As for inflation, the lowest inflation rate among the world's larger economies is in - you guess it - Japan. After 20 years of on-again, off-again deflation, it's on again in Japan...with inflation at NEGATIVE 2.2%. But inflation is negative in the US too - at minus 1.3%.

Both Japan and the US claim positive GDP growth, compared to Europe, which is still in recession. But throughout the world - except perhaps for the BRIC nations - growth is weak and hesitant.

The US and the UK are both consumption economies. No consumption; no growth. But how do you get people who've consumed too much to consume even more? They know they can't afford to keep spending. And they know that going further into debt just makes the situation worse. What can you do?

You bribe them!

You give them more money, say, in unemployment assistance. Or, you give them a tax credit when they buy a new house. Or, you give companies a big tax break. In the most recent stimulus bill, for example, the feds do all three - including giving Pulte Homes a $450 million tax refund.

Here at The Daily Reckoning we never met a tax cut we didn't like. But with the deficit at 13% of GDP, we might make an exception. One way or another, someone's going to have to pay for the feds' big spending stimulus efforts. Taxpayers. Bondholders. Dollar holders. All of the above.

President Obama told the crowd in Singapore this weekend that he would make sure Ben Bernanke stayed away from his helicopters. The Chinese are the biggest holder of US bonds in the world. The Japanese are next. Between the two of them they fund a big part of America's current spending. Naturally, America's president is eager to keep the cash coming his way. So he has had to reassure the nation's largest creditor that their loans to the US will be repaid in good order...and good currency.

China alone has $2.3 trillion in reserves...most of it in dollars. Of course, the Chinese want to diversify out of greenbacks. But they're caught in a trap of their own making. If they turn away from the dollar, they undermine its value...and the value of their own reserves. What's more, America is still China's number one customer. They need to sell to America. And for that they need to keep their own currency from rising too much against the greenback. A higher yuan makes their products relatively more expensive compared to other exporters.

So, the infernal system continues...America creates dollars. The foreigners take them as though they had value. And they will have value...as long as they take them.

In the '90s and '00s the newspapers were full of stories about what a great place America was. Its economy was so dynamic...its entrepreneurs were so clever...its financial system was so highly evolved and flexible. What could go wrong?

Everything!

And now we're going to read a lot of claptrap about what an awful place it is.

"The American dream needs repair," is forerunner of the genre. In today's Financial Times, it focuses on the rigidities of the US system. The time was when a young American could start at the bottom and work his way up. Luck and pluck was all that it took. But now, according to scholars at the Brookings Institution, people stay put. If you're born poor in America you're more likely to stay poor than if you had been born poor in Britain, Denmark, Sweden or dozens of other countries.

What happened? The authors do not say. So we will. Success breeds failure. As a society becomes rich, more and more people find ways to game the system. The elite get tax credits, tariffs, and protective regulations. Every layer of bureaucracy makes it harder for new competitors to get ahead. And every new tax on income makes it harder for upstarts to join the ranks of the rich. The poor get their parasitic benefits too. Welfare, unemployment compensation, child tax credits, medicare, food stamps, social security - all of these programs give the poor an incentive to stay poor.

Bill Bonner
for The Daily Reckoning Australia

• US Economists Think China Should Raise the Value of Yuan
• Obama Plans to Do Away With Ireland’s Tax Advantage
• U.S. Government Hiding True Unemployment Rate in Statistics
• Harding the Last American President to Deal Honestly With a Major Financial Crisis
• Baby Boomers Face Early Retirement With No Money Saved

Yes, dear reader, even our heroine, Angela Merkel, is joining the fools' parade. In a front-page feature in yesterday's International Herald Tribune we learn that Ms. Merkel is bringing Germany in line with the rest of the world - by increasing the public deficit to over 6% of GDP.

"Germany chooses growth over paying debt," says the misleading headline.

But 6% is only half the US level...and the UK is nearing 15%!

The raw news: the Dow fell 93 points yesterday. Gold held above $1,100. There's no sign of panic. But we keep our Crash Alert flag flying anyway; you never know.

We're in Rome...actually in the airport...on our way back to London. Alitalia offered the best deal to Buenos Aires. But the plane was a disappointment. The food was good; the hostesses were pretty; but the seats in business class didn't fully recline. After the first 10 hours, we were very uncomfortable. And pity the poor folks in economy!

But if you want to be an "international man," as our friend Doug Casey termed it, you have put up with some inconvenience. Why would you want to be an "international man?" As another old friend, Marc Faber, observes, it pays to travel. You get a broader perspective. And you realize that many things your compatriots take for granted others take for absurd. "The more you look, the more you see," is our dictum.

One thing Americans take for granted is that they will always be the richest, most successful people on earth. They think that because that is what they have always known. The US economy became the biggest in the world before 1900. Americans had just what it took to become the richest people on the planet. They worked hard. They saved their money. They had little government interference. They had the industrial revolution at their backs...and nothing in their way. And they had a dollar that was 'as good as gold.' By the time the baby boomers were born the US had such a big lead over the rest of the world, it seemed like nothing could stop it. Free enterprise guaranteed new innovations and new wealth. Democracy guaranteed a political system that would adapt to the needs of the evolving economy.

