…that our children are going to spit on our graves!

First, Americans made a colossal mistake in the ’90s and the ’00s. They partied…they spent…they borrowed…running up huge debts in the private sector. Most kids could forget about inheriting anything from their parents; the geezers spent it years ago.

The boomer generation also made a mess of the biggest success story in world history – the United States of America. In the ’60s and ’70s – when boomers matured and began to take over – the US was still on top of the world. It had a positive trade balance…huge savings…massive investments abroad…and the strongest companies in the world.

They ruined it. The financial industry took over…replacing manufacturing. Instead of making things we could sell at a profit, Wall Street sold debt – mostly to us! In government, imperial ambitions pushed aside the restraints and good sense of the old republic. Overseas, military bases were set up in 120 countries. We now have unwinnable, trillion-dollar wars that could go on forever. At home, the sheep look to the government to solve every problem. Thirty-five million Americans – almost as many as the entire population of Spain – depend on the feds’ food stamp program for their daily bread.

At least, most Americans are making amends in their private lives. The old days, when the US was “the world’s mouth,” are over. We can no longer be counted on to buy up every gadget and gizmo produced in the world. We’re rediscovering the old virtues of thrift and savings. Frugality is back in style. If this continues, the Baby Boom generation may not leave the next generation with much net wealth, but at least it will not leave behind huge net debts.

But over in the public sector, the debt toll mounts up. The boomers want the government – which means, the next generation – to pay for their health care…their unemployment insurance…their bailouts and their handouts. The deficit for this year is expected to be about $1.5 trillion. Next year, it will be about the same. The feds say it is too early to pull back on their stimulus efforts. Housing credits and unemployment benefits have just been extended. A trillion-dollar overhaul of the healthcare system is in the works. Even assuming a real recovery – don’t hold your breath – the deficits are supposed to run $1 trillion per year for the next 10 years. More likely, as we reported in this space a few weeks ago, the deficits will be $2 trillion per year. By the time today’s 30-year-old gets a family…a house…and a mortgage, he will also have his share of a $20 trillion dollar deficit – not to mention the “off budget” obligations of the US government, a total of more than $100 trillion!

But wait…aren’t these spending efforts paying off? Isn’t the stimulus helping the US economy get back to into the pink? Don’t all these federal spending programs create a safer, more prosperous world?

Ah…tell that to the kids! “We were just trying to get the economy back on its feet…so you could find a job in a thriving economy,” we might say.

Take any two young people, 16-24 years old. Odds are, one of them will be unemployed. Joblessness among the young has hit 53% – a post WWII high.

Seven million jobs have been lost in the last 24 months. Employers are still cutting payrolls. And when business picks up…what kind of jobs are they going to offer? Will the next generation compete with the Chinese for low-cost production? Are they going to compete with the Europeans for high-cost/high quality production? Are they going to develop more mortgaged-backed securities? Or are they going to put on waiters’ aprons and take orders from clients who no longer dine out?

Good jobs will be hard to come by. Because the ‘growth’ of the bubble period – 2001-2007 – was a fraud. Instead of building up capital assets and creating more jobs, people borrowed money …and then squandered it. And now, the recovery is a fraud too. Now, the government pumps up the economy with cheap credit…borrows trillions…and wastes the money on pointless ‘stimulus’ programs.

And day after day, the debt builds up. Soon, it will be too big to handle. And then, these same young people – who can’t get a foot onto the lowest rung of the employment ladder – will be asked to shoulder this huge burden of debt left to them by their parents. You can imagine their reaction…

…they will spit on our graves!

Spitting on the Boomers’ Financial Legacy 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.

So, when I arrived here this morning, I had one thing on the top of my list of things to do, and that was to find out what happened… Come on, I said to myself, it had to be more than the “risk on, risk off” stuff that’s been hanging over the markets like the Sword of Damocles! But, when you get right down to the nitty gritty, that’s all it was… For once again, there was some data, or story, or rumor, that spooked the markets into believing the global recovery isn’t going to happen, and the “risk off” came into play.

So what was it that spooked the markets… Well… The only thing I can find was the report yesterday about falling Housing Starts that Chris told you about… Did you know that about 14% of US homeowners were either delinquent on their mortgage or in some stage of foreclosure? That is the highest rate since the group started collecting the data in 1972!

But there was something else that was announced as the day went on, that I think probably spooked the markets more than anything else… And that is a key House panel approved two amendments to a sweeping financial-overhaul bill that would give federal watchdogs new authority to audit the Federal Reserve, and would establish a fund of as much as $200 billion to help dissolve large, troubled institutions. Rep. Ron Paul (R., Texas) offered the amendment seeking to subject the Fed to audits.

The House Financial Services Committee voted 41-28 to approve the amendments, wrapping up weeks of debate but postponing a final vote on the bill until after Thanksgiving.

OK… More deficit spending for sure, and I’m positive that this was “hung on this bill” to audit the Fed as the only way it would get through the gauntlet.

Why would this bill “spook the markets?” Ahhh grasshopper… To audit the cartel, is a step toward getting a peek behind the curtain, and that’s scary, folks… But it’s what is needed! And so I applaud the panel’s vote… (Too bad they had to hang that $200 billion deficit spending package onto this, but that’s how the dolts in DC work…)

So… When things get spooky, traders crawl back into the dollar’s corner… And when traders crawl back into the dollar’s corner, the currencies that have booked the best performances against the dollar, see their fortunes reversed the most… So… In this case, it’s the Aussie dollar (AUD), New Zealand dollar (NZD), Norwegian krone (NOK), and Brazilian real (BRL)… These three will most likely put a losing week into the books, which hasn’t happened very often during this rally that began in March. I say “most likely” because we’ve seen swings in these currencies that could easily wipe out these weekly losses in a NY minute! But with today’s data cupboard as empty as my stomach feels, right now… I doubt we’ll see any “swings” to bring these currencies to the positive side of the ledger this week!

