This pressure comes in addition to the recent Rasmussen Reports survey that shows 42 percent of Americans think he’s done a “poor job” in handling the credit crisis and bailouts versus only 20 percent who found Geithner’s performance “good” or “excellent.”

According to The Business Insider, “they’re discussing it on CNBC, as a serious question, which is exactly what the Congressmen hoped.”

Visit The Business Insider for more coverage of how Geithner’s resignation is on the table.

Timothy Geithner on the Chopping Block 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.

“Record numbers late on US loans,” says a headline in The Financial Times.

The story is easy to understand. People without jobs can’t make mortgage payments. So, payments are late on 1 of every 6 FHA mortgages. Mortgage defaults are at a 3-decade high. Of all mortgages, nearly one homeowner in 10 is running late in his payments.

As predicted in this space, problems in the housing finance sector are now shifting from sub-prime to prime mortgages. The subprime borrower had few resources. He washed up as soon as the crisis began. But now the prime borrower, who lost his job and is running out of options, is sinking too.

What’s the smart money doing?

The Dow is now up more than 50% from its March low…and has regained more than 50% of what it lost. Are the insiders taking advantage of this dip to get bigger stakes in their own companies? No… They’re selling 18 times as many shares as they’re buying. Go figure.

The insiders know that their businesses are not really in good shape. They’ve been able to maintain profit margins by cutting staff. But sales are down. And they don’t see where additional sales will come from.

Meanwhile, investors have been hallucinating about a real recovery. They’ve bid up the price of shares as though they expected a stunning period of growth. Generally, earnings have held steady…but stock prices have gone up.

This has brought a 10-point increase in the P/E ratio, to greater than 27.

What would justify such an ambitious P/E? Only growth. Where might growth come from? We don’t know. David Rosenberg says stocks are priced as if investors expected profits to double next year. But it usually takes profits 5 years to double. And then, only when they have a reason to double – such as higher sales and lower costs.

Don’t count on it, dear reader.

Real Recovery Hallucinations 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.

However, the operation actually came by way of extracting many of the economy’s critical organs — jobs, the financial health of the nation, the integrity of the US dollar, and so forth — basically the ones necessary to keep it alive.

Recovery Attempt has Castrated the Economy 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.

Well, the government is trying to help… which is usually a bad sign. The Federal Housing Administration right now has an insurance reserve ratio of just 0.53 percent. Robert Toll of home builder Toll Brothers recently referred to the FHA as a “definite train wreck.”

The government is also supporting the housing market with the $8,000 first-time homebuyer tax credit. It’s been expanded to include previous homeowners and extended until March. Unfortunately, it’s an even bigger fiasco than Cash for Clunkers. Most homebuyers using the credit would have needed to purchase a home anyway, so each additional house sold through the program may just be costing the government about $43,000.

There are very few bright spots in housing, which Barron’s describes as getting a “disastrous batch of data”. The article also goes on to say…

“Even with housing affordability the highest in years from low mortgage rates and reduced home prices, there’s little reason to expect a revival in homebuilding as long as the inventory of unsold houses and foreclosures remain high, credit is tight and unemployment is in double digits.

“Perhaps that’s why the shares of the big public homebuilders, as represented by the SPDR S&P Homebuilders exchange-traded fund (XHB), topped out two months ago and have been moving sideways to lower since. That says more than economists’ misguided forecasts of rising housing starts.”

For more information on the real estate sector see the full coverage in this Barron’s article on how the housing recovery is built on sand.

Latest “Disastrous” Housing Data Shows Homebuilders are Hopeless 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.

Our Chairman, who art at Goldman
Blanfein be thy name
The rally’s come
God’s work be done
On earth as there’s no fear of correction
Give us our daily gains…

Poor Goldman Sachs. Everyone is on its case. Criticizing. Carping. Jealous. Envious.

So, today we rise in defense of the Wall Street giant. Yes, the Goldmen may be shysters. But they are honest shysters…

We pick up sword and shield, ready to fight for Goldman, after reading The Financial Times. The FT has devoted a whole page to Goldman bashing. It’s time someone stood up to say a kind word for the firm.