But nothing lasts forever. As it matured, the US economy and its political system became more and more rigid and more and more costly, with handouts and bailouts...at every level. Large companies are protected. Millions of people are encouraged not to work. The whole financial industry is dipped in honey. And the whole population is urged not to save, but to spend. Why bother to save for retirement; there's Social Security. Why bother to save for health care emergencies; there's the government's new overhaul of the medical system! Why bother to save at all; the government has fixed short-term rates so low you get nothing for your trouble.

On our travels what we notice is that there are a lot of smart people in the world. And they're all sweating, striving, and angling to get ahead. You never know who will win the race, but you can be sure that no one will stay in the lead forever.

"US Wages Out of Balance," says The New York Times. It is pointing out the obvious. Americans are paid too much, compared to other people in the world who work just as hard and who now - thanks largely to the feds - have as much or more capital than we do.

Wages in the US will come down - probably thanks to unemployment and inflation. So will US living standards compared to the rest of the world.

Meanwhile...back to Angela...

Generations of German central bankers learned their lesson. They saw what happened when hyperinflation ran wild in the '20s. The middle class was wiped out in a matter of days. People lost faith, not only in the Deutsche Mark, but in Germany itself...and in all the old values. The next thing they knew, the Chancellor was wearing a silly uniform and they were on the road to Hell.

More recently, the last generation of German central bankers worried about the euro. They had no doubt about themselves. They had the backbone to protect their new currency. But what about the Italians? And the Greeks? And the Irish?

Well, they can fret no more. Now, the German deficit is higher than the Italian deficit.

Why would they do such a thing? They have the usual poppycock explanations - countercyclical spending, the need to maintain social services as tax revenues fall, the need to bailout the East, (see below) etc. But the real reason is that the old German economists are dead. One of the last of them was our colleague Kurt Richebächer.

Every time we saw him, Kurt would complain about American and English economists.

"Ya...you Anglo-Saxon economists are ruining the world," he would say. Kurt had no truck with Keynesianism. Or monetarism. Or any other of the fads in economics. Besides, he had lived through Germany's hyperinflation, the rise of National Socialism, WWII, partition, and finally, reunion. He knew that there were no free lunches...no easy fixes...and no panaceas. He knew too that people who promised miracles were dangerous frauds. Wealth is created by work...saving...innovation...investment...and perseverance. There are no miracles. No short cuts.

While wealth is created by work and saving, it is destroyed by consumption and debt. When you borrow money, you have to pay it back. Then, you must draw down your wealth...reduce your living standard...and cut into the capital you laid away in years past. You can try to squirm and dodge...but you just make the situation worse.

Kurt was right.

But now Kurt is dead. A new generation of economists has taken over. Born after the war, they know hard times only from movies and history books. They haven't forgotten the old truths; they never learned them. Instead, they probably did their training at Harvard or Chicago...and studied nonsense...such as the Efficient Market Hypothesis and Modern Portfolio Theory.

They think the key to prosperity is spending. Consumers spend until they can't go on. Then it's up to the government. That's why the Germans are running such a high deficit. The think they need to keep up spending - at all costs - in order to boost the economy. As Kurt used to point out, it makes no sense theoretically...and there's no evidence that it works in practice either. Every time governments have intervened with large dollops of countercyclical spending they have made a mess of things...either by stimulating the private sector to further acts of reckless insolvency...or by blocking the process of correction.

It's all claptrap. Angela, you should be ashamed of yourself.

Bill Bonner
for The Daily Reckoning Australia

• The Greatness of a Depression is Commensurate to the Government’s Efforts to Prevent It
• French Model of Economy Allows Meddling from the State
• Ben Bernanke “Respectfully Disagreed” With Angela Merkel
• The French are Feeling Pretty Smug
• Pension System: A Conversation With Chile’s Former Labor Minister

Most people find it both galling and absurd to see the bankers getting $10 million bonuses while there is 10% unemployment. Here at The Daily Reckoning, it's just a matter of curiosity. You'd think there would be more wage competition to drive down bankers' compensation. Why doesn't Goldman go to an unemployment line and make an offer...

"Any of you guys want to earn a $9 million bonus?"

Surely there would be a few takers. And Goldman would save $1 million.

Of course, we're joking. Banking is not a trade you can pick up just like that. Borrowing from the Fed at 1%...lending back to the Treasury at 4%...hey, it must take a few days of training to be able to turn around money like that.

On the other hand, there are periods when speculating for a big bank is a breeze. Over the last 7 months, for example, there was almost no way fed-financed traders could lose money. They borrowed dollars - the new carry-trade funding currency - at next to zero interest. It didn't matter what they did with it...they could trade it for Brazilian reals...or buy stocks in Singapore...or buy gold. Almost everything went up against the dollar.

Institutional investors - such as those managing money for banks - are judged on how well they do against the benchmarks, the averages, not on how much money they make or how many losses they avoid. If their colleagues are making money, they have no choice. They have to get in the game too.

So, they're in a "doom loop," where they continue to bid up asset prices - even at the beginning of a depression.

Meanwhile, over in the real economy...the deflation continues. David Rosenberg:

"It is like a magic show - the US economy is somehow out of recession with both employment and consumer credit outstanding still in full- fledged contraction mode.

