Good money management will make you money, even in tough times. And it will save you tens of thousands, perhaps even hundreds of thousands, of dollars, if you reach the rank of successful trader.

And it all boils down to this. You must take trades that have at least a 1-to-2 risk-to reward ratio. Of course, 1-to-3 (or higher) is even better.

In options trading, that is easy to ascertain. If I stand to make 100% but limit myself to a 50% loss, then even if I am only 50/50 on my trade selection, I’m going to come out ahead. Think of it this way: If my risk capital is $500 and I double that once, I have $1,000. If I risk $500 on my next trade and it is a loser, I still have $750 left at the end of that trade.

Keep risking only $500 until your account is up 300%. Once you have reached $2,000, you can double your risk capital to $1,000. If you ever fall below $2,000, just go back to risking $500 until you reach $2,000 again…

By only seeking to grow incrementally, always managing your risk, you can even go on a bad streak of 66% losing trades and still break even. Nobody wants to do that. But you better plan on it happening, because it will.

Money Management: The Holy Grail of Trading originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

I must confess, it feels every bit like a euro top to me. But even gasping tops can continue to rise a long way.

From a technical perspective, which is what I think we are really trading on, euro sentiment has really, really reached an elastic extreme. At the end of last week alone, futures open interest was up a monstrous 75% in just three days! That is extreme sentiment. And you know how I often say that 95% of the people who enter the forex game end up broke? It’s a reasonably predictable, bankable phenomenon that the ‘crowd is almost always wrong.’ That being the case, sentiment extremes often provide good opportunities for reversals.

Add that to the fact that nearly every grocer checker and bag boy knows that the dollar is doomed, and you have a nice scenario for dollar strength as the big boys take advantage of the ‘weak longs’ in the market… those who bought in at the top. If the rise is to continue, I would look for a pullback to the 1.44 area for a new entry.

A Contrarian Currency Play originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

The Bureau of Land Management, in its infinite wisdom, looked at a herd of wild mustangs and decided that they could no longer fend for themselves or find their own food. That perhaps the food was scarcer than it had been, and this could lead to detrimental results for the horses.

And so, employing pickup trucks and helicopters (we’ve come a long way from the Ponderosa), they rounded up these majestic beasts into a huge pen. And when I say huge, I mean the government has currently collected 33,000 horses. Again, in its infinite wisdom, it has provided birth equine control (at no cost to the horses). In addition, it is doing DNA testing to identify the horses individually. (Again, at no cost to the horses.)

They are housed and fed at a cost so far this year of $35 million. That’s right — 35 MILLION dollars, paid by you. But you can go adopt one if you like. You’ve paid for it. All you have to do is get there; I guess you could ride your horse home.

Enjoy Your New Horse Operation originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

And when we ran out of money, no problem! There was more where that came from. In one sense we couldn’t spend money fast enough. As soon as it was gone, there was more suddenly available. So we just finance the house again, take out some equity (which always rises) and do one of two things – Pay off credit cards (so we can load more debt on them) or just spend the cash on things a home improvement (that is no longer reflected in the price of the home) or a vacation.

Remember how MasterCard taught us that those memories were priceless? Hope you got some good ones… because you “done bought something you can’t eat,” as one of my teachers used to say.

At a time when we are drowning in debt, we are also out of money.

When a debtor is out of money, he has no ability to repay. And when a creditor has borrowers who are out of money, the creditor has no income. No earnings. No power to make better loans.

So how are banks in America posting “profits”? How did Citigroup, Bank of America, AIG and Wells Fargo jump 400% in stock price? Are they worth 400% more? Are their earnings up 400%? And where in the world did all this money come from?

These companies were just bankrupt… yet found a way to get back above water. And not just above water – they are making moon-shots!

Their share price should be zero (or less, if possible!). How are they worth so much more now?

As I have written before, mark-to-market accounting rules were repealed in favor of a fictitious slight of hand. Banks no longer have to list their distressed assets at the fire sale price they should be worth. Instead they get to record their value as the price they bought them, or what they believe they will be worth in the future.

In other words, it’s like me refinancing my house, but doing my own appraisal and assigning it whatever value suits me. I want cash out? Just pad the value of the house. I can’t afford a higher payment? No worries, I just pad my reported income. Two years down the road I can’t afford my payments anymore? Easy, just follow the same refinancing procedure all over again.

But my family and I would only have one toxic asset to deal with. The banks have them coming out the wazoo!

They are still in possession of the faulty loans and derivatives that caused this entire mess in the first place. Nothing has changed – except the accounting!

The banks always counted on that. This time, however, they are the ones left holding the bag. What are they going to do with all this JUNK? How can they unload it without attracting suspicion? How can they clean up their books without the short sellers making a profit off their downfall? They can’t. It’s a Catch-22.

But the real problem is that the US banking system would come crashing down in a minute if this were known and understood by the general public. The banks know it. The Fed knows it. I suspect that there are some congress people who know it.

But here’s where the rubber meets the road. Government engineered a bailout. They wanted the banks to lend to Joe Consumer. But the banks didn’t. And frankly, Joe Consumer didn’t want it. He was too busy trying to figure out how he was going to repay all the money he had already borrowed against his house. Especially with the boss breathing down his neck, threatening job terminations if he wasn’t more productive than some cheap labor in India.

