• The ultimate contrarian indicator: Greenspan declares recovery,
• Gold goes ballistic…but beware the Roosevelt years ahead,
• The long, slow death of the dollar continues and more…

Joel Bowman, reporting from Taipei, Taiwan…

Watching these markets is a bit like watching a game of Jenga, only the pieces are real economies, made up of real companies that employ real people…none of whom are particularly well equipped to suffer a fall from great heights.

But still the blocks come out from the foundation…and still the tower grows higher.

Under the spellbinding influence of recovery rhetoric, investors again piled into equities last week. The Dow Jones Industrial Average had grown 4% by Friday’s close. The 500 companies averaged by the S&P index did even better, finishing the week higher by 4.5%.

How long can they use fragments from the foundation to build higher the spire? The Feds can keep the illusion running for a while, but the structure grows more fragile with every passing day. We wouldn’t hold our breath…but we wouldn’t breathe too hard either. Having retraced over 50% of their initial selloff, stocks look mighty wobbly any way you dice them.

“If the bullish investors on Wall Street are too optimistic,” Eric Fry observed in this space last week, “it would not be the first time. Investors are prone to excess, both on the upside and on the downside. We cannot say that today’s upside is excessive, only that it is without any fundamental underpinnings.

“Stocks are trading at 19 times FALLING earnings,” Eric continued, “and there’s very little indication that earnings will improve – much less, accelerate – any time soon.”

Meanwhile, it is the gold/dollar story that has everybody in a real frenzy at the moment. The yellow metal is forging ahead. The greenback is taking a beating. A few more months of this kind of punishment and they’ll have to have a closed coffin service for the world’s reserve currency. By then, not even a founding father will be able to love its beaten mug.

Only two weeks ago, just after the G20 shindig in Pittsburgh, Timothy Geithener reiterated Washington’s “commitment to a strong dollar.” Then, last week, The Independent ran an article claiming that certain countries – China, Russia, some OPEC nations – were looking to ditch the greenback as their currency of crude trade. The news cleared the dollar store like a cigarette clears a room of pregnant women. Evidently, the word of the Treasury Secretary of the United States is worth nothing next to a few – later discredited – inches in an English newspaper.

Fearing the game may finally be up, investors – both man- and country-sized – are looking for a way to “get out of the dollar.” Many have bought gold. The metal crashed through resistance barriers like a prizefighter punching through wet napkins last week. $1,020…$1,030…$1,040…$1,050…

In the column that follows, Bill Bonner raises a few questions about the foundations of any recovery and the future of the world’s reserve currency. Please enjoy…

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Chronic Depression
By Bill Bonner

Last week, the Australian central bank became the first to declare victory. It raised its key lending rate 0.25% and gave a whoop…signaling an end to the slump. The European Central Bank fidgeted and vaguely threatened to raise rates too. But the Americans stayed in their trenches. New York Fed governor Bill Dudley said that even though the economy is recovering, any rate hikes in the United States would be over his dead body.

Then, word came that even Alan Greenspan thinks a recovery is underway.

“This is what a recovery looks like,” said the maestro. That settled the matter as far as we are concerned. Alan Greenspan didn’t see history’s biggest financial bubble until it exploded in his face. In the following few words we undertake to show that Greenspan is as blind as ever.

“Great time for US consumers, America is on sale,” says an item at YahooFinance. The “discounts are unbelievable,” adds a blogger known as Frugal Rhode Island Momma. All across the nation, merchants are no longer selling the merits of their products; they’re selling price. McDonald’s advertises its “dollar meals.” Hotels have cut room prices by 20% in the last year. House prices are down about 30% since 2006. Sellers are offering bargains and they want buyers to know it. “Sold for $365,000 in 2006. Now $195,000,” says a typical house ad.

Foreigners have noticed too. Colleagues in London say they are thinking of moving to Florida where they will get far more for their money. The dollar falls; foreign purchases go up. Stocks, for example. In the first quarter, foreigners were unloading US shares. Now they’re buying more than $100 billion worth per month.

It is a deflationary world, at least that part of the world between the Rio Grande and the 49th parallel. The CPI in the United States is negative and falling faster than at any time in 59 years. Households can only be induced to spend money by cutting prices. “Cash for Clunkers” cut prices on new cars by about 20%. As soon as it ended, so did auto sales. Most new house sales could be traced to a tax credit – which reduced the down payment by at least 20%. That program is scheduled to end in November.

And now, the White House frets about jobs. Unemployment is supposed to be a lagging indicator, but this time it seems to have dropped out of the race all together. Still, Congressional elections are coming up. Unemployed voters are surly and unreliable. So, the Obama administration is considering a $3,000 tax credit to bribe businesses to hire them. If the typical employee costs his firm about $40,000, this effectively reduces the cost of labor by 7.5%.

It’s beginning to look more and more like the Roosevelt years. By the end of this year, all the jobs created during the bubble era – 2002- 2007 – will have been eliminated, making it the first decade with no job growth since the ’30s. We’re expecting a fireside chat any day.

Typically big businesses cut workers in a recession. Then, when the economy recovers, small businesses are quick to take them back. But this is unlike the typical post-war recession. This time, deprived of capital as well as customers, small businesses don’t have a chance. Neither does a genuine recovery.

The authorities still do not understand what is going on. They are used to fooling most of the people most of the time. They think they can dupe them again – with bailouts and boondoggles. But real demand has vanished as households try to pay down their debt. That is not going to change anytime soon. Not while the federal government is sabotaging a genuine recovery. It’s savings – capital – the US economy needs. A capitalist economy in which the capitalist have no capital won’t work. Why is there no capital? Because the feds take it.

Supplying cash-for-this and cash-for-that is an expensive proposition, especially when tax receipts are falling. The money has to come from somewhere. As it turns out, the feds borrow it from the very people who are trying to rebuild their personal balance sheets. Of the $1.6 trillion the US government will borrow this year, the biggest single lender is the private sector, chipping in $700 billion. But instead of being put to use in a way that might stimulate a real recovery – providing credit for small business and consumers – it is taken up by the US government and then frittered away.

The banks are happy to play the government’s game too. They can borrow overnight money from the Fed at only one quarter of 1%, annualized. But lending to small business is hard work. And it is risky. Why bother? The US Treasury will pay them 4 % for lending back to the government, long term. This is practically free money to the banks. Both the bankers and politicians end up ahead – with a bigger piece of the economy under their control.

Meanwhile, the real economy staggers. “Drought of credit hampers recovery,” summarizes The Wall Street Journal. The United States needs to create a million and a half new jobs each year just to keep up with population growth. Currently there are 15 million people without jobs already…and a couple hundred thousand more unemployed every month. And if this recovery continues long enough there won’t be a single person left in America who still has a job.

Even if the economy could be stabilized, it will leave millions without jobs – more or less permanently. Add the people working reduced hours, and those who have been looking for work so long they are no longer counted, and their families, and you have a quarter of the population without money to spend. That’s why this slump is not going away any time soon. As in Japan in the ’90s, we may have to live with this depression for the rest of our lives.

