Prices are rising in India – pushed up by the high cost of food. Thanks partly to a disastrous government policy of encouraging the over-use of chemical fertilizer, food prices are shooting up. In a poor country, food is a bigger part of the family budget than in a rich country. India’s CPI is rising at about 11%.

Flash from the TIMES of India:

A man brought his wife to Mumbai from Augangabad. He then took her to the house of someone she didn’t know and told her to wait there for him to come back. But he didn’t return. The wife asked the owner of the house what was going on. She was informed that she had been sold to the man for 40,000 rupees (a bit less than $1,000). Her family back in Augangabad came to her rescue. They bought her back.

A thousand dollars seems like a lot of money to pay for a wife. Especially when you consider all the expenses that come later. Food, shelter, transportation, Gucci, BMW, and so forth…

But it’s just another proof that the feds are winning! They’re reflating the bubble…at least to some extent.

Stocks rose again yesterday – largely on the good feelings inspired by Ben Bernanke. The US Fed chief let it be known that if the economy slips back into a slump it won’t be his fault.

The Dow rose again – 45 points. Gold went up $3. Oil gushed up over $82.

That’s the 22nd time in the last 27 sessions that the Dow has gone up. And it’s now above its high for this rally…at its highest point in 17 months. This brings US stocks back to their levels of…

…1999! Is that progress, or what?

Emerging markets, meanwhile – at least the BRICs – are back too. They’re back at 1995 levels.

Emerging economies are using this new appetite for risk to sell a record amount of debt. When the crisis came in ’07, the spread in rates – between emerging market debts and US debts – widened. People knew they could count on Uncle Sam to pay up. They weren’t so sure about India, Argentina and Zanzibar. So, the yields on emerging market debt rose.

But now that the feds’ program of reflation seems to be working, they’re going to take a flyer on emerging market bonds. They’re still a little riskier than US bonds (or so buyers believe) but they have higher yields.

Here in India, for example, a portfolio of municipal and corporate bonds is paying more than 9% interest.

Hey, wait a minute…isn’t the inflation rate 11%?

“Well, that’s an aberration,” explains an analyst. “It’s caused by rising prices for food. The long-term inflation rate is only about 5% or 6%. But the real play on Indian debt is in the currency. The rupee is a relatively strong currency. India just doesn’t have the debt problems that you have in America. Our bet is that you can earn 9% on the bonds and maybe another 50% as the rupee strengthens…”

The investor in Indian bonds has Ben Bernanke on his side. So does the investor in gold.

Bernanke told the world that he’ll keep rates at zero for as long as it takes…

…but that’s not all…

The Fed also announced that it was changing its policy. It said so in such a subtle way that most people probably missed it – including us. We only realized what it had done when we read an analysis this morning in The Financial Times.

In the past, the Fed has been “evaluating” the impact of buying up mortgages in order to support the housing (and presumably even the commercial property) market. Now, it says it “will employ its policy tools as necessary to promote economic recovery and price stability.”

Monetizing private sector debt certainly promotes the hell out of something…but we doubt it really promotes either economic recovery or price stability. What it promotes is the eventual destruction of the dollar…and the US bond market. Behind the bonds stands the dollar. And behind the dollar stands the Fed. The Fed is telling us that it is ready to stab the dollar in the back in order to keep up the illusion of ‘recovery.’

The Fed’s $1.7 trillion bond buying program – quantitative easing – is supposed to come to an end at the end of this month. We were looking forward to seeing what happened when the biggest player in the market – a buyer – dropped out. Now it looks as though the Fed might not drop out after all.

Yes, dear reader, the US is still on the road to financial moksha (the final liberation from the cares of this world…achieved by a Hindu sect – the Jains – by starvation.)

Bill Bonner
for The Daily Reckoning

Declining Dollar to the Fed: Et Tu, Bernanke? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

We have never seen families sleeping on the pavement on Regent Street…nor on 5th Avenue. New York and London are great success stories. Turning the pages here, on the other hand, we read a failure story. It is the story of a people who haven’t got much. The world turned against them, relatively, at the beginning of the Industrial Revolution. But if the world turns long enough, it comes back to where it began. To make a long story short, we’re betting on rotation.

