• The growing risk in Treasurys and four ways to bet against them,
• The trouble with separating man from the economy he builds,
• It’s only the end of the world, why waste time worrying? And more…

Joel Bowman, reporting from Taipei, Taiwan…

Super typhoons, an earthquake and a tsunami; to put it mildly it has been a devastating week for the Asia Pacific region. Now another typhoon, Parma, is closing in on our doorstep. We await quietly its wrath. In the Philippines, the Catholics pray for deliverance. Here in Taiwan, the Buddhists batten down their hatches…

…and yet, from the shiny towers of modern economic theory, there pours forth a deluge of pure idiocy that threatens to drown us all.

In the aftermath of last week’s natural disasters, a few misguided economists have rushed forward to assure a battle-weary public that there will be “minimal economic impact” on the effected nations. Some, evidently suffering from a most unfortunate case of myopia, even suggest that the region will be “better off” for having suffered so at the hands of Mother Nature.

“Rebuilding has an accelerating effect on GDP,” Wai Ho Leong, Barclays Capital’s senior regional economist in Singapore, remarked in an interview with Bloomberg. “Typically, it more than makes up for such shocks. The overall impact on the economy might even be positive, if we factor in rebuilding programs.”

Such abuse of logic leads the unthinking person to assume that all our economies would be far better off, if only we were fortunate enough to be visited on by regular and extreme natural disasters.

One might have thought that such specious reasoning would have gone the way of the dodo after Frederic Bastiat elucidated for us its inherent flaw in his 1850 essay, “That Which is Seen, and That Which is Not Seen.”

In his famous example, “The Broken Window,” Bastiat examines opportunity cost, the cost of that which is “unseen.”

Suppose, Bastiat’s example goes, that a careless son breaks a windowpane in his father’s store. Witness that the bystanders will placate the shopkeeper with such statements as, “what would become of the glaziers if panes of glass were never broken?”

The idea here is that the “seen” effect of the broken window is a net positive, i.e., a glazier will be paid 6 francs (the figure in the example) to fix the window. What is left unseen, however, is not only that the shopkeeper must furnish 6 francs for a new window, but that he now has 6 francs less to spend on those things he might have purchased had his careless son not damaged his property in the first instance. (In Bastiat’s second supposition, where the window is not broken, the shopkeeper spends his 6 francs on shoes and enjoys, in addition to his new kicks, an unbroken window in his store.)

As Bastiat correctly concludes, “Society loses the value of things which are uselessly destroyed.”

The message is simple enough that one might think even a mainstream economist would be able to grasp it. Alas…

The misguided Leong continues: “We have seen the experience of Sichuan and more recently in Taiwan. Over an extended time period, there was no discernible impact on gross domestic product on a net basis.”

[It is true here that Mr. Leong has enslaved his reasoning capacity to the dubious metric we know as gross domestic product. And it is true that this measurement tends to paralyze the inquiring mind, often beyond resuscitation. But that debate is for another day...]

More than 3 trillion yuan ($440 billion) was committed to rebuild houses, highways and railways leveled by the earthquake that struck Sichuan back in May, according to Vice Provincial Governor Wei Hong. We can easily understand, therefore, that this money will not now be used by either individuals – to purchase new machinery for their farms, for example – or by the local government – to cover other expenses.

That 3 trillion yuan is an “unseen” cost, but a cost nonetheless…and quite a discernible one at that.

Even of we forgive Mr. Leong this error, we might have expected him to count the cost of the 87,000 people who perished in the disaster. Even if he wishes to separate these individuals from the economy, he must admit that such a tragedy represents a massive loss of productivity. You know…for the “economy.”

Such egregious remarks might be considered comedic fodder if the (lack of) thinking behind them was not so pervasive in modern economics, where spending – any kind of spending – is seen as an absolute and unchallengeable positive for all and sundry.

In the same article, Song Seng-Wun, an economist at CIMB-GK Securities Pte, assured us that, “For now, this is a human rather than economic story. In fact, there could be a mild boost from reconstruction works.”

Here we can see the pernicious misconception in higher resolution; that is, the assumption that economy and man are isolated entities. Of course, there is no “economy” without humans and any attempt to separate the two is, at best, a grossly sophistical error. From fascism to communism, all tyrannical and oppressive regimes have this mendacious claim at their heart.

Whether in response to natural or manmade disaster, beware the message, “good for the economy,” if it deviates in any way from what is good for the individuals who build it.

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And the Rest of Your Rude Reading…

The Last Bear
By Bill Bonner

Personal conversions sometimes mark dramatic turns in history. Saul of Taursus saw a vision so bright it left him blind. The next thing you know, he had changed his name and was pushing Christianity all over the world. According to Gibbon, the Roman Empire fell as a consequence. Then, on the advice of his mistress, Gabrielle, Henry IV became a Catholic, leading to the Edict of Nantes and its subsequent revocation.

How to Relax and Enjoy the End of the World
By Bill Bonner and Addison Wiggin

The world as we have known it is coming to an end. But what do we care? We smile and vow to enjoy it. It took the Roman Empire hundreds of years to fall. During that time, most people did not even know their world was coming to an end.

Kinder, Gentler…and Perverse
By Eric J. Fry

The kindlier, gentler version of American capitalism that has come into fashion since last year’s credit crisis is neither kind nor gentle… at least not to capitalists. The “new capitalism” visits the sins of an imprudent minority on the backs of a prudent majority.

The Sun Sets on the West
By Chris Mayer

What will the global economy look like in 2050?…and should we care about that now, forty years before the fact? Dr. Marc Faber, the 63-year-old Swiss editor of the well-regarded Gloom Boom & Doom Report, recently addressed both questions.

Risk-Free is Not Without Risk
By Eric J. Fry

“All things must pass,” George Harrison mournfully crooned on his 1971 album of the same name. “All things must pass away…Sunrise doesn’t last all morning. A cloudburst doesn’t last all day”…and neither does a superpower’s global economic hegemony.

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[Rude Endnote: Your editor is off to Seoul, South Korea, this week to catch a glimpse at the world’s second most populous metropolitan area. If you’re in the city and want to grab coffee, drop us a line below.

Until next time…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com

• Markets off to a sprinting start for the week, gold and oil retreat,
• Crushing consumer capitalism out of your fellow man,
• Plus, why no Rude houses in Panama? And plenty more…

Joel Bowman, deferring to the wisdom of the Rude readership…

Markets rallied in style yesterday. Well, they rallied in a style…the fake, plastic kind of style that is best left to the models who can actually pull them off. As for the rest of us, including that bloated, bureaucratic equities market, we expect a sudden bout reality – followed by a violent bout of bulimia – any day now. More on that below but, first…

You may remember back a few weeks ago when we asked readers to submit their opinions on what a “new normal” might look like. With the American, and indeed global economy undergoing a dramatic financial reinvention process, it’s bound to look a little different when all is said and done.

Will it be a Kafkaesque metamorphosis, we wonder, leaving us with a cockroach of an economy – hideous, burdensome but impossible to ever really kill off? (Think Japan’s lost decades here.) Or will it be more like a brilliant butterfly emerging from its cocoon, radiant and glistening in the sun-drenched dewdrops of a new and promising spring?

Well, the Rude votes are in. Cockroaches: 100%. Butterflies: 0%.

Here’s what a few of you had to say…

Gerald, a septuagenarian Rude fan writes that he is, “retired and living on 50% Social Security and 50% residential property rental income. No debt. No investment income. No problem. I take summers in Wisconsin at the lake and winters in Tucson where the golf is good.

“The new normal (NN) will pass me by,” continues Gerald, “but it will knock off a lot of my friends and fellow boomers because they still have debt. The NN will be high taxes, unemployment, social unrest, immigration problems, market speculation and even more corrupt politicians. NN and ‘average’ will take the USA to the lowest common denominator. And the czars will rule.”

“I don’t like what I perceive as the coming ‘new normal,’” opines another reader, Jim. “It consists of higher unemployment, tighter credit, belt-tightening everywhere, increased homelessness, agitated, fearful, and frustrated citizens, combined with a squirrely set of politicians making things worse as they muck around pretending that they know how to fix a broken system. Some good things appear in my perception, too, especially lower prices, which will make a lot of things more affordable–but they will still remain beyond the reach of most, especially those who had been seduced into exploring the U.S. credit factory.

“The worst on my radar screen, however, is war,” Jim warns. “The estupidos in D.C. will stretch their frustration outwards, sucking in a miserable public seduced by jingoism, spilling vast blood on both sides of a needless, goalless, war fought, as usual, in the name of freedom against a barbaric enemy who has no scruples and doesn’t share our righteous vision of a government of the people, by the people, and for the people. But we’ll show those bastards a thing or two and force freedom down their throats as we throw off the shackles binding them in their godforsaken land–while those in the Goldman Sachs suite, grinning from ear to ear, continue to rake in the chips, sharing a few with their politico buddies.

“Other than these things, quite a bright ‘new normal’ ahead. Full charge. Let’s start spending and finance our soon-to-be communist masters.”

And finally, a quick one from a reader who calls himself, simply, “Guy in Chicago.”

“The ‘new normal’ had better include innovation, simplification, and conservation… because continuing the ‘current normal’ (money and power driving every activity) is obviously destructive and unsustainable.”

As you can see for yourself, there was not much by way of poetic optimism among the “new normal” emails we received. “Oh dear,” we thought as we read through them. “Are we really that morbid? Is there no hope for a better day, no shaft of light pointing the way to a brighter future…no opportunity to be sought in crisis…no joy to be found at all? Do we really paint such a glib picture?”

We didn’t see any emails, for instance, that started with a , “Whoopee! Finally home prices will come back down to earth! My kids might be able to afford one when they grow up after all!” And not a single email went something like, “Hooray! Prompted by the government’s escalating stupidity, I finally decided to buy that holiday home in Panama. Now I spend my days writing that book I always wanted to write and evenings dining with my beautiful wife/handsome husband. We’re just so relaxed these days…and the sex hasn’t been this good in decades!”

It was enough to bring your editor close to tears.

And so, in an effort to prove that we really aren’t just a bunch of curmudgeonly old stick-in-the-muds, we offer today’s uplifting column. The timely advice featured therein comes from the updated second edition of Bill Bonner and Addison Wiggin’s bestselling book, Financial Reckoning Day: Fallout. We hope you enjoy it…

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How to Relax and Enjoy the End of the World
By Bill Bonner and Addison Wiggin

The world as we have known it is coming to an end. But what do we care? We smile and vow to enjoy it. It took the Roman Empire hundreds of years to fall. During that time, most people did not even know their world was coming to an end. Most must have gone about their business, planting their crops, drinking their wine, and bouncing their children on their knees, as if the empire were eternal. Of course, the mobs in Rome may have reeled and wailed with every news flash: The barbarians had crossed the river Po and were headed South — soon, they would be at the gates!

But others lived quiet lives of desperation and amusement — as if nothing had happened. And what could they have done about it anyway…except get out of harm’s way and tend to their own affairs?

Plenty of people enjoyed the Great Depression. If you had a well-paying job, it must have been paradise — no waiting in lines, no need for a reservation at good restaurants. Keeping up with the Joneses had never been easier — because the Joneses were in reverse. So much of the satisfaction in life comes from feeling superior to other people.