Joel’s Note: Word came in over the weekend that the updated, second edition of Bill and Addison’s book, Empire of Debt: the Rise of an Epic Financial Crisis, was back atop the Amazon bestsellers list. Could it be that people are beginning to wonder about the foundations of the Great American Jenga Economy? One can only hope. You can grab a copy yourself for a nice little discount right here.

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[Rude Endnote: Don’t forget, this is the last week we will be publishing our daily missives in this space. From next Monday, October 19 onwards, you ca catch us over at The Daily Reckoning. To ensure you don’t miss a single issue, sign up free here.

Until tomorrow…

Cheers,

Joel Bowman

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

• Labor force sheds 863,000, smashing economists’ guesstimates,
• Living through a Great Depression…and living longer for it!
• Was “Cash for Clunkers” just one big “broken window?” And more…

Joel Bowman, reporting from Taipei, Taiwan…

We begin this week a couple of percentage points lower than we started the last one, but more or less where we were a month ago. A prophetic man might have spared himself the tumult and simply taken the month of September off.

But not us, Rude reader. Your editors are neither prophetic nor inclined to miss a moment as the Greatest Show On Earth enters its next act. The show, as we have mentioned many times before in this space, is part tragedy, part comedy and entirely captivating. Where else, for example, can one witness a six-month global rally in stocks, worth an estimated $20 trillion, as millions of poor folks around the world lose their jobs? It’s hideous and deformed…and yet we can’t look away.

The official U.S. employment rate rose to 9.8% on Friday, a 26-year high, as employers axed another 263,000 jobs. As usual, that reality was a far cry from the 175,000-guesstimate economists had predicted. A not-insignificant 600,000 people also gave up looking for work during the month. Factor in those poor souls and the rate bumps up over 10%. Add in all those who have given up hope of full time work, including those hiding out in part-time jobs because they can’t find full time employment, and the figure skyrockets to 17%, or roughly 30 million people.

Clearly, and sadly, the human story represents the tragedy in the grand show. For the comedy, we must turn to the stock market.

As the labor force of the United States dwindles, as its credit rivers remain bone dry, its industry nationalized and propped up on stimulus pills, as the consumers of the world’s largest consumer economy save their cash…stocks mount an epic rally. The S&P 500 index now trades for almost 20 times reported operating profits from the past year and is up over 50% from its March lows.

Ha ha! Get it?

“The real economy is barely recovering while markets are going this way,” perennial realist, Nouriel Roubini, observed when interviewed in Istanbul last week. If growth doesn’t rebound rapidly, he continued, “eventually markets are going to flatten out and correct to valuations that are justified. I see a growing gap between what markets are doing and the weaker real economic activities.”

Roubini called the IMF’s 3.1% growth projection for the year 2010 “anemic” and “very weak.”

We might expect this from the man now referred to as Dr. Doom – a moniker given to him for his having the gall to predict the collapse in the first place. But the chasm between Main Street tragedy and Wall Street comedy has grown so large, even a Nobel Prize-winning economist was forced to conclude that U.S. stock-market investors may have “over processed” the stabilization of growth. We won’t discredit this man in the eyes of his academic peers by naming him in this space, though he does linger dangerously close to making a reasonable assertion. If he’s right, he can expect a spot on center stage as the Grinch Who Stole the Recovery.

In today’s column, Bill Bonner takes a look at the under-celebrated upsides of Great Depressions. Enjoy…

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Hooray, It’s a Depression!
By Bill Bonner

The God of Abraham may rule the Vatican. But another group of gods rules finance. They are like the Greek gods…playful and mischievous, with a keen sense of humor. They look down from heaven not like a benevolent shepherd watching his flock, but like a cackling gawker betting on mud-wrestlers.

Here at The Daily Reckoning, this is not the first time we’ve paid homage to these lesser deities. Nor is it the first time we’ve mentioned their perverse method: Those whom these gods wouldst destroy are first cursed with good luck. Today, we look at the bright side: later, they are blessed by misfortune.

According to a pair of researchers from the University of Michigan, a depression does more for longevity than diet or exercise. Life expectancy during the worst years of the Great Depression increased from 57.1 years in 1929 to 63.3 years in 1933, says the report by Jose A. Tapia Granados and Ana Diez Roux. It didn’t matter whether you were a man or a woman, black or white. And it didn’t matter if you were in the US during the Great Depression or in Spain, Japan or Sweden during their economic downturns. The results were the same.

By contrast, life expectancy declined during the boom years. For most age groups, “mortality tended to peak during years of strong economic expansion (such as 1923, 1926, 1929 and 1936-1937),” they wrote in the “Proceedings of the National Academy of Sciences.”

Conventional wisdom holds that recessions are times of stress. People do not eat as well. They skip medical check-ups. They should drop dead earlier. Instead, they live longer. Perhaps it is because the economy slows down, allowing people to live at a more comfortable pace. Maybe the unemployed get more sleep. We don’t know. But if you want to live an extra six years, nothing works like a slump. When it comes to economic health too, nothing beats a depression.

Last week, World Bank president, Robert B. Zoelick, explained to Washington how the dollar made Americans wealthy:

“The United States is incredibly fortunate that the dollar enjoys this special status [as the world's reserve currency.]” It made it possible for Americans could buy things abroad with dollars and then, rather than come back to the United States as a claim against US assets, the dollars stayed in foreign central bank vaults. It was as if the Untied States, and the United States alone, could issue IOUs and never have to pay up. An “exorbitant privilege,” Valery Giscard d’Estaing called it.

Since the end of WWII, the world had no real alternative. It had to use the dollar in its international transactions, just as it once used gold. This had a marvelous effect on world trade and roughly the same effect on America as a winning lottery ticket. And like a lottery winner, she was ruined by it.

With no effective limit on the number of IOUs they could issue, Americans issued far too many. From a low of around 2% of disposable income in 1945, US debt service rose to nearly 15% in 2007. In terms of total debt/GDP, the ratio was only about 150% in 1945, but that was with public debt from the war years at 120% of GDP. By 1950, the war debt had been cut down to about 70% of GDP, with private debt still at about 35%. At the height of the bubble years – 2005 to 2007 – total debt in America hit 360% of GDP, only 60% of it owed by the federal government.

Of course, most economists saw nothing to worry about. Instead, they set to work proving that such a ‘dynamic’ and ‘flexible’ economy would never fail.

They even won Nobel Prizes for elegant formulae that showed investors how to beat the market, year in and year out.

Then, the bottom fell out of asset prices in ‘07-’09. In March of this year, Americans found that their stocks had fallen back to real values not seen since 1968. Their houses were sinking fast too. By May 2009, one out of every four US homeowners was ‘underwater’ – with a mortgage greater than the value of his house. Incomes and profits were falling, along with the net worth of the typical American household. Everything was falling – except debt. How the gods must have roared when they saw the looks on their faces! In the biggest, longest boom of all time – even with a monopoly on the world’s reserve currency – Americans had lost ground.

But while Americans were once damned by good fortune, they are now blessed by bad luck. “Looking forward, there will increasingly be other options to the dollar,” says Mr. Zoelick. Thank the rascal gods. Americans are saving again…rebuilding their balance sheets…and, eventually, their economies. They can even look forward to living longer. And with a little more bad luck, maybe their moron economists will wise up too.