Besides, Lloyd Blankfein said he was sorry. That’s right. He announced that the firm regretted its role in the world financial crisis. And if that weren’t enough, he pledged half a billion dollars to helping small business through tough times.

In his apology, Blankfein mentioned that he thought Goldman was doing “God’s work.” That is what prompted humorists to make up the “Lloyd’s Prayer,” we have republished above. On the surface of it, it does seem absurd. If any group of people ever worshipped Mammon, it is the bunch that works at Goldman. Money is what makes that mare run; no one doubts it.

In 2008, the average compensation of the average Goldman employee averaged $364,000 – or more than 6 times the earnings of the average American who was not employed by Goldman. Naturally, the widespread publication of this fact caused a surge of envy. Now comes news that the average Goldman man expects to make about twice as much this year – or about $765,000. As you can imagine, this did nothing to soothe the jealous spirits. Instead, it inflamed them.

And now, everyone has Goldman in his sights. Newspaper editorials kvetch and moan. Union-organized yahoos demonstrate in front of Goldman’s offices. Cartoons make fun of Blankfein. Commentators say the Goldman crew is greedy. Rolling Stone magazine described Goldman as a “vampire squid.” Saturday Night Live mocked the company. Stand up comics stock up on Goldman jokes. Even priests criticize the firm’s claim to be doing ‘God’s work.’

The regulators cannot be far behind. It is illegal to trade on “inside information.” So, when a company targets the shares of a rival, and passes its buy orders through a Wall Street firm, the traders are forbidden from trading the shares on their own account. They cannot profit from ‘front running’ shares, based information not yet available to the public.

Goldman clearly profits from front running. But it does it by aggregating information from clients rather than using the inside information from a single client. This gives them a “market color,” rather than precise trading targets. In other words, if you have a client who sets out to acquire Acme Cement Company, you can’t buy up the shares yourself in anticipation of the rise in the share prices. That information is “protected, inside information.” But suppose you have two clients, each of whom targets a cement firm? You quickly get a “market color,” don’t you? You put two and two together. If they’re both after cement makers, probably, the whole cement sector will go up. You buy cement makers, though not those that your clients are buying.

This aggregated inside information gives Goldman a big advantage. So do its close contacts with the feds. Goldman has its former operatives in key posts throughout the government. It knows what the government is doing; it has a fair idea of what the government will do next. In trading US government securities, the biggest business in the financial world, this “insider” knowledge is no doubt a handy thing to have. It doesn’t hurt either that the Fed is making money available to Goldman at practically no cost. Nor, that the Fed is buying its mortgage backed securities – perhaps even ones that would be hard to unload on the private market.

These contacts and sources of ‘insider’ information are what George Soros has called the “hidden gifts” that Goldman enjoys…and that contribute mightily to its success.

But so what? As far as we know, Goldman holds no gun to any counterparty’s head. Nor does it lie…unless you call saying things that aren’t true “lying.” Goldman merely says the same falsehoods as the rest of the financial industry…the things people want to hear…which almost everyone believes anyway. And is there anything wrong with taking money from the US government? Doesn’t every retiree do so? Doesn’t every larcenous Congressman and every conniving contractor and every shiftless welfare addict aim to do the same thing? Isn’t the whole idea of government to take from someone and give to someone else? Then, why not to those who are most able to claim it? The swift…the strong…the smart…the Goldmans!

No, dear reader, we cannot criticize Goldman. Instead, we admire it. Goldman took advantage of the financial boom by selling debt and derivatives all over the world. Now, it takes advantage of the ‘recovery,’ by trading on its client information. And who can blame it for wanting to do business with the richest and dumbest client of all, the US government?

In God’s plan, at least as we see it, the lowly are raised up. The rich…the proud…and the foolish are brought down. God deals with the meek on his own. Goldman helps him bring the boom down on the others.

Until tomorrow,

Bill Bonner
The Daily Reckoning

In Defense of Goldman 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.

