The recovery continues...or so says the mainstream financial press. But the economy is still losing jobs...and people are still getting poorer.

NEW YORK (CNNMoney.com) - The percentage of American workers with virtually no retirement savings grew for the third straight year, according to a survey released Tuesday.

The percentage of workers who said they have less than $10,000 in savings grew to 43% in 2010, from 39% in 2009, according to the Employee Benefit Research Institute's annual Retirement Confidence Survey. That excludes the value of primary homes and defined-benefit pension plans.

The American economy has apparently peaked out. Its labor is too expensive. Its consumers are tapped out. Its government is going deeper and deeper into debt, with no way out. In other words, the US economy is yesterday's news. We're here in Mumbai learning more about tomorrow's news. We sat down with a group of 12 analysts trying to understand what is going on in India, generally. Of particular interest was Tata Motors... Our investment team at the family office recommended it last year. It went up 468% over the last 12 months...

"Sell it now," said an analyst here who follows the automobile sector.

You see the Tata name everywhere here in India. Autos (the family owns Jaguar), coffee shops, hotels, insurance, airlines, chemicals - you name it. Tata seems to own the whole country. Just about everything seems to have a Tata company behind it.

But who is behind Tata? The company is run by Ratan Tata, graduate of Cornell and Harvard, who is unmarried. With no children.

"The family is part of a tiny minority in India," a colleague explained. "They are Zoroastrians...which we call Parsees. They are a disappearing group because they don't believe in getting married and having children. And if a Parsee marries a non-Parsee neither of them can continue to be a Parsee."

They sound like the Japanese. On the road to extermination. But this dead-end is peculiar to the Indian Zoroastrians. Other groups of Zoroastrians accept converts...some even recruit them.

The word 'parsee' or 'parsis' was the term applied in the state of Gurajat, in Western India, to anyone coming from Persia. The Zoroastrians were originally from Persia, where they were pushed out by the Muslims. Now, they are a small religious minority, with a few recruiting centers...including one in Los Angeles.

"Parsees believe in playing an active role in the world. They fight for good against evil and try to establish order against chaos," says our informant.

We don't like to criticize anyone else's religion, but it sounds a little flat to us. Where are the body thetans? Where's the crucifixion? Where's the bread transformed into the body of the savior? That's probably why the Zoroastrians have lost market share. Not enough magic and mystery.

But we're not here to improve the world's religions. In fact, we're not here to improve anything. We're just watching...wondering...and waiting for the next absurd thing to happen.

Hey...here's something. Page one of the Times of India. It says that the president of France and his new wife, Carla Bruni, are both having affairs. The president is said to be doing a little hootchi kootchi with his minister of ecology. And if you believe the report, the first lady of France is now living with another guy.

Oh well...those French!

Back to our beat...money. Money doesn't cheat. It doesn't lie. It doesn't run around. It is interdenominational and ecumenical.

Well...real money doesn't cheat. You can trust gold. On the other hand, those paper dollars, euros and rupees are completely faithless. They say they're worth a certain amount one day. The next, it's a whole 'nuther story.

Lately, the dollar has been doing well. The bond market has held up...despite the extraordinary demands placed on it by the world's governments.

In February alone, the US government ran a record deficit of $221 billion. And February is a short month. Annualize that and you've got about $2.5 trillion in excess spending.

That money has to come from somewhere. And even if you took 100% of America's savings...it still wouldn't be enough.

If you're married to the dollar...it's time to see a divorce lawyer.

Regards,

Bill Bonner
for The Daily Reckoning Australia

• In India With a Strategic Partner
• Homebuilding Goes Down While Economy Gathers Strength
• Australian Credit Card Debt Grew by 9% in February
• Unlike China, India is Not Willing to Learn from its Mistakes
• India Can Grow for Many Years

Not much in the financial news worthy of comment this morning...

The Dow gained $13. Gold lost $13. Nothing much to say about it...

So we will comment on something beneath comment...something so low we have to dig down to find it...something so unworthy we hardly imagine we are mentioning it...something in the newspapers...

We're talking, of course, about politics...

The love-fest with politics is heating up. The drugs have been passed around. Now, the clothes are coming off...

"France keeps steady course in economic upheaval," says a headline at the International Herald Tribune. Steady course? You bet. It kept subsidizing, bailing out, protecting, coddling and otherwise meddling in its economy - just like it did before the crisis began. Had it not done so, the story continues, France might not have been the first major economy out of the worldwide recession.