"In September, total consumer credit fell $14.8bln making it the eighth month in a row of debt repayment - an unprecedented string of declines. Over this period, the amount of consumer credit (not including mortgages) that has come out of the system has totaled $163bln at an annual rate (or -6.3% at an annual rate). Looking at the fact that total household debt still exceeds long-turn norms of 60% by a factor of more than two, we are still in the early stages of a secular credit contraction that could well end up seeing another $5 trillion of debt collapse. This is a highly deflationary process; it will take time; and while we are bullish on gold and commodities strictly on global supply- demand imbalances, bonds remain a very good place because deflationary episodes provide solid real yields to investors."

Let's see. We've tried several ways to gauge how long it will take to de-leverage the private sector (which is another way of figuring how long this depression will last). At 6% a year - assuming private sector has about 2 times as much debt as it should have - it will take about 7 years to get down to a more comfortable level?

Did we do the math right? Well, who knows? But every time we do it, we come up with about the same answer - 7 to 10 years, more or less.

But it's not that simple. Because as the private sector de-leverages the feds try to prevent it...while they leverage up the public sector. This is bound to stretch the whole thing out...and bound to lead to some serious bust-ups.

Bill Bonner
for The Daily Reckoning Australia

• Baby Boomers Face Early Retirement With No Money Saved
• Feds Want to Increase the Money Supply and Induce People to Spend Money
• No Evidence of Recovery as Unemployment Getting Worse
• Have the Feds Given the Economy a Miracle Drug?
• Bankers Betting That the Money Given by Feds Will Be Worth Less Next Year

It's not really...it's just the point where this bounce will equal the bounce following the crash of '29. No reason in particular that this bounce should be the same as the one 80 years ago. But no reason it shouldn't either.

Gold rises with the stock market. The yellow metal hit a new record over $1,100 yesterday. Why is that that important? Well, it's not important either. But gold still has another $1,000 or so to go before it equals the last bubble peak in gold, set in 1980 - on an inflation- adjusted basis.

The point is, there's plenty of room on the upside for gold...and not much room left on the upside for stocks...

Stocks are going to be hit hard when people realize that the recovery is a fraud. When will that happen? We don't know. But another big wave of foreclosures might be the thing that sets it off.

"The Second Wave Begins..."

This was the title of a report over the weekend from John Hussman. The gist of it is that the long-awaited 'second wave' of foreclosures has, perhaps, finally begun.

First, many of the Top 50 metro areas in the US are reporting "sharp increases in foreclosure activity.

"Rising unemployment and a new variety of mortgage resets continued to gradually shift the nation's foreclosure epicenters in the third quarter away from the hot spots of the last two years and toward some metro areas that had avoided the brunt of the first foreclosure wave," said James J. Saccacio, chief executive officer of RealtyTrac. "While toxic subprime mortgages drove much of that first wave of foreclosures, high unemployment and exotic Alt-A and Option ARMs are spreading the foreclosure flood to more metro areas in 2009."

Hussman:

"While the news itself is no surprise in the sense that we have expected and written about this situation repeatedly in recent months, the phrase 'sharp increases in foreclosure activity' is notable in the context of widespread views that credit difficulties are abating. Below is a reminder of where we stand in relation to the reset curve. This news of a shift in the character of foreclosure activity comes precisely in tandem with the beginning of the predictable second wave. The pleasant lull in the reset schedule is decidedly behind us.

"The mortgages certainly do not reset at Treasury bill yields or even at standard spreads over LIBOR. Instead, they reset to a 'premium' spread above those rates. That 'yield spread premium' is precisely what the homeowners agreed to in return for the undocumented loan, and is particularly obnoxious at the point of reset if the mortgage itself is underwater (loan amount in excess of home value). Given that these mortgages were written during the last stages of the housing boom, at the highest prices, it is reasonable to assume they now sport very high loan-to-value ratios."

So, there you go.

If Hussman is right, we'll soon see real estate prices take another tumble.

Bill Bonner
for The Daily Reckoning Australia

• New Default Wave Hits Mortgage Industry
• The Interest Only Mortgage Option
• Bank Stress Test Not Stressful Enough
• House Prices in California and Las Vegas Hit Hard by Wave of Foreclosed Properties
• Recovery for the Real Estate Market

The Dow went up too - 203 points yesterday. It's over 10,000 again. Not very impressive for a bear market bounce. A 50% retracement would take the Dow to 10,300.

But you have to give the bounce credit. It's been going on since March. That is impressive.

And now everyone is bullish, except us. We'll see who's right... in the fullness of time...

Gold seems to be advancing towards a new milestone - $1,100. Makes us nervous. We always feel more comfortable out in the wide, open spaces...that is to say, in trades we have all to ourselves.

But gold is still a marginal holding by marginal investors - like us. Central banks - especially those in emerging countries - have very little gold. The man on the street doesn't know anything about gold. He wouldn't know a gold coin if it hit him on the head.

As gold becomes accepted as a true store of value, we can expect more and more people to want to own it.

Governments are running breathtaking deficits...and accumulating alarming debts. Japan has a national debt of nearly 200% of its GDP. Where did that debt come from? It came from 20 years of trying to buy its way out of a slump with borrowed money. Of course, it didn't work. But now, Britain and America are following the Japanese lead...and the Japanese are still at it! At the present rate, Japan's government debt will grow to 300% of GDP in 10 years. America's debt could grow to 100%...and then 200% of GDP...over the next decade (depending on whose projections you believe). And Britain, if we read the report in The Financial Times correctly, will have debt equal to 200% of GDP within 3 years.