What better time than a depression to enjoy it?

The secret to enjoying all mass movements is to be a spectator, not a participant. How much better it would have been to wave at the passing of the Grande Armée on its way to destruction in Russia than to march along with them. Perhaps you could have sold them earmuffs and mittens!

Likewise, what better way to enjoy the great boom on Wall Street of the 1990s than by tuning in to CNBC from time to time just to see what absurd thing analysts would say next? And now that it is over, how better to enjoy it than from a safe distance, standing well clear of the exits?

Readers are urged to be suspicious of headlines in the news and opinions on the editorial pages. Almost all mass movements that they stir up will one day be regarded with regret and amazement.

But that is the way of the world; one madness leads to the next. A man feels excited and expansive because the economy is said to be in the midst of a New Era . . .and then he feels a little exhausted when he discovers that the New Era has been followed by a New Depression.

And all the while, his life goes on exactly as it had before. His liquor is no better, his wife no prettier or uglier, his work every bit as insipid or inspiring as it was before. We have no complaint about it. Still, “the world is too much with us,” wrote Emerson:

Most men have bound their eyes with one or another handkerchief, and attached themselves to some one of these communities of opinion. This conformity makes them not false in a few particulars, authors of a few lies, but false in all particulars. Their every truth is not quite true. Their two is not the real two, their four not the real four; so that every word they say chagrins us, and we know not where to begin to set them right. Meantime nature is not slow to equip us in the prison-uniform of the party to which we adhere. We come to wear one cut of face and figure, and acquire by degrees the gentles’ asinine expression…

What better time to shut out the world and wipe that silly grin off our face than now — when the world that we have known for at least three decades, the Dollar Standard period, is coming to an end?

U.S. consumer capitalism is doomed, we think. If not, it ought to be. The trends that could not last forever seem to be coming to an end. Consumers cannot continue to go deeper into debt. Consumption cannot continue to take up more and more of the GDP. Capital investment and profits cannot go down much further. Foreigners will not continue to finance Americans’ excess consumption until the Second Coming — at least not at the current dollar price. And fiat paper money will not continue to outperform the real thing — gold — forever.

The United States will have to find a new economic model, for it can no longer hope to spend and borrow its way to prosperity. This is not a cyclical change, but a structural one that will take a long time.

Structural reforms — that is, changing the way an economy functions — do not happen overnight. The machinery of collectivized capitalism resists change of any sort. The Fed tries to buoy the old model with cheaper and cheaper money. Government comes forward with multibillion-dollar spending programs to try to simulate real demand.

And the poor lumpeninvestoriat  —  bless their greedy little hearts — will never give up the dream of U.S. consumer capitalism; it will have to be crushed out of them.

As Paul Volcker put it, “It will all have to be adjusted someday.”

Why not enjoy it?

Joel’s Note: Last we spoke to Addison, he told us he had 500 copies of his and Bill’s book to give away to Agora Financial readers as part of a new project he’s working on. Check out the project, “The Great American Recovery Rip Off!” and get your hands on a copy of the book, right here.

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[Rude Endnote: Wall Street stampeded out of the gates yesterday and were able to hold most of the gains made early on. The Dow Jones Industrial Average finished higher by 1.3% while the S&P 500 gained a pretty fantastic 1.8%. After last week’s long, slow drown, most investors welcomed the numbers.

Markets here in Asia quickly jumped aboard the “why worry?” train this morning with most major measures ending the day in the black. Japan’s Nikkei 225 finished up almost 1% while Hong Kong’s Hang Seng more than doubled that gain. In your editor’s immediate backyard, Taiwan’s Taiex also rallied 2% and, Down Under, the Aussies added 1.6% to the All Ordinaries index. China’s CSI 300 was unch.

But the party-poopers in Europe were having none of it. Indexes fro the Thames to the Rhine fell, though only slightly. London’s FTSE, Germany’s DAX and France’s CAC 40 finished close enough to 0.3% behind to call it a draw.

Over in the commodity pits, gold was down $4 last we checked to $990 per ounce while crude had fallen just under 0.40c to $66.44 per barrel.

And with that, we’re out of time. We’ll be back tomorrow with our thoughts on stock market bulimia and the news of the day.

Until then…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com

• The slow, undetectable rise of inflationary pressure,
• Revisiting the Ludwig Von Mises “crack up boom” theory,
• Plus, the trick to boiling frogs and plenty more…

Joel Bowman, reporting from Taipei, Taiwan…

It is sometimes said that the only way to boil a frog is to do it slowly. If you drop the unsuspecting amphibian in scalding water, it will hop right out. So, goes the theory, you must turn up the heat gradually.

The main problem with this strangely amusing anecdote is that it is not true. Firstly, frogs dropped into boiling water do not jump out. They die. Secondly, as Friedrich Goltz, the German physicist from whose work the theory is thought to have originated, pointed out, you must first remove the frog’s brain in order to successfully “slow boil” it.

Despite its fallacious nature, the metaphor is still useful to explain people’s insensitivity to gradual changes in their environment, usually negative ones. Most commonly it is employed to describe a country’s slow march to war or the gradual erosion of civil liberties. Equally, it might also be employed to describe the creeping debasement of a nation’s currency, the kind that slowly bleeds investors’ returns and visits inflation on those desperately trying to stay solvent or, “afloat.”

Right now, inflation isn’t a terrible concern for most people. They see asset prices falling across the board…except, that is, for the stock market, which threatens to boil over any week. They want the heat turned up a little bit. They want the government to pump through that stimulus so they can enjoy the Jacuzzi-like conditions of the bubble era.

Despite the Feds’ best efforts, the dubious inflation metric known as the Consumer Price Index (CPI) only budged 1.4% over the past year. Stimulus totaling $2.4 trillion has already been deployed yet, for the average person, deflating prices – of their house, for example – remains the primary concern.

Right now, there is little doubt the dollar is slipping. And worldwide risk appetite is rising, along with gold and high-yielding foreign currencies like the Aussie and New Zealand dollars. This signals a definite return of confidence to the market.

Your editor would not presume to know where prices might go from here, but he asks the reader to imagine for a moment that this rally is not the exception to the rule of history. Imagine, for a second, that it falters, as every bear market rally before it has done. Imagine that risk appetite snaps back and stock market gains are again cut in half…

What will the Feds do then? The big question, as they stir those gurgling waters, will be whether they can provide “just enough” stimulus to keep the economy from cooling too fast, while simultaneously making sure not to pour in boiling water directly, which can result in scalding. It is possible investors will get their warm bath…but also that they may be boiled alive.

Add to this delicate balance the fact that, in our version of the “boiling frog” metaphor, it is not only that those in the water are slow to register changes in the temperature; it is quite possible that those in control of the gauges are lobotomy victims themselves.

Today’s column, below, is an extract from the updated version of Bill Bonner and Addison Wiggin’s book, Financial Reckoning Day: Fallout. In it, the authors examine what led us to the worldwide “crack-up boom” that inspired such unprecedented federal intervention in the first place. Please enjoy…

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French Kisses and Asset Inflation
By Bill Bonner and Addison Wiggin

A kiss is still a kiss…and a bubble is still a bubble. When a kiss is over, it’s over. When a bubble pops…well…that’s all she wrote! All kisses end — even the wettest “French” kisses. And so do all bubbles — even sloppy mega-bubbles of liquidity.

“This one will be no exception,” we remember thinking before the carnage got underway. But, of course, it’s not the certainties that make life interesting; it’s the uncertainties — the known unknowns and the unknown unknowns, as Mr. Rumsfeld said. We are all born of woman and end up where all men born of women end up — dead. But that doesn’t mean we can’t have some fun between baptism and last rites.

The worldwide financial bubble we faced was both worldlier, and more financial than any in history.

And, in the summer of 2007, it was still very much alive. So much alive that the media could hardly keep up with it. Forbes magazine, for example, tried to estimate the wealth of the world’s richest people. But the rich don’t typically give out their balance sheets, telephone numbers, and home addresses. So, there’s a fair amount of guesswork in the calculations.

When it came to guesstimating the net worth of Stephen Schwarzman, founder of Blackstone, the Forbes crew wandered off into fiction. They put his wealth at about $2 billion. Recent filings in connection with the new Blackstone IPO show he earned that much in a single year!

In that phase of the bubble, it is as if your neighbors were throwing a wild party and you weren’t invited. You detest them…envy them…and want to join them, all at once. A very small part of the population is having a ball; everyone else is getting restless and wondering when the noise will stop.

Meanwhile, the experts, commentators, kibitzers, and analysts were saying that there is a whole new phase of the giant bubble about to unfold; things could get a whole lot crazier. Even many of our respected colleagues were pointing to a text by the great Austrian economist, Ludwig von Mises, for a clue. What we have here, they say, is what Mises described as a “Crack-Up Boom.”

Before we go on, readers should be aware that the “Austrian school” of economics is probably the best theory about the way the world works. Like our newsletter, The Daily Reckoning, it is suspicious of efforts to control the natural workings of an economy, in general…and suspicious of central banking, in particular. The fact that it was a one-time “Austrian,” Alan Greenspan, who became the most celebrated central banker in history, only increases our suspicions. He was able to master central banking, we imagine, because he understood what it really is — a swindle.

What Is a “Crack-Up Boom?”

Von Mises:

This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.

But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.

Mises is describing the lunatic phases of a classic inflationary cycle.

At first, no one can tell the difference between a real dollar — one that is earned, saved, invested or spent—and one that just came off the printing presses. They figure that the new dollar is as good as the old one. And then, prices rise…and people don’t know what to make of it. Later, they begin to catch on…and all Hell breaks loose.

You see, if you could really get rich by printing more currency, Zimbabweans would all be as rich as Midas, since the Mugabe government runs the presses night and day.

Von Mises died in 1973 — long before this boom really got going — let alone cracked up. He may never have heard of a hedge fund…or even a derivative, for that matter. A world money system without gold? He probably couldn’t have imagined it. People spending millions of dollars for a Warhol? Twenty million for a house in Mayfair? Chinese stocks at 40 times earnings? He would have chuckled in disbelief. He understood how national currency bubbles expand and how they pop, but he probably never would have imagined how insane things could get when you have a whole world monetary system in bubble mode.

He’d have recognized the beginning of this bubble…and he’d have recognized the end, but the middle…or the beginning of the end — that would have dumbfounded him. During his lifetime he saw a Crack Up Boom in Germany in the ’20s…and a few more here…but he never saw a worldwide Crack Up Boom.

No one, anywhere, has ever seen a worldwide Crack Up Boom. We’re the first, ever. Pretty exciting, huh?

Joel’s Note: Books forecasting the future only make it to a second edition if what they said in the first edition came to fruition. Fans of Bill Bonner and Addison Wiggin’s bestselling books, Financial Reckoning Day and Empire of Debt, will therefore be pleased to see them updated for the second print.

Whether you are a long time “sufferer,” or a first time fan, be sure to check out Bill and Addison’s monumental works right here, complete with additional chapters and updated charts to reflect the predicted collapse and where to go from here. Financial Reckoning Day: Fallout and The New Empire of Debt

The interested reader may also wish to know that, under the stewardship of Rob Parenteau, Agora Financial has reopened the doors to The Richerbacher Society. Rob uses proven Austrian School economic analysis (as opposed to what the mainstream press dishes out) to arm readers for the troubling times ahead. If you haven’t had a look through his work yet, you might like to consider applying for membership today right here.

