Actually, we've seen so much already that it's hard to believe there's more coming. But there's sure to be more...and we have a feeling it will be worth the wait.

Yesterday, for example, GM filed for Chapter 11 bankruptcy protection. It couldn't pay its bills. GM was once the strongest corporation on the planet. But it has been around for nearly 100 years. Heck, everything wears out eventually...even a '55 Chevy.

"Obama Nationalizes GM," says a triumphant headline in France's La Tribune.

Triumphant?

Yes, according to the papers, Obama may have been handed the keys to GM...but the old jalopy is worn out. The French say the whole US economic model is ready for the junkyard. More on the French...and the French model, in our other article....

First, let's stick with the USA.

The Dow rose 221 points yesterday - to 8,821... Investors think the worst is over.

Everything is going up. Copper is up 65% so far this year. Oil is up 53%. Soybeans are up 22%. Stock markets are up about 30% worldwide. And gold is 12%. In this company gold is a laggard!

Copper has risen so much, say the papers, because China is buying all it can get. What it is doing with the stuff we don't know; maybe it is stocking up at what it believes are low prices.

Maybe it is hedging its bets. China has the biggest pile of Treasury bonds in the world - $768 billion of them. That's 768 billion reasons to worry. Because each T-bond is denominated in dollars...and while everything else is going up, dollars are going down. Yesterday, the dollar touched a new low against the euro for this year - at $1.42.

T-bonds are down too - minus 5% for the year. It would not be at all surprising for the Chinese to be stockpiling oil, gold, copper and all the other inflation hedges they can get. Their dollar-denominated bonds may go down...but their commodities and gold would go up. Overall, they'd come out even. You can also hedge your own nest egg with commodities.

Yet this week, Mr. Tim Geithner - the big banks' main man in Washington - is in China trying to reassure the Chinese that America takes its financial obligations seriously. That's something we never expected to see either. America may have the strongest economy on earth. But if the commies stop financing it, we're out of business.

So Geithner is in China, hat in hand, like a major debtor called into the bank president's office. Geithner, of course, has no choice. He has to go...and say what he has to say. He will use all the right words. He will show the appropriate seriousness...he will smile when it is called for...and put on a grave face when he needs to.

The trouble is, there's little he can do to help the Chinese. They want him to protect the dollar and the bond market. That's something he can't do.

"It will be helpful if Mr. Geithner can show us some arithmetic," said Yu Yongding, a former advisor to the Chinese central bank.

Yes, we'd like to see that arithmetic too. How do you add $1.75 trillion in deficits...pay for it with funny money from the Fed...and still come out even on the value of the dollar? There's no arithmetic we know of that works in the Chinese favor. Right now, the numbers...and the logic of the situation...are telling us that feds aim to create inflation. Instead of trying to keep prices under control...they're trying to get them to go up. That's yet another thing we didn't expect to see!

The US government is less concerned with protecting foreign lenders than it is with getting the US economy back to its old E-Z money ways. Cheap money is what people want. Cheap money is what the feds are trying to give them.

Today - will wonders never cease! - the US is pushing its phony money all over the world. The Chinese, meanwhile, are champions of financial integrity. Just wait until they give up on US bonds...then, we'll really see something we ain't seen yet!

Bill Bonner
for The Daily Reckoning Australia

• The Chinese and the Fed Both Buying U.S. Treasury Bonds
• American Family’s Share of Government Debt Now Over Half a Million Dollars
• Country Has Moved Towards More Government Intervention in Economy
• Copper, the Metal with a Ph.D. in Economics
• French Model of Economy Allows Meddling from the State

Someone seems to think there is a whiff of inflation in the air.

Sniff...sniff....

We're not so sure. It seems too early to us.

But we're not even going to think about it. Today, we've got to make tracks. We're traveling.

In light of our voyage we're turning today's essay over to guest host Ian Mathias, of Agora Financial's 5 Min. Forecast. He'll take over from here...

Your family's share of the government debt is now over half a million dollars. A record $546,668, to be exact.