Joel’s Note: Want a free hardcover copy of Bill and Addison’s bestselling book, Financial Reckoning Day: Fallout, sent right to your front door? Well, it just so happens that Addison is giving 500 books away to dedicated readers as part of his latest project. He’s got all the details for you here.

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[Rude Endnote: A reader, Cindi, makes the following observation after yesterday’s Weekend Edition.

“Is this (the broken window) not the identical situation as Congress’ moronic cash for clunkers programs? The complete destruction of all of those cars and their usable parts is the same as replacing a window that need not have been replaced but for the careless action of another.”

Readers might like to discuss among themselves…and to forward any thoughts to the address below.

Until next time…

Cheers,

Joel Bowman

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

• 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.

—————————————–

[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

• Here’s what to do when we turn bullish on the economy…
• The bears wave goodbye to one of there own,
• Plus, your Rude editors’ new home and plenty more…

Joel Bowman, reporting from Taipei, Taiwan…

Before we dive into today’s feature essay, penned by Bill Bonner, we have a very important reader question to answer.

“It isn’t clear,” wrote an inquiring Rude enthusiast yesterday, after we had published our weekend edition. “Does that mean you are going to cease publishing Rude Awakening?”

Alas, Rude reader(s), the whispers are true. On Monday, October 19, the Rude Awakening as you know it will die. You will no longer receive this email.

BUT…

Just as there is opportunity to be found in crises (we’ve read that somewhere), there is also beauty entwined in tragedy.

Your editors are proud to announce that we will be publishing our daily missives, in the coffee-stained fashion you’ve come to expect, from our new, cushier H.Q. at The Daily Reckoning.

From our new perch over at the ‘DR,’ we’ll be able to bring you more insights from a greater range of authors. The DR team is stretched around the world, publishes in three languages and has offices in London, Paris, Melbourne, Baltimore and – as of October 19 – Taipei, Taiwan and Laguna Beach, California.

If you haven’t done so already, the best way to get acquainted with The Daily Reckoning is to visit our website here: http://www.dailyreckoning.com

We hope you can join us in the next phase of our journey. In the meantime, you can catch The Daily Reckoning founder, Bill Bonner, with his latest thoughts below…

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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.

Even in the world of finance, there are momentous conversions. As they say on Wall Street, a rally ends when the last bear gives up. An old friend had been a source of inspiration for tech bears for many years. He suddenly saw the light and gave up in 1999. Shares he had formerly scorned – often dotcoms with no revenue and no business plans – were suddenly added to his own portfolio. This also heralded a big change – the end of the tech bubble. Tech stocks collapsed. Most disappeared. Then, Stephen Roach became vaguely bullish in 2007, after a long period of doubt and misgivings.

Now it is Jim Grant who has changed his mind. A generation of investors has gotten used to Grant’s ‘doom is nigh’ warnings. Now, he says, it’s a boom that is nigh.

What is remarkable about the Grant conversion is that his vision gives off so little heat and light. His WSJ article shillyshallies around; rehearses the history of previous recessions and comes to rest in front of a flickering match: “The deeper the slump, the zippier the recovery.”

Many were the sheep in Grant’s flock. They feel betrayed, as if their shepherd had gone over to the wolves. Here at The Daily Reckoning, we take no personal offense. In the following few words we merely stoke up the fire.

We will not argue with Newton’s Third Law. For every action, there is a reaction. Every boom has a bust. And every busted bubble has a bounce. Even the Titanic’s stern rose, before she slipped below the waves.

First, we consult the facts. But facts are survivors. They will tell whatever tale their interrogators want to hear. As for opinions, after six months of a stock market rally, the once half empty glass has become half full. We predicted it ourselves. But we’ll let Robert Prechter say, ‘I told you so.’ Even before the rally began, Prechter foretold its story:

“Regardless of extent, it should generate feelings of optimism. At its peak, the President’s popularity will be higher, the government will be taking credit for successfully bailing out the economy, the fed will appear to have saved the banking system and investors will be convinced that the bear market is behind us.”

As to Mr. Obama’s popularity, Prechter was wrong. But 4 out of 5 ain’t bad. Grant’s brief tour of recession history seems to confirm his Newtonian position: the further an economy falls, the further up it rises to get back to normal. This downturn has clipped nearly 4% off America’s GDP, substantially more than any previous downturn since WWII. Therefore, it will come back strong.

Today’s slump in the United States hardly compares to the one of ‘29- ‘33, which took 27% off the GDP. Then, in the ranks of the unemployed, stood one out of every four able-bodied workers, as opposed to just one out of every 10, according to today’s statistical legerdemain. Still, the depth of the drop did not prevent a vigorous bounce; on the contrary, it seemed to demand it. After ‘33, the US economy grew by nearly 10% in each of the next four years.

In the slump of ‘82, GDP sank at a 6.4% rate. Again, the reaction was nearly equal and opposite to the action. “Not until the third quarter of 1984,” says Grant, “did real quarterly GDP growth drop below 5%.”

Of course, even a US Congressman will bounce, if you push him down the Capitol steps. But not every one will get up again. In the ‘33 example, the US economy, still youthful and vigorous, got up nicely. But then it fell again. By the end of the decade he was still on his back, with 15% unemployment and 2% deflation. Only later, after four years of world war, did the economy begin a sustained recovery.

Now it is 2009. The poor fellow is down again. The feds rushed to help him to his feet. They gave him a combined fiscal and monetary shot-in- the-arm seven times stronger – in terms of GDP – than the average postwar countercyclical stimulus. The juice opened his eyes. But he still staggers. He has put on some weight over the years; he now carries three times the debt/GDP as he had in ‘82. His stocks are three times as expensive, in P/E terms, too. His bones are more brittle and his mind a little slower. What’s more, in ‘82, he had been on a deleveraging diet for more than a decade. In ‘09, he has just begun.

What will happen next, we don’t know. But if we turn bullish on this economy and urge you to buy stocks, it will surely be time to sell them.

Joel’s Note: Want a free hardcover copy of Bill and Addison’s bestselling book, Financial Reckoning Day: Fallout, sent right to your front door? Well, it just so happens that Addison is giving 500 books away to dedicated readers as part of his latest project. He’s got all the details for you here.

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[Rude Endnote: If you have any questions or comments for today’s issue, let us know by sending them to the address below. There are only a few more times we’ll be able to solicit “Rude” thoughts without raising an eyebrow…so make ‘em count.

Until tomorrow…

Cheers,

Joel Bowman

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

• Dollar rallies, stocks wander, commodities pause…
• Gold goes over $2,000…three decades ago,
• “Huddled in an unheated Soviet apartment…” and more…

Joel Bowman, reporting from Taipei, Taiwan…

What’s this? The end of the rally?

The dollar is gaining…stocks are skating out onto untested ice…and we hear whispers that the Fed’s might pullback on the stimulus efforts…

But it’s too early to tell, Rude reader. There are too many competing theories, special interests, and backroom shenanigans clouding our vision. Too many hands pull too many levers, distorting the reality of an already opaque situation. It’s like someone punched the spike bowl and now nobody knows what’s happening. Everything is downside up and outside in.

Nope. Nobody don’t know nuthin’.