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[Rude Endnote: No frogs were harmed during the production of today’s issue. We’ll see you back here on the weekend.

Until then…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com

Taipei, Taiwan

• Pausing to take stock of the largest financial gamble in history,
• Credit not backed by real savings – the ultimate governmental fraud,
• Plus, the art of burning money, Coca-Cola offerings and plenty more…

Joel Bowman, reporting from Taipei, Taiwan…

There is a specter haunting Taiwan…

As another tropical storms draws near, the people of Taiwan busy themselves…burning money in the streets and offering pineapples, dumplings and bottles of Coca-Cola to the dead. Shopkeepers throng the sidewalks, peeling off paper notes to cast into the flames. Passersby gather around to burn incense and bow in a seemingly random fashion to the wayfaring spirits.

It’s the seventh month on the Chinese Lunar Calendar, you see, informally known as “Ghost Month.” Tradition holds that, during this most unlucky of months, ancestral spirits from the lower realm awaken to “live it up” among their earthly progeny. In order to avoid incurring any unwanted ghostly wrath, the Taiwanese people lavish gifts on their unseen visitors. (Ghosts without families to return to simply wander aimlessly across the earth, though they still enjoy the offerings other families outlay for “homeless ghosts.”)

Where possible, locals stay inside and avoid making any large purchases or conspicuous engagements during the month for fear of encountering an agitated apparition. Special care is taken to avoid walking near riverbanks where, it is believed, a water spirit may easily steal the body of the living. And, as for buying a house or a car…forget about it.

“Home purchases in the Greater Taipei area dropped nearly 20 percent in August, due to the Ghost Month,” according to the China Post. [The government also cancelled a NT$200 billion ($185 million) loan program to redirect financial aid to victims of Typhoon Morakot...but, back to Ghost Month.]

Now, your editor isn’t here to poke fun at personal superstitions and antiquated ceremonies. The participants usually do that well enough for themselves. Besides, heaven only knows what those of the Eastern religions think about, oh, say, transubstantiation. It is worth pointing out, however, that most faithful Buddhists here don’t actually burn real money. Only an idiot would do that. Instead, they burn representations of money; little joss paper cut outs with ink markings on them.

In this way, the believers follow in the footsteps of the world’s largest debtor. The United States, doesn’t burn through real money either. It too relies on a special kind of faith, particularly on the part of its creditors, to make it real. You might call it “numismatic transubstantiation,” or, “pecuniary reincarnation.”

Over the past few decades, blind faith abroad and deliberate currency abasement at home has allowed the United States to amass a deficit of biblical proportions. Addison Wiggin, executive director of Agora Financial, explained the dire situation in a recent interview with Fox News:

“What we’re all witnessing is a mutation of the housing and consumption bubble into a much greater bubble of government debt. The CBO [Congressional Budget Office] projections, which came out last week, look at a $9 trillion deficit over the net 10 years.

“We were horrified when we were putting together I.O.U.S.A. at the 2006-07 deficits”, Addison continued, “but, since the credit crisis, we’ve really jumped track to a much more unsustainable path.”

Put simply, the United States relies on the “good faith” of those abroad, mostly in Asia and the oil-producing nations of the Middle East, to continue buying dollar-denominated bonds. The U.S. government then dolls out proceeds from its global collection plate to prop up its zombie banks, failing auto industry, penny stock mortgage lenders and any other ill-conceived, poorly managed institution that happens to fall in arrears.

As long as there are believers, there will be liars. The trouble, however, is that, with the debt swelling to such gargantuan proportions, many of the U.S.’s creditors are beginning to suffer a crisis of faith.

“We’ve had a lot of rumbling from China, South Korea, Japan, our major creditors,” Addison explained. “They’re worried about their investment in our country. If they even start slowing down their consumption of U.S. debt, then that’s going to create a much bigger problem than what we saw during the credit crisis.”

In their book, Financial Reckoning Day: Surviving the Soft Depression of the 21st Century, Addison and Bill Bonner warned readers about the unsustainable levels of personal and government debt being pursued. Since then, much of the catastrophic events they foretold have come to fruition, including the “tech wreck” and the housing and consumption bubbles of the early and mid-naughts.

Today’s essay, below, is actually an extract from the second edition of that book, which Addison and Bill have updated in light of the recent crises. Please read on and send any comments to the address at the bottom of the page…

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Moral Hazards
By Bill Bonner and Addison Wiggin

Not infrequently, governments “shoot themselves in the foot. ” But in 2009, they have brought out the biggest cannon in history. We look on with amusement as they blow their fool heads off.

Readers are reminded of our Daily Reckoning dicta: “The force of a correction is equal and opposite to the deception that preceded it.” Now, we offer a corollary: “The greatness of a depression is commensurate to the government’s efforts to prevent it.”

Since these iron laws seem to contradict almost everything one hears on the subject, the burden of proof is on us. So, to the witness stand, we call our first expert, Angela Merkel. Alone among the world leaders, she seems to have kept her head:

“The crisis did not come about because we issued too little money but because we created economic growth with too much money, and it was not sustainable,” explains Germany’ s chancellor. She went on to suggest that maybe we shouldn’t repeat the errors of the past.

As a proxy for “deception” in our handy dictum, substitute “money.” And now consider it in its two misleading forms— credit and deficit spending. “Credit not backed by real savings is a fraud,” the great economist, Kurt Richebächer, used to say. It is a fraud when it comes not from willing lenders, but from central banks, artificially reducing lending rates in order to spur the economy. Deficit spending by government is a flimflam, too. Governments rarely have extra funds to spare; they have to borrow the money. Eventually, that debt will have to be paid.

During the entire last half century leading Western economists imagined a world that couldn’t exist for one minute — where consuming wealth makes people wealthier…and where simply making more credit available can stimulate consumption. Each time the economy slowed down, the authorities induced people to buy more of what they didn’t need with more money they didn’t have. This produced “ growth. ”

But it was an ersatz growth. Every dollar of borrowed money would one day have to be paid back. Every step forward would have to be followed, eventually, by another one to the rear.

In the first four U.S. recessions after the Great Depression, from the mid-1930s through the mid-1950s, the total amount of monetary stimulus was actually negative. Instead of lowering rates, the feds—witless, as usual—often increased them or left them alone. But deficit spending went up an average of 2.2 percent of GDP each time. Later, the feds began to get the hang of it; every recession after 1958 was met with both more credit and more spending.

As the feds put in more money and credit, they found that more money and credit was needed. At the beginning of the period an extra $2 of credit would result in $1 of extra GDP. By the time the lights went out in 2007, it took about $6 of additional credit to produce a single extra dollar of output. Each new dollar of credit had to support not only the new growth the feds were after, but all the accumulated debt and mistakes from previous stimulus programs.

In the recession of 1973, Brookings Institution economist George Perry told Congress that “we should be pulling out all the stops” to fix it. The resulting fiscal and monetary stimulus program cost the U.S. 4 percent of GDP, according to an estimate by Jim Grant.

Future generations of Fed governors and Treasury secretaries found more stops…and, of course, pulled them out, too. In the micro recession of 2001, for example, the combined fiscal and monetary boost amounted to 7.2 percent of GDP, according to Grant.

The deceptions of the bubble epoque, 2001–2007, were enormous. The correction has been enormous, too. And here are the same economists who mismanaged the economy, offering advice to governments who mismanaged their regulatory roles, about how to keep mismanaged companies alive, so that bondholders who mismanaged their investments might not go broke. That this will result in more misery is a foregone conclusion—at least, here at the Daily Reckoning.

The measure of that misery, if our iron law holds, is how adamantly governments fight to keep their mismanagement going. Just looking at the numbers, the toll will be monstrous. All over the world, interest rates have been cut and budgets padded. France’s deficit is running at 8 percent of GDP. England is running a deficit of more than 12 percent of GDP. And the U.S. is mobilizing as if it had been attacked by Martians. On the credit side, the feds have cut rates more than ever before, for a monetary boost equivalent to 18 percent of GDP, according to Grant. As to spending, $ 13 trillion has been pledged…an amount equivalent to a full year’s annual output of the United States.

This response is three times more (adjusted to today’s dollars) than the U.S. spent to fight WWII. It is 12 times more (relative to GDP) than the total committed to fight the Great Depression.

What will happen next?

We know no more about what will happen than the forecasters at the Federal Reserve or at the Dial-A-Psychic Hotline. Recently, a news item told us that the Dial-A-Psychic business was doing so well, the companies needed to hire new people to take the phone calls. “Will Train” said their help wanted ads. We thought about answering the ad. For as hard as we have tried, we have never been able to master the skill on our own.

Lacking clairvoyance, we take a guess…

Joel’s Note: To commemorate the release of the second, updated edition of their book, Financial Reckoning Day: Fallout, we’ll be featuring a selection of Bill and Addison’s “guesses” over the next couple of weeks.

In the meantime, you can pick up your own copy of Bill and Addison’s bestselling book right here, complete with additional chapters and updated charts to reflect the predicted collapse and, most importantly, where to go from here. Order Your Copy Here: Financial Reckoning Day: Fallout

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[Rude Endnote: Now, if you’ll kindly excuse your editor, he has some sacrifices to make to Poseidon, the Greek God of the sea, so that his next surfing trip might bring decent waves.

Until tomorrow…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com

Taipei, Taiwan

• A thriving, “non-BRIC” emerging market to keep your eye on,
• Coping with unfunded Social Security liabilities – your thoughts,
• The population bulge hits “payment due” time and more…

Joel Bowman, reporting from Taipei, Taiwan…

The global population story is one of a fuse burning at both ends.

Here in the developing east, most newspaper ink on the subject is devoted to overcrowding and its associated problems, economical, political and environmental. In the developed west, we generally think of inverted pyramid demographics and the inherent cost of funding programs like Social Security and Medicare.

There are, of course, plenty of exceptions to these general trends. Shanghai, for example, boasts the world’s lowest fertility rate – just 0.7 births per woman of childbearing age. Hong Kong, Taiwan and Singapore share similarly trajectories. By and large, however, the burden of “demographic bulges” are still a couple of generations away for the Asian economic powerhouses. There are still plenty of young workers to support the elders in the community, in other words.

America does not enjoy such a luxury of time. Baby boomers are retiring yesterday, today and tomorrow…and, quite rightly, they want the benefits they paid for. The clear and present danger here is that there are simply not enough “new” people paying into the system to support all the “old” ones about to draw on it. The toxic concoction of the government’s Bernard Madoff-like Ponzi scheming and the resulting unfunded liabilities is sure to end very badly, especially for those who most need it to end well.

In yesterday’s issue we featured an telling excerpt on this very subject from Financial Reckoning Day Fallout, the updated, second edition of Bill Bonner and Addison Wiggin’s bestselling book on “surviving the soft depression of the 21^st century.”

Before we get into today’s column, here’s what a couple of readers had to say about yesterday’s column. [If you missed it, you can read the whole thing here.]