Deep down, it pains me to part from GE. This is an iconic old American firm, now grown into a world technology powerhouse (no pun intended). I honestly LOVE the GE business divisions that deal with ‘real’ things, like jet engines and locomotives and power generators and windmills and subsea equipment. I get misty-eyed thinking of all the wonderful GE people who work in those metal-bending divisions, toiling at their workbenches and making the world a better place.

Then there’s GE management, which apparently has not learned its lessons from the world monetary crash of the past couple years. The money side of GE still has too much bad commercial paper. A lot of borrowers owe GE more than they’ll ever repay. And GE owes a lot of lenders more than the company can afford. There’s a looming crash in commercial real estate, and it’s set to kick in during the winter of 2010. It’ll shred GE’s capital position and rip a big hole in the bottom line.

I’ve often asked whether the GE industrial side can earn profits for the company faster than GE Capital can lose money. I’m not going to wait around to find out.

Get Rid of General Electric 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.

Some question his timing, and why he’d begin a fund right now given that the precious metal is at all time highs well over $1,100. He, however, must be confident given that his own money is at stake on this new yellow wager. Paulson has a consistent record of buying assets at low valuations, so presumably he believes that gold’s also undervalued right now.

The fund will invest in both miners and other assets tied to the price of gold, and he has experience in the sector. He already has about $3 billion of Paulson & Co’s money under management invested in gold-related assets.

More details are available from the Telegraph in its coverage of John Paulson’s new gold fund.

John Paulson Launching a Gold Fund with $250M of his Personal Fortune 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.

Many of the callers into the trade desk wonder how anyone would be buying the Japanese yen and US Dollar as ‘safe haven’ currencies. I think a lot of this buying of yen and dollars isn’t necessarily due to investors believing they are safer in US dollar and Japanese yen, but rather a result of the reversal of carry trades. The dollar and yen are the two major funding currencies of the carry trade. Investors borrow yen and dollars and then invest the proceeds into higher yielding assets including equities. This is what is called the carry trade, and it works best when an investor can use high leverage to increase the return. Since these trades are highly leveraged, they are closely monitored and reversed at the first sign of a possible fall in the value of the higher yielding assets. So while the popular press will talk about the ‘perceived safety’ of the yen and US dollars, I believe much of the dollar and yen buying is due instead to a reversal of the carry trade. Investors aren’t buying these currencies because they think the Japanese and US economies are stronger and therefore safer than others, but are simply deleveraging to take risk off the table, and are buying yen and US dollars in the course of this deleveraging.

So what caused investors to worry about their investments in the equity markets? Chuck sent me this note before heading out the door last night:

“I saw currencies jump around again on Wednesday… But here’s something that makes me scratch my bald head, and should make you wonder too… If you’re confused with this, then don’t feel alone… Fed Head Bullard was speaking yesterday and at one point he said… ‘FED MAY NOT START TO RAISE RATES UNTIL EARLY 2012.’ That really got the currencies going… But later in the same speech, he said, ‘MEMORY OF HOUSING BUBBLE MAY PUSH FED TO START RATE HIKES MORE QUICKLY THAN AFTER PAST RECESSIONS.’ WHAT? He said that the Fed may not start raising rates until 2012, but then says that the Fed may push to start rate hikes more quickly than before? In my best Andy Rooney voice… Do you ever wonder how these Fed Heads get in the door? Oh well… The second statement didn’t change the currencies, but it did change stocks… And for the first time in quite a while… US stocks sold off, and non-dollar currencies rallied.”

As Chuck points out, the St. Louis Fed Head Bullard seemed to be speaking out of both sides of his mouth, but his second statement that the Fed may push to start rate hikes more quickly than before scared equity investors. He stated that in the debate to tighten policy, “the idea that you might be creating asset bubbles by keeping rates too low for too long will be an important argument.” This is what scared the markets.

The economic data released yesterday certainly didn’t help investors’ confidence in the global recovery, as US housing starts unexpectedly dropped 11% in October compared to the month before. The pace of construction was the lowest since April’s record low, and illustrates housing’s reliance on government support. Obama has extended both the first time homebuyer’s tax credit and instituted a new (and I believe stupid) program to give existing homebuyers a tax credit to go out and buy a new one. These programs will probably give a bit of life support to the housing market in November, but many question just how long the government can continue them.