The secret of material success is simple enough. In the beginning there is nothing. In the end, there is much. In between is all the dust and noise of a real economy. Everything and everyone moves – the dirt and raw materials…the bussers and schleppers who carry them, heat them up and hammer them into finished products…the merchants who sell them…and the consumers who use them. The money moves too.

But over time…and space…it must all balance out. For every item produced there must be a consumer. For every surplus, there must be a deficit somewhere else. And for every boom there must be a bust.

Taking a train from Washington DC to New York City, you can look out your window and see the equation fastened to a rusty bridge, over a rusty river in a city of rust. It says “Trenton Makes, the World Takes.” It is a sign that might have been hung on any one of hundreds of bridges in hundreds of different factory towns throughout America and Britain. As a bit of civic promotion, the sign is not completely fraudulent; it is only incomplete. It should have been turned around…probably in the 1970s. That was when Trenton became a taker.

For more than half a century, Trenton pumped out exports…then, it spent almost another half a century getting swamped by them. First, it enjoyed a capital investment boom…and then a capital investment bust, followed by a consumer spending boom…and then a consumer spending bust. Now the rest of the world awaits neither its output nor its orders. It is neither maker nor taker, but a dead-end slum.

Where will Trenton’s next boom come from…or when? No one knows. In the meantime, it must pay for what it already got. America’s post-WWII consumer boom came to an end in 2007. For the first time since 1946, consumer credit is falling. Americans are paying down debt.

Which leaves us looking out our hotel window, wondering…

The best form of government, said Voltaire, is democracy tempered by an occasional assassination. India’s government must be as hard as steel by now. In 1984, the Prime Minister, Indira Gandhi, was assassinated by her Sikh bodyguards. Then, in 1991, her son Rajiv Gandhi was also killed, this time by Tamil Tigers. If we were named Gandhi, we’d go into a less dangerous line of work, like being a test pilot. But Sonia Gandhi, widow of Rajiv and the daughter of an unreconstructed Italian fascist, must like excitement. She was elected president in 1998. Her son is also a politician.

Western investors needed courage to put their money in India. Six out of nine governments since 1980 have been coalitions, several including communists. In 1999, Pakistan invaded the country. In 2007 Maoist rebels attacked police and killed 50 of them. Last year, terrorists set fire to our hotel.

When activists, foreign and domestic, failed to destroy India, nature took a whack at it. A cyclone in 1999 killed 10,000 people. An earthquake in 2001 carried off 30,000. A Tsunami struck in 2004. The next year, monsoons flooded much of the country.

Indian stocks paid off anyway. US stock prices went nowhere over the last 10 years; Bombay stock prices more than tripled. Over the 30 years, from the opening of the stock market to the end of 2009, the investor had a return of 17,000%.

All over the developed world, governments are getting a death grip on their economies, taking control of vital industries and increasing the state’s share of GDP. One of India’s advantages is that its feds have been choking the economy for years; now it is becoming a model of negligence. As a percentage of GDP, India offered only perfunctory stimulus to fight the downturn of 2007-2009.

Now, China overheats. America cools down. And India grows at 7% per year without breaking a sweat.

Wage growth is flat or negative in Trenton; in India hourly earnings double every 10 years. India depends less on exports than any other major developing nation except Brazil. And only the Philippines and Indonesia have less credit as a percentage of GDP.

While much of the rest of the world did it…and then over-did it…India hasn’t done it yet. There are more autos in the US than there are licensed drivers, and two chickens in every pot; India barely has one vehicle per 100 people and barely any pot at all. This is a country where the getting has just begun.

Bill Bonner
for The Daily Reckoning

Bombay Dreams originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

This sounds like a D-word to us…disinflation, almost deflation.

One report tells us that greater than 5% of Fannie Mae mortgages are 90 days in arrears – or more. Another report says it’s 10%.

This too sounds like a D-word. Default.

But wait…

“Fed signals optimism over US economy,” is the lead headline in today’s Financial Times.