Rude reader Bill Calvin writes: “When talking about Social Security, you didn’t even mention that almost half (I’ve seen different numbers, so I’ll go with almost half) of the present outlays go for disability payments, and not even for the retirement portion.

“I suspect that a large amount of the disability payments are affected by the entitlement mindset — it’s ‘free’ so why should I work? I know people who spend a whole lot of time and legal fees being ‘disabled.’

“Good article.”

Rude Reader Tom gives us his take on things: “In regards to the increasing costs of medical care, much of the increase is due to increased litigation and health insurance. Since doctors have to worry about being sued for almost anything, they have to order a battery of tests so that they have covered themselves if there is a law suit. Many of these tests are unnecessary and costly.

“Another problem is that people with health insurance don’t do any price comparison shopping or care about the cost because it is covered by insurance. When you pay a $20 copay, you don’t care if the doctor charges $40 or $100 for an office visit.

“Doctors also have to charge more because of the problems with collecting the payments from both the cash customers and the insurance companies. I have talked to doctors who have said that if they knew that they would be paid promptly and completely for their bills, they could charge less.

“I would propose that instead of changing our health care program, the insurance companies change their insurance program. Instead of a deductible that is paid first, have an amount that the insurance company pays first. Then when that is gone, have a deductible that is paid by the customer. When that deductible is gone, the major medical kicks in.

“An example, I purchase a $2000 policy. I would get $2000 of health care paid automatically. No questions asked. When that is gone, I would have to pay personally the next $2000 before the major medical kicks in.

“If I don’t spend the $2000 in a year, I would get a credit of 50% of the amount not spent added to my next years initial balance. This would give me an incentive to stay healthy and also an incentive to compare costs.

“Let the free market work.”

And finally, Rude reader, Jabe, poses the following question:

“You and your writers post very insightful articles that there is or will be a crisis with Social Security and Medicare, regardless of whether this most recent ‘health care reform’ is passed in any measure.

“I think that targeting Social Security or Medicare is not going to solve the crisis. If the government fully funds its obligations under these programs in the future as you cite it will effectively bankrupt the country. If the government does not fund these programs then who will support and care for the future elderly; i.e. you and me, for example. Our children? They don’t have jobs or money or houses. Should we continue working? You cited the unemployment numbers to answer that question.

“There are fewer jobs than people. I can think of just two alternatives:

“1. The elderly had better get in shape thereby not needing health care and had better start becoming self-sufficient farmers so they can eat.

or

“2. Die. (Phillip Morris reportedly proposed this (via increased smoking) as a solution to the Czech Republic pension crisis some years ago. It didn’t go down well.)

“Which will be your choice? Perhaps your cadre of esteemed economists and philosophers can conjure up another solution.”

Perhaps the Rude readership would like to take a swing at this one? Eh? If you are so inclined to do so, please direct your thoughts and comments to the address below.

In the meantime, Rude favorite Chris Mayer takes a look at the flipside of the population question and brings us some insights on an emerging market brimming with exciting, youthful investment opportunities. His full column is just below…

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A Silkier Road
By Chris Mayer

Change is like a pin to the balloons of conventional wisdom. Just when people settle into their views, here comes the pin.

For instance, it’s become widely accepted when talking about emerging economies to focus on the so-called BRIC countries – Brazil, Russia, India and China. But there is a very important region that gets lost in that discussion.

In fact, this region collectively has a bigger economy than Brazil, Russia or India. And in terms of growth, it is growing faster than any of these countries. In terms of population, it’s bigger than the U.S. and nearly as populous as the EU. It holds 60% of the world’s proven oil reserves and nearly half of its natural gas.

That last clue probably gives it away. I’m talking about the Middle East and North Africa, or MENA.

Among its largest economies are Saudi Arabia and the United Arab Emirates.

In one of my presentations at Vancouver, I focused on the growth in these economies because it touches on nearly everything we’ve talked about here recently – water and food scarcity issues, infrastructure needs, energy and the growth in non-U.S. trade. To start, let’s look at a couple of basic facts that push this along.

The first is explosive population growth. MENA is one of the fastest-growing regions in the world. Over the last 50 years, MENA’s population is up more than fourfold. And the population is still young, with the majority of the population under 25 years old. Over the next 30 years, MENA’s population will grow more than 60%, to nearly 700 million people.

The second is that trade is expanding in this part of the world, as I highlighted in last month’s letter. To show this in a different way, let’s look at Syria.

Yes, Syria. Long a pariah state with which the U.S. maintained frosty relations, all that is beginning to change. In July, the U.S. made a couple of announcements that I thought signaled an important shift. First, the U.S. would send an ambassador to Damascus after a four-year absence. Second, the U.S. would ease export bans to Syria.

But more important than this political thaw is the economic story. Syria has been a mercantile crossroads between East and West since its days as a link on the old Silk Road.

The ancient city of Aleppo, for instance, was a key stop along the old Silk Road. Even today, it still has the longest covered market in the Middle East – a souk seven miles long. There you can find goods that take you back in history – soap made from olive oil or silk scarves and keffiyehs of a variety of colors. Head down an alleyway and find gold jewelry and stands of fresh pistachios and sacks of spices and more. Then there are the backstreets of hawkers with lamb – always plenty of lamb – and you smell the scent of lime, garlic and mint.

But much has changed, as Ben Simpfendorfer relates in his book, The New Silk Road. Today, for the first time in 22 years, banks in Syria can set their own interest rates on loans and deposits. Today, you can change money on the street without the threat of a ball and chain winding up around your ankles. A stock market even opened for business in March.

The largest investor in the country is Haier, a Chinese company. It makes 50,000 washing machines and 50,000 microwave ovens in Syria every year. Another Chinese company, Sichuan Machinery Import & Export, recently completed a $180 million hydroelectric plant here. There are big real estate projects, including a new $300 million resort on the Syrian Mediterranean coast. There are some 40,000 new hotel beds coming online in the next three years – up from 48,000 currently. Tourism is already 13% of the economy.

Syria is basically following the “China model” of maintaining a closed political order but carving out free zones and allowing trade.

Of course, this isn’t some Big Rock Candy Mountain fantasy where the sun shines every day on the birds and the bees and the cigarette trees. There are all kinds of problems in Syria, and elsewhere, but I find the changes taking place so far absolutely remarkable.

In a sense, we’ve seen this movie before. Roger Owen wrote the classic study on the Middle East and its place in the economy. In his book, he covers the period 1800-1914. This was a time of growth and transformation. At least a few points are similar to today. Then, as now, the region experienced a huge population growth. The Middle East’s population alone grew 300%. Then, as now, trade grew even faster under a more liberalized economic regime.

Then, the Middle East benefited from growing demand for agricultural goods from European markets. (Somewhat ironic, in view of the situation today.) Today, the region benefits from expanded trade with China and the rest of Asia for the region’s oil.

The most interesting thing about this growth is that it is happening in a part of the world where it is most difficult to grow food. Water is scarce. MENA consumes far more water than it gets via rainfall. In some places, the disparity is dramatic. In Kuwait, for instance, annual water consumption is 22 times annual rainfall. No wonder the whole area is a net importer of food.

As I mentioned in last month’s letter, the Middle East is the world’s largest regional importer of food. Egypt, for instance, actually imports more wheat than China. The GCC countries – or Gulf Cooperation Council countries – will import 60% of their food by 2010. And it’s likely to get worse. Saudi Arabia aims to phase out wheat production by 2016 to conserve water.

For this reason, these MENA countries are looking to invest in farmland overseas. The Saudis have grabbed farmland in Indonesia. The UAE has locked down farmland in the Sudan and Pakistan. As Eckart Woertz of the Gulf Research Center in Dubai says: “In a global food crisis, you may find it difficult to secure food supplies at any price no matter how many oil revenues you have.”

The key takeaway from all of this is to recognize this other, non-BRIC, growth engine and the needs and opportunities it creates.

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[Rude Endnote: If you read this whole issue, top to bottom, you should be about 9 minutes older. If we’ve done our job correctly, you should be at least ten minutes wiser. In any case, we’re out of time for today.

We’ll be back this time tomorrow with more Rude views.

Until then…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com

Baltimore, Maryland

• The greatest social Ponzi scheme of all,
• The problems with demographic bulges,
• Social Security’s worst kept secret and more…

Joel Bowman, with a few quick words from Taipei, Taiwan…

Six and three years ago, Bill Bonner and Addison Wiggin published, respectively, the books Financial Reckoning Day and Empire of Debt. The ominous titles of these two polemics illustrate, succinctly and eloquently, exactly what the two authors predicted for the greatest economic powerhouse on earth.

Put simply, the ending was not to be a favorable one.

Now, as the foretold financial crisis unfurls around us, Addison and Bill return with updated versions of their commentaries; freshly refurbished with additional chapters and recast in light of facts unknown, though predicted, at the original penning.

We’ll be featuring excerpts from these two works in the coming weeks to celebrate the release (and vindication) of their updated versions. The first such essay appears below. Please enjoy…

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Social Security? Not Exactly
By Bill Bonner and Addison Wiggin

The first public retirement pension scheme was created by Otto von Bismarck in 1880 Germany. Fifty years later, during the Great Depression, Franklin Roosevelt followed suit in the United States. As we’ve seen, the number of people expected to reach the retirement age of 65 was not considered to pose a threat to future funding. Life expectancy in 1935, in the United States, for example, was 76.9 for men. Workers relying on the plan for retirement would not receive much each month and were not expected to live long enough to drain the system.

When Social Security was founded, the typical US worker at age 65 could expect to live another 11.9 years. But if today’s official projections are right, by the year 2040 the typical 65-year-old worker can expect to live at least another 19.2 years. If the normal retirement age had been indexed to longevity since 1935, today’s worker would be waiting until age 73 to receive full benefits and tomorrow’s workers even longer.

In a report called “Demographics and Capital Markets Returns,” Robert Arnott and Anne Casscells argue that the crisis is not in Social Security, but in demographics. “When an entire society ages,” suggest Arnott and Casscells, “…the thing that matters most is the ratio between the workers to retirees. Unfortunately, the aging of the baby boom generation, which is a significant bulge in population, will cause a dramatic increase in the ratio between workers to retirees, one that will put enormous strain on society and cause friction between generations.”

In the United States, as in other developed countries, the unfunded benefit liability for public pensions amounts to 100 percent to 250 percent of GDP. It is a ” hidden debt ” far greater than official public debt. Unlike in the private sector, these debts are not amortized as expenses over 30 to 40 years. And it may be worth pointing out that under normal conditions economies do not run such crushing deficits. They only do so in crisis mode.

The annual cost of Social Security benefits represented 4.4 percent of GDP in 2008 and is projected to increase to 6.2 percent of GDP in 2034, and then decline to about 5.8 percent of GDP by 2050 and remain at about that level.

And to the retiring boomers’ other doubts and insecurities, we might add that US health care costs are expected to rise by 7 percent of GDP over the next 40 years – a rate that is more than twice as fast as other developing nations. The “old old,” – those aged 80 and over – are predicted to rise sharply through 2050 and will dramatically increase long – term care costs as well as disability, dependence, and health care expenses.

