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

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

"Inflation is good," they say.

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

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

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

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

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

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

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

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

Yesterday was a day of strikes throughout France. Elizabeth reports

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Keep reading for today's essay,

Bill Bonner
for The Daily Reckoning Australia

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SO HANK PAULSON, Ben Bernanke and George W.Bush got their wish. The US Dollar is now the world's strongest currency.

Aw...shoot!

"I believe that a strong Dollar is in our nation's interest," claimed Henry Paulson in his first speech as US Treasury secretary, made at Columbia University two years ago...

It's a phrase he then parroted time and again, repeating the formula first dreamt up by Robert Rubin 13 years earlier.

The plan then (and ever since) was to fob off foreign complainers back when Bill Clinton faced a federal deficit worth nearly 5% of the US economy. Now Paulson's banking bail-out charade will sit atop a government deficit already equal to more than 7% of this year's GDP.

Small wonder, then, that the "strong Dollar" has vanished from official speeches and comment. But the damned thing keeps turning up everywhere else.

Paulson repeated Bob Rubin's phrase so often from late 2006 to mid-July this year, even Ben Bernanke got on the train in May '08. Come June, and the Fed chairman raised the rhetoric again, dedicating himself to "ensuring that the Dollar remains a strong and stable currency."

Real US interest rates, however - which deduct Consumer Price inflation from the Fed's own target rate - were then sinking to pay savers their worst negative return since 1980.

Hell, satire this sharp even saw George W.Bush get with the program, telling Fox News last November that "if people would look at the strength of our economy, they'd realize why...you know...I believe that the Dollar will be stronger."

The president said it again - no word of a lie! - at a White House press conference in Feb. 2008 ("We believe in a strong Dollar policy") and in March, he said it to CNBC too, adding that "Our policy has not changed.

"We're for a strong Dollar."

Whether or not the Three Stooges ever meant it, their joke of a currency is now out-stronging the Yen - itself nearly 30% stronger since summer 2008, thanks to $6 trillion in wealth all trying to get home at once, squeezing its way through the forex markets as Japanese savers panic out of their Euros, Pounds, Reals and Zlotys.

Versus the Hungarian Forint - formerly a great destination for Japanese cash fleeing 0% interest at home - the Yen has gained nearly one-half in the last 12 weeks alone. It's added 5% since Wednesday, despite an emergency rate-hike by the Magyar Nemzeti central bank.

Why? Because not even a 300-basis point hike to 11.5% can stop hot money escaping when it runs for the exits. For that, you need exchange controls and guns.

Hiking UK interest rates from 10% to 15% inside one day failed to stop the British Pound collapsing in Sept. 1992;
Two years later, not even a yield of 40% on Mexican bonds could attract foreign cash into D.F.'s coffers;
In 1997 the Korean Won lost half its forex value despite 30% interest rates;
During 1932, the Federal Reserve hiked US interest rates to stem the outflow of gold reserves, but US citizens responded by simply hoarding gold for themselves for fear of a devalued Dollar. (They got it, too - but not before F.D.R. banned private gold ownership in 1934.)
Back to the future, and Hungary's domestic economy stands fit to collapse thanks to this new run on hot money. "Foreign currency loans made up 62% of all household debt at the end of the second quarter," reports Bloomberg, "up from 33% three years earlier."

Now all that money wants out - forcing the IMF in - as Budapest's bubble goes bang. The International Monetary Fund is awful busy already, struggling to keep Iceland, Serbia, Ukraine, Pakistan and Belarus afloat as today's strong Yen (and the yet-stronger Dollar) reverse the last five years and more of easy loans, easy terms.

Of course, the IMF - that lender of last resort to lenders of last resort - exists to avoid repeating the mass currency crises of the Great Depression. So just like Ben Bernanke's four-decade study of the US depression, the world's about to find out if the central banks' central bank is up to the task.

The Dollar's put on 30% vs. the Mexican Peso since the summer; it's gained one-third from its floor versus even sensible things like the Canadian Loonie and Aussie Dollar. Together with the continued shutdown in credit, the pace and breadth of this bounce is quite literally destroying the global economy. Industrial production is collapsing in the US, Germany and Japan; the failure rate for small UK businesses has risen seven times over since summer '07. And the strong Dollar is also destroying everyone's pension as well, just as surely as the banking collapse devoured mom 'n' pop savers during the '30s depression.

Germany's stock-holders are down 44% so far in 2008. The Bovespa in Sao Paolo has been cut in half since mid-June. Moscow's stock market plunged by one-fifth on Oct. 6th. The Nikkei index in Tokyo stocks has dropped one-third of its value in the last month alone.

State-side, the Pension Benefit Guaranty Corp. has watched more than $3 billion of its $63bn portfolio evaporate as Wall Street sinks. All told, America's 500 top stocks have cost investors 31% of their money since the Dollar turned higher in mid-July.

Yet "a strong Dollar is in our nation's interests. It is in the interests of the global economy," claimed George W.Bush as climbed aboard Air Force One this June. He was just as wrong there as he was on Saddam's deadly arsenal, and with similarly disastrous results. But he then repeated this line to a journalist as he flew to Slovenia for a US-European summit.

"We want the Dollar to strengthen. Relative evaluations of economies will lead to that Dollar strengthening."

Read that again, and ask - as nobody did when the joke was still funny - How could a strong Dollar possibly be in the best interests of the US or global economies if it comes thanks to anything other than a reduction in America's trade and budget deficits? What good can a strong Dollar do if it appears instead thanks to a run on over-geared investment worldwide?

The Decider himself knew this as early as Nov. 2004 - back when the Euro was worth only a little less than it is today. "The best way to affect those who watch the Dollar's value is to make a commitment to deal with our short-term and long-term deficits," the president said to reporters attending the 21-nation Apec conference in Chile that year.

And what a commitment he's made since then!

Adrian Ash
for The Daily Reckoning Australia

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