The markets responded, pushing the Dow up 47 points to a new high for this bounce…though still midway between its all-time high and its low of March 2009.

Oil rose a dollar too. So did gold. The euro edged up too…

Reading more closely, we don’t see much reason for the Fed’s optimism. And apparently, neither does the Fed. It is leaving its monetary stimulus program in place for an “extended period.” It says inflation is likely to remain subdued “for some time.”

The Great Correction (our term) destroyed nearly 8.4 million jobs (the FT’s count) and wiped out $14 trillion in household wealth. And now Americans are struggling to find firm footing in an economy with fewer job openings, less credit available, and an uncertain growth outlook.

What’s going on? There’s a word for it. Another D-word…several of them. There’s Depression. Deflation. And De-leveraging, for example.

Our old friend Porter Stansberry writes to tell us that we’re wrong about household de-leveraging. The drop in credit we reported yesterday was caused by defaults…not by voluntary reductions in debt, he says.

He’s right. Most of the decline in household credit, so far, comes from defaults. And maybe it is just wishful thinking on our part… hoping that Americans would willingly and eagerly improve their balance sheets. The savings rate is up…but it’s not yet clear whether this marks the beginning of a major trend or not.

But whatever the cause – be it voluntary de-leveraging or involuntary de-leveraging – we think there’s more of it ahead.

Here’s a statistic: 21% of Iraq and Afghanistan veterans are jobless. They’re mostly men. And mostly unprepared for the modern job market. After all, who wants to hire someone who knows how to drive a tank or patrol a gas station?

Ultimately, an economy gets rich by making and acquiring things people want.

Ah…we look back nostalgically at the Bubble Epoch. It was so easy to make fun of people back then. They thought they could get rich by buying things they couldn’t afford with money they didn’t have. Now, we’re in a new era… of sorts. Now, it’s the public sector that has lost its head. The feds think they can make the economy work better by buying things nobody really wants with money nobody really has.

Who really wants to guard a gas station in Baghdad? Nobody we know. Who’s got the money to fund the fed’s $1.8 trillion deficit? Nobody.

And think of the poor fellow who draws that sorry duty in Iraq. When he comes back to the US, what does he have on his résumé? He’s good at guarding a gas station against terrorists? Not many job offers for that skill set.

So, one in five of these fellows is unemployed. And the feds try to do something about it by spending more money they don’t have on more things nobody really wants.

Bill Bonner
for The Daily Reckoning

Default, Deflation and Other Financial Curse Words originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Yes, dear reader, we have been a voice howling in the wilderness. First the wilderness around the Café des Dames in Paris’s 19th arrondissement…recently the wilderness of Bethesda, Maryland…and lately the wilderness near the Taj Mahal Hotel in old Bombay.

Reading the TIMES of India is a delight. We see that a politician has been given a colorful, over-the-table bribe…a garland made up of 50,000 thousand-rupee notes (about $1 million)…

…a headless body has been found in Kandivli…26 people were killed when their bus fell off a bridge…

…and that more than half the population defecates in public.

In fact, India is Number One in outdoor Number Two, if our dear, delicate readers know what we mean. It has 10 times as many people defecating in public as the runner up, Indonesia. The US didn’t even make the top ten.

The poor Indians. They can’t handle alcohol. Research shows that Indians suffer higher rates of heart disease if they drink. Even light drinkers face a 40% higher risk of heart trouble, according to the study. Heavy drinkers’ risk of heart problems is twice that of non-drinkers…still, well worth it, in our humble opinion…

“110,000 killed on India’s roads and railways,” says another news item.

“Is that all,” we asked a colleague. Every time we cross a road we narrowly escape death. And we’re being careful. Other pedestrians seem to ambulate in the middle of highways…beg between lanes of busy rush-hour traffic…and make daredevil dashes across chaotic intersections. It’s amazing more aren’t killed.

There’s also an item that shows how India’s civil justice system works. A landlord has finally won an eviction – thirty-three years after he went to court! The unauthorized tenant lived in the apartment for an entire generation before finally being booted out.