But, knowing that (nobody knows what is really going on), we can make a pretty safe bet: That those who tell you they do (know what is happening) are probably full of baloney. Moreover, given that they don’t even know that they don’t know, there’s a pretty good chance they know the least of all.

Are you still with us?

That said, it would take more than a simple knowledge deficit to stop world interveners from getting their grubby mitts all over the crime scene. Leaders from the Group of Twenty (G20) will converge on Pittsburgh, PA, later this week to discuss all they know about the current economic landscape. Back slapping, handshaking conga lines aside, the meeting ought to take about six minutes. But it won’t. Instead, those who caused the current malady will prolong the affair with myriad pie charts and PPT presentations. They’ll talk about how to spend money they haven’t yet stolen on everyone but the people they haven’t yet stolen it from.

Then, at the end of the conference, Paul Krugman will jot something down in the NYT about how ballooning budget deficits and government intervention postponed the end of the world again, leaving those who actually live in that world to scratch their heads and wonder what on earth just happened. The whole thing is nothing but a big make-work affair designed to give the impression of order and understanding.

What can one say in the face of such a poorly disguised dog and pony show? To borrow a line from that modern day poet, Homer Simpson:

“I don’t need any serving suggestions from you! You barbeque-wrecking, know-nothing know-it-all!”

Indeed, with so many chefs around the B.B.Q., it’s impossible to tell which way the smoke will blow. All we can do is try to put together what we see…

We notice, for instance, that the S&P 500 has gained some 57% since its March 9 low. The MSCI World Index is higher still, up 65%. We’re now looking at one of the longest bear market rallies of the past century. Stocks in the U.S. are now back at 2004 valuations, Bloomberg reports. Are they fairly valued at 20 times reported earnings? The reader may have an opinion here…

We observe, meanwhile, that the greenback has fallen almost in anti-step with stocks…and gold…and the rest of the commodities. The Fed’s openly sacrificed the world’s reserve currency on the altar of “recovery.” But, did they get what they paid for? Or did they get a bum deal? Time will tell.

But while we’re all waiting for it to do so, some 7 million Americans have lost their jobs since the recession began. Tens of millions more have taken pay cuts or have been forced to work shorter hours. In California, according to one article, only three in five working age residents have a job. What happens to all these people? Where do they fit into the national recovery?

“I want to be clear,” President Obama told CNN on Friday, “that probably the jobs picture is not going to improve considerably — and it could even get a little bit worse — over the next couple of months.”

If we were to take a guess – which we are not – we would guess that a recovery without jobs might be difficult, perhaps even impossible. But again, we’re not guessing…just looking.

And looking further into the abyss we notice that consumers are saving, not spending; that credit lines are contracting, not expanding; and that government debt levels are exploding in a hyper-volcanic fashion.

We’ve just about run out of space with our wandering wonderings this morning, so we’ll hand you over to Bill Bonner who offers us some thoughts on the recovery that wasn’t, isn’t and might never be…

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All That Glitters
by Bill Bonner

Of all the many miseries that man faces on his journey from cradle to grave, few of them can be eased by enlightened central banking. And a credit contraction is not one of them. Japan proved it. After the Japanese market collapsed in 1990, public officials went to work with their characteristic energy and incompetence. They lowered the cost of borrowing to nearly zero. But did consumers take up the money and add to the demand for bread and bicycles? No. They didn’t want to borrow. They wanted to save. They had speculated during the previous bubble years and lost money. Then, with retirement approaching, a penny saved was worth even more to them than a penny earned. They saved more than ever…and the consumer economy sank.

The Japanese persisted. They lent so freely that the yen became the ‘funding currency’ for a worldwide boom. Prices rose all over the planet – except in Japan itself. The land of the rising sun couldn’t seem to get up in the morning. Property investors lost money. Stock market investors lost money. Japanese consumers sewed their pockets shut.

And now that the dollar is the world’s ‘hot money’ the world’s surviving gold bugs see their moment of rapture fast approaching. Gold is not an investment category. It is no investment at all. Instead, it is more like a religion or a political position. True believers stick with it through thick and thin. When gold goes up, they are insufferable. When it goes down, they are unrepentant.

The price of gold peaked out in real terms in 1979 at over $2,000 in today’s money. Briefly, an ounce of gold was so loved – and stocks so despised – that you could buy all the stocks in the Dow index for just a single ounce of gold. But then, the gold martyrs suffered a terrible persecution – nearly two decades years of steadily falling prices. Not just in real, inflation adjusted terms, but in absolute terms. By the end of the period, it took 43 ounces of gold to buy the Dow stocks, and gold bugs were gathering in small groups praying for salvation and awaiting the end of time. It seemed as though the cult might be extinguished; few were still alive. Fewer were still solvent. Of those, even fewer were still sane. But then, like Christians huddled clandestinely in an unheated Soviet apartment, the wall fell. Gold began a comeback.

What inspires this little reflection, apart from a night of heavy drinking, is the price movement. At the beginning of the week, gold closed comfortably above the $1,000 an ounce mark. Then, on Wednesday morning…it shot up. The end of the world has been delayed, perhaps indefinitely. And yet, gold – an option on financial chaos – trades as if it were coming next week.

What gives? Here on the back page we keep an eye on the yellow metal. Not because we expect the end of the world. Still, you never know; maybe the gold bugs are onto something. No monetary system lasts forever. This one – an impromptu experiment, at best; premeditated larceny at worst – has already lasted longer than most marriages. The bust-up, when it comes, threatens to be nasty and expensive.

The easiest story to sell in the current marketplace is the inflation story. In an effort to revive the go-go economy of the bubble era, the feds are adding to the money supply. They will continue doing so until inflation rates go up. They make no effort to hide it. They have as much as warned the world: prepare to be robbed. According to the popular story line, the gold market now anticipates inflation. Investors should too. We have told this story ourselves; we still believe it. But today, we caution readers: there may be a plot twist.

The problem with inflation is that there is none. Consumer prices are falling in China, Europe and America. And if we look harder, we find out why. The feds are pumping the money supply as hard as they can. David Rosenberg reports that the monetary base rose at a 141% annual rate over the past four weeks. But the money fails to reach the real economy. The money supply figures that relate to actual cash in people’s hands – M1, M2, and MZM – are shrinking, at -28%, -4.9% and – 6.2% respectively. Why? Because the banks don’t lend and consumers don’t borrow.

In short, the feds’ money goes into cool bank vaults and hot speculative trades. When it tries to find its way to the consumer, it gets lost. As Rosenberg explains it, the transmission mechanism has broken down. We live in a bust economy, not a boom one. In a bust, consumers cannot borrow. They have nothing to borrow against. Both their wages and their assets are going down. Who would lend to them under those conditions? Not a bank that almost went broke itself 12 months ago.

And even if consumers had access to credit, they wouldn’t take it. Consumers too, almost went broke a few months ago. Instead of saving money during the boom years, they spent it…or gambled with it. Then, when the bust came in ‘08, they realized that they were 10 years closer to retirement with little money saved. Now they have to make up for that lost decade, by cutting spending and saving as much money as they can.

Still, gold speculators think they’ve got God on their side. They march into the coliseum confident that the feds will inflate consumer prices and cause the price of gold to soar. Maybe gold will rise. If so, it will be thanks to speculators and Chinese central bankers, not consumer price inflation. The smart money is still on the lions.