The Weekly Initial Jobless Claims here in the US printed yesterday at 505,000, same as the week before… I heard one airhead TV commentator say that at 505,000, it shows that employment is on the mend… Ahem… Did you do the math? That’s over 2 million new jobless people per month!

Yes, I know it doesn’t net out the jobs that were created… I’m strictly talking about jobs that are lost on a weekly basis… You can’t in your wildest dreams think that we’re creating more than 2 million jobs a month during a depression!

So… That data wasn’t good for the “recovery campers”.

I was writing some notes for my latest video on Wednesday, and noted that Japanese yen (JPY), gets the best of “risk on, risk off” trading. For some strange reason – and yes, I’m well aware that Japan is the second largest economy in the world – Japanese yen is considered a “safe haven” when the “risk off” is in play… And when the “risk on” is in play, spanking the dollar, Japanese yen doesn’t sell-off!

Now… I’m not a HUGE fan of Japan, as their government deficit is tremendous in size, rivaling the doubled in size national debt of the United States. And I personally feel that the yen at 88 and change is bumping the ceiling… But, the markets can be irrational, right? And with yen, they are really irrational!

Hey! Did you see that there’s pressure on US Treasury Secretary Tim Geithner to resign? Personally, I don’t know that he’s done any worse than Hank Paulson… But then, is that what we’ve come to accept? Bad leadership? I’ve said this before, and I know it really gets under some people’s skin… But, besides the national deficit and the trade deficit, we have a leadership deficit… I’m talking about the lawmakers, the Fed Chairman, and Treasury Secretary… I guess the administration should be thrown in there, as well.

The European Central Bank’s President, Trichet, and the Swiss National Bank’s Governor Roth, both spoke last night, and neither referred to the currencies in any way; but Trichet did add to the “risk off” mood of the markets by saying, “it is too early, as of today, to declare the crisis is over.” The People’s Bank of China’s Governor, Zhou, said that China was “passive on the direction of the dollar”… Hmmm… I have to wonder if he was truly speaking from the heart there, or just stating that to keep the dollar from falling into an abyss.

You know about the stock sell-off that I’ve been warning you about for a couple of months now, that could very well drag the currencies and commodities along for the ride? Well… I know that you all think that I’m playing the boy who cried wolf, here… But, recent trading days have me worried a bit about this taking baby steps right now.

My trader/chartist friend sent me a note and told me to watch the Aussie, for it is very close to its 9-month trend line support of 0.9093 (it’s currently at 0.9110), for should it close below that number it would signal (according to him!) a correction to 88-cents. Not a huge drop, but it’s not like these charts can pinpoint a level that a currency will turn around… Or maybe they can! I’m lost when it comes to charts… I look at them and unless they are as obvious as a man with a hatchet in his head (like the US dollar chart since 1971) then I could make a case for an asset that’s being charted to go either way!

That’s why charts are not “fundamentals”… Fundamentals are what put an asset into a trend, either weak or strong, and charts tell you what happened in that trend.

And then there was this… According to The Wall Street Journal, “Some of Goldman’s largest shareholders have urged the firm to reduce the size of its bonus pool, arguing that it should pass along more of its blockbuster earnings to investors. The investors hold tens of millions of shares in the Wall Street firm, which is on track to make the biggest employee payout in its 140-year history.”

Where have these “largest shareholders” been all these years? Why make a big deal about this now? Oh, that’s right! The government has made it look “dirty” to give bonuses.

Oh… And I heard that the Senate’s version of the Health Care Bill would cost $849 billion… Just keep spending money we don’t have, Congress… I’m reminded of a saying by Voltaire… “Common Sense is not so Common.”

To recap… The “risk off” wax is being applied by Mr. Myagi again this morning, as the non-dollar currencies, other than yen, have given back recent gains versus the dollar. The “audit the Fed” bill has been pushed through the gauntlet for a vote after Thanksgiving. The Aussie dollar is near its 9-month trend level, and shareholders want “some of the action”!

“Audit the Fed” Bill Moves Along 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.

“If we keep on adding to the debt, even in the midst of this recovery, at some point, people could lose confidence in the U.S. economy,” President Obama told reporters in China yesterday. His administration is offering no solutions to this coming crisis (quite the contrary, as you’ll read below), but we’re a bit taken aback nevertheless… can’t remember the last time any president offered this stern a warning over our debts. He even went as far as to say that this lack of confidence could lead to a “double-dip recession.” Gasp!

“Now the tables are turned,” our currency man Bill Jenkins wrote to his readers yesterday. “And the president’s trip to Beijing has proven it.

“The American president will make his scout’s pledge to take our debt seriously and not to spend too much more. He will also reiterate that we believe in a strong dollar policy. The Chinese president will smile and nod and promise to continue buying our debt. He allows us to save a little face and does not reprimand us publicly for our self-indulgence.

“They will pretend to believe us, and in gratitude, we (ignoring the beads of sweat accumulating on our brow) will not force any of the other issues.

“First, America wants China’s help with a laundry list of adversarial relations from North Korea to Iran. Second, we (and the rest of the world) would like a renminbi that floats, instead of being pegged to the dollar. Third, we want to pontificate on the issues of human rights, of which Tibet is the universal poster child. Fourth and last (but NOT least), we would like the Chinese to continue purchasing American Treasuries (our debt).

“I am certain President Obama will get us the last of the requests. He will pay for that by caving on the first three.”