But wait…our beat is money. So back to the big money story…

Mainstream economists and mainstream financial media tell us that the worst is over…that the ‘recession’ has passed…and that things are getting back to normal.

Nope, we reply. Not a chance. The old economy that existed since the end of WWII is dead. No way could it recover; you can’t revive a corpse.

It was beginning to look as though we would have to eat our words: the cadaver was sitting up in bed and watching TV.

Everything was beginning to look eerily normal, after all. A year after the stock market hit bottom, it still has not resumed its downward slope. Businesses that should have gone bust are still in business. Politicians who should have been run out of town on a rail are still putting their earmarks on everything. Bankers who should now be parking cars are still making loans.

The government is still misleading… Economists are still mis-interpreting… Investors are still mis-understanding…

…it sure seems like things are back to normal!

But something important has changed. And here comes the proof from the good ol’ FT.

The FT, by the way, has the same dim economists as everyone else. While we wouldn’t trust a government employee to manage a coffee shop, the FT’s leading economist, Martin Wolf, thinks they can manage the whole world’s economy. It’s just a matter of getting the balance right, he thinks.

But beneath the surface of the flow of silly opinions and distracting noise, there is a powerful tide…an undertow that is sweeping everything out to sea. For the first time since 1946, household debt in the US is actually going down.

This is what de-leveraging is all about. The credit expansion is over. The tide has turned. Credit flowed for 61 years. Now it ebbs. No more increases in household credit. No more increases in consumer spending, over and above wage gains. No more extra sales. No more ‘growth’ at the expense of private sector debt.

It’s over.

Regards,

Bill Bonner
for The Daily Reckoning

Declining US Household Debt Signals the Beginning of the End originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

In the meantime…we await clarification…

When will this bounce end? What will happen when it does?

Yesterday was another inconclusive, information-free day. The Dow rose 17 points. Gold went up $5. Oil fell to $79 a barrel.

But the deep trends continue. The government grows…and heads towards bankruptcy. Most developed nations are running huge deficits in their public accounts. The one that has been most in the news is Greece. The Hellenes promised to cut their spending, rioted in the streets, and now hope for some back-up plan from Europe. The rest of the PIGS (peripheral European states, with good food and wine, but bad finances) watch carefully. What Greece gets now they’re likely to get later.

But the problem is hardly limited to the small states of Europe.

Barron’s reports that the states face “massive shortfalls” in their pension programs. This is in addition to the other massive shortfalls faced by governments all over the planet.

“US ratings threat,” is the headline on today’s Financial Times:

“Moody’s Investor Service will warn the US today that unless it gets its public finances into better shape than the Obama administration projects there would be ‘downward pressure’ on its triple A credit rating.”

Moody’s learned a lesson last year. You take money from the ratee. You give a good rating to junk. Then, people point their fingers at you and sue when the junk goes bad. The raters don’t want every Treasury bond holder in the world at their throats.

The US is going broke; no doubt about it. Of course, it may take years…

What the hell? We can wait…

Some Treasury buyers aren’t waiting until the last minute. “China continues selling US Debt in January,” comes a report from The Wall Street Journal.

Japan too, adds Bloomberg.

Japan, of course, faces a financial crisis of its own. It already has government debt greater than 200% of GDP…and its aging citizens are saving less money each year. Pretty soon, it will be unable to finance its deficits. Then what?

Then, yields will rise and Japan will face a crisis similar to that of Greece.

And what about China? Even countries with sound budgets can take huge financial hits.

“China may face massive bank bailouts,” Bloomberg reports.

Yes, dear reader…China has a solid budget…and industries that make money. The trouble is, it has too many of them. And now it’s made the mistake of stimulating them to increase production – as well as increasing infrastructure – at the worst possible moment, just as their major customer goes into a funk.

So, while China’s state finances are in good shape – at least on the surface – its private sector finances are a mess. They are such a huge potential mess that one analyst refers to China as the ‘mother of black swans.’

Who’s going to bail out China’s banking sector? Who’s going to bail out Greece? Who’s going to bail out Japan? Who’s going to bail out the US?