So the banks were sitting on a good deal of the money from the Fed in order to protect them from future losses. Some of them have even paid it back. But the truth is, from an accounting standpoint, they don’t need it anymore. From an accounting standpoint, their mortgages and derivatives are all valued at a big fat surplus. Why keep federal money? Why incur interest charges when “all is well”?

If they can show a profit from an accounting standpoint… and if they can repay their bailout money (plus interest)… and if they can still service the customer at the drive-in window or the teller counter, what’s the big deal? What am I crying about?

It’s all because those toxicities still exist. And they all have to be accounted for, whether the government says so or not.

We should have learned, or have been reminded of, one of the greatest lessons in the world from convicted felon Bernie Madoff: “Be sure your sin will find you out.”

Even the greatest engineered schemes on the planet come undone at some point. No Ponzi scheme can continue forever. But if you are very bright (as Madoff was), you can keep the game going for a long, long time.

But what if you’re not brilliant? After all, I doubt the government is as smart as Billionaire Bernie. Luckily, if that’s the right word, the government has another way to keep the game going, using one thing it has that Madoff didn’t.

Cash.

Gobs and gobs of it.

The government’s massive wad of cash is what keeps the game going. And foreign investors lending us money. And millions of pensioners happy as long as they receive their check on the first of the month. And the multitudes of purchased votes that are blissfully sitting on the dole.

But it’s not just the United States. Every country in the world is in the same pickle – because every developed nation believed they could successfully manipulate the game. The problem now is that the governments are running out of money. The United States has been broke for a long time, of course, but it could still trade on the value of its good name… and it did. Other nations are not so lucky.

The United States still possesses the reserve currency status; other nations aren’t so lucky. We still boast the largest GDP; other nations are not so lucky. I’m pretty sure we still have higher tax receipts, and more room to raise taxes than other nations. But somehow, I can’t bring myself to call that lucky…

But as it is an “option,” I have to think that whatever smarts our government does have, someone will eventually realize it. Good Lord, deliver us.

I do not honestly think that anyone can seriously contest us in the role of reserve currency, no matter how many times China rattles the saber.

Twenty years ago, China couldn’t even feed its own people or keep them employed. Now it is boasting a 7% annual growth rate. Despite the massaging that may be done to the numbers before they are released, we can already see that a country growing solely on stimulus cannot grow very long. The weaknesses in China’s underbelly are already becoming apparent. She is an export economy. And people are not buying.

She cannot save the world, whatever her strength might be.

There is another round of destruction coming. The banks will have to come clean. If you thought the residential crunch was stunning, wait till you see what’s coming on the commercial front. It will be a tsunami of epic proportions. Banks are not lending now, and the chances of business expansion are lower than at any time in recent history. No one will be buying excess of anything except maybe food and precious metals, so businesses will not continue to post profits. Without profits you can’t service the loans you have, and rolling them over will be out of the question. The day is coming… don’t let it catch you by surprise.

But until that day arrives, we must deal with what we have.

Regards,

Bill Jenkins
for The Daily Reckoning

An Appetite for Risk originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

And the truth is, when adjusted for inflation, the market didn’t break even again until 1960. (If you’re a “buy-and-hold” investor, you MUST account for inflation. It is the single biggest “invisible” tax in our wonderful Fed managed economy.)

But before people could get too happy with making money again, along came President Johnson and the “Great Society.” I don’t know who it was so great for – the market began crashing again in ’66. Once again, adjusted for inflation, it didn’t get back to breakeven for another 30 years.

So, 30 years from the Great Depression to the Great Society. Then 30 years from the Great Society to the Great Depression II. Each of the peaks resulted in 10-15 years of declines. Of course, they didn’t fall straight down. That’s the “trick” of the whole deal.

Each rally draws in a few more people, a little more money, until there are no suckers left. Then when the bottom hits, it has takes 15-20 years to “recover.”

It will take a very long time to recover from what we’ve been hit with: Exxon/Mobil lost two-thirds of its profits… that’s 66%! The “World’s Company,” GE, saw a 47% collapse in profits. Toyota, the recession-impervious carmaker, posted its largest yearly loss EVER and is looking at losses this year, too. Insurers have been hit. Computer giants have taken a whacking. Even Disney is down over 25% in the third quarter.

These are not “bumps in the road.” They are “driving off a cliff.” By some estimates, inflation-adjusted earnings are down 90% in the last 20 months.

We are now in just the second year of this disaster. We are witnessing an almost perfect copy of the first Great Depression. And there are more nasty little secrets in the economy, waiting like ticking time bombs to explode. We will see more businesses in trouble, more banks failing, more foreclosures and more commercial real estate losses.

At the end of June alone, there were over 5,300 commercial properties in the United States in default. That’s more than double the number from the end of 2008 – and there are still six months to count. Still think American companies are recovering? What will a 300% rise in commercial defaults do for jobs? Profits? Banks?

So don’t let the recovery pundits fool you, even though they’re out in force.

No doubt you’ve heard the optimists: “The Recession is over.” “The Recovery has begun.” “Better get in on the ground floor now if you hope to recover all that retirement money you lost last year.”