On the other hand, the French never went deeply into debt... So maybe they just didn't have so much exposure to the worldwide debt crisis in the first place.

Never mind. The papers don't know what the problem is, but they're convinced that government interference is the solution.

Over at The Financial Times, Clive Crook is breathing hard, too. He reckons that the "downturn called for a big stimulus," and that the US stimulus effort headed off a worse recession. He then explains that the feds' stimulus really didn't stimulate at all, it merely offset a decline in spending at the state level. State tax revenues fell; states spent less. State tax revenues declined $87 billion in the last 12 months, the biggest drop on record. The feds made up for it by spending big.

Meanwhile, The New York Times tells us that the whole downturn is now behind us. The economy is "surprisingly normal," it says.

The US economy is some 11 million jobs short of full employment. Nothing very normal about that. But February saw an unexpected upturn in consumer credit, reports the Times. And unemployment seems to have bottomed out, adds The Wall Street Journal.

Surprisingly normal?

Well, there's a big difference from something that looks surprisingly, reassuringly normal...and something that is actually working normally.

Which is it?

The New York Times is right; it is an economy that looks surprisingly normal...

Zombies can look surprisingly normal too. If you clean them up.

Bill Bonner
for The Daily Reckoning Australia

• Stimulus Stimulates
• Mr. Market Never Gets a Say on Government Jobs
• Obama Plans to Raise Taxes on the Rich and Businesses
• South Australia Law Will Have a Chilling Effect on Political Speech
• Normally Small Businesses Lead the Economy Out of Recession

The Dow rose 91 points yesterday. Gold fell $6.

Officially, the crisis is over. Everyone says so. Central bankers and Treasury officials have been congratulating themselves. It's been a year now since the end of the world didn't happen. These fellows take credit for it.

Bernanke said yesterday that he'll keep the monetary spigots wide open for a while longer...but that's just because the recovery is fragile. He also talks of an 'exit' from stimulus programs, now that the economy is getting back on its feet.

Claptrap! Balderdash! Flimflam!

The mainstream economics profession is guilty of dereliction of duty. They should be telling people that this 'recovery' is a scam. They should be warning investors that the markets could fall apart any day. They should be buying gold and selling US Treasuries...and explaining to the politicians that you can't buy your way out of a depression with phony dollars squandered on wasteful projects!

Instead, the dopes are patting each other on the back...praising themselves for saving the planet from destruction.

But what really has gone on? And what's going on now?

Glad you asked.

First, there is a real economic phenomenon going on - the depression. It's alive and well...and doing just fine. Households are de-leveraging. Businesses are building up cash. People are losing their jobs. Savings rates are edging up.

Almost everything is happening as it should.

Depressions are times of falling prices. Markets are always discovering what things are worth. In a depression, they find that assets - stocks and real estate primarily - are not worth nearly as much as people thought.

That's why we have our 'crash alert' flag still flying. Prices are vulnerable to sharp, unannounced drops until they finally get down to real depression levels. Since that hasn't quite happened yet...we figure it's still to come.

On the employment front, this depression has put more than 6 million people out of work. And every month, more people join the unemployment ranks. So far, so good. The US economy didn't need so many marble countertop installers and so many mortgage refinancers. (If only something could be done to get rid of lobbyists!)

But the worst thing about a depression is that it holds jobless people prisoner for so long. Many of them will become lifers...they'll never work again.

In that regard, this depression is similar to Japan's 20-year depression, 1990-2010. After the bubble burst, the Japanese...who were aging faster than any race ever had...figured they needed to get serious about saving money. So, they cut back on spending...and saved. Domestic spending collapsed. Fortunately, the rest of the world - especially Americans - were still spending their fool heads off. And Japan is an export-led economy. Even so, with its own consumers dragging their feet, the Japanese economy didn't go very far or very fast.

The Japanese put their vast savings, directly or indirectly, into Japanese government bonds...helping the government fund its massive stimulus programs. Of course, the stimulus programs were a waste of money. The economy never really recovered...and now the government is expected to have gross debt equal to 200% of GDP next year, according to the IMF.

For reference, the US is expected to reach 100% of GDP next year. Britain is hard on America's heels with debt at 94% of GDP.

And now Americans are entering retirement savings mode too. The biggest age cohort - the boomers - need to do some fast saving in order to finance their retirements. They're cutting back...not just temporarily...but permanently. They will never, ever again spend money like this did during the big bubble years 2003-2007. That's what makes for a durable depression...