Just what kind of crisis do these numbers portend? It's hard to say. Probably a combination of confidence, followed by debt default and inflation.

Would the US actually default? We agree with Paul Samuelson; the answer is 'maybe.' Samuelson, writing in The Washington Post:

"The idea that the government of a major advanced country would default on its debt - that is, tell lenders that it won't repay them all they're owed - was, until recently, a preposterous proposition. Argentina and Russia have stiffed their creditors, but surely the likes of the United States, Japan or Britain wouldn't. Well, it's still a very, very long shot, but it's no longer entirely unimaginable. Governments of rich countries are borrowing so much that it's conceivable that one day the twin assumptions underlying their burgeoning debt (that lenders will continue to lend and that governments will continue to pay) might collapse. What happens then?

"...People have predicted such a crisis for decades. It hasn't happened yet. The currency's decline has been orderly, because the dollar retains a bedrock confidence based on America's political stability, openness, wealth and low inflation. But something could shatter that confidence - tomorrow or 10 years from tomorrow.

"Despite huge deficits, interest rates on 10-year Treasury bonds have hovered around 3.5 percent. In time of financial crisis, investors have sought the apparent sanctuary of government bonds. But the correct conclusion to draw is not that major governments (such as Japan and the United States) can easily borrow as much as they want. It is that they can easily borrow as much as they want until confidence that they can do so evaporates - and we don't know when, how or whether that may happen."

Why wouldn't the US just "print its way out of debt?"

Because it's not that easy. In effect, the feds are trying to print their way out of debt now. They've added huge amounts to the monetary base. But that money is not getting into the real economy. Instead, it's going into vaults and speculations.

"Jittery Companies Stash Cash," says The Wall Street Journal.

And banks, too, borrow...but they don't lend. They can borrow at negligible rates of interest...and buy US Treasury bonds on a leveraged basis...producing a 20% yield. That means, the US dollar has replaced the yen as the go-to currency for speculators.

Net effect? Lots of cash in what appears to the Mother of all Carry Trades. The Financial Times:

"The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates - as low as negative 10 or 20 per cent annualized - as the fall in the US dollar leads to massive capital gains on short dollar positions."

But in the economy itself? As in Japan, very little economic progress comes from this kind of speculation.

Bankruptcies rose 7% last month. Unemployment gets worse.

The financial markets bubble up. The real economy shrivels up. And people with any sense are stocking up.

David Rosenberg, again, on gold:

We are still contemplating the massive gold purchase by the Reserve Bank of India - the largest in at least 30 years that took up half of what the IMF intends to sell. Look for China to come in next.

But here is the reality. All India did was bring gold to a 6% share of its total FX reserves from 4%. Fifteen years ago, that representation was closer to 20%. China has increased its gold holdings by 76% over the past six years but they are a mere 1.9% of the aggregate 2.2 trillion of reserves and Russia's gold holdings is just under 5%. This is not the 1990s when Bob Rubin was running a hard US dollar policy, US fiscal deficits were vanishing and gold production was on the rise. Today's world is exactly the opposite. Policymakers beginning in the 1990s wanted disinflation and got it. Now they want inflation - it will take years, maybe a decade, but it will come. For the near-term, we are still optimistic on Treasury securities but be forewarned that this view has an expiry date that is earlier than the peak we are likely to see in gold.

It is very clear that central banks are behaving in a way that would suggest that gold is now again being considered a currency within the global monetary system. As we said before, it is all about relative scarcity and a well-defined supply curve - fiat currency at this juncture does not share that quality. As a good friend reminded me yesterday, when the Fed was created nearly a century ago, it was acceptable to have at least 40% of the money supply backed by gold reserves. The US now has 8,133 tons of gold in reserve, which equates to $285 billion at this year's pricing.

Meanwhile, the Fed has spiked the punchbowl to such an extent that the monetary base now stands at $1.7 trillion. Do the math - under the old regime (which indeed hamstrung the Fed), the US alone would need to buy an incremental $400 billion of bullion or the equivalent of what would be nearly four times the typical level of annual demand. We could do the same calculation based on M2 but we don't want anyone falling off their chairs.

And finally today, we're still ruminating about what to tell you about our trip to the ranch. The funny thing was...it had little to do with cattle ranching...and a lot to do with the personalities that we brought with us. It's no easy job being a parent...especially when the kid is 38 years old...and not your kid.

More to come on that another time...

Bill Bonner
for The Daily Reckoning Australia

• Gold is Money
• An Irish Bond Bomb
• Denmark, Spain, the U.K. and Ireland Have Begun to Register Falling Housing Prices
• Where Do the Feds Get Any Money?
• Borrowing and Paying Back in a Foreign Currency

But along came two very important bits of information.

First, we got word that the crisis was officially over. GDP grew last quarter. Thanks to all the Cash for Clunkers, Cash for Bankers, Cash for Houses, Cash for Trash, and cash for every other blessed thing under heaven, the number crunchers were able to report positive economic growth for the third quarter.

Let's not get too excited. Stocks bounce. Bonds bounce. An economy bounces. Even dead economists bounce. And if we're following the Japanese experience, with a long, slow on-again/off-again period of depression, we can expect some quarters of growth, followed by quarters of non-growth. It's going to be a painful adjustment to the 'new normal,' whatever that is.