Just look at the evidence, they say:

• Markets up 50%. In the greatest bull run since the Great Depression, stock indices are forging higher. The numbers are swelling. Ride the wave!

• Housing numbers are turning north – Over the past six months, there have been some the fall in some housing numbers are slowing, and some have turned up. Building permits. Existing home sales. New home sales. New housing starts. Pending home sales. Hmmm… nice!

• Manufacturing looks like it’s exploding. Earlier this week, the Institute for Supply Management manufacturing index posted a stronger-than-expected rise at 52.9. Well above expectations, and well into the 50+ territory that signals expansion. Looking better and stronger than it has in 2 years. It would be a mistake to bet against it!

But you probably know what I’m going to say right now: Don’t believe a word of it!

No market goes up forever. Isn’t that one of the first lessons we learn when chasing a bull market?

This one is no different. Could it go higher? Sure. But just how far can you stretch a rubber band? Eventually, it is going to snap back.

And, as it happens, we’re heading right into “snapback” season.

Historically, the month of September is the worst month for stocks. Hands down. Indices fall more in this month on average than in any other month of the year.

In fact, the S&P has declined in 11 of the past 20 Septembers. You may be inclined to say, “That’s not so impressive.” But an average decline of 10 points is something worth noting. Additionally, 40% of those falls consisted of declines that were 75-125 points. That’s huge. No other month has such an anomaly. And it seems to me that this September may be ripe for the picking.

In fact, the first day of September was a real whopper. And Monday (although technically an August day) was not so august for US equities. Thus, as the calendar turns over, we have two days in the down column.

But as bad as September is, October has the reputation for being a real bloodbath. It certainly possesses a number of the largest down and crash days. But in order for a crash of monumental proportions to take place, there has to be some lofty level from which to fall.

I get physically sick when people tell me how they are moving (what’s left of their money) back into equities. I try to reason with them; I try to warn them. It breaks my heart to see pensioners barely getting by. You remember all the drama from recent years, how we were told that the elderly were forced to choose between food and medicine? Do you remember the seniors who were reportedly sharing their cat’s food so they could buy their prescriptions?

And that was during the go-go boom years. I cringe when I think of what lies ahead for them.

Will it start this fall? Has the band stretched far enough? Has Wall Street suckered in all the money that will venture out into the street? That’s all they’re after. Draw everyone out of the woods. Get all those who believe that it’s time to buy and hold into the game again. A 50% rally? Child’s play! This time the Dow is headed for 18,000!

Better tread carefully. This is without question the area of thinnest ice. One misstep by the government, a foolish line slip or a negative surprise, and the entire “recovery” falls like a house of cards.

Keep your money, and your exits, close… and don’t be afraid to take profit.

Regards,

Bill Jenkins
for The Daily Reckoning

The September Syndrome originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

US equities have just come off their best July since 1989. Overall, the market is up over 8% for the year.

But if we look backward (after all, hindsight is 20/20), March 1989 also saw a huge run up. It was followed by an even stronger rally in July, during which volume dried up. It appears the same is happening now. What came next in 1989 was a big sell-off in September, followed by an even greater one in October.

Don’t look now, but history tends to repeat itself.

Also, consider the fundamental picture. We have rallied 48% from the March lows on the back of what? Good earnings? Good employment figures? Good spending figures? Expanding GDP? No.

We have rallied based on one of the largest and most concerted propaganda campaigns ever waged, supported by government stimulus. But no government can stimulate forever. The bottom line is this, if Americans do not return to work, THERE IS NO RECOVERY. Memorize this line. Post it on your refrigerator, your mirror, your dashboard – wherever!

So maybe now you’re asking yourself, “Aren’t the unemployment numbers getting better?”

Well, let’s see…

Verizon – 8,000 jobs cut
Motorola – 7,000
Microsoft – 5,000
Untied Technologies – 8,000
HSBC – 6,100
Anglo American – 19,000
Avon – 2,500
Goodyear Tire – 5,000
GM – 10,000
Nissan Motors – 20,000
Panasonic – 15,000
PNC Bank – 5,800

Many of these will be released in the third and fourth quarters. No doubt there are plenty more we haven’t heard from yet. Frankly, I couldn’t list the thousands of companies and millions of jobs lost in this write-up. That’s just a sampling. But let’s get to some hard and fast figures.

According to Seeking Alpha, 13 million Americans will lose their benefits by years’ end. So if unemployment claims are falling, people must be getting back to work. Right?

WRONG!

They are exhausting their benefits. There are 30 million people in the United States on food stamps. There are only 200 million working-age Americans (age 15-64). Is there any wonder why the Administration is NOW saying they will have to raise taxes on the middle class to fund their programs?

Unemployment has been estimated by many good economists as being around 20%. Unfortunately for these people, their nanny-government lifeboats are slowly running out of air.

Those 3 million people who lost their jobs in the second half of last year? Once you factor in their dependants, that equals 10 million people who have no income and no savings.

And how about the other 4 million others who lost their jobs in the first half of this year? They will be next. The numbers get so depressing, I hate to even count them up.