Another thing that makes for a depression is a lack of lending. Bank credit is still falling. Households cut back because they need to get out of debt...and save money for retirement. Businesses cut back too. New projects typically don't do well in a depression. Small businesses struggle...and fail. Big businesses get bailouts and subsidies. Depressions are times to neither a borrower nor a lender be.

Debt is only increasing at the government level. But that's another story for another day...

Regards,

Bill Bonner
for The Daily Reckoning Australia

• Japanese Government Displays Generosity as Prices Fall in Japan
• Japan and its Economy Did Not Have Secret to Everlasting Success
• How Will the United States Finance the Biggest Deficit of All Time?
• The Solution to a Depression is a Depression
• Consumer Spending Rises

But the financial industry blew itself up in 2007-2009. Now, what do we have?

The government! Doing all the same things...making the same mistakes (only worse)...and working hard to blow itself up.

"Basically, it's over..." says Charlie Munger. Warren Buffett's partner figures the glory days of the US economy/empire are behind it. He spelled this out in what he calls "a parable," in Slate Magazine.

This puts Munger in direct opposition to all those economists, bankers, politicians, pundits and meddlers who think they can do better than the financial industry. Martin Wolf, in The Financial Times, says the challenge is to "walk the tightrope" between too much additional stimulus and cutting off stimulus too soon.

Richard Koo and Paul Krugman think the feds need to give the economy a lot more stimulus in order to offset the forces of contraction.

Most people think the economy will muddle through somehow...thanks to all those geniuses working at the Department of the Treasury and the Fed.

Dream on! The economy might muddle through or it might not. (The Wall Street Journal says growth rates have already returned to normal.) But if the economy does pull out of this depression...it will be in spite of all those ham-handed central planners who are telling it what to do, not because of them.

Yesterday, the Dow fell 100 points. Gold dropped $9.

As far as we can tell, we're still in a depression - that is, a deflationary contraction. You'll see a lot of contradictory statistics and BS analyses for the next 5 to 10 years. What you won't see is real growth...not until debt is substantially written off, costs are reduced and a new economic model is discovered. The 'growth' we're seeing now is largely an illusion, a mirage, and an attractive nuisance. We'll have to pay for it later!

To put it another way, you won't see real growth until there's something solid to build on - a new foundation of lower costs and fewer leeches.

Yes, dear reader, the problem is not a liquidity problem. It's not a banking problem. It's not even just a debt problem. The bigger problem is that the US economy - but nearly the same could be said of Japan...the UK...Italy...and other places - is too expensive, too rigid and too full of zombies.

Munger is right. At least, he's right about what has gone on so far. The financial industry turned the country into a casino...and too many people lost their money.

We don't know what happened in the second part of Munger's parable. We couldn't get the 2nd page of the Slate article on our laptop screen. But he's a smart guy. We doubt he missed the government's role. First, the private sector loaded itself up with debt. Now, it's the feds' turn.

Was it Ronald Reagan who said of the Soviet Union, that it was on the "wrong side of history?" The derelict Bolsheviks were definitely on the wrong side of history in 1989. We knew it. They knew it. It was such a glaring problem; they had no choice. Their economy was imploding - thanks to rigid central planning. They gave up and switched sides.

But now it's the US that is on the wrong side of history. Like the Soviet Union, it tries to impose its will, by force, on Afghanistan. Like the Soviet Union, it has too many expenses and not enough income. And like the Soviet Union, it tries to impose its will on the domestic economy too - by central planning. Not exactly in the heavy-handed fashion of the old apparatchiks... This is post-Berlin Wall central planning. Collectivism with a clown face.

The US nationalizes key industry and borrows heavily...shifting the weight of economic 'growth' from the private sector to the government. Everything from home finance, banking, insurance, automobiles, employment and food is now owned, provided or subsidized by the US government.

After the Soviet Union fell...the rest of the world went over to look down the collectivist hole...and then slid in too. In October 2009, the IMF counted 153 separate stimulus or bailout programs. If you bought a house or a car in 2009, you may very well have had the government to help you. And now, if you hire a new employee, you will have the government by your side again. If you get sick, you will have the comfort of knowing that the feds are in practically every examining room, every operating room, every drug laboratory, and every pharmacy. And if Obama has his way - there will be even more of them. Is there any economic act, howsoever trivial, that no longer involves government support, approval, or funding?

Munger may have pointed out. Or maybe he didn't. In either case, we will: the US economy was at its strongest before it was burdened by so many people depending on it...and so many smart people helping it along.