Day by day, the lumbering, clumbering wheels roll on…towards bigger governments with greater debts… One government looks to another one to help it out. The other looks to yet another. One nation depends on its central bank…and its central bank depends on the US Federal Reserve, the capo di tutti capi of all the world’s central banks.

Bill Bonner
for The Daily Reckoning

The Great Correction: Awaiting Bailouts that Will Never Come originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

The Chinese are paying for their enterprises. They already own footholds in some of the most important companies in the US. Yesterday, they announced another big move. CNOOC, China’s state-owned energy company, is buying half of Argentina’s second largest oil producer, Bridas. The Chinese have described the deal as giving them a “beachhead” for entry into Latin America.

The world’s richest people (two of the top five are Indians)…its biggest markets…it largest financial reserves…its most profitable companies – all are moving away from the US.

And now the Chinese are proposing to help the US upgrade its transportation system. Word from Beijing is that Chinese contractors are pitching high-speed rail lines to California, Florida and Illinois.

What next?

Empires you can trust…

At least there is one area in which the US maintains a clear and decisive lead – the military. Nobody comes close. No navy. No air force. No army. We’re number one.

The trouble with being number one in military power is that you need to find a way to pay for it. Which brings to mind a recent book by Thomas F. Madden, Empires of Trust. We spent the weekend sitting in a wicker chair by the pool reading it, drinking lime sodas and red wine.

The book is a delightful history book, recounting Hannibal’s war against the Romans and the Romans’ many wars against the Greeks. It is a marvelous book of history. It’s too bad the author draws conclusions that are comically out of sync with his own tale.

The storyline is that the US, like ancient Rome, is a very different empire from most. It is a good empire…based on strong family and religious values…which wants only the best for the rest of the world and only peace and security for itself. The Roman Empire succeeded, he says, because you could trust it. America will endure, he believes, for the same reason.

If this were true of Rome, it makes the Romans the most hopelessly incompetent race of humans that ever existed. They sought peace? The record shows a thousand years of wars; the history of Rome is a history of war. They fought the…

Sabines & various other tribes
Fidenates
Veientes
Albans
Latins
Samnites
Greeks
Carthaginians
Illyrians
Macedonians
Syracusians
Spartans
Doric Cretans
Argosians
Seleucids
The Aetolian League
The Ebro
Lusones
Various Celt-Iberian Tribes
Lusitani

This leaves out the small fry and only brings us up to 139 BC… They had another 500 years of hard fighting ahead of them. If there was anyone in the ancient world with whom the Romans didn’t kick up some dust, we have never heard of them.

And security? Mr. Madden seems to think Roman armies went all the way from the banks of the Tiber to the banks of the Tyne, the Rhine and the Euphrates just so as to make the walls of Rome itself more secure. Having beaten one neighbor, they then faced another, who was naturally nervous about Rome’s next move.

As its circle moved outward, Rome found itself with more and more neighbors to defeat. Where once it had only a few potential enemies, it soon found itself ranged, albeit with allies of more-or-less questionable loyalty, against half the world, including against the world’s best military powers of time. In the name of security, in other words, it put the ancient world’s leading military geniuses to work trying to destroy it.

Mr. Madden really ought to get out more. He seems to know a lot about Roman history. The problem is that he knows not much about other people…their history…their motivations…and their empires. While there are vast differences in the character and the style between various empires, they all are alike in that they are all run by humans who are all after the same heady mix of power, money and status. All use both carrot and stick – insofar as they can. Some were better with the carrot. Others were better with the stick. Using the carrot was often the cheapest way for an empire to get where it wanted to go. But all empires were also capable of making and winning wars, often ruthlessly and cruelly, when the occasion called for it.

Ultimately, an empire is a protection racket. The imperial power provides protection and demands tribute in return. If he gets no tribute…or cannot provide protection…he is out of business. Trust is useful to empires, as it is to the Mafia; it is a tool, not the core business.

This is clear from Mr. Madden’s own recounting of the Punic Wars. After the Romans had conquered all of Italy, they looked across the straits of Messina at Sicily. There, the Carthaginians were trying to take control. Naturally, the Sicilians of the time looked for support wherever they might get it, and signaled to Rome that it could use help.