Tables Turn on the US Fiscal Agenda 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.

‘We didn’t ask you to stock up all those dollars,’ as Obama might have put it. ‘It’s not our fault if the dollar goes down and you lose money.’

Perhaps Mr. Obama should have quoted the immortal words of a former US Secretary of the Treasury, John Connolly. “It may be our dollar, but it’s your problem.”

Over at USA Today, the editors are more concerned about human rights. The paper must imagine itself back in the days of Woodrow Wilson or George W. Bush, when the US nobly embarked on a mission to raise all of mankind out of sin and error. In effect, Mr. Obama said that all people have ‘universal rights,’ including the right to a free press. China figured this was just the sort of opinion that its people didn’t need to hear. So, it killed the story in its own press. The American president might as well have been talking to himself.

China is today’s big story. Throughout the world’s media there is much buzz and blather about the “romance”…the “historic relationship”…between the two titans. Some reporters see love. Some see jealousy. Some see rivalry.

Here at The Daily Reckoning we are suckers for romance. Give us some “a cigarette that bears a lipstick’s traces…an airline ticket to romantic places…” and we are moonstruck. But we don’t see much romance in the US and China hook up. What we see is the sort of things that delight psychologists and bore everyone else – perversion, co-dependency, and enabling.

On the surface, the two giants bicker over money like any other couple. The US accuses China of being a tightwad…holding its currency down and saving too much. China accuses the US of being a spendthrift, destroying its own purchasing power by wanton and reckless expenditures.

“US president’s currency call breaks with script,” says a headline in The Financial Times today. US economists think China should raise the value of the yuan. This would immediately lower the value, domestically, of the trillion(s?) worth of US-dollar assets China holds as reserves. It would also make Chinese products less competitive on the world market.

Mr. Obama wasn’t supposed to say anything about it on his trip. It would be like bringing up your husband’s drinking problem on your wedding anniversary; it would spoil the occasion.

Apparently, Obama couldn’t help himself. Or maybe he just thought the folks back home would like to hear him give the Chinese a piece of his mind.

But how does the American president know what price to put on the yuan? A sinking dollar is good for the goose over in the US. Why isn’t it okay for the gander in the Middle Kingdom?

A strong yuan would help the world economy “rebalance,” say economists who think they know what they are talking about. In a nutshell, the Chinese produce too much; Americans consume too much. A higher yuan would come down on the high side of the scale – giving the Chinese more purchasing power (thus increasing consumption in the Peoples’ Republic)…and making Chinese exports more expensive (thus decreasing consumption across the Pacific). With a stronger yuan, the Anglo-Saxon economies would be able to produce and sell more things to the Chinese…thus tilting the US economy more towards capital formation and production.

Chinese authorities are no dopes. They know they have a “floating” population of some 150,000 million people who are looking for work. They know that if they don’t find some way to keep these people occupied they are likely to cause trouble. Trouble is the thing China’s leaders most don’t want.

“You think you’ve got trouble,” Premier Hu Jintao might have replied to Mr. Obama. “Did you know that there are something like 200 million Chinese who still get by on as little as a dollar a day? Let’s face facts. You’re sitting there in Washington, comfortably talking about how much free health care and unemployment benefits to give the American people. We don’t have the time…or the money for those kinds of things. Too many Chinese people. They don’t earn enough to afford the kind of cradle-to-grave bribes you give your people. We have to keep them working; there’s no other way.

“Besides, we don’t quite see why we should pay for your mistakes. It wasn’t our economy that blew up. It wasn’t our financial industry that sold houses to people who couldn’t afford them. It wasn’t our consumers who spent more than they had and went too deeply into debt.

“It’s the debtor who’s supposed to pay, not the lender. We’re the lender!”

Behind all the superficial arguing, accusing and kvetching, however, is a sick relationship. It has give and take. But the US is all take. China is all give. And now, on both sides, public authorities make the same mistake. In the US, they try desperately to prod Americans to take more…to continue doing what they were doing wrong. They offer incentives of every sort to lure consumers to consume even more. And their solution to the debt overhang is to hang on even more debt.

In China, meanwhile, the authorities desperately prod their people to give more…to produce more. Or, at least to build more plant and equipment with which to turn out more goods.

In the US, consumer spending is about 70% of the economy. In China, fixed capital formation is estimated to have made up 70% of China’s growth in 2008 and as much as 90% in the first half of this year.

Is this a formula for a happy marriage? Over the last two years, this co-dependent relationship has broken down. Paul Krugman wrote in The New York Times that we’ve seen “the greatest collapse in world trade in history.”

But neither side has learned a thing. The taker now proposes to take more. The giver now proposes to give more.

They don’t need counseling. They need a divorce.

The Great US-China Romance 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.

Someone asked me yesterday a question about the euro… He said, “Chuck, I know you like the euro, but couldn’t the Aussie dollar (AUD) be a better choice going forward?” And I answered like this… The euro is the offset currency to the dollar… But that doesn’t mean it is the best performer when the dollar moves down. The Aussie dollar has outperformed the euro since 2002, and will probably continue outperform the euro… But so has the Norwegian krone (NOK), and the New Zealand dollar (NZD), and the South African rand (ZAR), and the Canadian dollar (CAD)… Hmmm… Does that list ring a bell?

Why, yes, Chuck, it does! For these are all “commodity currencies”… You’ve gotta love ’em!

Countries that have “stuff” to sell to other countries, that either don’t have the “stuff” or are too lazy to deal with it!