It won't make much progress again until it gets rid of those people. And that won't happen until it has crashed...and become desperate. Living at the expense of others is a hard habit to break.

Bill Bonner
for The Daily Reckoning Australia

• Chinese Economy Seems to be Growing
• Major Premise That Government Economists Can Improve Workings of a Free Economy
• Price of Oil May Rise Due to Scale of Georgian Conflict
• US Economy is Some 11 Million Jobs Short of Full Employment
• The Bubble Deniers Deny that Their Own Stimulus Caused it

That's the new motto of the whole Washington establishment. Every spending bill has something in it for everybody.

Today is a holiday in America. It's "Presidents Day," a day set aside for Americans to honor those who rule over them. Most Americans think of Washington, Lincoln and Roosevelt...but here at The Daily Reckoning we honor America's truly great presidents - William Henry Harrison, Chester Arthur and Warren Harding - those who didn't make things worse.

But look on...ye dead chiefs...at what your country has become:

Europe has only 1,800 registered lobbyists. There are 15,000 of them in the US. Most of them probably live in our new neighborhood...getting in our way as we drive around the Beltway...taking our parking places...hogging the tables at Starbucks... The parasites!

The Financial Times reports that companies spent more on lobbying in 2009 than they had the year before. Investment in new plants and equipment fell dramatically. But investment in lobbying rose by 5%.

You don't need a Ph.D. in political science or economics to figure out why. Returns from lobbying were higher. That is the big shift in the US economy...the final shift.

We'll come back to this theme in a minute. First, let's look at what happened on Friday. Just to set the stage...we're trying to figure out whether the stock market has entered a declining phase. At the beginning of last week, we thought so...by the end of it we weren't so sure. And on Friday, the evidence was mixed. The Dow fell 46 points, but still ended up for the week. Gold dropped $4.

As to the economy, the evidence was mixed too. Consumer spending rose in January...but consumers are still reluctant to spend. And they don't have any money to spend anyway...

So let's return to our Presidents Day theme...

The US economy began as a frontier economy on the tidewater area of the East Coast...with a few big planters, but mostly small farmers, merchants and artisans.

Then came the entrepreneurs with their mills and factories.

Then, a few of the entrepreneurs grew to be captains of industry - the Vanderbilts, Carnegies, and Rockefellers.

When the inventors, founders and innovators died off, their businesses were taken over by corporate managers.

And then the leading corporations shifted their focus, from making things to marketing them. This shift corresponded roughly with the ascendancy of New York over Chicago...and, then after 1980, the focus shifted again - to financing. Wall Street grew rich. Motown - Detroit's automotive industry - fell into decline. For a while, even the auto businesses made more money financing cars than they made building them.

Finance blew itself up in 2007-2009. Now, there's a new shift underway...from the private economy to the government. Mommas in the '20s and '30s wanted their babies to grow up and go into manufacturing. In the middle of the century, marketing was more rewarding - Madison Avenue was the best address in America. And by the end of the century, the best and the brightest were headed to finance.

Where should bright young grads go now? Well, follow the money...! Where's the money now? Not in manufacturing...at least not in US-based manufacturing. And not in marketing either - gone are the days of selling soap to big families with big pay raises. How about finance? Forget it. The boom in credit lasted more than 50 years. But who can borrow now? Only the feds. Sure a few big banks will make money by helping the feds raise cash. But the big expansion in consumer credit is over.

Now, government is about the only major industry that is expanding. The feds have the money now. They're even handing it out. Get in line!

Bill Bonner
for The Daily Reckoning Australia

• A Golden Vending Machine
• The Story Behind China Dumping its US Treasury Debt
• US Economy Still in a Deflationary Contraction
• Now in Post-bubble Era as Financial Industry Bombs Out
• JPMorgan and Goldman Sachs Making Billions in Profits

Obama to California: Uh...

Yesterday, stocks lost 103 points on the Dow. This looked like a confirmation to us. The stock market appears to have begun its next and final phase...

AP seemed to think so too:

"Stock investors see threats from all directions," said the headline.

We didn't bother to read the article. We already know the directions.

From the north, investors worry about falling consumer demand. Consumers are in a funk - they have more debt, less income, fewer jobs, and less access to credit. The only news on that front we have today is that even jumbo housing loans are going bad...delinquencies are up to 9.6%.