Another piece of data released showed that the cost of living in the US rose more than forecast in October as the price of gas pushed CPI up 0.3% following a 0.2% rise in September. Today we will get the weekly jobs data along with the leading indicators for the month of October. Last month’s leading indicators surprised the market with a 1% increase, but this month the expected rise is just 0.4%. This would be the seventh consecutive month of increased indicators begging the question: Just how LEADING are these indicators??? They have posted positive gains for seven months, but the economy sure doesn’t feel like it is picking up steam. Housing and unemployment continue to be drags on the US economy and, according to Chairman Ben S. Bernanke, economic ‘headwinds’ will limit the recovery for an ‘extended period’.

Speaking of our esteemed fed head, Bernanke’s clout among US lawmakers will be tested today as the House Financial Services committee will consider how much to expand audits of the US central bank. Panel members will be voting on a Democratic proposal to retain a ban on audits of the Fed interest-rate decisions. This would be a big blow to Ron Paul and his bill to allow audits of the Fed. Unfortunately I believe the Democratic ban on audits will pass, and Ron Paul will have to figure another way to try and hold the Fed accountable.

The worst performing of the currencies versus the US dollar over the past 24 hours is the New Zealand dollar (NZD), which fell by over 2%. The kiwi dropped as the nation’s main opposition party said it would no longer accept the central bank’s primary policy of targeting inflation. The head of the central bank’s salary is actually tied to keeping inflation rates at an acceptable level. This is one of the main reasons interest rates in New Zealand have been among the highest of industrialized nations. But in the opinion of the nation’s main opposition party, these high rates have been at the cost of slower growth and weaker exports. In my opinion, having a central bank focus on keeping inflation within a targeted range is absolutely required; and tying the main policy makers’ incomes directly to this objective is smart.

The Australian dollar (AUD) also dropped for a second day on interest rate speculation. As Chuck has written, the markets have expected the Reserve Bank to raise rates again at their December meeting, but the minutes of their November 3 meeting caused some concern that they will not raise rates again until 2010. The minutes, released yesterday, said the pace of interest rate increases is an ‘open question’ as policy makers balance the risk of inflation against an economy that could slow as government stimulus ends. But I am still firmly in Chuck’s camp, and believe the RBA will raise rates in December, and that interest rate differentials will continue to rally the Aussie dollar versus the US dollar.

Minutes of the Bank of England’s November meeting were also released yesterday, and showed that the policy makers were split on whether to extend the ‘quantitative easing’ program or possibly cut rates further. The pound sterling (GBP) lost ground against both the euro and US dollar as investors worried about the lack of direction. The minutes show there are three different camps at the BOE, one that favors expanding the program of pumping money into the system with bond purchases, another that favored no change, and a third that wants to use another interest rate increase to stimulate the economy. The lack of a clear plan by the central bank policy makers strikes fear into investors who want to see more of an agreement on the direction of policy.

While we don’t trade the Russian ruble, it is part of our BRIC MarketSafe CD (for which time is running out!). Chuck pointed out to me yesterday that the Russian ruble has been the best performing currency of the BRIC, which was surprising. A story overnight said that Russia’s central bank would have to accept a stronger ruble next year as rising commodity prices move the currency higher. Strong commodity markets have pushed capital into the Russian markets, pushing the ruble higher. Policy makers had indicated they would try to cap the ruble’s gains, but the IMF warned recently that these efforts to fight the ruble’s advance would prove ‘unproductive’ and that ‘underlying factors’ justify the ruble’s strength. This is good news for holders of the BRIC MarketSafe. If you haven’t purchased this latest MarketSafe CD, the cut-off is approaching – you only have until December 3, and then your opportunity is lost.

OK, to recap… The dollar rallied on carry trade reversals… The ‘audit the Fed’ bill is in jeopardy… Aussie and New Zealand dollars fell… And the BOE is split on the future of monetary policy in England.

Carry Trade Reversals Rally the Dollar and Yen 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.