As I have said before, unemployed people don’t spend money. They don’t buy technologies, or durables, or even pay their mortgage. Bankruptcies are up 600% in this recent downturn. And that includes the time after Congress affected new rules to make bankruptcy harder.

So who is going to pay for anything when they are struggling to buy groceries?

If the equity averages are already rallying on the back of these horrible stats, there is nowhere to go but down when the real truth sets in.

And we have seen this corollary frequently in recent months. When stocks and risk assets fall, so do the currencies, and the dollar rises. We are a long way from being out of the woods on this retracement.

So why do I cite all this doom and gloom about the United States? Believe me, there’s plenty more to go around. Because the fact of the matter is this: When these chickens do come home to roost, we will see another gut-wrenching breathtaking sell-off in equities, which will be followed by currencies. We have not seen the end of this yet.

While some are talking of a recovery, others are talking about a possible double-dip recession – and I’m reasonably sure we are in for a “multi-dip.” It is hard to be bullish on the dollar for any reason, but if the market drops again, which I believe it will, funds will rush right back to the dollar (and the yen).

So far, we have seen range-bound trading in the recent months as currencies search for direction. This week the big news was the US GDP. Risk currencies rallied on the back of it, but for 24 hours they have remained flat as there were no buyers to move it higher.

Also, the market got awfully jittery on the release of the consumer spending news yesterday. The manufacturing euphoria expended itself, and now we find out that personal income has dropped 1.4%, the biggest fall in four years. Inflation-adjusted spending fell 0.1%. The real dark spots in the economy have started showing back up. The stimulus has worked its way and done its best, but its effects are now negligible. Even though there are signs of a “recovery,” it isn’t going to be one without the consumer. If he’s exhausted his means of spending, or is just afraid to put out any money, the recovery trade will be doomed. And that means dollar strength once again.

But for now, we will have to trade with what we have. It is hard to argue with the markets, even with the most compelling of reasons. A person may as well try to stop an ocean wave from breaking onshore.

And as we look ahead, we must always be mindful of what may be. As numerous talking heads were saying on Tuesday of this week, “We have turned the corner… things are going to get better – if they don’t get worse!”

Regards,

Bill Jenkins
for The Daily Reckoning

Illogical Optimisim originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Now, Canada has the same edge. In fact, you may hear the Canadian and Australian dollars called the CommDolls (commodity dollars) for short. But Canada is inextricably tied to its neighbor to the south (namely, us), and that’s more than just a little problematic.

Australia, on the other hand, is not tied to the United States. Instead, it’s better placed to trade with another resource-hungry nation — China.

As China attempts to lift itself up by its own bootstraps, Australia comes into the picture. It has been widely understood that Australia is a little China. Not in culture, custom or language, but in economics. A significant part of Australia’s commodities flow into China, and the more the Chinese move ahead, the better it is for Australia.

Also, let’s consider that Australia’s central bank is still holding its interest rates at 3%. In a fairly stable country, with a fairly stable currency, that is one heck of an attractive rate. Why, it is downright appealing!

Indeed, Australia may now become the benefiting member of the next carry trade. After all, if can you borrow money at 0.25% and invest it at 3%, you stand to make a decent haul. And as risk appetite re-enters the market, you can bet your bottom dollar that Australia will likely be a real beneficiary.

My Favorite Currency originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

When this rot began to be exposed, I often reported that things had been turned on their head in the currency world. Bad news for the U.S. economy became good news for the currency. Why?

Basically, risk aversion settled over the market. People and governments were fearful. And since currencies tend to be considered risky investments, investors avoided them. In short, the worse the news for the U.S. dollar was, the more money flowed into the it.

But you cannot, under any circumstances, run contrary to the law of supply and demand forever. It’s just impossible. Therefore, at some point, a return to fundamentals reverses the current perverted trends.

And as of last week, fundamentals have showed back up on the stage. For the first time in a long time, investors are treating bad news for the dollar as bad news for the dollar. So let’s take a peek here and see what we have.

Initial jobless claims rose again last week. This time to 637,000, which was higher than forecast, and the previous week’s number was revised upward. In addition, continuing claims for unemployment came in higher as well – 16 straight weeks of increases.

The Federal Open Market Committee also hung the markets out to dry. You see, the Fed heads discussed the weakened condition of the economy at their meeting. They also revised their economic projections for 2009 and 2010 lower.

Here was the key. They DID NOT PURCHASE as many Treasuries as the markets believed they would – part of the infamous quantitative easing. Now, at first blush, we would be happy about that. But once we lift the Feds’ curtain on this act, things are not what they seem. The market’s reaction assumed that a less-than-stellar bond purchase number portends that the Fed will have to purchase more later on.

At this point all factions are feeling the squeeze.

The Feds know they cannot continue to inflate as they have indicated. While runaway inflation remains a threat, the bigger problem is whether or not traders and investors (including the sovereign states who buy our debt and support our spending addiction) will pull the plug on the dollar.

If such massive selling occurs, that only leaves them the option of perpetually inflating the currency, since borrowing becomes out of the question.

Nobody wants to be the last one out the door once that begins. As of now, the Fed still has a little opportunity to actually control the hyper inflation scourge, but if they tip the scale just a bit too much and the selling begins full force, control will be out of their hands entirely.