From the east, investors worry about the continued invasion of cheap consumer goods and cheap services. China's economy is said to be growing at double-digit rates. How can US firms compete? And what if China is a bubble, as Jim Chanos believes? When it blows up, US stocks will come down too.

From the south comes the threat of higher interest rates. The poor dopes think the recovery might be for real. If so, inflation will rise and the feds will increase interest rates...possibly cutting off the new boom.

And from the west what do they have to fear? Well, there's that business in Europe. You know, Greece and all. The PIIGS - Portugal, Italy, Ireland, Greece and Spain... Europe's peripheral countries are in trouble. Lenders fret that they might be forced to default on their debt. So, they want higher interest rates. This, of course, just makes state finances worse...pushing the PIIGS closer to default.

The PIIGS owe $2 trillion, which might need to be restructured. Yes, dear reader, the sovereign debt problem is a big one - much bigger than Bear Stearns, Lehman Bros. and AIG. But the biggest porker of all - the USA - has fives times as much sovereign debt as all the PIIGS put together.

It won't take investors long to figure out that there isn't a whole lot of difference between Greece's finances and those of the US. Each has about the same amount of debt and the same size deficit, relative to GDP. The big difference is that the US ultimately controls the currency in which its debt is calibrated. Greece does not. Neither does California.

Both California and Greece borrow long-term at about the same rate...around 6%. Lenders know that when their backs are to the wall, both governments will have only two choices, not three. They can cut spending. Or, they can default. What they can't do is wiggle out of their obligations by inflating their currencies.

Jean Claude Trichet has already made that clear:

"...belonging to the euro area, you...have an easy means of financing your current account deficit. You share a currency that is credible, so that you have a quality of financing that corresponds to that of a credible currency."

He went on to say that Greece contributes only about 3% to the total output of the euro-zone. If push comes to shove, Greece will be pushed out rather than allowed to weaken the euro.

Then, Mr. Trichet made an odious comparison. California is a much bigger part of the US economy than Greece is of the euro economy. In fact, it is more than four times as large. Will the US come to California's aid? Mr. Trichet didn't say.

It is possible, of course, that Mr. Obama will say to the Golden State what Gerald Ford said to the Big Apple. In 1975, New York City's back was to the wall. It appealed to Washington for help. "Ford to City: Drop Dead," was the famous headline in the New York Daily News, reporting the president's response.

New Yorkers were incensed. Later, they realized that by vowing to veto a bailout President Ford had done them a great favor; he forced New York to clean up its act. The city went on to its greatest years. Likewise, the feds would be doing all of us a favor by letting failure fail with dignity.

Will Obama help California mend its ways? Or will he turn it into a zombie state?

Bill Bonner
for The Daily Reckoning Australia

• It’s the Little Economies that Have Trouble
• The Debt Collection Business Booms
• Trichet Should Tell Greeks to Drop Dead
• Reality Sovereign Debt Finance Theatre
• Australian Dollar Set to Grow for the Remainder of 2008

Maybe we were wrong. Maybe the mainstream economists are right.

You know, up to now all they've been good at was explaining why the forecasts they made in the past didn't work out. But maybe they're right, after all. Maybe up IS down. Maybe better IS worse. Maybe you can squander trillions of dollars and yet have more!

It is all too much for us. Our head aches thinking about it. But there it is, right there on the front page of the weekend news:

"US growth accelerates..." announces The International Herald Tribune.

Right there in black and white. And it must be true. The newspapers wouldn't lie, would they? And, the economists who fiddle the numbers for the US government wouldn't hit a false note on purpose, would they?

Nah, that never happens. But how is it possible for the economy to go right back to Bubble Era growth rates after taking only a couple percentage points off of US GDP? We all know it was a credit bubble, right? We all know it couldn't last, right? We all know, too, that the fuel for that growth - bubbly gases coming out of the banks and the real estate sectors - has disappeared. So where is this growth coming from?

On Friday morning, the stock market got excited about the stronger- than-forecast growth numbers, along with news that Ben Bernanke was around for another four years. The Dow rose more than 100 points. But by the afternoon, investors were asking questions again.

If the economy really is recovering, maybe the feds will reduce their stimulus...

If the economy really is heating up, mightn't it melt all that money and credit frozen by the depression? Doesn't that increase the odds of inflation - and higher rates from the Fed...?

If the feds tighten, won't the US economy fall back into the second part of the W-shaped recession...just like Paul Krugman says?