Well, you had a one day window to buy gold cheaper, for the overnight sessions has the shiny metal hitting on all cylinders, and soaring once again to $1,148! Don’t you just hate those one-day windows? I mean, you wanted to pull the trigger and buy, but thought, what if gold drops more today, that would mean I could buy it cheaper tomorrow… Don’t be fooled! It’s like this, folks… If you want to buy something, buy it! Trying to time a purchase will leave you sitting on the sidelines with a baseball cap turned backward on your head and holding a clipboard!

OK… Remember when I questioned the current administration’s claims that instead of “creating jobs” they were “saving jobs”? I pointed out that claiming that jobs were saved would be difficult to prove… Well, guess what? Proving that the jobs saved don’t exist has been pretty easy… And the people claiming that the stimulus “saved jobs” have egg all over their collective faces.

One of my fave economists, Nouriel Roubini, had this to say about jobs…

“Think the worst is over? Wrong. Conditions in the US labor markets are awful and worsening. While the official unemployment rate is already 10.2% and another 200,000 jobs were lost in October, when you include discouraged workers and partially employed workers the figure is a whopping 17.5%.

“While losing 200,000 jobs per month is better than the 700,000 jobs lost in January, current job losses still average more than the per month rate of 150,000 during the last recession.

“Also, remember: The last recession ended in November 2001, but job losses continued for more than a year and half until June of 2003; ditto for the 1990-91 recession.

“So we can expect that job losses will continue until the end of 2010 at the earliest. In other words, if you are unemployed and looking for work and just waiting for the economy to turn the corner, you had better hunker down. All the economic numbers suggest this will take a while. The jobs just are not coming back.”

And you think the recession/depression is going to end with the unemployment problem in this country? Not when the consumer is needed to generate nearly 70% of the GDP.

And all that tells me that the cartel/Fed is going to believe that they need to keep rates near zero for some time to come.

Yesterday’s data cupboard was a mixed bag of economic data as the US PPI wasn’t as strong as forecast, industrial production slowed in October, but capacity utilization bumped higher, and the TIC Flows for September were $40.7 billion, which was more than the $34.2 billion in August. The report showed that Japan, China and the UK all increased their holdings of Treasuries. September’s TIC Flows were probably the best report of the day, and the best report that this series has printed in a long, long time. Does this mean that the all-clear horn is blaring, telling us not to worry anymore about whether we finance our deficit or not? Well… It might be, but I’m not listening to it!

Well… The President ended his visit to China, with a call for a more flexible Chinese currency (renminbi). And… The Chinese said… Nothing! They met the President’s words with silence. I used to date a girl that would (when I wasn’t talking)… “Silence is Golden, Chuck” and I would say… “Then shut up and we’ll make a million!” HA!

Now, while it would nice if the Chinese played ball with us… I understand their dilemma… The IMF still believes that China’s currency is about 25-40% undervalued. China could not deal with a floating currency that went up 40% overnight!

Did you know that America’s trade deficit with China widened to a 10-month high in September? Well… It did, thus raising concerns that the combination of a recovering US economy and a fixed renminbi (CNY) exchange rate against the dollar will worsen global imbalances. But… As I’ve said at least 100 times before… The Chinese will do what they believe is best for their country, and that’s not floating the renminbi at this time, no matter who the US sends to visit them to persuade them to do so!

Moving further south in the Pacific, we land in Australia… I thought about the Reserve Bank of Australia (RBA) quite a bit the past couple of days… And have come to the conclusion that the December 1st meeting of the RBA will net another 25 BPS rate hike. The reason I think this, is the fact that there will be no meeting in January, thus leaving a two month gap, which in these economic times could be devastating… So… Look for another rate hike in Australia on December 1st… It would be their third consecutive meeting rate hike, and could be the harbinger to parity for the Aussie dollar.

I know that yesterday morning, I talked about how the RBA meeting minutes had been perceived as “dovish”, and that spooked the markets into thinking that the RBA would NOT hike rates in December… But upon further review, the meeting minutes were really pretty vague, and while they didn’t sound outright hawkish, they also didn’t sound “dovish” either… After reading the minutes, I got the feeling that overall, the minutes support the idea of “steady rate hikes”. I don’t think the RBA will stop until they reach an internal rate of 4.25% early next year.

I was giving an interview last week with a writer from BusinessWeek… And he asked me when this dollar weakness all started… I told him that, “Over the past nine years congress and two administrations have instituted fiscal policies that have undermined the value of the US dollar, and the deficit spending has gone from $350 billion budget deficits to $2 trillion (annualized) budget deficits in the blink of an eye. So… The dollar made brief comebacks in 2005 and in the financial meltdown of August 2008 through February 2009, but other than that, the dollar continues to decline, and I just don’t see anything on the horizon that will stop this decline.”

Well… As I look across the desk at the currency screens, I notice that every currency that’s supposed to be lighting up green (going up) is doing so, and every currency that’s supposed to be lighting up red (going down) is doing so… We’ve got it all going on today.

OK… To recap… The currencies have gained back the ground they lost in yesterday’s “risk off” trading sessions. Gold is back to soaring after a 1-day stall… Data yesterday in the US was a mixed bag. Chuck expects the RBA to hike rates in December, and China responds to the US President’s request to allow greater flexibility in the renminbi… With silence.

It’s All About the Commodity Currencies 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 today we take up a foul and disagreeable task. We ask ourselves: what if we are wrong?

If you bought gold when we first recommended it, ten years ago, you are in a very comfortable position. Gold sells for more than 4 times as much today. But what should you do now? And what if you didn’t go for broke on gold in the early ’00s? Is it too late to get in on the bull market?

To give you a warning, in the following windy ambulation we come to no conclusion we haven’t come to before. We say gold is going to the moon. If we are wrong about when…we will be delighted sooner than expected…self-satisfied…and insufferable for years. If we are right, we may have to wait a long time before saying “I told you so.”

