Edward was raised in France. He was only 2 years old when we left to live in Europe. He is now discovering his homeland. So are we.

"All the people who clean up at the school are Mexicans. So are the guards. And look at the guys working on the roads. They all look like Mexicans...or Latin Americans."

Yesterday, we were late picking him up. We went into the school building and asked one of the cleaning ladies if she had seen him waiting somewhere.

"No hablo ingles," she replied.

She was then delighted when your editor was able to respond in flawless Spanish - albeit heavily accented. Not for nothing has he been taking Spanish lessons for the last 3 years!

The woman who cleans our office in Baltimore is from Nicaragua. The woman who serves coffee at The Diner in Bethesda is from El Salvador. Guys operating backhoes, trucks, shovels - all of them look like they are from Latin America.

"I don't know Edward," we replied. "They were all black when we left."

Regards,

Bill Bonner
for The Daily Reckoning Australia

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• Only “Essential” Government Employees Need Report for Duty
• Bubble Age Jobs Lost Because of Recession
• Government Could Succeed in Reflating the Bubble