By the close of business the Dow had lost 53 points, which makes us think the final push to the bottom has begun. Even good news can't stop it. When 5.7% growth - after the worst slump since the '30s - doesn't get investors excited, there's something wrong.

Wait a minute...

"The biggest lift to economic activity," continues The New York Times, "came because businesses ran down their stocks of unsold goods at a much slower rate than earlier in the year..."

In other words, the 'growth' came because businesses restocked their shelves at a faster rate. So, there's more on the shelves to buy. Hmmm. Wonder if it will sell...?

The only way you could have real, sustained growth is with a recovery in employment - and earnings. Looking at it broadly, Americans were earning a certain amount of money in 2007. Then, they discovered that much of what they were doing was not worth doing. They were building houses for people who couldn't afford them, for example. And they were spending money that was "taken out" of their houses. At the peak, a substantial part of US GDP - and virtually ALL the growth - came from these sources.

That money has disappeared. People aren't getting paid to build houses that no one will buy anymore. And shops aren't selling to people who pay with money from mortgage equity extraction. They've already extracted so much that there's nothing left. Or less than nothing. Many homeowners have net negative equity.

What does this mean? It means that people are earning less, borrowing less, and spending less. What else could it mean? A substantial part of the economy, 2003-2007, was fraudulent - in which excessive consumer credit masqueraded as real purchasing power. That part of the economy has gone away. So should that portion of the GDP. In theory, GDP should go down and stay down until new industries, businesses, and jobs are found.

Bill Bonner
for The Daily Reckoning Australia

• Bubble Age Jobs Lost Because of Recession
• Market Driven by the News
• If the Economy is Not Recovering It Isn’t Getting Enough Stimulus
• Economists Agreed the Stimulus Was Working and the Recession Was Coming to an End
• Is the Real Economy Growing, Expanding, and Making Money?

He (Mr. Reality) left a calling card in New York on Friday, that's for sure. Stocks in New York fell 2.09% on the Dow. Wall Street has realised that it's become the political whipping boy for a President who needs a popular enemy. It's all probably a bunch of bluster to get the President some political momentum.

But if anything has momentum, it's the volatility index. It's up 55% in the last three days (see chart) The VIX measures implied volatility on the S&P 500. It's nominally a measure of the cost of options on the U.S. exchange. It goes up when uncertainty increases. It does that because options are a way of hedging against future outcomes (positive and negative). When the future becomes more uncertain, the cost of insuring against it (at least in the stock market) goes up.

It's all basic supply and demand really. But in this case, demand for uncertainty insurance is rising because the supply of uncertainty is soaring. The U.S. economy, the Japanese economy, the European currency, the Chinese bubble, the Australia resource super cycle...these are all part of the complex adaptive system that is the global economy. Hmm.

84% of Australians think house prices will rise in the next twelve months, according to the January Westpac-Melbourne Institute Consumer Sentiment Survey. Mr. Reality is clearly giving these Australians a wide berth. Twenty one percent of those surveyed believe house prices will rise by 10% or more in the next twelve months.

Doing a little back of the envelope math, and if our calculations are correct, a $450k property compounding at 10% a year for 10 years would turn into a $1.16 million dollar property. It would be a gain of 160%. And one million dollars would be the new median house price in Australia.

Now you have to assume a lot of income growth from here for affordability to remain the same with house prices at those levels. Or you'd have to assume much lower interest rates. That would be a stupid assumption, though, given that interest rates are headed up at the moment, and that we are likely at the low end of the interest rate cycle.

Perhaps the 21% of people believe house prices will go up by 10% a year are all real estate agents and bankers. Or perhaps they are functionally illiterate in the financial sense. Either way, it's a large percentage of people surveyed to believe such clap trap. It's this kind of belief that is the rocket fuel for the blow off stage of a bubble.

But we're not going to win that debate this week. We'd just like to point out that this is whole point of the Daily Reckoning really, to scrutinise received thinking and conventional wisdom. Whether it's the housing bubble, the economy, or global warming, your best defence against a world full of bogus thinking is to question it.

Of course that doesn't mean you'll always be right. For example, we're obviously not a climatologist. The mail bag was full of some choice words for the comments we published last week (Burn More Coal). The polite synopsis is that we were told to stick to our knitting.

But calling out mainstream thought IS our knitting. And climate change is fair game because the financial stakes are extremely high. Indeed, all the stakes are high (political too). We're not going to rehash the argument here. However, if you don't like uncomfortable ideas, don't read them!