First, the press has certainly noticed the bull market in gold. How could it not? Most reporters say gold is going up simply because the dollar is going down. In the popular press, we found no other explanation. In fact, much of the notice of gold seems to occur within articles about the dollar. We found, for example, that the dollar is at a 15 month low…and, coincidentally, gold has just hit an all-time high.

There’s something lopsided about this account of things. If the yellow metal has hit a record high, how come the dollar is down for only 15 months and not since the Flood? Makes you wonder if the dollar isn’t the whole story.

Elsewhere, we find that the dollar is trading at $1.49 per euro. Wait a minute. We remember the dollar at the exact same level…was it a year ago…more…? And it’s been at that same level, more or less, all the while gold has gone up more than 10%.

It’s not the fall of the dollar that is driving the gold market, in other words, it’s something else…it’s the fall of ALL paper currencies. For when the dollar goes down, so do the rest of them – more or less. No nation wants its currency to rise too much against the greenback. Americans are still the world’s biggest spenders. They spend dollars…not rubles…not euros…not zloties. A nation whose currency rises against the dollar is in a competitively weaker position. Its costs – in local currency – go up while its sales – in dollars – go down (it has to charge higher prices). Typically, central banks buy up dollars with money created for that purpose…thus increasing their own money supply and thus decreasing the value of their own local currencies relative to the dollar.

Since all the world’s central banks, more or less, are doing this, all paper currencies are going down together – compared to gold.

But wait, wouldn’t they be going down together against everything else too? If currencies are getting weaker…shouldn’t they be getting weaker against oil…and McDonalds’ hamburgers…and woolen underwear? The oil price is at $78 – where it’s been stuck for a while. Oil is a special case, but almost all consumer prices are stuck too. Take out energy and food, and consumer prices are deflating in the US. Put back in the energy and food and they’re just stuck. There is no sign of generalized consumer inflation – not in the USA and not in Europe either.

The only thing that is going up is gold. There is a bull market in gold and gold alone. But why?

According to the law of supply and demand, you expect the price of a thing to fall when its supply increases faster than the demand for it. In today’s news are two reports on gold production. One, from South Africa, tells that a scientist says the nation’s residual gold in-the-ground is much less than expected. It has been overstated by 900%, he says. Another report shows the output of from the gold mining industry clearly topping out. Gold supply, in other words, is increasing, but not as fast as it used to.

The supply of paper money, on the other hand, needs no new discoveries. Since there have been huge increases in the monetary base of paper money all over the world, it is reasonable to expect the price of paper money to go down. Gold, traditionally the thing that paper money is priced in, should go up. Speculators are buying it now in anticipation. Even central banks are buying again. And nearly everyone expects the price to continue going up.

As near as we can tell, gold is properly priced already. Comparisons are rough, but an ounce of it appears to buy about as much stuff as it did 2,000 years ago. You can buy a suit of clothes for an ounce of gold – no problem. Go to Wal-Mart; you can buy 4 suits.

As Roy W. Jastram wrote in his 1977 book, The Golden Constant, gold’s “price has been remarkably similar for centuries at a time. Its purchasing power in the middle of the twentieth century was very nearly the same as in the midst of the seventeenth century.”

Gold…or the people who speculate in it…may be looking ahead. Or, they are dreaming. If gold is already about where it should be why would you pay more? You must expect paper currencies to go down…to buy less stuff. In other words, you’d have to be anticipating a fall-off in the value of the paper currency.

It may come to pass exactly as they imagine it. Gold may rise and rise and rise…as paper currencies fall and fall and fall some more. In that case, we here at The Daily Reckoning headquarters as well as all of our dear readers who followed our advice 10 years ago will be delighted. Gold may hit $1,500 by the end of the year. By the end of next year it may be $3,000. By the year after, well…who knows…? “We told you so,” we will say.

But there is almost always more under Heaven than speculators think. When we look into it, we see gaudy increases in the monetary base…but only very modest increases in M2, the money that buys stuff. What’s more the rate of increase for M2 has fallen in half over the last 8 months. It’s now only about 7% annually in the US. And when we look at the CPI we see no increase at all. And despite the ‘recovery,’ unemployment is still rising and house prices are still falling. So, if speculators see the price of stuff going up in paper currency terms, they must be looking way over our heads.

To more fully describe our own state of mind, we don’t doubt that all the liquidity added to the world’s monetary system will eventually be soaked up by paper currencies. But it could take a long time; we might be dead before it actually happens.

But since we are entertaining the possibility that we might be wrong; let us look at what is going on in more detail. If there were a real recovery – as announced in the world’s newspapers and proclaimed by its stock markets – you’d expect a rising increase in demand…leading to higher prices…leading to a higher gold price.

Yesterday’s news brought word of greater retail spending than anticipated. This was greeted as more evidence that a recovery is actually underway. But upon examination, we discover that the evidence comes almost all from auto sales. We also find that the number crunchers contributed to the lift by revising figures for September. These are month to month movement numbers. So you can raise October’s number simply by lowering the number for September.

What’s more, while sales went up…auto prices actually went down – in paper dollar terms. This doesn’t sound inflationary to us.

Meanwhile, news reports said that fewer people are defaulting on credit card debt. The reports also tell us that delinquencies on credit card debt are up. So, we’d have to call that a draw.

And then there’s the news from GM. The giant, government-owned auto company says it will repay its loans from the feds earlier than expected. But wait…we also find that the company continues to lose money. How then will it repay debt? Perhaps by refinancing!

Other reports are similarly confusing and inconclusive. Profits are up on Wall Street. But wait…sales are down. You can increase profits by cutting expenses (getting rid of employees, mainly). But you can’t increase sales. And as long as sales are falling you have to expect lower profits in the future. (Stock market buyers…take note.)