That cheery Monday stat comes courtesy of a USA Today study, which claims that each American family's share rose 12% in 2008. That's $55,000 in new government debt last year for every US household - thousands more than the median household annual income. Here's how it breaks down:

Last year's spike is the biggest since the Medicare prescription drug benefit was added in 2003. According to the rag, the government garnered $6.8 trillion in "new obligations" in 2008, bringing the total US tab to $63.8 trillion. Given our spending record so far in 2009, it's safe to say your family's burden is already much, much larger.

And you ain't seen nothin' yet... the Social Security program will grow by 1-2 million beneficiaries every year until 2032 as baby boomers retire. Medicare will add just as many each year starting in 2011, when that same demographic starts turning 65.

Unless the US becomes a net saver, "another global financial crisis triggered by a dollar crisis could be inevitable," forecast former Chinese central banker Yu Yongding over the weekend. (Oy... Beijing is 7,000 miles from Washington, and even they can see this coming.)

Yu's comments were purposefully timed - US Treasury Secretary Geithner embarked on a sudden PR tour of China this weekend. His mission? Keep the cash flowing from America's No. 1 creditor.

"No one is going to be more concerned about future deficits than we are," said Geithner, whose government's budget deficit will exceed $1.75 trillion this year. "As we recover from this unprecedented crisis, we will cut our fiscal deficit [and] we will eliminate the extraordinary government support that we have put in place to overcome the crisis."

In the meantime, Geithner assured students at Peking University that China's investments in US paper are "very safe."

"I doubt the Chinese believed him," says friend and currency expert Chuck Butler. "Of course, I'm not a Chinese official, so I don't really know what they are thinking. But I've watched them smile and tell former US Treasury Secretary Paulson that they were going to allow greater currency flexibility, and after he would board his plane, it would be business as usual... Same thing for Graham and Schumer, who thought their prestigious status as lawmakers would get them someplace with the Chinese.

"It all comes down to the fact that the US needs China more than the other way around."

Bill Bonner and Ian Mathias
for The Daily Reckoning Australia

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But first, the market action. Crude oil kept on keeping on and closed up 3.4% in New York at $68.58 a barrel. Oil is up 54% this year.

Overall, the Reuters/Jeffries commodities index was up 3.07%. Oil, copper, gold, stocks, the euro-pretty much anything that is NOT the U.S. dollar or U.S. Treasury notes and bonds-is going up. At 81 cents versus the greenback, the Aussie dollar is at an eight-month high.

So it's happening again. Can't you see? Everyone is moving out of U.S. Treasuries and into commodities and stocks because the recession is over! Demand for government debt is falling. Demand for risk is rising! Dollar weakness equals economic strength!

Well. Maybe not. But that's the story that's being spun today. China's Purchasing Manager's Index expanded for the third month in a row. The dragon is breathing fire and building roads. "By the end of April, China had built 20,000 kilometres (12,430 miles) of rural roads, 214,000 low-rent homes, 445 kilometres of highway, and 100,000 square meters (1.08 million square feet) of airport buildings under the stimulus plan," reported China's National Development and Reform Commission on May 21.

Talk about shovel ready.

The Chinese surge in building and construction activity goes a long way to explaining the pickup in base metals prices and base metal stocks. But that just makes yesterday's news even more curious. Matthew Murphy over at the Age reports that the China Iron and Steel Association (CISA) has rejected the benchmark iron ore price negotiated last week between Rio Tinto and Japanese and Korean Steel mills.

That agreement cut the annual contract price for fine ores by 33% and for lump ores by 44%. According to Chamber's report, the CISA is rejecting the agreement because, "those cuts did not reflect the real supply and demand situation in the international market." "These prices do not reflect a mutually beneficial, win-win relationship for steel makers and iron ore suppliers," said a CISA statement. "CISA therefore cannot accept these prices and will not follow them."

We'll see about that. Maybe the Chinese are pushing for an even bigger cut. This is the peculiarity of the iron ore pricing system. Prices are negotiated between producers and consumers (Asian steel makers) on an annual basis. Last year, that worked out great for BHP and Rio Tinto. The 2008 contract price average was nearly double the 2007 price.