Don't worry though. We will say, yes, most of the time our beat here is investing. And there is plenty to think and write about on that score. So we'll get back to the main game this week. Until tomorrow!

Dan Denning
for The Daily Reckoning Australia

• Reserve Bank of Australia Will Meet to Determine the Price of Money
• Australian Credit Card Debt Grew by 9% in February
• U.S. Trying to Auction Off $162 Billion in Debt
• Copenhagen Climate Talks Possibly Sent the Market Higher
• Rule Thumb for Modern Times

'Yes...we sold a lot of toxic, explosive stuff to our clients,' they said.

'Yes, we used our own money to bet against them...' admitted Goldman's top man.

'Yes, we blew up the whole world economy. We're sorry.'

Associated Press reports:

"The bankers - whose companies collectively received more than $100 billion in taxpayer assistance to weather the crisis - offered no regrets for executive pay that is now likely to increase as a result of their survival...

"Lloyd Blankfein, the chief executive of Goldman Sachs, took the brunt of the questions, especially on his firm's practice of selling mortgage-backed securities and then betting against them.

"'I'm just going to be blunt with you,' Angelides told him. 'It sounds to me a little bit like selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars.'

"Blankfein replied: 'I do think the behavior is improper. We regret the consequence that people have lost money in it.' Later, though, he defended the firm's actions as 'exercises in risk management.'"

This is not the first time we've seen this show. We're not old enough to remember the Pecora hearings of the 1930s. But they shared the same story line: captains of industry and finance make blunders; they cause Great Depression; politicians save the day.

Back in the '30s, the guys hauled before Congress generally refused blame. They were just doing their jobs. By and large, they were right.

This bunch today is more media savvy. They realize that their power and money come at a price. The feds have to pretend to punish them; they have to pretend contrition.

And the rest of us can only enjoy the show. After all, it's the greatest show on earth. We love every minute of it. But it's only entertaining when you understand the real plot.

What's the plot?

Well, you already know it. After the bubble blew up, the feds swung into action to repair it. But you can't really fix a bubble...at best you can only create a new bubble.

The real economy is still deflating. Just look at the jobs situation. Far from slowing or stabilizing, 2009 was the worst year yet for job losses - '07...'08 ...and '09...each year has produced greater losses. Even James Grant, who predicted a "barn burning recovery" now admits that his forecast has gone up in flames. He was "either early or wrong," he says.

And just look at the real estate market. "Home prices are softening again," says David Rosenberg. As for commercial real estate, here's Kenneth Laub, who's been in the business for 50 years, as reported by Bloomberg:

"He says the current downturn will overshadow all of the others...

"'It won't be a typical part of a cycle where we're down for two or three years and things recover,' says Laub, 70, whose New York firm, Kenneth D. Laub & Co., says it has handled more than $40 billion of real estate transactions since its inception in 1969. 'It will be longer than we've gone through before.'

"As in past slumps, the weak US economy is curbing demand for commercial space, increasing vacancies and causing rents and property values to fall. The key difference today is the explosion in debt financing and related derivatives that fueled a run-up in commercial real estate prices in the 2000s, Laub says. That's left property owners struggling to make mortgage payments. The overhang of debt will delay any recovery, he says.

"'It's not a supply-demand thing; it's an overleveraged condition,' Laub says.

"Laub expects a wave of restructurings by troubled commercial borrowers as hundreds of billions of dollars of loans come due annually during the next few years. Commercial real estate may still be recovering a decade from now, he says. 'What you're going to see is a tremendously long workout period unprecedented in commercial real estate in this country,' Laub says. 'That's where we're going, and it's just beginning.'"

Bad property market. Weak employment market. That's the background. And it will probably last for years - until the extraordinary debt in the private sector has been worked down to more comfortable levels.

Against this natural process of de-leveraging and depression struggle the feds - our heroes...making the situation worse! More below on that too...

Instead of blaming themselves for their silly theories...for causing the bubble with artificially low interest rates...and then failing completely to understand what they had done...they blame Wall Street.

Sure, the bankers, more knave than fool, took advantage of the situation. But they didn't cause it.

Still, they're very sorry they almost brought modern civilization to an end...but, hey, business is business...

Oh the roar of the greasepaint...the smell of the crowd! What a circus!

Obama says the feds 'saved' 2 million jobs. But the cost of each job saved was as much as $65 million, according to our not-very-precise accounting.

Was it worth it?