Our colleagues over at The 5-Min. Forecast sent through this chart, illustrating the “recovery that wasn’t.”

“With the majority of publicly traded companies done reporting third quarter earnings,” writes 5 editor, Ian Mathias, “the trend is clear: Profits were way better than expected, revenue was flat at best.

“Of what little we recall from freshman year, Finance 101 insists that profit equals revenue minus costs. Thus there really can’t be any questions left as to how the market pulled off this quarter…companies are simply trimming the fat at an incredible clip. Not exactly a long-term plan for growth.”

The New York Times reports that job losses continue to be “deep and enduring.” Mortgage applications are running lower than they were 9 years ago. “More households report food shortages,” says a Wall Street Journal headline. And insiders are still selling their own companies.

So, it still looks to us as if we are in a depression…one that will take many years to sort out. It is unlikely that the bull market in gold will reach its final blow-off top while the depression continues. But stranger things have happened. Eventually, gold will reach the apogee of its bull market. And when it does, we want to be ready for it. We will celebrate with champagne and sparklers.

Still, we wouldn’t get out the party hats…not just yet.

Until tomorrow,

Bill Bonner
The Daily Reckoning

Gold in the Face of the Fiat Fallout 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.

1. With interest rates near zero there’s basically no opportunity cost to choosing to buy gold over Treasuries.

2. The Fed is going to keep building debt, and will eventually cause “world-wide central bank inflation as the banks seek to devalue their money in an effort to keep the dollar strong.”

3. In a departure from their usual routine of selling gold, central banks around the world are now net buyers of gold. They are looking to shield themselves from the weakening dollar. 

4. Countries are increasing the amount of gold in their reserves. On the one hand, developed nations like Italy and France hold 66.6 percent and 70.6 percent, respectively, of their reserves in gold. On the other hand, nations like Russia and China only hold 4.3 and 1.9 percent of their reserves in gold. Developing countries have an easy justification for growing their holdings.

5. Few people in the US own gold. In fact, many seem more inclined to sell jewelry through services like Cash4Gold.

6. Lastly, only a few nations, like China, are encouraging citizens to buy gold for personal savings. There’s plenty of room for buying by the public to increase. As Russell pointedly puts it, “most Americans have never seen a gold coin.”

The six reasons are presented in their entirety on The Pragmatic Capitalist in its post on why Richard Russell wants to own gold.

6 Justifications for You to Own Gold 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.

Throughout history, no empire has managed to rule forever. Instead, empires rise to power, they prosper and spread their influence. Thereafter, they over-extend themselves and then break down in some fashion. In fact, all the glorious empires of history had one thing in common – a spectacular collapse.

Now, there can be no doubt that America ruled the economic world for the better part of the previous century. However, this powerful nation has now entered a terminal decline. The recent credit crisis and the failure of some of the largest American financial corporations is compelling evidence that the world’s largest economy is well past its prime.

Today, America finds itself heavily in debt and to make matters worse, its demographics are also worsening. Unfortunately, the American leaders are attempting to postpone the day of reckoning by taking on even more debt! It is noteworthy that over the past year alone, America’s federal debt increased by approximately US$2.1 trillion and its projected budget deficit over the next decade is now slated to be almost US$9 trillion! If this does not shock you, then consider the chart below which shows the total obligations of the US government.

As you can see, over the past six years, American unfunded obligations increased by almost 50% from US$79 trillion to US$114.7 trillion! Alarmingly, over the same period, American government revenue rose by only 12%! Now, you do not have to be a genius to realize that no entity can continue to increase its liabilities by more than four times the rate of its revenue. If this spending frenzy continues, commonsense dictates that at some point in the future, the solvency of the American government will come into question. When that happens, foreign capital will flee America, interest-rates will skyrocket and we will witness an epic currency crisis.

Furthermore, it is worth noting that apart from the American government, the Federal Deposit Insurance Corporation (FDIC) is also in serious trouble. In an ironic twist of fate, the FDIC’s Deposit Insurance Fund has spent so much money covering bank failures over the past three months that it has completely run out of money! This implies that there is no capital available now to insure bank deposits held at American banks.

Given the horrendous deficits and ugly debt obligations, the American government is now left with the following options:

a. Raise taxes (not sufficient to meet obligations)
b. Cut back on spending (highly unlikely)
c. Default (unimaginable)
d. Print money (only viable option)

Remember, America is the largest debtor nation the world has ever seen and the only way it can repay its obligations is through a process known as quantitative easing (euphemism for printing money). In fact, this stealth confiscation of savings is already well underway. A recent report published by the Federal Reserve revealed that the American central bank purchased half of the newly issued US Treasuries in the second quarter of this year. Needless to say, the Federal Reserve financed these purchases by creating dollars out of thin air – a short-term fix but a long-term disaster.

Let us put it bluntly; the days of American hegemony are drawing to a close and within the next two decades, China will become the world’s most dominant economy.

If you are sceptical about our claim, you may want to note that twenty years ago, China’s economy was worth only US$342 billion and as of last year, its GDP had grown to US$4.4 trillion; representing an annual growth rate of 13.6%. Now, if China succeeds in growing its economy by roughly 8% per annum over the next two decades, its GDP will grow to US$20.5 trillion by 2029. At that point, China may well replace America as the world’s largest economy.

It is worth keeping in mind that whereas American households are up to their eyeballs in debt, their Chinese counterparts have a savings rate of almost 40%! Furthermore, at a time when America and other nations in the West are struggling to stay afloat, China’s foreign exchange reserves have surged to US$2.3 trillion!