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 book, Financial Reckoning Day:Surviving the Soft Depression of the 21st Century, will therefore be pleased to see it 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 work right here, complete with additional info and updated charts to reflect the predicted collapse and where to go from here. Financial Reckoning Day: Fallout.

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[Rude Endnote: While hunting around for that slice of “Homeric” wisdom, above, we found a nice little metaphor for the level of denial regarding the rancid state of the economy.

In the following sequence, taken from the episode “Lisa the Vegetarian” Homer and Bart are in hot pursuit of a rotisserie pig that Lisa, in a moment of protest, “set free” from the Simpson’s carnivorous B.B.Q. celebrations.

[Homer and Bart are chasing the rolling rotisserie pig. It rolls through some bushes]

Homer: It’s just a little dirty! It’s still good, it’s still good!

[the cart falls off the edge of a drainage culvert, and the pig floats down the stream]

Homer: It’s just a little slimy! It’s still good, it’s still good!

[the pig reaches a dam at the end of the stream and plugs the drain hole. The water pressure builds up behind it, until it launches out of the hole into the air]

Homer: It’s just a little airborne! It’s still good, it’s still good!

Bart: It’s gone.

Homer: I know.

Ahh…the moment of realization! When, if ever, will such a moment come to pass in the real world, we wonder? And what will the non-fiction economy look like thereafter?

[Editor shudders]

Until tomorrow…

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.

—————————————–

[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

• The “Lehman Weekend” anniversary: What’s different?
• Back-slapping, handshaking and self congratulations at the G20,
• Celebrating a year of political idiocy and plenty more…

Joel Bowman, reporting from Taipei, Taiwan…

At the close of business today, our world will complete its first solar orbit since Lehman Bros. collapsed last year. We may well be in the same place astronomically speaking…but what has happened to the financial universe during that time? You know, the universe back here on planet earth?

Cosmetically, things may appear to be pretty good. The recovery, we’re persistently reminded, is “right on track” and the world governments’ heroic response to the disaster continues to save each and every one of us each and every day.

Investors are recovering losses at a momentous rate; it is true. Sure, they’re still down since “Lehman Weekend”, but not as much as might have been expected. The S&P 500 was lower by 16.6% to last Friday’s close. Include dividends earned and that loss shrinks a little further to “just” 14.4%. Compared to the March lows, when many indexes were down 45% or more, today’s market looks positively radiant. Right?

Without waiting for the final verdict to come in, the stewards of the costliest exercise in government-sponsored market manipulation in history are lining up to lavish praise on themselves for saving the day. Timothy Geithner, the U.S. treasury secretary, was on hand last week to remind us again why the world needs more people like him.

“The emerging confidence and stability of September 2009 is a far cry from the crippling fear and panic of September 2008,” Geithner told a congressional watchdog panel last Thursday.

But, as far as your editor can tell, Mr. Geithner and his applauding acolytes seem to have missed the whole point of the exercise. The problem was never a lack of confidence; it was a surplus of it. The world did not reach “the precipice” because of too little credit; it did so because of too much. One year on, Wall Street confidence is rising in lock step with Main Street unemployment figures. That’s not good. Companies that were considered “too big to fail” are growing even larger as a result of government coddling while countless smaller businesses, including 89 regional banks, have failed. That’s not good.

Meanwhile, the government is adding to its deficits at a rate never before seen in the country’s history. And that, perhaps above all, is not good either.

In today’s column, Bill Bonner takes a look at the back-slapping, handshaking parade that was the last G20 meeting and wonders why all the hoopla. Please enjoy…

—- The Richebacher Society —-

Secretive Society of economists, market players, and world-class researchers and analysts reveal…

The TRIPLE TIMEBOMB That Makes Market Recovery Almost IMPOSSIBLE in 2009 or 2010… but that could still make a few people very rich!

Elite alliance of experts warn: don’t hold your breath waiting for a recovery this year or even in 2010. The three toxic timebombs they name below make a quick rebound next to impossible.

Yet, they also name seven “Super Shields” you can use to safeguard against further losses… plus at least five surprising “long” plays you can still use — even now — to get very rich. Read On Here.

——————————————

Fed’s Fake Recovery
By Bill Bonner

The press attributed this week’s rise in gold to benign causes. The end of the world seems to have been postponed – indefinitely. Bloomberg reported that a clear majority of those polled thought the world economy was recovering. With no more fear of the deflation devil investors feel they are in the arms of angels. Surely Ben Bernanke watches over them even when they sleep. Even the President of the United States thinks he saved the nation.

As for Tim Geithner, he takes no chances; he sings his own praises. Speaking to a gathering of the G20, he congratulated them all:

“…facing the greatest challenge to the world economy in generations, the G-20 gathered here in London and committed to an unprecedented program of policies to restore growth and reform the international financial system. Those actions have pulled the global economy back from the edge of the abyss. The financial system is showing signs of repair. Growth is now underway.”

Stocks are still up. Commodities too. Oil is over $70. And most encouraging of all: the 10-year US Treasury note yields only 3.47%. So what evil sends investors running to the protection of gold? None at all, say the papers; investors buy gold in anticipation of better times. They see a recovery, bringing with it tightened supplies and rising demand. Every economist, investor and hair stylist knows what this means – inflation.

But if growth is underway, investors should be glad there is not more of it. The key indicators of real economic progress are negative. Unemployment is not rising; it is falling. Nearly 7 million Americans have lost their jobs since the recession began. In California, only 3 of 5 working age residents have a job. And those who are still working are putting in the shortest workweeks ever recorded. How could the economy be growing with fewer people earning money? The New York Times attempted to explain the enigma by calling it a “jobless recovery.” But a recovery without jobs is like a loveless marriage or a fat-free burger – it is disappointing.

Another key indicator is personal spending. Not surprisingly, that is down too. Personal spending has fallen in four of the last six quarters – something that has never happened before, since they began keeping records in 1947. The level of consumer spending is down 33% from a year ago – with discretionary spending in the United States now down to a level it hasn’t seen in 50 years. Consumers aren’t spending partly because they have no money…and partly because they apply what money they have left to relieving the headache from their previous binge. A report this week showed they had reduced their hangover of personal debt in July by more than $21 billion – four times as much as economists forecast. These are, of course, the same economists who pimp for the angels at Bernanke & Co. If they’re right, we have a spending- less, jobless recovery pushing up the price of gold.

We offer an alternate interpretation. We begin with a doubt about the one now on the table. In the popular version, the more the recovery seems real, the more investors fear real inflation. This drives them to buy gold. Of course, it should drive them to sell US Treasury bonds too – which hasn’t happened. Nor has inflation gone up. And if this view were correct, we should begin to see remedial measures from the US central bank. The Fed should soon begin to withdraw its monetary stimulus, returning the economy to a kind of normalcy it hasn’t seen in years. The risk, not insignificant, is that Fed economists will err. They may loosen monetary policy too slowly or too quickly. Asked about the risk, Janet Yellen, President of the Fed’s San Francisco branch, promised to avoid the error of 1937 – she will not “tighten policy too soon, aborting the recovery.”