Yesterday, we went on at some length as to why government jobs weren't the same as private sector jobs. Since they're never put to the test of the market, you never know whether they are worth having, let alone saving. Do they add to the sum of human wealth and happiness...or do they subtract from it? No one knows for sure.

But here's the strange and remarkable thing; modern economists actually would prefer jobs that are NOT worth doing.

In the twisted mind of a mainstream economist the problem in a depression is that people don't spend money. Since they don't spend, demand goes down. The secret to avoiding a depression, they believe, is to replace private demand with government demand.

Easy, peasy...right?

The government just spends more money. And since it doesn't have any more money to spend (practically every government on earth was already running a deficit), it borrows the necessary funds. Thus does demand go up. And thus do the feds create the next bubble - in public debt.

But what if government-funded stimulus projects actually produced goods and services that people wanted? Ah...that would be a problem. Because in a depression, there is too much supply and not enough demand. Prices fall, encouraging people to delay spending...further depressing demand...and causing an even worse depression. So, the last thing the feds want is more supply. They want more demand but LESS supply. That means that the ideal government project is one that doesn't produce anything worth having. Such as military spending. Or digging holes and filling them up again. Or, departments and agencies that employ people who don't do anything.

It sounds to us as though practically any government program would fill the bill!

Regards,

Bill Bonner
for The Daily Reckoning Australia

• We’re Not Threatened by Inflation but by Depression
• Government Pretends to Punish the Bankers
• Hidden Inventory of Unsold Houses Will Depress Housing Prices
• We Trust Gold Because We Don’t Trust Central Bankers
• Gold Doesn’t Always Need Inflation to Rise

We mean the fight between greed and fear, boom and bust, expansion and contraction.

This is a fight that goes on all the time. But it is usually kind of a 'cold war.' Years go by without much activity. Stocks meander. A few companies go bust. A few boom. Interest rates...the dollar...and commodities are fairly steady.

Then, there are periods when all Hell seems to break loose.

We've been in a shooting war for many years - since the bubble blew up in the tech sector at the beginning of the '00s. After 20 years of boom...suddenly we were in a bust. But the fear didn't last. Out came the feds with their big guns...both monetary and fiscal...and pretty soon it was boom again...and then bubble.

You know what happened next. The housing/finance bubble blew up with subprime. Then, the stock market gave way. And then the economy was in the worst contraction since the '30s.

Of course, the feds fought the correction with everything they had. In 18 months the Fed doubled the nation's monetary base. Federal spending went to the moon too - with budget deficits over $1 trillion...and no end in sight.

All this firepower had an effect. The banks were able to pay their bonuses. And big players were able to borrow at nearly zero interest and gamble against the dollar. So, the financial world could slide back into party mode.

But it was a wild and desperate kind of partying...like Berlin in 1945, as the Soviet Army approached the city. Because, outside the financial markets, fear has never gone away. And on Friday, it should have been obvious even to economists that there's not much to celebrate.

"Jobs gloom hits West's recovery hopes," says a headline.

After much anticipation of a stable jobs picture - or even rising employment - the figures came in showing that the US economy is still losing jobs.

About 7.5 million jobs have disappeared since the contraction began. All told, since the fighting began in January 2000, the US economy has not created a single new job...despite steady population growth.

As for the stock market, it too is no higher today than it was 10 years ago.

The battle between inflation and deflation - boom and bust - has been hot for a decade. Why? Because the feds try so hard to prevent nature from taking her course. Normal markets are never entirely stable. They boom and bust. But the busts happen naturally...and usually, quickly. People who make mistakes are punished. They take their lumps. The economy recovers.

But since the mini-recession of 2001, the feds have fought a pitched battle to keep the markets from doing what comes naturally. Ben Bernanke denies it, but their intervention caused the huge bubble in housing/finance of the 2002-2007 period. They put in so much new money and credit that it looked like they had won the war. Stocks hit record highs...and houses too.

But something that has to happen is going to happen, one way or another. Corrections have to happen. And now, the US economy is correcting - like it or not. That's the meaning of Friday's unemployment numbers. The jobs of the bubble époque are going away. Employers are reluctant to create new ones. They want to see a real recovery before they obligate themselves to more fixed expenses.

So stay tuned. The war isn't over...

Bill Bonner
for The Daily Reckoning Australia

• Gold Market Was Looking for an Excuse for a Breather
• Feds Think They Have Won This Fight Against the Depression
• From Bubble Watch to Bust Watch
• No Great Slump, but Stagnant Inflation Looms
• US Economy Still in a Deflationary Contraction