In fact, by official projections, in 2030, the US government will be spending more on nursing homes than it spends on Social Security today. “Although people justifiably worry about Social Security,” says Victor Fuchs, an economist who studies the health care industry, “paying for old folks’ health care is the real 800-pound gorilla facing the US economy.” Adding projections for Medicare and Medicaid ’s expenditures to those of Social Security could raise the total cost to more than 50 percent of payroll taxes.

The fiscal kickers of health cost inflation and political demand for more long-term care benefits threaten to raise public spending dramatically in the United States. Between 2005 and the fall of 2008, we spent two and a half years chronicling the efforts of David Walker, the former comptroller general of the United States, and Bob Bixby, executive director of the Concord Coalition, to reign in reform and shore up the Social Security and Medicare systems. The project yielded a feature length documentary film, which earned us a trip to the Sundance Film Festival in January of 2008 and another to the Critic’s Choice Awards in Los Angeles a year later. We published a best-selling companion book of the same title in late 2008. You’re encouraged to delve into the numbers we presented in the film and book. They’re truly mindboggling. But in many ways the project was dated the moment we released it to the public.

The credit crisis that reached a fever pitch developed in 2008 pushed the date of insolvency of these programs ever closer. On May 13, 2009, the Medicare Trustees warned that the fund they tap to pay for beneficiaries’ hospital care will be insolvent by 2017 – two years earlier than trustees had predicted the year before. The program has been paying out more than it collects in taxes and interest since last year, in part due to a recession well underway. Medicare would have to deposit $ 13.4 trillion – $ 1 trillion higher than last year’s estimate – into an interest-earning account today in order for the hospital fund to pay its scheduled benefits over the next 75 years. The program’s total unfunded obligation, which includes doctor and prescription drug benefits, is $37.8 trillion. The trustees estimated that in coming years, Medicare spending will rise faster than workers’ earnings or the economy as a whole.

Trustees say that while the financial standing of Social Security decreased more sharply than Medicare last year, the health program remains at greater risk of insolvency. The financial difficulties facing Social Security and Medicare pose serious challenges, the report concluded.

For Social Security, the reform options are relatively well understood but the choices are difficult. Medicare is a bigger challenge. Its cost growth can be contained without sacrificing quality of care only if health care cost growth more generally is contained. But despite the difficulties – indeed, because of the difficulties – it is essential that action be taken soon, particularly to control health care costs.

After the revised Social Security and Medicare announcement the world began to wonder: Can the US hold onto its AAA credit rating?

“The US government has had a triple-A credit rating since 1917,” David Walker, now president and CEO of the Peterson G. Peterson Foundation, commented in the Financial Time s following the release of the Trustees report, ” but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.

“First, while comprehensive health care reform is needed, it must not further harm our nation ‘ s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.

“Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.”

Of course, we must note that the whole credit rating biz is…well…corrupt. The agencies that are responsible for dishing out sovereign credit ratings (S&P, Fitch, and Moody’s) are the same ones that left us all out to dry in 2007. (Of course, mortgage – backed securities get a AAA…housing prices never fall!) Rest assured, if Wall Street can buy its way into AAA, Uncle Sam surely can, too.

But even Moody’s is starting to hedge their bets. They’ve since created three subdivisions within their AAA rating: resistant, resilient, and vulnerable…a corporate way of saying the good, the bad, and the ugly. While the United States isn’t in the worst of the bunch, it’s certainly not the best.

Joel’s Note: Both of Bill and Addison’s works are available, in updated, second edition format, at the links below:

The New Empire of Debt and Financial Reckoning Day Fallout.

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[Rude Endnote: Finally today, we offer a thoughtful email from Michael, a fellow reader:

“The article “Vandal Economics” in the Rude Awakening, 8/17/09, by Bill Bonner was a great read and nice to see good old economic “truths.” His quotes from Hayek and Bastiat (especially Bastiat) reminded me of a quote by Dean Russell (the translator of Bastiat’s “The Law” in the mid-1950’s at F.E.E.).

“Here’s what Dean Russell wrote about economics in a socialist economy (remember, ‘we’re all socialists now!’):

“‘Economics deals with consumer and producer choice in a market economy; socialism deals with the arbitrary edicts of officials in a controlled society. Economics is to socialism as astronomy is to astrology. Economists are scientists who search for cause and effect in their field without prejudice. Socialists, without exception, have a preconceived notion of what a society of men should be. Thus, without exception, the socialists always advocate the use of the police powers to force men into their ‘ideal society.’ Socialists are necessarily authoritarians.’

“If one accepts Russell’s premises, then one can logically conclude that socialist economies are arbitrary and that “economists” can no longer deal with consumer and producer choice, as they could in a market economy. That is why we’re seeing a bull market in a depression economy – its not the effect of the market but an effect of the government. The problem for socialists is that the inexorable law of cause and effect continually shows them the error of their ways, but they will continue to ignore it.

“Thanks for the great articles and I’ll continue to read them if you remain ‘true’ economists as defined by Russell (As I’m sure you will).”

We’ll do our best, Michael. Thanks for the words.

If you’d like to add any of your own thoughts, shoot us an email at the address below. We’ll be back tomorrow with more Rude views.

Until then…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com

Baltimore, Maryland

• Make way subprime meltdown…here comes the next wave!
• More of “Thriftville’s” comments on I.O.U.S.A.,
• How to gold plate your portfolio for a penny per ounce and more…

Joel Bowman, reporting from Taipei, Taiwan…

Clearly embarrassed to admit it, one lady told us, “I am not a good saver. I don’t even save half of my money.”

We had just come from a promotional screening of I.O.U.S.A., the movie our colleagues Addison Wiggin and Kate Incontrera spent the last few years producing and promoting. Keen to get a glimpse of what an Asian audience thought of the movie, we loitered around outside the cinema, hoping to ask a few moviegoers their opinion on the flick.

If you haven’t yet seen Addison and Kate’s “Big Budget Movie,” the basic plot follows protagonist David Walker, former chief of the Government Accountability Office, on his Fiscal Wakeup Tour. Mr. Walker talks debt, deficit and dollar delusions at town hall meetings around the country, trying to warn the good folk of the perils of unsound fiscal and monetary policy.

Necessarily, part of the documentary deals with the gargantuan trade gap between the U.S. – boasting the world’s largest trade deficit – and China – with the largest trade surplus. What do the world’s best savers have to say about that, we wondered.

One fellow, Mr. Chang, was kind enough to offer this anecdote:

“I have a friend, he works at a financial company here in Taiwan. A while ago, we were talking about this exact thing – America having too much debt and so on. I asked him, ‘what will the U.S. government do when they face this kind of problem with too much debt and no money to pay for it?’ He say, ‘print the U.S. dollar!’ But I don’t believe him. But in fact, this is what happens.

“I am not an economist,” continued Mr. Chang (a journalist), “but anyone can see this will be disasterous…all I can think now is that I must save my money.”

Back in a January of 2007, long before your editor found himself accosting Taiwanese moviegoers to ask their opinion on U.S. fiscal and monetary policy, we ran an article by the late, great Dr. Kurt Richebacher. In a characteristically prescient warning, Dr. Richebacher observed that:

“Private households in the United States have embarked on their greatest borrowing binge of all time, fostered and facilitated by the rampant house price inflation and a most aggressive financial system. What has been developing in the balance sheets of private households, therefore, is a race between booming ‘wealth creation’ through rising house prices and soaring indebtedness…

“According to the consensus of economists, American balance sheets are in excellent shape because asset values, mainly equity and housing, have soared in value for years, altogether by about $19 trillion – or almost 40% – since recession year 2001.

“But the bulk of these gains has been entirely in illiquid assets, mainly equity and housing. Liquidity, measuring existing cash against overall liabilities, is at its lowest ratio in postwar history. To us, consumer balance sheets in the aggregate look more like a house of cards.

“The great question is whether there is anything in the pipeline that might shake this house of cards. Clearly, we do not want to be standing near this house of cards when the macro-economic trembler finally arrives.”

Dr. Richebacher issued similar warnings to a handful of his readers much earlier than this, helping them to prepare for the coming subprime debacle long before it made its way through the economic pipeline and on to the front page of the Main Street Press.

[Ed. Note: We’ve actually just formed a Richebacher Society to help carry on the good doctor’s legacy. If you’d like to join this elite group of investors, you have the opportunity to do so now. We’ll be accepting members until 5pm this Tuesday.]

Unfortunately for investors, we’ve only witnessed the “first wave” of resets in the U.S. housing market. Still to come are the Option ARM and Alt-A peaks, due to hit a real estate market near you sometime around 2011. We’ll continue this line of discussion on tomorrow’s edition but, for now, please enjoy Addison’s take on the comedy/tragedy that was Housing Meltdown, Part I, below…

— Richebacher Society Invitation ENDS TOMORROW —

The Good Doctor Lives On…

We lost an economic heavy weight in 2007: Dr. Kurt Richebächer. Many of you heeded his warnings and insightful forecasts about the coming housing bubble burst and subsequent credit crisis, and your portfolios were the better for it.

Well, we would like to give you another chance to use the Good Doctor’s warnings to avert or even recover from the later stages of financial catastrophe. We’ve just formed a brand new “wealth- protection” society, and named it in honor of Dr. Richebächer.

For a limited time, we will waive your membership to the Richebächer Society for a full year…a total of $9,554 of benefits – free of charge. But you must act by Tuesday, April 21 at 5 PM.

Click here for all the details.

—————————————–

The Failed Intervention: A Morality Play in Three Parts
By Addison Wiggin

CAST OF CHARACTERS:

A.W. (a.k.a. Renter #1)
T.D. (Renter #2)
K.I. (Renter #3)
L.S. (Unwitting Speculator #1)
C.D. (Unwitting Speculator #2)
M.N. (Real Estate Investor)
A.P. (30-Year Fixed Rate New Homeowner)
Chorus: Café patrons and waitresses

TIME and SCENE: Mid spring 2005 A.D., our great nation is in the throes of a tenacious housing bubble. Whole cities have been tantalized, wooed and seduced by this Siren song of easy wealth; entire populations rendered giddy by profits… on paper. Nearly every conversation heard around the dinner table… across the bar… in a cab… is focused on one subject: the housing market.

The scene opens in Café Hon, a locally famous Baltimore eatery in the trendy suburb (sic) of Hampden, where big hair and gaudy make-up are curiously in vogue and admired. Seven colleagues from the Daily Reckoning’s HQ are seated around a Formica-topped table.

Lacking an additional 30-yr fixed mortgage holder, the table less-than- fairly represents the breakdown of mortgages nationwide: roughly 60% fixed rate, 40% ARM… 25% of all new mortgage originations in 2004 were real estate investors.

LS (Unwitting Speculator #1) is closing on a house the following day. Mere hours stand between her and the single biggest financial transaction of her young life. Can those stalwart pessimists (Renters #1, #2 and #3) lash her to the mast in time to save her from the Siren’s tantalizing tune? We shall see, dear reader… below…

ACT I – A MORTGAGE BROKER’S WET DREAM

Renter #1 : Hey, LS… I’m going to ask you one question. Your answer will determine how much I speak for the rest of this meal. Is your loan… an adjustable-rate mortgage?

Unwitting Speculator #1 : Not at all. It’s interest only.

[A gasp is heard. Ominous Lon Chaney-style horror music rises from the background.]