Gold bulls are counting on her. And they may be right. But here on the back page, we add a nuance. We’re not surprised by an occasional Fed error. What surprises us is the rare accidental success. There are 500 basis points between zero and 5%. It would take a miracle for central bankers to find exactly the rate the market needs precisely when it needs it most. The ‘37 error, for example, might have been a success. At least it sped up the process of liquidation so the decks were clear when the post-war boom finally came.

Maybe we’ll get lucky and the Fed will make the same error again. Not likely. This time they’ll make a different error – adding too much cash and too much credit for too long a time. Today’s ‘recovery’ is based on hot money from the feds. It’s a fake. It won’t cause real growth. When this becomes clear, commodities will sink – along with stocks…and gold. Central banks, ignoring the futility of their hot money program so far, will add even more hot money. Eventually, the hot money will cause inflation to rise and gold to ‘melt up.’ Gold bulls will be proven more right than they imagine. But they may be proven wrong first.

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

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When it happened again, I called it a coincidence…

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[Rude Endnote: Last week we asked readers to speculate on what they thought the “new normal” might look like. We’ve had plenty of interesting replies, which we’ll share in the coming days. Here’s one we found particularly amusing, from a reader named Anne.

“The New Normal is economic fantasy land. This is a version of the normal that already functions in many aspects of American life. We have medical fanatasy land – where you pay lots of money for no cure and lots of lifetime meds. We have daily life fantasy land – where you watch reality TV instead of living in reality and you watch cartoons in order to find the sort of reality you’d like to have. We have lots of fantasy lands. Economic fantasy land is our newest. Please visit us soon and see what all the talk is about and how it can make you the happiest you’ve ever been for no good reason at all.

“And now back to our normal channel – fantasy land.”

Until next time…

Cheers,

Joel Bowman

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

• Employment down, stocks up…credit falls, Wall Street cheers,
• Buffett and Bonner with thoughts on the dollar’s direction,
• What would Grandfather Bramp do? And plenty more…

Eric Fry, reporting from Laguna Beach, California…

Once upon a time, debtors went to prison, cocaine was an ingredient in soft drinks and women could not be trusted to cast an intelligent vote. But today, debtors go to “loan modification specialists,” cocaine vendors go to prison and NO ONE can be trusted to cast an intelligent vote.

From generation to generation, social conventions change…mostly because the conditions that shape conventions change.

One generation faces adversity; the next generation reads about it. One generation labors; the next generation plays. One generation struggles to accumulate wealth; the next generation squanders it.

Last night, your editor’s oldest son tried to exterminate an invasion of ants by spraying them with Axe aftershave. As the potent scent spread through the house like desperate males through a nightclub, his father nearly suffocated.

“Hey Noah!” he yelled downstairs. “What the heck are you doing?! Did you try to kill those ants with Axe?”

“Yeah, but it didn’t really work,” he replied

“Duh!” His annoyed father replied. “What were you thinking? Did you think that ANYTHING in an aerosol can would simply work like ant spray?”

“I dunno. I just thought it might work,” Noah explained.

For some reason, this little incident reminded your editor of his grandfather, “Bramp,” …and how little Noah resembled the man. Bramp would never have sprayed ants with cologne. DDT, yes. Cologne, never.

Bramp didn’t mess around with half-measures. He kept a loaded Colt 45 under his mattress and would not hesitate to draw it at the slightest inexplicable nighttime sound. He was not mean-spirited or paranoid, just hyper-vigilant.

My grandfather guarded his savings as passionately as he guarded his home. Bramp spent 20 years in the Army, and 85 years saving pennies. He cared about saving, protecting, guarding and, in every possible way, hanging on to what was his. He was a cheapskate, yes… but also so much more than that.

Bramp carried more keys on his belt than a locksmith. He locked everything…every door, cabinet, case or hinged item of any kind. He also used to stockpile enormous quantities of canned goods in his garage.

As one of the many millions of Americans who lived through two World Wars and a Great Depression, Bramp had learned to fear deprivation and sub-optimal outcomes. He had learned to shun risk. By contrast, Bramp’s great, great grandson, Noah, never gives a thought to deprivation.  Why would he? The refrigerator is always full and his dad still draws a paycheck. Noah never worries that his circumstances might change for the worst. Why would he? It hasn’t happened yet…to him. But circumstances have changed for the worst for millions of Americans.

Nearly one year ago, the financial markets crumbled, government officials warned of a potential economic meltdown, and for the very first time in their lives, an entire generation of Americans began to imagine that things might get worse, not better. An entire generation began to consider the possibility of adverse outcomes. It considered the possibility of job losses, mortgage foreclosures, and yes, even the possibility that the stock market might fall a lot.

For many, many Americans, these horrifying fears actually came to fruition. Millions have lost their houses; millions more have lost their jobs; and tens of millions more have lost large percentages of their savings. These are realities. These are facts.

And yet, many of the geniuses on Wall Street – who would be unemployed geniuses if the federal government had not intervened – say to one another, “Hey, this recession isn’t so bad. Looks to me like this whole thing is just about over.”

And maybe they’re right. Or maybe they just don’t realize that failing businesses usually fail. Maybe the Wall Street seers fail to understand that most Americans work for enterprises that the government will NOT rescue.

Thus, Americans are still losing their jobs – day after day, week after week. Americans are still refusing to borrow and spend or invest. They’re still incapable of borrowing and investing. They’re still saving what they can and spending as little as possible.

These traits, dear investor, are not the traits that typify and nurture an economic recovery.  Rather, these are the characteristics of an economy in distress – the kind of economy that tempts ham-fisted Washington bureaucrats to “solve” the problem but pouring newly minted dollars into the economy.

Pity for us all. Pity for the US dollar, as Bill Bonner explains today’s edition of the Rude Awakening…

— Breakthrough Technology Report Special —

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Only 63 People Know Exactly Why These 6 Tiny Companies Will Change the World… You’re #64 – And You’re About to Become Ultra-Wealthy

This will go down in history as the “story of our era…”

By then, you could be among the ultra-wealthy…All because you took decisive action in early 2009. A chance like this pops up once every few lifetimes.

YOUR chance could end at any moment due to a shocking announcement that will be revealed today…Continued Here.

—————————————-

Danger for the Dollar
By Bill Bonner

The dollar will probably go up. Still, we’d stay away…

Here is Warren Buffett’s view:

“Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.

“They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.

“The United States economy is now out of the emergency room and appears to be on a slow path to recovery.”

This is probably the view shared by most economists and most investors. It is not our view. From where we sit there is no recovery underway…and there never will be one. You can recover from a hangover. You can recover from a nasty divorce. You can even recover from an earthquake. But once a depression begins, you can only endure it. Get on with it. Get it over. And then, you can begin rebuilding again. You will never recover the economy you had before the crisis. You must find a new economic model.

A recent headline declared: “Reluctant shoppers hold back recovery.”

That’s one way to put it. Shoppers don’t have any money. They need to cut back. Most likely, they will cut back until their savings rates reach 10% of disposable income. That will take $1 trillion out of consumer spending. The economy cannot possibly recover under those conditions; it can’t return to its same old, consumer-led, credit-fueled self. Instead, it must go through a period of transition – in which output is depressed – until it finds a new personality, better suited to the new economic circumstances.