Now, we are aware that many commentators are criticising China for the sheer size of the stimulus unleashed by its leaders. In our view, this ridicule is baseless because instead of spending printed or borrowed money, at least the Chinese are spending their savings.

In any event, the stimulus applied by the Chinese policymakers seems to be working. Over the past seven months, money-supply growth in China has risen by 26% and loans have surged by 32%. In turn, this inflationary orgy is creating a residential construction boom. All this economic activity is in stark contrast to America, where despite all the policy-actions, private-sector credit is contracting.

Look. The Chinese economy is roaring along…and you can be pretty certain that the country’s rapid growth will cause domestic consumption to explode. Already, roughly 900,000 cars are sold each month in China and by the end of this year, the Asian powerhouse will replace America as the world’s largest market for automobiles. Interestingly, similar trends of rising consumption can be observed in various household items such as refrigerators, motorbikes, mobile phones and so forth.

So it seems to us that in this low-growth world, investors would do well to take a good hard look at high-growth opportunities like China.

Regards,

Puru Saxena,
for The Daily Reckoning

Debts… They Grow Up So Fast! 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.

Here’s his description of American leverage…

“It is fashionable to talk of America as the supplicant. That misreads the strategic balance. Washington can bring China to its knees at any time by shutting markets. There is no symmetry here. Any move by Beijing to liquidate its holdings of US Treasuries could be neutralized – in extremis – by capital controls. Well-armed sovereign states can do whatever they want.

“If provoked, the US has the economic depth to retreat into near autarky (with NAFTA) and retool its industries behind tariff walls – as Britain did in the 1930s under Imperial Preference. In such circumstances, China would collapse. Mao statues would be toppled by street riots.”

Evans-Pritchard paints the picture of a fairly dark and disturbing economic environment. Things would have to get pretty bad for these options to be employed. Still, there’s something refreshing about seeing the remnants of US economic power spelled out in no uncertain terms (…by a Brit no less).

The whole article is an interesting read, and covers how China’s $600 billion stimulus has been spent, how credit has exploded, and other issues in the Daily Telegraph’s coverage of how China is now the biggest risk to the world economy.

How the US “can bring China to its knees” 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.

Yesterday, we had a couple of Fed Heads talking, but the Big Kahuna stood out and moved the markets with his statements… Here’s the skinny…

Big Ben was giving a speech, and said, “The Fed will monitor closely the currencies, and the Fed’s policies will ensure that the dollar is strong.” Now, when he first uttered those words, the dollar got bought and the non-dollar currencies were sold… But then, a few of us had this feeling… It was a feeling that we had heard all this before… And there – in the archives, circa June 2008 – Bernanke said, “In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets.” Wait! We won’t get fooled again!

In June 2008, his statements spooked the markets into believing the Fed was really going to do something to bolster the dollar… But when nothing came along, the dollar REALLY got sold until the financial meltdown of August 2008… I mean… What has the Fed done in the past 1 1/2 years to “bolster the dollar”? Near zero interest rates that will remain in place for longer than they should… Quantitative easing… A bloated balance sheet of toxic bonds.

You could see the V-8 moments on traders’ faces when they realized, yesterday, that all this had been said before, and nothing came of it, so… We won’t get fooled again!

So, then traders reversed their buying of the dollar and sent the dollar to the woodshed. You should have seen the reversal… It was amazing… The Big Dog, euro (EUR), went from 1.4970 to 1.4860, and then turned around to rise to 1.50! Now, overnight, there has been some renewed selling of the non-dollar currencies, and the euro is back to 1.4910. Crazy… But not as crazy as Big Ben spouting off about “monitoring the currencies”… Yeah, right… And what are you going to do about them when they get out of line, Big Ben? Get the ruler out? I’ll tell you what he’ll do… Nothing… Absolutely nothing!

Memo to Big Ben… Ahem… Am I on? OK, long time listener, first time caller… Big Ben… Just what policies are you talking about that will keep the dollar strong? In the future, you might want to list to them, so that people like Chuck Butler don’t rip your comments to shreds for their lack of truth, and facts.

Non-voting Fed Head, Fisher, had this to say yesterday… “Our job is to maintain the purchasing power of the dollar, while fostering the conditions that enable the economy to grow without fanning inflation.” Hmmm I would say that he’s got that right… But, apparently, somewhere along the way, the part about “maintaining the purchasing power of the dollar” got lost, eh? I mean, since the Fed/cartel was formed in 1913, the dollar has lost 95% of its purchasing power… YIKES! Most people that did their jobs that badly would be fired… These guys have had almost 100 years to figure this out, and have failed miserably… And hey! Before I get accused of, Fed Head Fisher was the one that described the Fed Heads’ job, not me!

OK… While I’m on this subject of being accused… I have been beating on the US administration for nine years, folks… I know I’ve really stepped it up with the step up of deficit spending by this administration, but I chastised the previous administration beginning with their protectionism measures in 2000, and never let up with their deficit spending… Someone even said I never talked about Cheney and his “deficits don’t matter” comments… WHAT? I’ve even repeated the same joke several times about the deficits don’t matter crowd, and that they remind me of a guy standing on the Empire State Building who decides to jump off, and as he passes the 56th floor, he says… “So far, so good!”

Yes, so far, so good, because he hasn’t hit the concrete yet… And neither has the deficits crowd… But they will, and in fact, they are getting awfully close right now!

The US economy got a boost yesterday when retail sales grew at a faster rate than forecast, growing 1.4% in October, above the 0.9% rise projected by Wall Street. The jump came on rebounding demand for cars, a sign the economy kept recovering despite climbing unemployment. Aside from automobiles in October, other sales rose just 0.2%.