Renter #1 (face wincing): Why… why?! [Screams of horror coming from the kitchen.]

Unwitting Speculator #1 : What?! I was tired of throwing away money on rent every month. I wanted to invest in something real… and build equity. Besides, we’re going to sell in five years, anyway. So we’re cool.

[Somebody snickers.]

Renter #2 : That doesn’t make sense. You are still throwing away money. The only difference now is you pay a finance company instead of a landlord.

Renter #3 : And what if you can’t sell in five years… doesn’t that make you nervous?

Unwitting Speculator #1 : [muffled unintelligible remarks... something about the location of the house...a leafy street...children on bikes...speed humps... shiny happy people... yada, yada...]

Renter #3: Answer the question. What if you can’t sell?

Unwitting Speculator #1: Well… I am a little nervous. [nervous laughter] We’re risking a huge amount of money… more money than I’ve ever known. But hey, you only live once!

Unwitting Speculator #2: Oh come on LS, don’t listen to them. I have an interest only mortgage, too. [More gasps of horror. Another burst of Lon Chaney music.] These guys are all gloom and doomers. Remember, they work for The Daily Reckoning.

[Renters' heads snap in unison to glare at Unwitting Speculator #2]

Renter #1: And…what about you, AREN’T YOU nervous?

Unwitting Speculator #2: Nope. I try to take life one day at a time. I don’t look that far ahead. I’m doing okay right now… and besides, in 5 years, I hope to be married.

[Unwitting Speculator #2 holds up both hands with her fingers crossed. Smiles.]

All (in unison): Awwww.

Unwitting Speculator #1: Don’t you know it’s bad luck to cross your fingers with BOTH hands?

ACT II – UNSEEMLY PROFITS

Real Estate Investor: What about you Addison, why do you rent?

Renter #1 : Well, we live down by the water… in the neighborhood we want to live in… and to tell you the truth, I just don’t understand the market anymore. Let me give you an example.

When we lived in the same neighborhood before moving to Paris back in 2000, the house across the street went on the market for $97,000. The price was so high, everyone thought the owners were nuts. It was a different time. A friend finally bought the place for $87k, gutted it and started renting to college students.

We moved to Paris for four years. Last year, when we were moving back, we looked for a place to buy in Fell’s Point… low and behold, we saw the same property on the market. Guess how much?

All (in unison): How much… tell us!

Renter #1: $357,000. [Renter #1 moves his hands to his hips in disgust. Nods around the table.] A four-fold increase in just as many years!? Tell me, what market – any market – can sustain that kind of growth?

Real Estate Investor: Hey, a lot of people I know would say that’s still cheap. Besides, it sounds like you were a damn fool to move to Paris. You should have held on for the ride. Still, I think you’re right. The market is getting frothy… that’s why I just sold my Baltimore properties.

[Puzzled looks of intrigue.]

Renter #1: Yeah, that’s probably a good move. You bought in nice and early, and now you’ve sold near the top. Then you put the proceeds into a resort property in West Virginia… everyone knows that’s an undervalued market.

[Fiddle-heavy blue grass music wafts from the kitchen. More nods of agreement around the table.]

Real Estate Investor: Yup. The price is up already. We only put ten percent down, but by the time of closing we had accumulated enough equity, the bank said they weren’t going to require mortgage insurance. We’d already amassed an additional 10% of equity!

30-Year Fixed: Hell yeah! We made over $30,000 on our house before we’d even slept there!

Unwitting Speculator #2: Yeah… same here… my house is way up already, so I have a good margin of safety. And when I get married…

All (in unison): Awwww.

Renter #1: Hey, 30-year fixed, I know you’ve already made money on your house, but what do you see in the future?

30-Year Fixed: I have a response, but first I’d like to make a comment…

There are some neighborhoods that will always hold value. [muffled remarks... something about the location of the house...a leafy street...children on bikes...speed humps... shiny happy people... yada, yada...]

Renter #1 (with much enthusiasm): Au Contraire! (after all, that is THE motto of The Daily Reckoning…)

Baltimore is a case study of good neighborhoods gone bad. Look at Druid Hill… beautiful row homes. Back in the ’20s F. Scott Fitzgerald and Gertrude Stein held garden parties and entertained European royalty up there. Now look at it. Hell might offer better refuge for a family of four.

On the other hand, in the ’70s respectable folk wouldn’t let their children go down to Fell’s Point unchaperoned. It was a haven to bikers, ne’er-do-wells and urchins of the night. Today, they’re building spec homes on the water that start at a million plus…

Renter #3: Too bad the harbor smells so bad…

All (sighing): Yeah…

[Pregnant pause. A moment of quiet reflection.]

Chorus: At this point, it’s not clear what conclusion, if any, can be drawn from the play.

When will the housing bubble burst?

Is it a bubble at all?

Or… will prices keep rising for five years, handing the interest- onlys the last laugh; leaving the renters, humbled once again with egg on their faces… and feeling like chumps? Well, dear reader, this is what makes a market.

Still, the renters bumble on…

ACT III – THE INTERVENTION

Unwitting Speculator #1 (jolted with excitement turning to Renter #1): Oh, that reminds me, can I have the day off tomorrow? I’m closing on my house. [Turns to the table.] Should I wear a suit?

30-year Fixed: Nah…you don’t have to wear a suit for those yahoos.

[Snickers]

Renter #1: Sure, you can have a day off. But I forbid you to use one of these.

[Renter #1 holds up a pen. Renter #2 and Renter #3 smile at each other.]

Renter #3 (smugly): Ahhh… No pens, no signing.

Renter #2 (smug and grinning): Yeah… no pens.

30-year Fixed (Gesticulating expansively, raises his voice): Ah, don’t listen to THEM… (mutters to himself) for crissakes.

[Check arrives. Curtain falls.]

Regards,

Your playful playwrights at The Daily Reckoning

DISCLAIMER: Any and all events in this dramatic reenactment are purely non-fictional. Any resemblance to real life is intentional; not at all coincidental. Some liberty may have been taken with the facts, but we swear it was in good faith. We may have been embellished a tad for dramatic effect.

AUTEUR’S NOTE: It goes without saying, if this reality play had been written in 1999, the object of desire would have been tech stocks instead of houses.

A lot has changed since 2005. (Addison fell prey to the Siren song of real estate and now owns a home). And, unbeknownst to the cast of characters, the real estate bubble was about to find its pin…starting with the subprime market. As the subprime loans began to reset at higher rates, borrowers found themselves in over their heads, not able to make their mortgage payments. The subsequent defaults shook the lenders to their cores, causing a ripple effect over the rest of the economy…the effects of which, we are still feeling.

We aren’t out of the woods yet, unfortunately. Another wave of defaults will soon be upon us when the “Alt-A” and “Option ARMs” reset at higher rates.

But there’s still time for you, dear reader. Learn from the mistakes of our friends, above, and find out how to protect yourself and your assets (while building a nice cushion of wealth). Read our newest report here.

https://www.web-purchases.com/RCHTripleTimebomb/ERCHK437/landing.html

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How can that be possible?

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————————————

Rude Endnote: Markets are due to open any minute now, so we’ll leave it there for today. Remember to tune in tomorrow for Part II of our little housing and morality drama.

In the meantime, please feel free to send us any boots-on-ground anecdotes from your local real estate patch at the address below.

We look forward to hearing from you.

Until tomorrow…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com

· Bernanke drops rates to 1%, gold rallys,
· Paul Volcker on the role of the Fed, Bretton Woods and inflation,
· Global banks follow the Fed’s move, markets soar and plenty more…

Joel Bowman, reporting from afar…

Zero score and seven years ago, Fed Father Greenspan brought forth, upon this continent, a new era of easy credit, conceived in lunacy, and dedicated to the proposition that all paper monies were ultimately combustible.

It took Fed Father Greenspan until 2003 to finally reach the 1% interest rate level after lopping his way down from 6.5%. Over the ensuing half-decade, major asset classes, largely fueled by cheap credit, rose dramatically.

Investors, bankers and anyone with a pinstriped suit or PC in their home office made money hand over fist. Online brokers proliferated, allowing for the emergence of the soccer mom day trader. Pretty soon, dad was staying at home too, trying his hand at the magical money machine.

Real estate also vaulted higher during our most recent period of plenty. According to the National Association of Realtors, the annual percentage appreciation of a median priced existing home leapt 6% and 7% for ‘03 and ‘04 before topping out at nearly 12% in 2005. Homebuyers hadn’t seen this kind of appreciation since the 1970s, when twice that decade the average house increased in “value” by over 12%.

From June 27, 2003 to the October 12, 2007 all time high for the Dow Jones Industrial Average, the index rose over 150%. But we’ve had a rough last year, to say the least.

Yesterday, as you’ve no doubt learned by now, Ben Bernanke chopped interest rates back down to a Greenspan-era 1%. A few hours later the markets closed…with the Dow up just one solitary point from that day back in June 2003, on 8990. Half a decade of stock market wealth, in other words, has now disappeared…and Bernanke’s running out of bullets.

What would Paul Volker do in a situation like this, we wondered as we read the Federal Open Market Committee’s statement this morning. As it just so happens, our friends and colleagues, Addison Wiggin and Kate Incontrera, had the opportunity to interview Dr. Volcker for their I.O.U.S.A. documentary. Given the Fed’s move yesterday and these strange and dangerous times we live in, we thought we’d share a transcript of the interview with you below. Please enjoy and send any and all comments to the address at the bottom of the page…

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An Interview With Paul A. Volcker
Taken from the companion book to I.O.U.S.A.

Paul A. Volcker has had a long and successful career in monetary affairs but is best known as the chairman of the Federal Reserve from 1979 to 1987. Dr. Volcker is lauded for battling inflation during a time of major economic imbalances in the United States. However, to do so, he had to raise interest rates to an all-time high: 19 percent.

Q: In the film, we talk a great deal about the dollar and its value. Since the dollar is the medium by which people save money and right now we’re running out of it, our country is faced with a savings deficit. What is a fiat currency and what is the importance of gold in the monetary system?

Paul Volcker: Throughout my career, I have worked in finance, particularly in the Federal Reserve and the Treasury. I’ve also been concerned with the management and the stability of the dollar. Although the dollar had its ups and downs during my career, it has been an interesting period, to say the least. After World War II, we started out with a bright new monetary system, the so-called Bretton Woods system, which IMF created. The basic fulcrum of the Bretton Woods system was the stability of the dollar and its conversion into gold.

It was assumed that exchange rates would be fixed and not change very much. And that’s the way it was for about 20 years. In the 1960s, the system came under increasing pressure when the United States had a small amount of inflation.

At that time, this small inflation was actually considered rather large, particularly against the growth of other countries whose economies were becoming stronger. While other countries got more dollars and exchanged some for gold, we began running balance-of-payment deficits. That put pressure on the Bretton Woods system. In 1971, we broke away from it. At that time, I was the secretary of the Treasury for monetary affairs, so I was right in the middle of that decision-making.

Q: How did you feel about the decision at the time?

Paul Volcker: Well, I was in favor of the decision. I was one of the proponents of the decision, but I had very mixed feelings about it because I was brought up in defense of the system. I believed that the dollar should be supported at the center of that system and that a stable monetary system was important to the prosperity of the world. The system was set up in reaction to the turmoil in the 1930s – in the Great Depression of the 1930s – which had a lot of currency instability and antagonism between countries. So to see that system potentially undercut was a rather traumatic experience for me, especially since I was hoping for it to be restored at the time.