Interestingly, the whole tenor of the minutes from the Fed meeting indicates that the worst is still ahead. Yet Ben Bernanke and company are still telling the public about “green shoots” – small signs that things are improving.

Bill Bonner shares a headline from Politico last week: “Obama Would Regulate New ‘Bubbles.’”

Oh, the sheer absurdity of it all! We have a government that doesn’t even seem to know where bubbles come from. They don’t know how they work. They don’t know why they keep inflating. They don’t understand why you can’t deflate them slowly. In short, an administration with a rudimentary understanding of economics is confident it can regulate the next bubble – whatever it might be.

But I suppose that is the plan of all governmental types. Whatever doesn’t work needs more regulation.

What we need is to be left alone. The market has been, and remains, the most efficient system for regulating itself. Is it perfect? Not in a moral or theological sense. Not even in a fairness sense. The market will make some men rich while impoverishing others. Many people do not consider that “fair.” But it doesn’t matter. The market does what it does, because it is the most efficient way to do things. Regulation be hanged, the market will undo regulation and tyranny, because free markets create free men. And on its way to undo the foolishness of men, it will cause great inequalities. Why? Because of the foolish restraints that governmental do-gooders have foisted upon it in the name of “fairness.”

The ironic thing is, bubbles are created by regulation. You can’t undo them with more of the same.

Since the government has had such a great track record with spending and credit, now they want to get their greedy little paws into the credit card business, too. Apparently, it’s not enough for them to control the major banks, or the once monstrous auto industry. The heady days of markets free from governmental interference are going the way of the dinosaur.

Our Senate, by an overwhelming majority, passed a new bill that would dramatically impinge on the credit card company’s policies to alter rates and fees.

Now, I am not going to bat for the credit card companies. Frankly, they have abused people for years. As a younger man, I, too, enjoyed the pleasures of free money being offered by these benevolent giants. Every time my wife and I got a new card, we treated it like a raise.

Before long, the handwriting was evident on the wall, and I didn’t like what it said. So we got out. Don’t get me wrong, I still use my credit cards. But they no longer own me. Yet the number of my friends and relatives who are slaves to these things is atrocious. In sum, I have no love loss for these companies and how they try to enslave people.

But I will stand and declare their right to do it as a free market entity as long as people will keep applying. The fact is, if and when the credit card companies get “out of hand,” the market will reign them in. We don’t need the government to do it. They won’t do it well anyway.

Meanwhile, the Federal Deposit Insurance Corporation (FDIC) suffered its biggest bank failure of 2009 last week. BankUnited FSB, Florida’s biggest regional lender, performed its final curtain call. Having over $20 billion in assets and deposits, it’s the biggest flop of the year, and the second biggest of the whole credit crunch (IndyMac still has that award).

BankUnited’s failure will take a $4.9 billion chunk out of the FDIC’s checkbook. It is the 34th bank to fail in the first five months of this year alone, compared to 25 for 12 months last year. A green shoot? Not hardly…

So on the edge of this knife, Big Ben and the Fed have to balance. That is, the Fed has to sell $3.25 trillion in Treasuries to fund this years’ obligations between now and September.

If the markets can absorb the U.S. issuance over the next 90-120 days…and if it is done without driving up interest rates…and if the economy begins to show signs of positive growth… then the stage is set for a wonderful second act. (And Bernanke might win an Oscar!) The dollar will return to strength. The market will continue, or resume, a climb to the top – sensing that “everything is coming up roses.” Refinancing will surge ahead. We may even see significant job creation into the end of the year.

At that point the Fed must begin to worry about inflation. Will the infantile recovery be strong enough to fight off a bout with interest rate increase flu?

I wouldn’t bet the farm on that.

On the other hand, if Treasury rates continue to rise as they already are, and the Fed is forced into extensive quantitative easing to contain them, then it may very well be curtains for the dollar. And the critic’s reviews won’t be kind.

Earlier this month, the dollar index fell below its 200 DMA for the first time since July 2008, and has been falling ever since. Not long after, the euro and sterling popped above their 200 DMA.

Of course, there’s probably a good reason why. The world is beginning to notice the U.S.’s monetary policies. Our rising deficits are eclipsing Mount Washington. Those deficits are going to need financing. And right now, the government doesn’t care – it’s still behaving recklessly because it thinks people will always be ready to buy its debt.

I wouldn’t be so sure. Consider the credit rating of Great Britain. Standard & Poor’s changed the outlook on the United Kingdom from stable to negative. Now, that’s not the same thing as a rating cut. But it does betray that the rating agency sees the nation on the wrong path. Continue on that path, and the outcome is guaranteed.

It doesn’t take an advanced degree in logic to apply the same principle to the United States. Indeed, I have wondered if all this was orchestrated for that purpose alone. It is far less damaging to downgrade a substantial nation like the United Kingdom than it is to downgrade the world’s reserve currency economy… the very definition of value.

But if it can happen in the United Kingdom, the United States had better be prepared. To that end, we heard Bill Gross, from PIMCO, the world’s largest and most influential bond trading firm, say that he believed the United States would eventually lose their AAA rating.

That’s scary stuff – but not all that surprising. After all, the administration is predicting a $1.8 trillion budget deficit. Perhaps more.