But… Are these numbers suspicious? Well, when you look at the previous month’s revision, you have to question these numbers as well… September retail sales, which were reported as -1.5%, actually fell -2.3%… I wonder what this number’s revision next month has in store.

Today, the data cupboard is stocked to the brim with data prints… Producer Price Index (PPI) prints along with two of my faves, Industrial Production and Capacity Utilization… And then the Big Kahuna of the day… The TIC’s data… For those of you new to class, The TIC’s data stands for Treasury International Capital… Or… Easier to understand… It’s the fancy, schmancy name for Net Security Purchases by Foreigners… This is how we track, how well we’re doing as a county at financing our ever expanding deficit…

I made a mistake yesterday when talking about the Reserve Bank of Australia (RBA) and saying that if they didn’t hike rates in December, that they would most likely come back in January at hike them… A reader pointed out to me that the RBA doesn’t meet in January… OK… So, I guess I should have said that the RBA would hike at their next scheduled meeting!

Speaking of the RBA… They issued their latest meeting minutes, in which they sounded less hawkish than one would expect, since they raised rates at the same meeting… But this less hawkish tone, set off a round of Risk Aversion once again in the currency markets overnight… Risk on, Risk off, is reminding me of a Wayne and Garth street hockey game…

For, it’s Risk on, one day, and Risk off the next day… So, while I find that the RBA minutes did set off this round of Risk off for the currencies, I don’t see it having lasting power… Look for this all to fade, especially if we get a rogue data print in the US today…

Late last week, I came across a story on the dollar that I totally forgot to talk about yesterday… So, here you go… Oh, by the way, strap yourself in for this one, and keep your arms and legs inside during the ride…

The German government’s 5-person council of economic advisers issued a report that said, “After the massive global increase in US dollar reserves in the past years, an “uncontrolled exit”, especially in emerging economies from the US dollar as a reserve currency is a possible trigger of instability in currency markets.” The went on to say…

“Countries holding “high” dollar reserves should consider committing to selling their dollar holdings in a coordinated way over a longer period of time.”

The folks over at the Royal Bank of Scotland (RBS) think that Bernanke’s speech yesterday, basically gave the green light for a further, slow, gradual decline of the dollar… And, quite frankly, that’s what traders would prefer to see too, given that they don’t like getting whipsawed day in and day out by the Risk on, Risk off game… When assets go to fast one way or the other, it just causes strong corrections, and people get hurt by the movements… But a slow, gradual decline I would think would be the preference of the US government… That way, no one notices… It’s not like a bubble that grows and everyone notices it…

Speaking of bubbles… And if you’re like me, when I type, or say bubbles, I immediately think of Big Al Greenspan… Well, you’ll love this Fed Head statement about bubbles… Here’s Fed Head Kohn… “Asset price bubbles can be spotted when they become extreme, efforts to spot bubbles may result in seeing more than there is.”

Now that statement plays well with Big Al Greenspan, who always claimed that bubbles could not be spotted before they got out of hand… Basically, what these two are saying in different ways is that the Fed could spot them, but probably wouldn’t like it, and wouldn’t have much at their disposal to do about it, so they just turn away…

And speaking of such… Fed Head Yellen said last night that the “US stock market is not overvalued”… That’s all I’ll say about that!

OK… Hopefully, you are still with me here, and reading… And you will recall me going on and on about China and their FX currency swap agreements and how that was a baby step toward gaining a wider use of the renminbi… Well… Yesterday, there was a story, that I think Ty told me about, that talks about China preparing to float the renminbi, testing it in Hong Kong… The Chinese government has been moving to allow banks in Hong Kong to issue bonds, hold deposits, and settle trade with the mainland — all in renminbi.

However, don’t look for this conversion to a floating currency to happen soon… Financial analysts believe it will not happen before 2020… It may come sooner… But I wouldn’t get all lathered up that it happens in the next year!

One of the best performing currencies VS the dollar this year, has been the Brazilian real, with a greater than 30% gain, so far… There’s been a shakeup at the Brazilian Central Bank, and there will be a few new members, with voting power at the next meeting on December 9th… I still don’t think the Brazilian real interest rate will be moved at this meeting, but with the new members, they might want to make a “statement” about how hawkish they are… And on December 10th, Brazil will print their third quarter GDP, which I would think would be quite strong… You would have to think that the Central Bank will have privy to this report before they meet on the 9th… And with the new members possibly wanting to make a statement, there’s a whole new outlook for the Central Bank meeting…

You know… As we draw closer to the end of the year, the closer we get to the winter Olympics which will be held in Vancouver, BC.Going back to the early days of the World Markets Division at the old Mark Twain Bank, here in St. Louis, we tracked currencies from countries that were holding the Olympics, noticing that there was always a rise in the host country’s currency… If that were to hold it would benefit the Canadian dollar/loonie… Will it hold true for the Vancouver Olympics? We’ll have to wait-n-see, eh? But really… Wouldn’t it be worth a flyer, a shekel or two to see if it did hold true?

And then there was this… Were you confused by the GM announcements yesterday? I was… First there was an announcement that GM would be paying back some of the bailout money to the Government… But then later it was announced that GM posted a $1.5 Billion loss… Kind of difficult to pay someone back, when you’re booking losses, eh? Strange announcements for sure…

OK, to recap, which I forgot to do yesterday! UGH! The currencies were whipsawed yesterday by comments by Big Ben Bernanke, that we’ve heard before! The RBA issued a not-so-hawkish minutes report that spooked the markets and it’s Risk off today… Brazil might have a different outlook for their next meeting in December, and the winter Olympics are ready for Vancouver, will that mean a boost for the loonie?

Bernanke Digs Up Some Old Words 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.