Q: Once the Bretton Woods exchange rate system was abandoned, did the Federal Reserve became the proponent of a sound currency?

Paul Volcker: Once we moved off gold, which was kind of the last vestige of a gold-based system, we entered a world of so-called fiat currencies. In that world, there’s nothing behind money except the credibility of the government and of the central banks. They have the responsibility of maintaining the stability of the currency. Yet this country and other countries did not always honor this responsibility because of the ever-present tension between maintaining stability of the currency and maintaining full employment or economic growth. I think maintaining full employment is a false economy. Most central bankers and most economists now understand that you shouldn’t set up full employment in opposition to stable currency, but the stable currency domestically is important to building a base for prosperity over the long run.

Q: Following the end of the Bretton Woods era, the United States entered an era of rapid inflation. Were you surprised at the high rate of inflation? What do you think were the root causes of the ’70s inflation that led to you taking over the Fed?

Paul Volcker: Well, I don’t know whether it’s fair to say I was surprised. I was disheartened, I suppose. It is difficult to sustain the domestic price stability. But there was a combination of problems that led up to this high level of inflation. The 1970s was also a period of great instability in exchange rates, which led to some difficulties for the economy and for relations with other countries. People had become rather inured to a small amount of inflation. And as I indicated earlier, there was this feeling of a trade-off between maintaining price stability or maintaining economic growth. I think that this false trade-off made people more relaxed than they should have been. When these inflationary forces began getting stronger, it affected wage demands and pricing policies, and had a certain built-in momentum. And that whole process was aided and abetted by the big increases in oil prices and was something of a chicken-and-egg situation.

For instance, you can argue that the inflationary pressure has encouraged OPEC to increase the oil price, and the increase in oil prices led to inflation, or more inflation. So we got into a discouraging passivity and cycle of poor economic performance and inflation.
And I think they were related.

Q: The popular press also tells the story of how you came in and raised interest rates in order to slay inflation. I even noticed you have the famous painting out in the hallway of you with a shield, fighting off inflation. Can you just tell us how it felt to be in that position, and also describe what was really happening rather than the popular portrayal expressed in that painting?

Paul Volcker: When I became chairman of the Federal Reserve, I think there was a general feeling in this country that economic affairs, and inflation in particular, had reached a kind of crisis point. Things were not going very well. There was a feeling of uncertainty.

There was a lot of speculation in commodities and the gold price, which was then free to fluctuate up to $ 800 an ounce. In an odd kind of way, that’s a good time to step into a job because people thought that something needed to be done. I also think the mood of the country was willing to accept action, which 10 years earlier they wouldn’t have been willing to accept. And once we got caught up and I got caught up – or the Federal Reserve Board got caught up, for that matter the country got caught up – in an anti-inflationary effort, there was a certain willingness to take very high interest rates and eventually a rather severe recession, with the hope and expectations – certainly, the expectation that I had – that things would get better. And if we could restore any sense of stability in the currency, the country would be better off as long as we sustained that phase.

Q: Would it be fair to say that in that era the high interest rate was the tough medicine?

Paul Volcker: No. There was a lot of opposition and concern, understandably. It was a bad recession, but I think there was this underlying core that the country had not been on the right path economically and that it needed to be shaken up in order to restore stability. And that faith not only sustained me, it sustained the country.

Q: What do you feel were your proudest achievements? If you were able to restore stability, how did that come about?

Paul Volcker: Well, it’s not a question, of course, of me achieving stability and sustaining stability. It was a situation in the country as a whole that a stronger approach was acceptable and that we have a Federal Reserve Board and a government who’s all in. Although it was controversial – I don’t want to minimize the controversy – there was a basic core of support and willingness to do it. And I think one of the lessons of the early ‘ 80s is don’t let inflation get started, because once it gets some momentum it’s very difficult to deal with, but it’s also destructive for economic growth and prosperity. That lesson is also important today.

I repeat it all the time ad nauseam: Don’t let inflation get out of control and build a kind of momentum that’s inevitable. If that happens – and right now it seems like there is a little flavor of it – we will all find ourselves back in the days of stagflation and unacceptable economic performance.

Q: Do you feel like that the policies that are in place are reactive enough now?

Paul Volcker: Well, right now we are in a very difficult circumstance. We are in a financial world with lot of excess spending and lending, particularly in the infamous subprime mortgages. These many excesses put a lot of pressure on economic institutions.

The question becomes, how much pressure will they put on the economy as a whole? In the past 20 years, we have had a very good run of economic activity and a lot of success in the financial world. But now we have reached a point of excess, maladjustments, and tensions. Correcting them is going to be a little bit painful.

Q: Why is it important for Americans or people who are not involved in the financial industry and/or economics to understand these issues?

Paul Volcker: It is always difficult to answer that question because it seems that these issues are small and abstract in comparison to people’s day-to-day problems of making a living and going to work. Well, they no longer seem abstract when it comes down to people maintaining fiscal discipline and paying for Social Security and Medicare. But the greatest challenge for democracy is to be able to effectively cope with problems that are pretty clearly out in the future but require some action, discipline, and restraint today.
That’s the test we’re going through. And, as people get a better understanding and education about some basic economic issues, the democracy will be better able to cope with those future challenges.

Q: What are the consequences of not being successful in this endeavor?

Paul Volcker: In the future, there will be all kinds of consequences and uncertainty if we don’t deal with these problems. But when I look back on my lifetime, it is obvious that letting inflation get a little bit out of control and not dealing with economic problems effectively in the ’70s led to a very uncomfortable crisis. We don’t want to have to go through big recessions again to teach people fiscal responsibility. Instead, we should anticipate what needs to be done while maintaining the growth of the economy. And the threat will always be an unstable economy and an unstable currency. And that’s not just destructive to economic life, but it can be destructive to America’s position in the world, which to me is the greatest concern.

Editor’s Note: The above was taken from the companion book to the critically-acclaimed documentary I.O.U.S.A. . Included in the book you’ll find interviews from some of the most revered voices in the nation, including Warren Buffett; former Treasury Secretaries Paul O’Neill and Robert Rubin; Pete Peterson, CEO of The Blackstone Group; Congressman Ron Paul (R-Texas); and bestselling Empire of Debt author Bill Bonner. Defiantly non-partisan, the empowering solutions outlined in these pages are a must-read for any American who wants to help change “business-as-usual” in Washington as a new administration heads towards the Oval Office.

To get your copy, along with the I.O.U.S.A. DVD and a special “Emergency ‘Personal Bailout’ Bundle” click here

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GOLD $2,000

“I’m so sure gold will soar higher I’ll even make you a guarantee… plus, I’ll give you five entirely new ways to play the trend…”

“Including one hidden way to snap up gold… for less than one penny per ounce…”

How can that be possible?

Give me the next four minutes and I’ll show you how…Read On Here

—————————————–

[Rude Endnote: The Dow collapsed to the tune of 400 points in the final ten minutes of trading yesterday. What can we expect today? Put simply: the unexpected.

As we write, U.S futures are up on the back of worldwide rate cuts following the Fed’s chop. Gold rose $8 overnight and trades at $763 early this morning. A barrel of the world’s grease goes for $68.74.

And that’s all we have time for this day.

Until next time…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com

• The real story behind the crumbling economy,
• Jobs slump…but what doese it mean for your investments?
• Recession, regression, depression and other hard truths…

——————————————————————————–

Joel Bowman, reporting from Dubai in the Persian Gulf…

Most analysts now agree (or admit) that the US has sunk into a recession. In fact, the debate now seems not to be regarding the timing of the recession, but the severity of it. For many, the picture is even bleaker, with that ugly “D” word popping up more and more in the press; Depression.

Optimists will contend that the latest scare-mongering in the media is simply part of the natural cycle of the markets…part of the usual highs and lows…something the economy must “work through.”

Interesting, especially given that the number of working American’s is falling by the month.

“Employers in the U.S. cut the most workers in five years last month,” reported Bloomberg yesterday, “signaling that the economic contraction is deepening and that the Federal Reserve will continue to lower interest rates.”

Great! Few jobs AND a weaker dollar! How can you go wrong with that?

Payrolls shrank by 83,000, the third consecutive monthly decline and higher than forecasts, said the Labor Department. The jobless rate crept above 5 percent to 5.1, the highest level since September 2005, from 4.8 percent.

“A host of economists had predicted a net job loss, but today’s numbers far exceeded their expectations,” reported Addison Wiggin in yesterday’s 5-Minute Forecast. “The Bureau of Much Belabored Statistics has now reported three consecutive months of job losses.”

With bad news and sad stats piling up quicker than wealth in a Chinese savings account, we thought it might be instructive to take a closer look at what all the numbers mean. Today’s column is an excerpt from Addison’s bestselling book, Demise of the Dollar…and Why it’s Good for Your Investments. Details below…

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Fictitious Capitalism
By Addison Wiggin

Economists like talking about the gross domestic product (GDP) because it is a big melting pot. But it ’s misleading. All we have to do is look one by one at the parts that make up GDP and we will see the real trends.

The way the news is reported is itself an economic illusion. Our manufacturing base — a historical source of good jobs and economic growth — is undergoing a multi-decade trend that is harming our dollar’s value. Starting in the late 1970s, the trend involves the loss of manufacturing plants and jobs overseas; and it has gotten worse during the past few years, a hidden indicator.

In past recoveries, industrial production always led the way; it was a dependable sign to measure the strength or weakness of the recovery. Production surged by an average of about 18 percent in the first two years after the typical recession.

Since November 2001, though, when the so-called current economic expansion began, industrial production — the creation of goods and the traditional driver of the economy —has barely moved. In fact, the total number of factory jobs lost since the start of the most recent recession in March 2001 is 2.8 million. (We have lost a total of 3.4 million jobs since 1998.) This was the single greatest percentage fall in the labor force in almost eight decades since the Great Depression of the 1930s.

What has been happening to American manufacturing can only be described with the word depression. And yet this important trend is almost invisible if we look at overall GDP.

This loss in industrial base is not a temporary thing. It is a sharp downward plunge within a longer-term trend — going south and with the dollar’s spending power soon to follow unless we turn it around.

How does the loss of manufacturing jobs play into the true economic picture and, by association, the dollar crisis? Putting it another way, how is the news spun by the media?

In one headline on the topic in 2003, when the fallout from the 2001 recession was still being felt, we read: ” Jobs: The Turning Point Is Here. ” What was even more interesting in that story was a table titled ” A Jobless Recovery? That Depends.” Obviously, the author wanted to convey the message that the dismal employment picture was offset by good news elsewhere in the economy. But in fact, the story’s statistics only confirmed that the U.S. economy is in a wrenching crisis. Today a more timely news headline is “Making Less Than Dad, ” published on May 25, 2007, on CNN. The production side with high – paying jobs is disappearing, while the consumption side with low – paying jobs is booming.

As the nearby chart shows, since the end of 2001, the main job losses have occurred in the most historically productive sectors. In manufacturing, losses have almost doubled, while computer systems design and services have dropped nearly 80 percent.