And where is GDP going? How much will it grow this year for all that fuel being added to the fire? It’s like adding a cast of thousands to a one-man show, just to try to give it a bigger billing. The expenses become monstrous, but no more people show up to pay the admission fee.

But the directors just want to keep adding more actors. At that point, the expenses of the show run absolutely in the opposite direction of the of the income. Until soon, the producers default on their lease, the curtain falls on the show and the affair is over.

When will the U.S. show be over?

Hard to say. But when your expenses are 650% of your income, it can’t go on for long. Not only is the curtain falling, the whole theater is collapsing around us. Better make sure you have a clear shot at the exit.

In fact, some U.S. businesses already are.

My home county has a few decent sized towns, but for the most part is still rural. Our biggest claim to fame is a section of famous U.S. Route 1 – the first route to run from New York to Miami along the East Coast. On our section of Rt. 1 has an abundance of auto dealers. But recently, the largest one put out one of those fancy electronic message boards. The advertisement read:

“NOW TAKING GOLD AND SILVER FOR YOUR VEHICLE DOWN PAYMENT.”

I’m pretty sure they’d be just as happy to take it for the entire payment as well. So who needs the U.S. dollar after all?

Regards,

Bill Jenkins
for The Daily Reckoning

The Almighty Dollar originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

“And now nothing shall be withheld from them which they have desired to do…” I mentioned this quote several weeks ago. It comes from one of the many attempts that foolish men have made to be as God. It also brought about one of the greatest cataclysms in history. You can read the whole thing in Genesis 11.

For us, it applies heavily to the advances of government into the field of business. It only makes sense: the occupants of the White House and the Capitol have done such a good job with their budgets over the years, they just want to help everyone else (over the cliff, that is).

It began, as it always does, with just the camel’s nose in the tent. A bit of money here, some bank guarantees there. But then, as the fable tells us, the rest of the camel wanted in.

The government insisted on foisting money on companies who didn’t even need it. Washington’s excuse? If the only companies taking the money were the ones that needed it, those companies would suffer a “stigma.” But if every company took the money, even if they didn’t need it, the bad ones couldn’t be singled out.

We, of course, would never know the difference between the two. So much for more transparency in government. Now the companies who didn’t need the money are lashing back. Having to pay 5% interest on money they didn’t need to borrow is only a greater liability to already burdened companies.

But the government’s fun still wasn’t over. It forced out a CEO at AIG, now one at GM… and it passed a stimulus plan that required contractual bonuses be paid, then issued a 90% tax on them when the public outcry became too great.

Now Chrysler is being pressured to bring green cars to the market by none other than their new “boss,” the Obama administration. Of course, they already have a green car, but the “boss” says it’s too expensive for the public to afford. So, essentially, he pulled the plug on it. Frankly, I’d like to know why he thinks that Chrysler’s greenie is too expensive. It certainly could not cost more than the bailout price tag they have forced each of us to shoulder. Expensive is a relative term.

Make no mistake about it, we are living in times that will likely produce great changes in the world. There is a certain theory that attempts to explain the history of the world through great cataclysmic events.

Some are occurrences in Nature; some are wrought by the folly or the genius of men. Let me say at the outset that I am a subscriber to this philosophy, so have no illusions about what I am saying.

Actually, most people who ever think about such things believe that all of existence began with a great cataclysm. You can call it the “Big Bang” — no matter if you’re referring to the “Big Bang” that set the evolutionary process in motion, or the “Big Bang” of God creating the heavens and the Earth.

At some point, life came into existence – a big event in the universal process of all things. Of course, this is the point where the two theories begin to diverge from one another. Evolution has no more “Bangs” left in its bag. It is a slow and relatively even process from there on. Which is, I suppose, why it takes them billions of years to get to the point that God was able to accomplish in six days.

But for the recorded history of men, it has been one cataclysm after another, of varying sizes and types. Famines, floods, pestilence, earthquakes, volcanoes… and other natural disasters take their toll, but seem to always right themselves over time.

The follies of men, however, are a different matter.

The wonderful world of economics is no exception, and has no exemption. As I have said before, economics bears within itself the very principles by which God has made it to be governed. The Laws of Supply and Demand are not dependant upon Congress. They were not invented by the whim of elected or appointed regulators. They are not governed by the United Nations, the International Monetary Fund or the European Union.

It brings to mind a letter someone once sent to Congress. Perhaps you’ve heard about it before. If not, please enjoy:

Senator John W. Bricker
The Senate
Washington, D.C.

Dear Senator Bricker,

In my opinion I would suggest that if the Senate and Congress would abolish that awful law of supply and demand, it would increase production. Stop hoarding for high prices as is now being done by the government and others. Push all products for sale to the markets and start competition. The law of supply and demand is a burden to the Consumer because they foot all of the bills.

I trust you and your fellow senators and congressmen will act promptly.

Gerald V. __________

(Taken from Dear Mr. Congressman, by Juliet Lowell {New York: Duell, Sloan, and Pearce, 1948}, p. 91.)

I suppose we ought to give Gerald high marks for even knowing the term “supply and demand,” since I tend to think you might be hard-pressed to find it in the vocabulary of modern high school students. I have long felt that it would be a good question for Jay Leno’s “Jaywalking” segment of the Tonight Show.