Trouble was, the Romans had an understanding with the Carthaginians. Like Hitler and Stalin before the invasion of Poland, the two had agreed to respect each other’s spheres of interest. The Romans, who desired no conquest, according to Madden, had agreed to leave the rest of the world to the Carthaginians; the Romans got free run of Italy in return.

But the empire of trust betrayed Carthage; it went to war in Sicily and won the island for itself. This was the first Punic War. The second came about as had the first; this time the Romans breached their agreement by meddling in Carthaginian affairs in Spain.

The Second Punic War saw Hannibal cross the Alps. Then, we got to see how strong those bonds of trust in Italy really were. Given the choice between weak Rome and the strong Carthaginians, dozens of Italian cities switched alliances – including the second largest city on the peninsula, Capua.

The Romans could be trusted, as long as trust worked for them. When it didn’t, they turned to violence – just like everybody else. In the case of the Punic Wars, and all of Rome’s wars, it was violence that settled the issue, not trust.

Madden spends considerable ink telling us how nice the Romans were in their wars against the Greeks. But when push came to shove, that is, when trust no longer paid, Roman forces looted the treasures of Corinth, and leveled the city.

Mr. Madden misses the point about Rome. He misses the point about the US too. Like Rome, America uses carrot and stick. Carrots are usually cheaper. But, in the end, it’s the stick that counts. Americans were able to calm indigenous peoples with treaties and reservations; but if they had not been ready and willing to go to war against them, they would never have been able to colonize the continent. Then, they used big sticks against their own people too. In their war against the Confederacy, Sherman did to Atlanta almost exactly what Mummius had done to Corinth. He destroyed the city…and laid waste to the countryside around it.

Brief dummies guide to empire: A coalition of the willing is all very well; but when they’re not willing to go along, get out the stick and whack them hard.

Regards,

Bill Bonner
for The Daily Reckoning

American Military: Trust in the Last Vestige of US Dominance originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

This is the day Caesar was assassinated. What’s it to us?

Well, it just reminds us that things go wrong. Even when you’re on top of the world. There are always countercurrents…undercurrents, beneath the surface, where you don’t see them…plots…conspiracies…and just bad luck.

On the surface, the US economy is recovering. Well, not even. It is stabilizing.

The Dow has been creeping up. It rose 12 points on Friday. Gold fell $6. Oil held at $81.

The most recent figures show the consumer becoming a little freer with his money. But look beneath the surface and you find government statisticians juking and jiving with the numbers. They seasonally adjusted downward the figures for January…which boosted the figures for February. Had they not done so, the figures for February would have been negative!

Still, consumers are not as lifeless as they have been…and on the surface, this is good news.

And who can blame consumers for being a little more ready to spend money? The newspapers tell us that the Great Recession is over…and that we’re in a recovery. The lumpen consumer probably thinks he’s going to find a job soon…and that his house is going up in price.

But beneath the surface, there are powerful downtrends still underway. These trends began in 2007. They were misinterpreted, naturally, by leading economists and policymakers as a “liquidity crisis.” In fact, they were signs of a debt crisis. The private sector had far too much debt.

Economists who never expected trouble, reacted to it in a predictably moronic way – they rushed to the rescue with more debt. Now, they think they’ve triumphed… They’ve prevented another Great Depression. They’ve saved the world!

We’re written so much about that; you surely don’t want to read any more on that subject.

But here’s the interesting point: by failing to address the real causes of the crisis, the feds only allowed those undercurrents to grow more powerful and more dangerous.

Instead of reducing the world economy’s reliance on debt, they increased it!

On the surface, the rescue efforts look vaguely like a success. The private sector stopped spending. Government increased its spending to make up for it. Okay so far.

Alas…net, the world’s debt is still increasing – by a huge margin. Over the next 3 years, the biggest 20 economies in the world – the G20 – are expected to slip over the 100% mark, with more debt than GDP.