The gains in construction, commercial banking, and real estate were directly related to the housing and mortgage refinancing bubble, and now, with the growing number of foreclosures that are mounting as the fallout continues into 2008, in two of these sectors growth comes from refinancing and not from any form of productive activity.

Look at the phenomenal growth in accommodation and services — 10 times the numbers just a few years ago — and at temporary help services, which more than doubled. What does such growth say about our real productivity? This employment record shows just how the economy’s grossly distorted spending and growth pattern is moving. While the production side is collapsing, the consumption side is expanding.

Our economy is changing in big, big ways. We are moving away from goods production and toward services. It is a development that American policy makers and economists have hailed as a normal and natural shift in emphasis for a developed economy. This complacent view ignores two important points, though. First, the manufacturing sector pays the highest wages, which makes it a no-brainer for anyone to understand — especially anyone who has lost a manufacturing job and who now works in the retail sector. Second, manufacturing is the source of earnings that pay for the overseas obligations of every country.

After a slight dip in 2005 to 53 percent, the United States is now at the point where our exports are at only 56 percent of our imports (57 percent, if you count the gold shipped out of the country). We know that manufacturing produces more and more goods while employing fewer and fewer people. But the American case is different; the production of goods increasingly lags behind growth in personal income. But so what? How does the balance of trade affect the typical American, and how does it hurt the dollar?

We read in our media that miraculous productivity gains have become the main driver of U.S. GDP growth. But is this for real, or is it only a big economic hoax? We may hear a variety of possible explanations. For example, businesses are supposed to be able to squeeze more value out of the average worker. As this idea boosts profits, the impending comeback of business investment spending is taken for granted. The concept of improved productivity is supposed to offset lost market share in a global sense.

The belief that productivity growth is the whole deal is delusional, but as an economic principle it is unique to American economists. In contrast, European economists rarely mentioned the notion. They know about the importance of productivity growth, but they view it as part of a more important trend, capital investment.

American economists don’t like to go there, because it brings up the real problem with the relationship between employment and the value of the dollar. As a rule, where there is high capital investment, high productivity growth can also be taken for granted. And by the way, capital investment also provides the increase in demand and spending necessary to translate growing productivity into effectively higher employment and economic growth.

Joel’s Note: Addison’s work in his book, Demise of the Dollar…and Why it’s Good for Your Investments, earned him another position on the bestsellers list and acclaim from his intrepid peers in the industry. If you have not yet read it, we suggest you grab a copy and uncover what’s really happening to your currency, your country and ways you can protect your investments. Click here to order now.

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Rude Endnote: Finally today, one observant reader sent in this Speed Bump comic that appeared in yesterday’s Houston Chronicle.

On that…ahem…note, we’re off.

Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening

The Final word on the Cash or Not to Cash debate,

Striking while the iron is hot! Before the iron strikes you!

Toning down finance’s animalistic appeal and plenty more…

Joel Bowman, reporting from Dubai, UAE…

Sometimes the financial publishing business can be so overwhelmingly sexy that we need to tone things down a little. During such times, we try to imagine we are employed in a profession with a little less raw appeal… like a fireman, a navy pilot or a rock star.

You may recall last week when Dan Denning, editor of the Australian Daily Reckoning, boldly declared, “I know its crazy, but I’m advising my readers to liquidate all their positions and get into cash.”

The inevitable question that arose was, what’s better than cash?

Feeling a little overwhelmed with all the titillating discussion that ensued, I decided to write to Dan myself, under a relatively prudish guise…

Dano,

As far as the “Agora Live Tonight: Sold Out” show goes, I may only be playing a triangle at the back of the band, but I’ve heard the crowd singing your lyrics back to you in the emails they’ve tossed on stage. “Gold, Silver, Energy,” they chorus back in response to your “Better Than Cash?” query.

From the whiskey-swigging bluegrass contingent up the back we hear, “Guns, Ammo, Fallout Shelters!”

Then there are the currency crowdsurfers, singing out for a dollar hedge with a basket of other currencies – Yen, Pound, Loonie, NZD and AUD.

Those with a more fiscally conservative conscience (I think they came to see the Matchbox 20 show afterwards) are quietly pulling for a 50-50 split between gold and the buck… “win none, lose none…” they whisper, shyly.

You’ve read what your fellow Agora Financial band members have had to say.

I’d reckon if you poked around outside the crumbling walls of the Empire, there are plenty of contenders that are ready to fill the void…and companies that will be helping them do it. Maybe rather than going ex-US dollar, you might consider going ex-US altogether…?

Anyway, that’s just my 0.02c. The encore is up to you…

Read on for the final word on “To Cash or Not to Cash?”

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Agora Financial…Unplugged, Part III
Edited by Eric J. Fry

Dan Denning, editor of the Australian Daily Reckoning:

Friends, Agorans, contrarians…lend me your imagination.

Imagine you have been hired by a wealthy client to take him to the summit of some very high and technically challenging mountain he’s always wanted to climb. You’ve been paid top dollar. Your client is genial, equipped with all the best gear, and seems reasonably fit…for a 75-year old chain smoker from Ames, Iowa. He’s also a complete novice at what he’s about to attempt. But he has the money and you have the expertise, so you get acclimated at base camp and off you go.

Then, you notice a storm rolling in. It’s not right upon you. But you know the weather around the place. You know it will get worse. You know, in fact, that if you get caught in the storm, your client will probably die. You might die too, although you are younger and healthier. But your client…if he insists on hiking into the storm you know is coming…he may not make it.

At that point, isn’t it your job to be a good guide, and REALLY earn your pay by altering from the planned course when you conclude that’s what’s called for?

Strike while the iron is hot! Before the iron strikes you! Or, as my dad used to say, “The map is not the territory.” When the investment conditions have changed so much (if they have) isn’t it prudent to change direction?

Isn’t your job to tell him, “We might get lucky and make it. But the weather can change. It is unpredictable. But the odds are if we keep going, something very bad is going to happen. The probability of success is low and the magnitude of getting caught in the weather is…well…it’s as big as it gets.”

Anyway, before I belabor the metaphor, my point is that it’s not a betrayal of your relationship with your reader to say you think it’s time to do something radical that wasn’t part of the original plan. Most of the time you’d never have to say that. Markets go up. You buy and hold stocks for the long haul. Blah blah blah.

It’s the few times where something radical IS required that your reader really needs you. We give our readers radical ideas that are mostly bullis…because the stock market has mostly gone up for the last 20 years. It hasn’t required a radical departure from a conventional buy-and-hold strategy.

Even when those big ideas were bearish, as they were at Strategic Investments while I was there, there was still some bullish silver lining…something you could buy to hedge against the risk and calamity. It’s been this way for most of the ten years I’ve been doing this. All the good ideas have been stock tips. Now maybe the best idea is a “cash tip.”

Now, getting into cash IS a pretty radical idea for a stock-focused newsletter. And it certainly is not a market-neutral position. It’s a claim that in the bursting of a credit bubble and the deleveraging that ensues (fire sale selling) it is much better to be in cash. You’ll need that cash later.

You can’t take advantage of a firesale if you’re inside the warehouse when it burns down. You want to be outside the warehouse, with a pocket full of cash, and a manifest of all the assets you want to own when the smoke clears.

So yes…I’d make a list of energy stocks, stocks not correlated to the U.S. consumer, or balance sheets heavy on tangible assets and light on debt. I’d check it twice. And then I’d wait for this little rally to blow itself out and see what happens.

In the meantime, I’d turn my attention to a part of world where all the biggest growth in the real economy is going to be for the next twenty years. Places where corporate earnings won’t be driven by debt. That’s a great opportunity for the readers now.

It’s outside the dollar, in companies that serve all these new consumers in Asia with fresh lines of consumer credit or – egads! – actual savings in the bank! It’s really an American investor’s last best chance to reduce his home bias before the credit bubble fully trashes the stock market…and leads to Nanny State Finance under the next Clinton Administration.

Or I could be wrong and the collapse of the biggest bubble ever will have a negligible effect on U.S. stock values and corporate earnings. Or I could just be two years early. You can decide for yourselves.

Anyway, I know everyone is working really hard on good ideas. Just wanted to share my thought process for what it’s worth…and the belief that this is not just a fire drill this time…but a real inferno.

This really could be your last chance to get out of the dollar and dollar-denominated assets before it’s too late. Reckoning Day…Empire of Debt…Mobs…it’s been a steady progression. We shouldn’t be surprised we’re there. And we needn’t do anything irrational now that we are…but we should do what we can, whatever that is.

Byron King, editor of Outstanding Investments:

The quote below is from the great Richard Russell…

“OK, aside from an honest man, what’s the rarest thing in the world? It looks like it’s going to be energy. With the Chinese buying cars, and the Indians buying air conditioning, there won’t be enough energy available, not at today’s prices. The life-blood of the civilized world is energy. And XLE is a direct way of participating. The ETF has consolidated since June, and it turned bullish this month. I like XLE. I mean, if the energy business doesn’t do well, then what the heck will?”

Could not have said it better myself. Hey, I did say that.

Dan Denning:

So you’re telling me not to jump?

Hmmm…I’d describe the last week as thoughtful anxiety evolving into nervy conviction.

We’ll see how it goes.

Joel’s Note: Indeed we will. But the larger question still remains: Why bother with rock and roll CDs when you can grab the Agora Financial Investment Symposium CD set? It’s packed full of investment ideas from the whole band and, unlike a rock and roll CD, this one is bound to MAKE you money. Click here for your copy.

Rude Endnote: As for your Dubai-based editor, our ribs are crushed under the weight of all the fan mail and, besides, we’re still learning the sheet music for our three triangle dings toward the end of the set.

Having said that, we’re inclined to agree with a selection of the readers that are looking outside the U.S., into emerging nations. Here in the UAE (a nation that, as a member of the GCC, have considerably lessened their holding of U.S. Dollars in favor of Esperanto Euros) things are humming along nicely. But it’s not what’s in Dubai already that’s most impressive…it’s what isn’t. A cursory glean over a map of the area reveals a great many “(u/c)” land parcels, ie; Under Construction. In other words, there’s much growth to come.

The mass of earth being moved here is done by cheap labor from Indian, Pakistani and Bangladeshi workers. These blokes are working harder than one-armed brickies in Beirut…and they are doing it for pittance. We’ve heard the monthly wage for a day laborer is around 500-800 dirhams – about USD$200-300. Rather than build walls along their border, the Emirates are only too happy to send their immigrant workers up 95 stories of scaffolding to work on their towers. And while many of them send the little money they can spare back home, the buildings stay here. These monolithic structures are then outfitted by local firms and bought up by European companies lured here by huge tax breaks and other business incentives.

We read somewhere recently that only a small fraction of the U.A.E.’s wealth is generated by actual oil…the majority comes from tourism (mostly Europeans) and the service industry (mostly Asians) – financial and other.

The area is also a huge technology hotspot. In fact, we’re off to the Gitex Technology Week conference in a couple of hours. It’s the largest conference of its type in the region and attracts a multitude of tech companies, all showcasing their wares and hoping for a slice of this enormous market.

We’ll be back with more Rude news tomorrow. For now, it’s over to your 5-Minute Forecast.

Cheers,
Joel Bowman
Rude Awakening