The other important bit of news was that the Fed - faced with undeniable evidence of growth and prosperity - decided to err on the side of caution. It will keep monetary policy loose from here until kingdom come, if necessary, in order to avoid a Japan-style slump.

But so far, a Japan-style slump is just what we seem to have...and our public officials are fighting it, Japan-style.

Unemployment is headed up. The U6 figure - a more accurate picture of how many people are out of work - is up to 17%. There are 1.5 million homeless children in the US now, including 300,000 in the state of California alone. One out of 10 Americans will not bite the hand of government - for it is the hand that gives him his food stamps.

Foreign direct investment has dropped 30%. International trade is down 10%.

Do you call this a recovery? We don't.

As David Rosenberg puts it, the man on the street is perhaps "less enthused by the fact that a lower rate of inventory de-stocking is arithmetically underpinning GDP growth at this time."

In other words, it's 'growth' that only an economist could love...and then, only an economist who was an idiot. Rosenberg:

"Put simply, a Wall Street Journal/NBC News poll just found that 58% of the public believe the economic recession still has a ways to go - and that is up from 52% in September and means that the private investor, unlike the hedge fund manager, is not interested in adding risk to the portfolio even after a 60% surge in the equity market.

"Only 29% of those polled believe the economy has hit bottom - imagine having that psychology with nearly zero interest rates, a bloated Fed balance sheet and unprecedented fiscal deficits (poll was taken from October 23-25). Nearly two in three (64%) said the rally in the stock market (still a bear market rally - not the onset of a new bull market) has not swayed their view (or ours for that matter). There is going to be some very tough slogging ahead as far as the economy is concerned."

Growth is largely illusional. It is the result of delusional policy- making at the Fed.

So, we'll just keep our Crash Alert flag flying.

Bill Bonner
for The Daily Reckoning Australia

• Markets Rise While the Economy Sinks
• Take Away Stimulus Spending and You’ve Got an Economy Entering Depression
• Bear Market Bounce a Sure Thing
• AIG to Receive $85 Billion Loan from Fed
• Feds Have Used the Correction to Increase Their Power and Add to Their Wealth

Stocks rallied on this news.

Employment is said to be a lagging indicator. Economists tell you it's the last thing to recover from a recession. Businesses don't begin hiring until after they are sure the worm has turned in the economy. But right now, there is a pretty big decoupling between the stock market's verdict on the economy (it's all good, man) and the employment market's verdict (it sucks, man).

But there's no doubt the rising market has lifted a lot of spirits...and superannuation balances. Aussie Super data firm Rainmaker says the average super is now down just -0.8% as of the end of September. To be honest though, we found this data incomprehensible.

Is it down 0.8% for the year (since January) or in the last twelve months? Or is the average super fund down 0.8% from its all-time high? The average super fund fell 21% from its heights to its lows during the GFC. But the Aussie market has rallied 55% this year.

So does this mean super has done well? Average? Above average?

In today's Age, Eric Johnston reports that for the last three years, the average super fund is down 0.3%. Over five years, the average fund performance is a bit better at 5.2%. And over ten years, a 6% average super return just means boring old government bonds at 5.6%.

To us, this suggests that the equity premium in stocks really is collapsing. What's the point of getting average super returns if you're better off in bonds? Or, if all you can get in the average super is a performance that barely beats bonds, wouldn't it make more sense to stick half your money in bonds, 30% cash, and actively manage the other 20% in your own self-managed super?

You could do worse, of course. Maybe it's a lousy idea. So we asked the man with the wealth gampelan, Kris Sayce, what he made of the enigmatic super figures. He's on the super beat full time. It's a sensible complement to the growth-stock tipping he does at the Australian Small Cap Investigator.

"I think what this research shows you," Kris writes, "is the utter failure of the funds management industry. The research claims the S&P/ASX200 is up nearly 55%, yet the best performing fund manager has only managed a 9.9% return. Something doesn't quite add up for investors.

"But still they're charging you between 1% and 3% for underperforming the market! That's just bizarre. Then again, I've always thought you're better off investing in the shares of a fund manager rather than in their funds."

Australia's super annuation industry is often trumpeted by the government (and the industry) as one of the best pension schemes in the world. And there's a lot of talk now about raising compulsory contributions from 9% of salary to 12%. This would be a real gift to the funds management industry.

But according to a report from Boston Consulting, the GFC hit Australian investors about as hard as anyone in the world. The report says the GFC wiped out 27% of Australian pension "wealth." That was the third-worse wipe-out of 62 countries surveyed. Only Britain (-32%) and Sweden (-28%) were worse off.

If you're having a hard time reconciling that fact with the rosy picture routinely painted by the media and the funds industry and the government, you need to dig a bit deeper and see how your fund is investing your money. At the very least, you ought to know whether your super fund is underperforming the market and over-exposing you to a certain class of stocks.

If it's your average Australian super fund, odds are it's doing both. According to an OECD report released earlier this month, "Australian superannuation funds had the highest exposure to equities last year and were the third worst performing group of pension funds in the world." The default Aussie super has 60% of its assets invested in shares and 70% of those shares are growth stocks.

Not only does this mean the average Aussie super investor is over-exposed to equities, he's way over-exposed to growth stocks. Granted, that might be exactly the sort of asset allocation you wanted if you were a young investor with time on his side, investing at the beginning of secular bull market.