Now, let’s do a little math. The US has total tax receipts equal to about 15% of GDP. If the interest on the debt is only, say, 3%…that means you’re spending 20% of tax receipts on debt service. But suppose inflation rises…and interest rates go back up to where they were in the late ’70s. Back then, the feds had to pay 15% interest to borrow money for 10 years. At that rate, financing the whole federal debt would take 100% of tax revenues – just for the interest.

Obviously, that’s not gone to happen. Something else is going to happen. What? Hard to say. Some combination of default and inflation, most likely…

Of course, this doesn’t bother the feds. That story is still beneath the surface… It’s a crisis that hasn’t happened yet. They couldn’t see the crisis in the public sector coming in ’07. They can’t see the next one coming either.

Economists can’t tell a government job from a private sector job…and can’t tell $1 of government spending from a dollar spent by the private sector…and can’t tell a dollar’s worth of GDP from a dollar’s worth of real prosperity…

…which means, they can’t tell the difference between what’s happening on the surface to what’s happening underneath.

In a sense, this is just another manifestation of the same “battle” we wrote about years ago. On one side are the feds. On the other is Mr. Market.

The feds want to inflate. Mr. Market wants to deflate. The feds want a boom. Mr. Market wants a bust. The feds want to inflate another credit bubble. Mr. Market has a knife in his hand.

On the surface, the feds are winning. At least, that’s the way it looks if you get your information from reading the newspapers or listening to CNBC. And in a sense, these reports are correct. Superficially, the battle is going the feds’ way.

But deeper down…the debt is still there…and it is growing bigger. And Mr. Market sharpens his dagger.

Bill Bonner
for The Daily Reckoning

Economists to Miss the Next Financial Crisis originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

There were beautiful women dressed in brightly colored traditional gowns. Men favored western business suits, but a few sported the outfits usually worn at Hindu weddings…with flowing, colored tunics, baggy white pants and little embroidered slippers.

These were the men and women who are leading the Indian economy in one of the most remarkable growth stories in economic history. India has been upstaged by China. The middle kingdom’s story…from communist rags to capitalist riches in a single generation has a lot of dramatic punch. But India’s story may have a longer run. Because India grows without relying too heavily on exports. And it seems to have a large class of people who may be capable of keeping that growth on track.

“I now work for Blackrock,” said a pretty young woman. “I did my undergraduate work at the University of Texas. Then I worked in New York for a while.

“My sister lives in Georgetown, not far from you…”

Another man was a Sikh, with a turban on his head.

“I’m a metallurgist. I believe in machines. When I have money, I buy machines. I don’t trust stocks…”

It was a Sikh who assassinated Indira Ghandi. The Sikhs – a military caste – were regarded with deep suspicion for a while. Incidentally, the French prohibit people from wearing a turban when they get an official photograph. This is to provide the government with an accurate picture of the person, presumably. But since the Sikhs wear their turbans all the time, a more accurate picture would show what the man looks like with his turban on…

“I went to the University of Nevada,” said one of the guests. “I went to MIT,” said another. “I went to the University of Pennsylvania…”

“I got a patent on…. I’m a biochemist… I’m on the board of… I run a business that…”

One after the other, the résumés were impressive. These are people who have money, training, ambition, manners…

“There is no Social Security in India,” explained a colleague. “And no welfare. We’re too poor for that. People know they have to work to support themselves and their families. And the economy is still an entrepreneurial economy. The people who have money usually run their own businesses. The money is still in the hands of entrepreneurs instead of professional managers. It’s more like the economy in the US during the early part of the 20th century, in other words, than like today’s US economy.”

Bill Bonner
for The Daily Reckoning

An Impressive Résumé for Long-Term Indian Expansion originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

The Daily Mail account put the blame for these disturbances on Germany’s finance minister, who warned the Greeks that “the German government does not intend to give a cent.” At least Bild, a popular German newspaper, was trying to be helpful. It suggested that Greece sell Corfu…and that Greeks get up earlier and work harder.