But Buffett is not worried about the depression. He’s worried about how the recovery is financed:

“…enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.”

Buffett does the math. This year, the US deficit will total $1.8 trillion. That’s 13% of GDP! Since 1920, the largest peacetime deficit was 6% of GDP. The magnitude of it alone should be cause for alarm. But there’s more. Where does this money come from? Even if you could direct 100% of the net US trade deficit (about $400 billion, the money that ends up in foreigners’ hands as a result of American spending) and 100% of American’s savings (estimated to be about $500 billion), you’d still be $900 billion short.

Desperate borrowers should expect to pay high rates of interest. A borrower who doesn’t need the money can shop for the best rates and hold out for a good deal. But when a person needs to borrow, he takes what the market gives him.

Yet, one of the most curious things about the financial world circa 2009 is the yield on the 10-year Treasury note. It has fallen to under 3.5%. Despite record borrowing by the feds, lenders content themselves with the lowest yields in nearly half a century. Go figure.

The market seems to be anticipating a depression. Why else would bond yields be so low? If the economy sours…and the stock market sinks…the safe yields on Treasury bonds will seem like a good alternative. But Buffett believes the Treasury yields are not as safe as they appear. That other $900 billion has to come from somewhere. And the feds can’t allow interest rates to rise significantly; that would undermine all their stimulus efforts. High real interest rates depress economic activity. So, what can the feds do?

“Washington’s printing presses will need to work overtime,” says Buffett prophetically. Of the two ways of financing the deficit, one is a flimflam; the other is robbery. In the great credit expansion consumers borrowed so they could buy things such as automobiles. Now, the feds borrow and bribe the voters with money to buy automobiles.

No matter who does it, borrowing for consumption is merely taking from the future. Then, when the future comes…the account has to be settled. Result: no net gain. What was consumed in one year is not consumed in the next.

Of course, the feds don’t spend money the same way consumers did. Consumers wasted their money on frou-frou and watchamacallits of their own choosing. The government wastes money on different things – like turtle crossings and billion-dollar bailouts.

Not that we’re complaining about government spending. We’re just pointing out that it’s not the same as private spending. What makes goods good is that people choose them and buy them with their own money. They get what they’ve got coming. But the feds are spending other peoples’ money. If they get any goods at all it is practically an accident.

But what we’re talking about this morning is the dollar. According to Buffett, the dollar is in danger. He’s worried about the larceny, not the flim-flam. Printing up additional dollars robs savers. Each new dollar created to buy US debt makes each one already in existence – say, in a vault in the Bank of China – worth less than it was before. If that isn’t true, the whole body of economic thinking from Adam Smith to Irving Fisher is nothing but a fantasy. And the only way to protect the value of the dollars held by savers, theoretically, is to withdraw the stimulus money before inflation sends prices soaring.

Buffett is an optimistic fellow. He believes that responsible authorities will turn off their dollar-printing machines in order to protect the greenback. Here at The Rude Awakening, we’re not so sure.

First, the depression is likely to be worse than people think. This will mask the effects of dollar printing. Plus, it will make the need for more dollars – more federal spending, more US debt – seem more urgent than ever. Instead of pulling the plug, they’ll turn up the speed.

Second, the feds are not really interested in the health of the real economy anyway. This is an insight, which while it may seem obvious, only came to us recently. When the feds put in place absurd policies to delay and restrain the inevitable correction, they are making things worse, generally, for everyone. But the politicians are responding to their constituents’ demands. One campaign donor wants to keep his business alive. Another wants to keep his job. Still another promises the feds high paying jobs on Wall Street, after their term in Washington is over. Millions of others – more than enough to turn an election – want free pills and mortgage subsidies and so forth. When the feds try to bailout the economy, they are only doing their jobs! They’re not going to stop doing their jobs – especially in a depression – just to protect foreign dollar-holders.

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 Richebacher Society Breaking Report —-

Secretive Society of economists, market players, and world-class researchers and analysts reveal…

The TRIPLE TIMEBOMB That Makes Market Recovery Almost IMPOSSIBLE in 2009 or 2010… but that could still make a few people very rich!

Elite alliance of experts warn: don’t hold your breath waiting for a recovery this year or even in 2010. The three toxic timebombs they name below make a quick rebound next to impossible.

Yet, they also name seven “Super Shields” you can use to safeguard against further losses… plus at least five surprising “long” plays you can still use — even now — to get very rich. Read On Here.

—————————————–

[Rude Endnote: Wall Street continued its seemingly bulletproof run yesterday…and, for the most part, the rest of the world followed in step.

Here in Asia, Japan’s Nikkei led the way overnight with a 2% climb while the Aussie All Ordinaries and Hong Kong’s Hang Seng managed just above 1% gains for the session. China’s CSI was really the only major measure in the red. The index slipped 1%.

Last we check the European measures they were up between one third and one half of a percent.

Of course, gold has been the talk of the town over the last week as the greenback continues to slide. The yellow metal sold off another few bucks overnight and sits this morning around $994 per ounce. Crude followed the equity markets higher as traders watch the demand side of the equation. A barrel of the global goo goes for $72 and change as of this writing.

More tomorrow.

Until then…

Cheers,

Joel Bowman

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

Taipei, Taiwan

• Boosting consumption in the U.S. and production in China,
• A few observations from the general public in Hong Kong,
• Putting the Rude brains to work on Labor Day and plenty more…

Joel Bowman, back in Taiwan with a 30-day stamp in his passport, reports…

There is an air of excitement in Asia, a sense that things are going to be “back to normal” pretty soon. As we know, “normal” differs from country to country, region to region. So, what kind of normal will the future bring?

While savoring some of Hong Kong’s culinary delights over the weekend, your never-off-duty editor found enough time to conduct some unofficial research. On your behalf, Rude reader, we went bar hopping around the island Saturday night, hanging out at all the places a knowledgeable local might be found.

We started the night at the trendy Wagyu bar on Wyndham Street, just above the rowdy party central zone down on Lan Kwai Fong. The place is usually decked out with sharp suits and attractive people and the cocktails flow freely into the late hours. Since money has a habit of attracting attractive people, it seemed as good a place as any to start. Plus, we were thirsty.

The first couple we got chatting with were not actually a couple at all, as they kept reminding us. They were simply the friendliest friends at the bar. The gentleman, a pilot, is based in Hong Kong and has watched the effects of the global economic bust up from more countries than most have ever visited. Plus, he invests a little of his own money on the side and was keen to share his opinion with us.

“We’re just starting to increase our frequency again now,” he told us. “Business really dropped off a cliff there for a while. People weren’t going on vacations and businesses really cut back on corporate expenses. We weren’t going crazy like some of the other airlines before the collapse, adding new routes every other week, so we were better off than some. It was really hairy there for a while.”

“And now?” we asked. “Do you expect things to continue picking up from here?”

“I fly into China a lot and things seem to be slowly getting back to normal there. If any country is going to lead us out of this crisis, I expect it to be China.”

“You wouldn’t be trying to sell an airline stock now, would you?”

“Nah, you seem like a decent enough guy, so I wouldn’t do that to you,” he laughed. “You know, it’s just like that old joke: How do you make a small fortune in the airline industry? You start with a large fortune and invest it in airline stocks.”