But now? And let's not forget that the half of the total average return for stocks over time comes from reinvested dividends, not capital gains. That means that Aussie investors probably have too few income producing stocks in their portfolio, and too many stocks period.

If you have an asset allocation plan already (some percentage of your assets in stocks, property, bonds, cash, and gold, respectively), it may not be a bad time to revisit your percentages (rebalance). And if you don't have a plan - if you're leaving it to your super fund to make your asset allocation decisions for you - the odds are THEY don't have a plan either. They're just chucking your money into growth stocks and clipping your ticket.

That's not a plan at all. But it's probably a better plan than stick all your money into bonds willy nilly. That's not a plan either. Or, if it is a plan, and those bonds are U.S. bonds, it's a really bad plan. Worse than no plan at all (owning equities blindly).

Dan Denning
for The Daily Reckoning Australia

• Your Actively Managed Superannuation Fund Cannot Beat the Market
• A Look at Debt and Super
• World of Super Collides With World of Credit Crunch
• The Problem With a Well-Diversified Portfolio
• Pension Plans are Selling Stocks

It's More Than Half Full.

Ok, Bill, let's review those wonderful days from whence we sprang, so fraught with the advantages of having nothing. So potent with opportunity. It was the middle of the '70s when we started our careers. Inflation was high and rising. The Soviets were seen as a major threat. Japan was beating our brains out and buying everything, even if nailed down (like Pebble Beach and New York skyscrapers). I had to borrow money at 15% (or more) to buy paper in order to meet customer demands for printing. And guess what? The banks got into trouble and called loans willy-nilly. (My bank even called my mother and threatened her to pay my loan - against written agreements - and she did. Evil sons of bitches. The more things change... And they delightedly did fail! Not that I hold a grudge.)

There were multiple successive and deeper recessions. Gold was rising as the dollar was seen as a joke. Howard Ruff (a good friend to both of us when we were starting out!) and almost every newsletter writer were telling people to buy gold and freeze-dried food to protect themselves against a near certain economic, if not apocalyptic, catastrophe. Unemployment was high and rising for a decade.

The correct answer to the question, "Where will the jobs come from?" back then was "I don't know, but they will." And it is the correct answer today.

In 20 years, no one will want to come back to the halcyon days of 2005. Our kids (all 13 of them) are getting ready to live through what will be the most exciting period in human history. There will be a century's worth of change, measured by the standard of the 20th century, just in the next ten years, and then we will double that pace in the next ten after that. Medical miracles that will mean our kids and grandkids will live a lot longer than their dads, although I intend to be writing well into my 80s, like our mutual hero Richard Russell.

There will be whole new industries developed in the US. How do I know that? Follow the money. The rest of the world spends a fraction on research and development that we do. Where do you go if you are looking for venture capital?

Do I care if the Chinese and the "developing" worlds are far better off, relatively speaking, than the US in 20 years? Not a whit. Good on them. I hope they make discoveries and inventions and new businesses that benefit us all. But we are not going into some long dark night. We, and our kids, get to choose how we respond to what is the reality of the day.

Our nation had to almost hit the wall in 1980 before a Volker could come along and force us to take the pain of recessions to beat back inflation. And we will have to come perilously close to the wall this time before we take action as a nation. Way to close for comfort. Maybe you are right, and we have a soft depression. I hope not, but even so, the world will be better, far better, in 20 years, with far more opportunities than today.

It was not fun starting new businesses in the '70s and early '80s. But we did. I remember coming to Baltimore and being (literally) afraid to get out of the car to visit your offices in the slums. But that was what you could afford. A far cry from the chateau in Ouzilly.

I lived in a small mobile home. Tiffani was born there, and we converted part of the kitchen to be her bedroom. (Yes, I was white "trailer trash.") But I got up every morning just like you did and killed as many alligators as I could. The rest had to wait till the next day.

And that is the legacy our kids have. They know what it is to wade into the swamp every morning. Never quitting. In thinking about this, you may be the father I respect the most. You have raised your kids to be multi-lingual children of the world. What a work ethic. How did you get them to scrape window shutters at your chateaus? (I actually saw this, and my kids marveled.

Thereafter I threatened to make them go live with you when they did not act right!)

You have given your kids the opportunity to follow their dreams, even demanded that they do so. And such dreams they (and mine) have. Will they succeed? Who knows? But they will go at it with gusto, in a world with more opportunities than you and I ever imagined 40 years ago. And, oh boy, were we optimists back then. How else could we have done what we did? If we believed the rhetoric that the world was coming to an end, would we have dared to venture out?

You cannot have raised your kids to be such bold adventurers without instilling in them a certain high level of optimism. I am going to out you, Mr. Bonner. You present yourself to your readers as a bona fide end of the world pessimist. But you are a really and truly a closet optimist. Your whole business empire (and what an empire it has become!) is based on finding people who are optimists, in the sense that they think they can actually get people to send them money for what they write. Which they do! Even if it is to read why the world will come to an end, which it thankfully never does.

You are right in this: it is personal gumption that makes or breaks us. There are those who started out with less than we did (hard to imagine but true) and made a lot more. And there are those who started out with far more and made less. But there are very few who are happier than either of us. Or luckier.