Meanwhile, from Iceland comes news that every voter with an IQ above air temperature has cast his ballot against a bailout plan. The Icelanders were slated to make good $5.3 billion in bank losses. But why shackle common voters to the banks’ losses? The plan was so outrageous and so unpopular that Iceland’s normally compliant Prime Minister called for a referendum. Given a chance to vote on it, 93% said no. The other 7% probably read it wrong.

Insurrection is in the air. In England, government employees are preparing the biggest strike since the ’80s. In America, dissatisfaction with Congress is at record highs; four out of five of those polled say, “Nothing can be accomplished in Washington.”

Herewith, an attempt to deconstruct the rebel yell. By way of preview, it’s not the principle of the thing, we conclude; it’s the money.

There are more clowns in economics than in the circus. They invented an economic model that has been very popular for more than 50 years – particularly in the US and Britain. It began with a bogus insight; John Maynard Keynes thought consumer spending was the key to prosperity; he saw savings as a threat. He had it backwards. Consumer spending is made possible by savings, investment and hard work – not the other way around. Then, William Phillips thought he saw a cause and effect relationship between inflation and employment; increase prices and you increase employment too, he said.

Jacques Rueff had already explained that the Phillips Curve was just a flimflam. Inflation surreptitiously reduced wages. It was lower wages that made it easier to hire people, not enlightened central bank management. But the scam proved attractive. The economy has been biased towards inflation ever since.

Economists enjoyed the illusion of competence; they could hold their heads up at cocktail parties and pretend to know what they were talking about. Now they were movers and shakers, not just observers. The new theories seemed to give everyone what they most wanted. Politicians could spend even more money that didn’t belong to them. Consumers could enjoy a standard of living they couldn’t afford. And the financial industry could earn huge fees by selling debt to people who couldn’t pay it back.

Never before had so many people been so happily engaged in acts of reckless larceny and legerdemain. But as the system aged, its promises increased. Beginning in the ’30s, the government took it upon itself to guarantee the essentials in life – retirement, employment, and to some extent, health care. These were expanded over the years to include minimum salary levels, unemployment compensation, disability payments, free drugs, food stamps and so forth. Households no longer needed to save.

As time wore on, more and more people lived at someone else’s expense. Lobbying and lawyering became lucrative professions. Bucket shops and banks neared respectability. Every imperfection was a call for legislation. Every traffic accident was an opportunity for wealth redistribution. And every trend was fully leveraged.

If there was anyone still solvent in America or Britain in the 21st century, it was not the fault of the banks. They invented subprime loans and securitizations to profit from segments of the market that had theretofore been spared. By 2005 even jobless people could get themselves into debt. Then, the bankers found ways to hide debt…and ways to allow the public sector to borrow more heavily. Goldman Sachs did for Greece essentially what it had done for the subprime borrowers in the private sector – it helped them to go broke.

As long as people thought they were getting something for nothing, this economic model enjoyed wide support. But now that they are getting nothing for something, the masses are unhappy. Half the US states are insolvent. Nearly all of them are preparing to increase taxes. In Europe too, taxes are going up. Services are going down. And taxpayers are being asked to pay for the banks’ losses…and pay interest on money spent years ago. Until now, they were borrowing money that would have to be repaid sometime in the future. But today is the tomorrow they didn’t worry about yesterday. So, the patsies are in revolt.

Several countries are already past the point of no return. Even if America taxed 100% of all household wealth, it would not be enough to put its balance sheet in the black. And Professors Rogoff and Reinhart show that when external debt passes 73% of GDP or 239% of exports, the result is default, hyperinflation, or both. IMF data show the US already too far gone on both scores, with external debt at 96% of GDP and 748% of exports.

The rioters can go home, in other words. The system will collapse on its own.

Bill Bonner
for The Daily Reckoning

The Patsy Revolt of 2010 originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

We were on our way to CNBC, where we were being interviewed. For some reason, your editor has achieved minor celebrity on the subcontinent. The announcer told his audience that we were a “venerated western economist.” Other interviewers ask for autographs. Many have read our books. All want to know what we really think.

This is probably because our views flatter them. Unlike the US, India is not at the end of a 50-year credit expansion. It’s only at the beginning. Investors might look forward to many years of growth.

The Bull Market Is Over originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."