This year, even with a 45% cut from the 2008 price, the eventual price will still be higher than the 2007 price. That's not bad at all for Aussie ore producers, considering how awful business has been for everyone everywhere else. It shows a lot more resiliency in pricing-and a lot stronger Chinese demand-than you might expect.

What does it mean for shares? Well, if the price cuts in the contract price are smaller than expected, traders are going to revalue the ore producers at the new contract price. And of course, we're assuming that Chinese steel production is going to remain stable.

There is always the possibility that there is already way too much capacity in the Chinese steel industry and that ore demand, as resilient as it is, does not reflect a sustainable economic situation. But we'll just have to see about that won't we?

Whatever the fate of Chinese steel production, it's pretty clear China is beginning to swing its economic weight around. U.S. Treasury Secretary Tim Geithner was in Beijing promising that the U.S. would be a good borrower and reduce its deficits and not to worry about them so much and just make nice please and stop worrying and smile for the cameras would you please?

Meanwhile, former Chinese central bank adviser Yu Yongding was more direct. "I wish to tell the U.S. government: 'Don't be complacent and think there isn't any alternative for China to buy your bills and bonds','' Yu said in an interview yesterday. "The euro is an alternative. And there are lots of raw materials we can still buy.''

Yes, there are. And by the way, why not a gold exploration boom? Gold mining requires lower capital overheads than bulk materials extraction. And with a rising gold price, it's worth a punt. If the gold mania really takes off (it's starting), look for a boom in the junior explorers.

But back to Yu. Yu has encouraged the U.S. to think about China's interests, "So that your own interest can be protected...You should not try to inflate away your debt burden." He hinted that if the U.S. does that, China has options like the euro. "Yes, some people say the euro is very weak...Okay, weak is good, we'll buy very cheap.''

The man is both a psychic and a good trader. He is also a moralist with an old fashioned sense of fiscal responsibility. "The borrower should keep their promises...The U.S. should be a responsible country."

Note to Yu. U.S. central bankers and government policy makers gave up being responsible a long time ago. 1913, 1971, 1980...take your pick. The policy of perpetual debt and gradual inflation has been around for nearly a century now. The only trouble is that the liability side of the Federal balance sheet has exploded. Hence the need for greater inflation via quantitative easing...and the situation we all find ourselves in today.

It's just the sort of thing that could trigger another dollar crisis. And THAT is what's really behind the market moves, we think. It's not a cyclical rotation out of bonds into higher risk assets because everything's peachy. It's a stealth retreat from U.S. bonds under the covering story of economic recovery.

But what's really going on is that investors are heading for the door on U.S. debt. Ten-year yields spiked again today and bond prices fell. Goldman Sachs reckons the U.S. will have to borrow over $3 trillion this year to finance new deficits and roll over old ones. And if it can't borrow it, the Fed will have to buy it.

For some reason, the Fed is confused about why bond yields are rising. A Reuters headline reads, "Federal Reserve puzzled by yield curve steepening." Are investors ditching the dollar and U.S. bonds because the U.S. credit rating is in jeopardy? Is the huge new supply of debt causing the Bond Vigilantes to protest inflation and punish President Obama buy selling bonds? Or are investors just so confident in the economy now that they feel no need to hide out in the government bond market until they get the all clear signal?

Hmm. What's so confusing again?

A few years ago, we called it "The Money Migration." That still seems like the right description today. You've got a debtor nation whose largest corporate institutions are failing (perhaps a preview of State failure). It's shipped its industrial infrastructure off-shore and replaced it with a financial industry that thrived on credit and derivatives. And now you wonder why investors are pushing interest rates on your debt up?

It's not hard to see who's in the global driver's seat now. It's creditors and producers. And for Australia's sake, that's good news. Because the world's largest creditor and producer is keenly interested in Australian assets, both as a hedge against the fading greenback and as a key input to its long-term expansion, which seems to be coming along just fine for now.

Dan Denning
for The Daily Reckoning Australia

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