Our kids? It is not the times which dictate the man (or daughter!), but the response of the man which dictates his own time. Today has a brighter future for someone young than any other time in history, whether they are in the US or Brazil or China. They just have to seize it.

And as our kids do just that, and as the millions of kids of those who read us do so, and the billions of kids who are just now getting ready to bust loose all work to achieve their dreams, the world is going to be a far more fantastic place. Smooth ride? Not a chance. We didn't get one, and in thinking through history, there have not been many smooth rides. Why should we think we will get any better? Our kids will just have to live with our generational (and individual) iniquities, government debt and all, and figure out how to master their own fates. But if I had a choice to take the '70s or today? In less than a heart's beat I choose today. And I bet you would too!

Regards,

Bill Bonner and John Mauldin
for The Daily Reckoning Australia

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Last week, stocks went up. Stocks went down. Not much was proved one way or another. The week ended in a draw, as near as we can tell.

But we think we are making progress in understanding what is going on. The private sector is de-leveraging. Now, it's the public sector doing the heavy lifting. It is leveraging everything it can.

Leverage in the private sector led to the banking crisis/bear market of 2007-2009. Debt always leads to trouble. Next up: a crisis in the public sector.

But wait...hold on...not so fast...we haven't reached the end of the private sector crisis yet! Bank lending is still falling. House prices are still falling. Unemployment is still falling. Soon, stock prices will be falling again too...

First, let's see what's in the headlines. Last week there was a lot of press about the pay czar and his efforts to limit compensation in the companies that the feds bailed out. The public and the news media love this sort of thing. It's a battle between the greedy rich and the public interest, or so they believe. The public hates bankers. But they don't want to see just pay capping; they want to see knee-capping. We'd like to see it too. Or maybe public flogging. Or at least a lapidation or two.

But our true sympathies are with the greedy CEOs. After all, they stole the money fair and square. They should be allowed to keep it. The feds wanted to leverage up the financial sector by giving money to the banks. What'd they expect? The bankers took it.

Yes, the financiers are paid outrageous amounts of money - far beyond anything they are worth. In fact, if you studied it carefully, you'd probably discover that their net contribution to the betterment of mankind is now negative.

The bankers are betting that the money they were given by the feds will be worth less next year than it is this year. So they exchange it for everything and anything, confident that when it comes time to pay it back it will be even easier to come by than it is now.

So far the bet has gone their way. Copper has doubled. Gold is up 20%. Stocks markets all over the world are up 60%. Foreign currencies, too, have beaten the dollar.

Will the wager against the dollar continue to pay off? Well, that's the big question. If so, you should stay in stocks, gold and commodities. If not, you should move to cash.

But it hardly matters to the gamblers. They're playing with someone else's money! If the bets go well, they pay themselves huge bonuses. If they go badly...well...hey...gimme a bailout!

In the long run, bets against the dollar are almost sure to turn out okay. All paper currencies go to zero, eventually. But in the short run, who knows? The whole world is betting against the greenback. With such a massive short position against the buck, it would be just like Mr. Market - aka Mr. Mischief- maker -- to send the dollar up.

But you can't blame the bankers. They're performing a very valuable service. They are helping to separate fools from their money. Too bad we taxpayers are the fools....

Among all the whiners and kvetchers about bankers' huge bonuses hardly a single one draws the obvious conclusion:

That them that deserve to go bust should be allowed to do so.

"I remain of the view," writes Martin Wolf, a bit pompously, in The Financial Times, "that the only thing worse than rescuing the system would have been not rescuing it."

He's welcome to his opinions. And if he used his own money to bail out the bankers we would have no objection. In that case, it would just be a futile and foolish act. Instead, he insists upon using our money...which raises the charge from stupidity to larceny.

Another message that came through last week was that the real economy is not improving. Good news came in from several quarters. But the news that really counts - housing prices and jobs - was bad.

"It's all bad. That's all we know," said John Stepek, editor of MoneyWeek. "People ask if we're going to have inflation or deflation. The bulls think we're going to have inflation. The bears bet on deflation. But I'm not sure it matters. We're probably going to have both.

"The point is, whichever we have, it's going to be the bad sort. Neither inflation nor deflation is necessarily bad. Prices have to adjust. That's how the market conveys its signals. When prices rise, it tells producers to get busy and increase output. When prices fall, it tells them to lay off. In the natural order of things prices usually fall. Or, they should fall. This is 'good' deflation. It just means that producers are becoming more efficient, as they should. There's good inflation too - when prices rise due to increased real demand. When people earn more money, they can buy more things; prices rise.

"But what we're going to see is bad. Bad inflation. And bad deflation. It is the result of monetary problems and mismanagement. And it is going to send all the wrong signals and inevitably make things worse. First, the deflation is bad because it is result of a massive de- leveraging accompanied by a write-down of debt and assets. It's a depression. Or a major recession. Or a 'great contraction.' Call it what you will. It's a deflation in which prices fall...and it's not going to be any fun.

"Then, there's most likely going to be bad inflation too - caused by the central banks printing too much money. This is bad inflation because it is just an increase in the quantity of paper money, not an increase in real demand.

"We don't know exactly what is coming. But whatever it is, it will be bad."