Mr. Pilot’s friendly friend works in market research and has been doing so since the early naughts. Her company, we learned, does all kinds of number crunching for large retailers all around Asia. They advise clients, some of the largest retailers in the region, on how best to sell into their chosen markets – effective price points, marketing strategies for different Asian countries, target demographic breakdowns, etc. etc..

“I expect we’ll be hiring again within a month or two,” she told us. “Unfortunately, research is considered a somewhat ‘soft’ industry so, when clients cuts costs, they tend to cut research outfits pretty early on.”

“And now?”

“Look, I’m just glad were starting to get back to normal. We’re booking more jobs already, so that’s a start. It might be a while before we’re doing business like we were a few years ago, but at least we’ve probably seen the worst of it.”

Most people we spoke to throughout the night – from the women at a Nepalese action group meeting to the cigar crowd at some of the fancier establishments – were of similar opinion: Sure, things were pretty rough for a while, but it’s getting better now. Normal, apparently, is only just around the corner.

Perhaps the reader would like to weigh in with our little group research project. We’d like to know what you think the “new normal” might look like. What will normal stocks sell for? What will normal standards of living look like? Normal employment levels, company earnings, energy prices, etc. Send your musings to us at the address below.

In the meantime, here are some thoughts from Bill Bonner…

— Breakthrough Technology Report Special —

Breaking News, Full Report – For Your Eyes Only…

Only 63 People Know Exactly Why These 6 Tiny Companies Will Change the World… You’re #64 – And You’re About to Become Ultra-Wealthy

This will go down in history as the “story of our era…”

By then, you could be among the ultra-wealthy…All because you took decisive action in early 2009. A chance like this pops up once every few lifetimes.

YOUR chance could end at any moment due to a shocking announcement that will be revealed today…

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Fixers Aim to Fix Fixes With Another Phony Fix
By Bill Bonner

From California comes word that the summer program of Singularity University came to an end this week. The idea of SU is simple enough. Put smart people together with the latest technology; let them figure out solutions to the world’s problems.

‘The Singularity’ is an idea from Ray Kurzweil. The gist of it is that computers will soon be smarter than humans; by the middle of this century they’ll be smart enough to figure out how to get smarter and smarter, faster and faster.

No doubt, many of them will go into finance. And no doubt, many will make a fast buck. But will more smartness really make the world a better place? According to the singularists, increased brainpower will be able to solve all sorts of problems – from global climate change to market crises.

But the brain is a big disappointment. No mechanical engineer has ever improved the old-fashioned kiss. Nor has any brain ever straightened out the business cycle. Dumb as a slide rule, the brain does what it is told to do; it doesn’t ask questions. Tell it to build a bridge and it is on the case. Put it to work packaging tranches of toxic assets or selling aluminum siding…it is just as happy with one task as with the next. And the more a man’s brain bends to a challenge, the more it elbows out of the way his finer senses…and the dumber the man becomes. He turns his back on his own intuition as well as the accumulated wisdom from previous bust-ups and bruises. Like a man who has gone crazy, as G.K. Chesterton put it, all he has left is his sense of reason. Then, with nothing more to work with, he comes down on his work like a blacksmith’s hammer on a fine Swiss watch.

During the bubble period, the big banks were the biggest employers of top graduates from the world’s top schools. Oxford, Cambridge, Harvard, Yale…the financial sector drew them in like flies to an open latrine. The financial industry made so much money it had a hard time explaining it. The smart dudes did not toil in the fields, neither did they spin. Then, what did they do? They earned millions, bought BMWs and got dates with actresses. They claimed they were doing a fine job of allocating the world’s wealth and making everyone better off.

But when the bubble blew up, it was apparent that the financial world they created was fragile and perverse. Not a single one of the largest Wall Street banks survived without government handouts. And a news report from this week tells us that Americans were so damaged by the Bubble Epoque that their discretionary spending has now been cut to levels not seen in 50 years. The geniuses wiped out a half-century of economic progress in the richest, most successful economy the world has ever seen.

Smart people were also to blame for the biggest single error of the last century: central planning. The central planners thought they could fix the supposed evils of the natural economy with logic and reason. The idea was so alluring half the world fell for it. If the Nobel Committee had been on the ball they would have given Karl Marx a prize.

If the bug had come from stupid people…smart people might have avoided it. They might have come through the period without permanent scaring. But the wheezy intellectuals behind it were too clever for their own good. They soon infected the top universities…and the government. They convinced almost everyone that central planning was the wave of the future and that anyone who stood against it was a bumpkin, a parasite or a fool. Then, in the name of human progress, they took control in two of the world’s largest countries and turned them into prison camps.

But by the last decades of the 20th century it was obvious even to central planners themselves that it wouldn’t work; in both Russia and China, the planners simply gave up.

Central planning didn’t work because people had plans of their own. They resisted. Then, the planners brought down their hammers. “If you’re going to make an omelet, you have to break some eggs,” said chef Vladimir Lenin. The “Black Book of Communism” puts the death toll as high as 100 million.

Then too, central planning didn’t work for less obvious reasons. Planning requires information. The planners had plenty of it. But private individuals had far more – local, current, more accurate information from first-hand observation and experience. With better information, they could make better plans. Most important, individuals didn’t limit themselves to only the fresh fruit of their rational brains. They put their hearts in it…and drew on instinct and tradition – the distilled spirits of previous generations – giving them a huge advantage over the apparatchiks.

But the brains kept at it. When the forensic experts sifted through the debris from the 2007-2008 financial blow-up they found fingerprints from a whole list of Nobel winners. It was they who had developed the formulae and the theories that deceived investors, and themselves. They believed they could tame risk…by calculation! They figured out the odds and worked out prices – to as many decimals as needed to put investors to sleep. And then along came a risk they had not foreseen – the risk that their own formulae were claptrap and that they were idiots.

Meanwhile, the brains were at work in the public sector too. There, they were still pushing central planning…albeit on a much less ambitious scale than in the last century. In Western countries, government economists fixed lending rates and credit policies in order to encourage over-consumption. In the East, they fixed exchange rates and recycled credit back to their customers in the West in order to encourage over-production. And what ho! Wouldn’t you know it; now the world has too much debt and too much capacity.

And so the brains are back on the job. In China, the government boosts production. In America, the central planners are trying to boost consumption. In short, the fixers are still fixing. And soon, the world will be in an even worse fix than it is now.

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 Richebacher Society Breaking Report —-

Secretive Society of economists, market players, and world-class researchers and analysts reveal…

The TRIPLE TIMEBOMB That Makes Market Recovery Almost IMPOSSIBLE in 2009 or 2010… but that could still make a few people very rich!

Elite alliance of experts warn: don’t hold your breath waiting for a recovery this year or even in 2010. The three toxic timebombs they name below make a quick rebound next to impossible.

Yet, they also name seven “Super Shields” you can use to safeguard against further losses… plus at least five surprising “long” plays you can still use — even now — to get very rich. Read On Here.

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[Rude Endnote: “The New Normal” emails go to the address below…but please, don’t spend all Labor Day writing them.

Cheers,

Joel Bowman

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