At any rate, the laws of economics are established by a much Higher Power than we will ever be. And while we are at it, we should also understand that the Power is stronger than we can ever successfully contend with.

This is why, try as we might, we cannot substitute our own economic devices and have them succeed.

So let’s put a finer point on all this. The value of a nation’s currency is built upon the honesty behind it. Even a currency backed by gold becomes worthless if the government holding the gold cannot be trusted. While in days gone by it was easier for authorities to debase a metal and get away with it, all such obligations now are simply based on a government’s willingness to part with its gold. Of course, these days it does not happen.

And while the United States has been an expert in telling other countries how to morally treat their people, we have been robbing them blind! It has gotten so bad that even the Evil Empire and the Red Menace have seen through our chicanery. We may look upon them as people less “evolved” than we are, but the jig is up. Our hypocrisy has been found out.

We have become like the man in the Biblical parable who tried to remove a speck from the eye of his friend, when he himself had a log in his own eye. “First remove the log from your own eye, and then you will see clearly to remove the speck that is from your friend’s eye.” Seems like pretty simple (and common-sense) advice. But in the words of newspaperman Horace Greeley, “Common sense is very uncommon.”

I began this by saying that cataclysmic times are upon us. We are seeing the shaping of men and nations. We are setting the groundwork for the impoverishment of generations.

Spain fell in line with the prevailing models of economics by bailing out its first bank in a quarter of a century. And with a broad brush it painted its regional banks as “heavily exposed to property developers struggling during a deep recession.”

I have told you often of the difficulties prevalent in Europe. Here is but one more piece of evidence. Authorities are planning to solve this with 2-3 billion euros — but, oddly enough, have promised up to 100 billion euros. Wow! That’s a huge disparity. I believe they may think it will take more than just 2 or 3 billion.

On the same topic, European Central Bank President Jean-Claude Trichet sees more ongoing deterioration all across the Eurozone. Market forecasts believe Brussels will announce a 50-basis-point rate cut later this week. Germany, which makes up about 25% of the euro economy, is looking for an acceleration in economic deterioration.

This is a cataclysm.

Central Banks are flying blind with an instrument panel that has no configuration for the geography. The fixes they are trying will lead us to Zimbabwe (hyperinflation) or Tokyo (perpetual slump). Pick your poison.

In the meantime, I am forced to look for more overall dollar strength. The United States still possesses the deepest markets and the “deepest pockets” in the world. If other economies continue to fail, fiat currency supply and demand will favor the dollar. And by “deepest pockets,” I mean they are committed to inflating their way out — and have more ability to do so than anybody else.

I know looking for dollar strength seems a little backward while they are inflating. But the truth is, ever since the credit crunch, everything has been turned on its ear. If you are new to the currency markets, say within the last couple of years or less, likely most of this action makes very little sense to you. But in these times we must remember this axiom: The market will eventually adjust to actual realities. In the meantime, it will be moved by perceived ones. As long as fear filters through the markets, the currency flows will come back to the dollar. When there are periods of vacillation between fear and risk, the currencies can swing wildly.

Laws Congress Can’t Change originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

When I was a boy, my uncle was the richest man I knew. He was fond of saying, “”There are three things you need to get rich: time, leverage and other people’s money.” I didn’t know what it meant at the time, but when I got older, I wanted to hear how he made it big

“I always knew I would be rich,” he said. “Even when I didn’t have two nickels to rub together.”

He started out as a barber, renting a chair in another man’s shop for $20 a week. “10 heads,” he said, “that’s all I needed. After that, every dollar was mine.”

“At that point,” he remarked, “all I had was time. I was making money, but I wasn’t getting rich.” It finally occurred to him that a real way to get ahead in barbering was to have his own shop and rent out his own chairs to other guys who were getting started in the barbering business.

So he looked high and low until he found a dumpy old place where he could afford the rent, then spent his nights and weekends fixing it up. In a couple months, he had it ready and went to work. He rented out the five chairs in the shop while he still worked at the same chair he had rented for several years. “It seemed like a risky idea to leave the spot where my customers were used to coming,” he told me.

Unfortunately, after a year, his landlord realized how good the business was and forced my uncle out. “What a setback,” he said. “All these customers and nowhere to go.”

His first thought was to look for a new place to rent. But then he was hit with a stroke of genius: “Own my own place, and I can’t get kicked out again!” It only took him a handful of days to locate what would become his goldmine: 3 acres of land with a corner shop and two houses.

He set out his shingle in the shop, bought a trailer for $150 and moved it onto the back of the property, then rented the two little houses. He had talked the owners into selling him the whole ball of wax with 100% financing over 10 years. After he got his extra chairs rented out and moved another trailer onto the property, he was flush with cash. In the end, the property was paid off in eight years. But in the meantime he dabbled in other real estate, left the country and bought a house in Cancun where he lived as a tour guide. Years later he came back and bought a beachfront house on a local river, where he lived until just recently.

“Everybody gets the same amount of time, Billy,” he would often say. “But that’s not enough to get you to the top of the heap.” His experience with collecting the rent from four other barbers showed him the power of leverage. His no-money-down real estate deal taught him about other people’s money. And I imagine he probably watched a boatload of late-night infomercials that helped formulate his “Wealth Outline.”