Another big item in last week's financial press was the "Cash for Houses" scheme. The feds give new house buyers an $8,000 tax credit. But since not all new buyers buy because of the credit, the actual cost to the government per additional new house purchased is much higher than 8 grand. For each additional house purchased because the credit taxpayers are paying as much as a quarter of the entire cost of the house.

And now there is a proposal to extend and broaden the credit. Soon it may be "Cash for Everything."

This sounds crazy, but there are a lot of economists who think more stimulus is necessary. Nobel prize winner Paul Krugman, for example. And Richard Koo, mentioned here last week. They've seen what happened in Japan. And they see that the real economy is not recovering as they hoped it would. Now, they warn that America might have a "Lost Decade" if it doesn't continue to stimulate the economy.

How long must it continue bailing out and stimulating? Until consumers have finished de-leveraging, they say. How long will that take? Maybe another 5 years, by our calculation...maybe much longer.

But wait...the whole problem is too much debt, right?

Yep.

But the only way the government can stimulate is by going further into debt, right?

Yep.

And isn't the budget deficit already at $1.6 trillion...or 11% of GDP...the most it has been since WWII?

Yep.

Well, then where's the benefit? Won't the public sector have to de- leverage too?

Bingo!

How does the public sector deleverage?

Two possible ways - honestly...and dishonestly. It can pay down its debts to a level at which they can be carried even if interest rates go up sharply. They did it after the War Between the States...after WWII...and even during the Clinton years. Believe it or not, when the Congressional Budget Office looked ahead in 2001, it saw a budget SURPLUS for 2008 of more than $600 billion. Surpluses had been coming in for years during the Clinton administration. They thought it would keep going like that. Instead, 2008 saw a DEFICIT of nearly $500 billion.

The higher the debt and deficits go the harder it is to pay them down honestly. Eventually, the feds reach the point of no return...like a guy who's so deep in debt he can't possibly work his way out. Then, you get another crisis...either in the form of default...or (hyper) inflation...or both.

Tomorrow, we're off on the road to the Andean highlands...

No phone. No internet. No fax. No Blackberry. No iPhone.

We've got cows to round-up, wrestle, and vaccinate.

In the meantime, we'll leave our "Crash Alert" flag flying...and send a message as soon as we can...

Until then,

Bill Bonner
for The Daily Reckoning Australia

• Bankers Take Money From the Government and Use it to Speculate
• The More Money in a Financial System the Less Each Unit is Worth
• Warren Buffett: People Do Not Make Money by Betting Against the US Economy
• The Feds Are Trying to Avoid Deflation
• The Battle Between the Forces of Inflation and Deflation Wages On

What's a little odd about this story is that this woman has three grown children...six grandchildren...and even a great grandchild. Now, what's going on here? Are all those kids so heartless that they won't take in grandma? Or is grandma so insufferable that no one can stand her?

We always take the 'glass half full' approach here at The Daily Reckoning. So this reminds us of what is so nice about depression: it brings families together. It also improves manners. Grandmothers know they need to watch their behavior, or they'll be sent to a homeless shelter.

Once you knock them down it is harder than ever for grandmothers to get back on their feet. Why? They're not as flexible as they used to be. Besides, they have no way to earn money.

Mortimer Zuckerman, editor of US News & World Report, provides the figures:

Of people who are out of work, more have been jobless for longer than at any time since 1948. More exhaust their unemployment benefits before finding a new job than ever before. And if they are lucky enough to find work, they'll work the shortest workweeks since 1951.

In other words, the baby boomers have never seen times so rough...for themselves as well as for their children. One American in nine depends on the government for his daily bread. There are 6.2 million more people on food stamps than when the recession began. And there are 6 people waiting in line for each job opening, up from 1.7 when the recession started.

The baby boomers meanwhile figure they will have to keep working longer than expected. Sixty-three percent of them say they expect to delay retirement in order to build up more retirement savings.

This is bad news for younger workers, who were hoping the boomers would get out of the way to free up some jobs. Among young Americans, unemployment hasn't been so high since 1945.

If that weren't bad enough, the government has made things worse by increasing the minimum wage; that alone cost the young an estimated 300,000 jobs. In a depression, prices fall. The price of labor falls too...but not easily. That's why inflation usually helps increase employment - it lowers the real cost of labor. But people do not accept wage cuts readily. And then, along come the feds with a crackpot scheme to INCREASE wages...making the situation worse.

Naturally, Zuckerman looks at these facts and comes to the wrong conclusion. The headline:

"The free market is not up to the job of creating work."

"Only massive programs are equal to the challenge of restoring stable growth to our economy," he writes, in The Financial Times. What kind of massive projects? He mentions an "infrastructure bank." He might have said a war. WWII worked wonders for unemployment. All of sudden, anybody who wanted a job could find one.

But it's all hokum and claptrap. The Soviet Union put everyone to work. You can see where that got them. It's not the fact that people are sweating on a job site that makes a society prosper; they also have to be doing things that add to their wealth. Infrastructure, like any other capital investment, makes sense only when it pays off. The Japanese poured more concrete per square inch than anyone before or since. They proved that you can put up all the bridges and canals you want; it still won't restart the economy.

The free market is the only thing that can create worthwhile work. Because it is the only thing that knows - by sales and earnings - which projects make sense.

But we're facing a losing battle. People much prefer soothing lies.

Heck, we like them too.

Mundus vult decipi et decipiatur!

Bill Bonner
for The Daily Reckoning Australia

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