I have come to find that what he said (even though it was completely borrowed and not original) held a great deal of truth.

But up to this point, you’re probably wondering what in the world this has to do with socialism. Seems like a pretty entrepreneurial story. Right? You are correct.

Seeing the proper working of a man and his wealth, well, that makes a counterfeit all the more easily spotted. But we could add to that story our own little adventure in currency options. The same three principles are at work. Time, leverage and other peoples’ money.

But the path to wealth through socialism is not so clearly seen. As a matter of fact, it is more like a path to nowhere. Because socialism denies the capitalistic importance of these four pillars: wealth, time, leverage and other people’s money. Instead, they corrupt them to their own destructive ends.

Any socialist will tell you wealth is important. As a matter of fact, that is the big carrot held out to entice people to follow such a muddleheaded plan. They will also tell you that time is important. Not because you need it to build wealth, but because you need it to spend wealth. In other words, the here-and-now is what is of the utmost importance. And you must be rich now, in order to enjoy what time you have here!

Leverage is also important to the socialist. As poor men manage their wealth very poorly (but seem to know instinctively how to manage their ballot), it is imperative to leverage out the efforts of the poor man into large voting blocks. One poor man cannot get a candidate into office. But 100,000 of them, that’s a horse of a different color.

Finally, we have the socialist’s take on other people’s money. They love it. They covet it. And they’ll do anything to get it. Obviously it is impossible to enrich the poor men who voted for them with the candidate’s own money. This is why other people’s money is so critically important. Unfortunately for them, they have forgotten the words of U.K. Prime Minister Margaret Thatcher, who said, “The problem with socialism is that you eventually run out of other people’s money.”

Whether she actually believed that or not is a question for another day. But it still has the ring of an eternal truth.

My uncle’s understanding of other people’s money was that it could be used to make money for himself. And he was right. But here is a key difference. The “other people” in my uncle’s life lent him that money VOLUNTARILY, not because they were coerced. And they expected a real cash return on their funds, not just the “warm feeling” that comes from being forced to help an indolent person by way of government-run charity!

Because socialists reward those who treat money poorly and penalize those who treat money well, the system will never work. True, advocates of wealth redistribution can point to circumstances where it did “work,” and where it does “work” from time to time (if only for a limited time). But I can also point to circumstances where the laws of gravity are temporarily suspended, such as when I get on a plane.

But even God will not help me if I just assume because I can fly for a few hours from here to there that I can fly forever. At some point my plane has to come back to the ground. At some point the laws of gravity will resume their authority, and I will realize that my flight and my violation of gravity’s laws are coming to an end.

Capitalism is a law established by God, just like gravity. Its foundation is in the 9th Commandment, “Thou shalt not covet.” I am never free to desire to take what is my neighbor’s. Not his wife. Not his house. Not his lands. Not his possessions. I can trade him for them if I have something he wants more than what he has. (Except his wife, of course…) I can buy them from him if my offer is right. But I cannot steal (or vote) away his property into my account. That is not wealth creation; it is merely re-distribution. God condemns it, and He will not be mocked by those who think that they can make socialism “fly” forever.

Eventually, they will run out of other people’s money. And when they do, their plane will come crashing to the ground.

One more thing. All around us, we see the widespread push toward more socialism, even when it hasn’t yet worked. How could that be? To explain what we are seeing currently, we must acknowledge that if the socialists manage to escape complete annihilation in the plane that they wreck, they will begin a campaign of propaganda, reminding the people that if only the free market force of gravity hadn’t gotten involved, they would have been successful. And that all they need is more fuel (other people’s money) to get the thing going again.

And, of course, the people will see the wisdom of their case, and will vote for more fuel or parts or anything, just so long as we don’t let those stupid Gravitarians have control of the cockpit.

More groundbreaking efforts will be tried, such as debasing the fuel, so that we have more of it. Sure, if you add five gallons of water to five gallons of gasoline you get 10 gallons… Certainly we can go further on twice as much fuel, right? Yeah, Right. Whatever you say, Comrade. Meanwhile, anybody who knows better had better be preparing a parachute.

As the major nations of the world move deeper and deeper into the “Pit of Despair” (to borrow a good term from “The Princess Bride”), their solutions will work less and less. Each effort will become more and more futile. Perhaps then we will learn our lessons. If not we will be doomed to repeat them.

All that being said, we did have a big news item from last week. Chinese Premier Wen Jiabao fired a shot across the bow of the Good Ship USS Treasury.

It was not just a request, and it was not couched in the tactfulness of political diplomats.

China warned the United States to “Keep its word.” Seems that the Moral Empire of America has a hard time with the bad habits of lying and stealing.

And now the rest of the world knows it.

And now we know that the Chinese know it.

And we know that we need their lending to keep up our little charade.

And they know we need their lending.

Now they are telling us, do not fool with our investments. China has options of where to put their money. What options do we have? How many nations can lend us the amounts we are consuming? China has options. We don’t. “The borrower is servant to the lender.”

The world is changing… and we will keep looking for opportunities to profit from it.

The Problem with Socialism originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.