Gold rose $24 per ounce Thursday. The Dow fell 12 points.

The smart money is using this dip to buy gold.

Why?

Because the world’s major stock markets… currencies… and economies all depend on reckless measures by central banks. In the short run, the central banks can make things appear safe and stable.

How?

By making lending money at ultra-low rates the norm. It’s hard for major players to go broke; they can just refinance.

But in the long run, those same policies can lead to instability, bubbles… and disaster.

Too bad, but you can’t buy prosperity. You can’t print prosperity. You can’t borrow prosperity. You can’t ZIRP, QE or OMF (“overt monetary financing,” a phrase that is bound to become current soon) prosperity, either. Prosperity comes from hard work, saving and discipline.

That is, it comes from responsible policies, not reckless ones.

Paul Krugman says that economics is “not a morality play.” But he’s wrong. That’s exactly what it is.

And Japan is going to prove it first. Yes, it may be a good thing we congratulated ourselves when we did. If we’d waited a few days, our Trade of the Decade wouldn’t look so good.

The important news yesterday came from Japan. Bloomberg reports:

Japan’s Topix index tumbled almost 7%, the most since the aftermath of the March 2011 tsunami and nuclear disaster, as financial firms slid amid rising bond yields. Nikkei 225 Stock Average futures traded in Osaka and Singapore fell in after-hours trade, signaling further declines.

Every company in the Nikkei 225 retreated for the first time since April 2005…

“Rising interest rates is the story today,” said Tomomi Yamashita, a fund manager who helps oversee the equivalent of $5 billion at Shinkin Asset Management Co. in Tokyo. “There’s also a lot of profit-taking going on. When volatility is high, investors want to take off risk.”

Credibly Irresponsible

As you know, Japan is always ahead of us. Its go-go economy peaked out in 1990.

The US dot-com boom peaked out 10 years later. Japan’s stock market hit a high in 1990. US stocks reached a high 10 years later (though prices hit nominal highs later). Japan resorted to bailouts… ZIRP and QE in the 1990s. The US began these experiments in the following decade.

And how about this? Japan’s population has been falling for years. America’s women only recently began reproducing at below-replacement levels.

There are differences, to be sure. In the US, we read left to right, front to back. And we eat our meat well-done! But in important matters, the Japanese are always ahead of us. And now they’re being even more reckless than the Fed – increasing QE at a rate that we’ve never seen before. From Pragmatic Capitalism:

When a central bank commits to being “credibly irresponsible,” it’s not unusual for market participants to take it at its word. And the commitment to support equity prices gives traders a false sense of confidence that can then lead to a sort of Ponzi environment that leads to a huge boom.

By committing to being “credibly irresponsible,” the central bank can actually contribute to the boom, which then creates the imbalance that results in the bust.

This is almost a “Volcker moment” for Japan. That is, Japan’s central bank has changed direction. Investors take note.

But the Bank of Japan’s new governor, Haruhiko Kuroda, is no Paul Volcker. He’s more like Gideon Gono of the Reserve Bank of Zimbabwe. Volcker was incredibly responsible. Gono was credibly irresponsible. And when the markets realized how irresponsible he was… they went wild.

Mr. Kuroda announced that he will double Japan’s monetary base. Investors have been buying stocks enthusiastically ever since. Which is why our Trade of the Decade – “Buy Japanese Stocks. Sell Japanese Bonds” – looks so good.

Stocks have gone up. Bonds have gone down. Does this mean that Japan’s troubles are behind it? Not at all. It means only that, when you’ve got a reckless central banker, stocks are a better buy than bonds. Stocks will be lifted on a “rising tide.” Bonds will always go in one direction: down.

Japan’s real crisis is still ahead. That’s what yesterday’s big selloff signals – trouble. And there’s more trouble is coming for the US and Europe too. Most likely, they’ll want to follow Japan as it heads for disaster.

The new governor of the Bank of England, Canadian Mark Carney, has just proposed that his bank imitate the rapid money-printing policies of the Bank of Japan. From the Financial Times:

QE may have done its job as far as propping up the financial sector goes, but… For the economy to really recover, and for it to avoid another massive shock, there is still an urgent need to redirect much of the liquidity that’s been created – currently chasing risk assets – to those frozen out of the economy more permanently.

Print more money! Drop it from helicopters!

Banzai!

The Best of Bill Bonner

We are visiting our children in the US before heading to Europe for the summer. Last weekend was spent with son Henry in La Jolla, California. Henry is working with Rick Rule’s investment firm in Carlsbad.

Now we are in Mississippi, visiting daughter Maria, who is shooting a movie here. Mississippi is courting the film industry with low costs and tax breaks. This is the second film Maria has done in this area.

Yesterday, the markets reversed direction, albeit timidly. The Dow fell 19 points. Gold rose $19 per ounce.

And if there is anyone who knows what these markets will do tomorrow, he doesn’t work at theDiary of a Rogue Economist.

The Rise of the Technicians

Before coming to California and Mississippi, we gave a speech in London. In it we quoted economist Paul Krugman. Here’s the quote, from an article in The New York Times:

Keynesian economics rests fundamentally on the proposition that macroeconomics isn’t a morality play – that depressions are essentially a technical malfunction. As the Great Depression deepened, Keynes famously declared that “we have magneto trouble” – i.e., the economy’s troubles were like those of a car with a small but critical problem in its electrical system, and the job of the economist is to figure out how to repair that technical problem.

What kind of brain could think such a thing? How could you confuse an economy with a machine? We promise not to become earnest about it, but it is probably worth spending a few minutes exploring this claptrap.

It is the fatal flaw at the heart of modern economics. It also happens to be the foundation of the Fed’s attempt to revive the economy. Krugman, Bernanke, Summers et al. think they are technicians…

They’ve got the wrong metaphor. You may be able to describe the human body as a machine too. But don’t try to fix it with an adjustable wrench. It’s a good thing Paul Krugman isn’t a medical doctor!

Unlike a machine, an economy was neither designed by anyone nor built in a factory. There are no plans… no owner’s manual… no guide to troubleshooting problems… and no website where owners go to talk about the problems they’ve had and the tricks they’ve used to fix them.

Not made by man… it cannot be repaired by man. But let’s look at why this is so.

The Economy Is Not a Machine

First, an economy is a “complex adaptive system.” It has lots of moving parts, in other words, and each of these parts has information and desires of its own.

The farmer in Mississippi may know that his bottom 40 acres are too wet to plow. The Department of Agriculture has no idea. The plumber in Milwaukee may know that his business is slowing down. But how would Krugman know?

What machine has intelligent parts… each responding to its own information base, more or less independently?

Second… and perhaps more importantly… the parts have desires of their own. You build a machine to accomplish the desires of the designer. An economy, on the other hand, is merely a way for the constituent parts to achieve their own ends.

Imagine an automobile that goes where the steering wheel wants to go! Imagine a motor that runs faster when the carburetor feels frisky… and slows down when the valves get tired.

You can see that this is like no machine ever created. The parts want to go in different directions… at different speeds… for different reasons. The economy is much more like a flock of birds than a Boeing 747.

In today’s America, real (inflation-adjusted) wages are lower today than they were 10 years ago. Depending on how you adjust for inflation, they may be as low as they were at the end of the second Eisenhower administration.

With so little in earnings, people are naturally careful with their money. They go to giant discount shops… in order to get as much for their money as possible. They want low prices.

What is an economy for, if not to satisfy the hopes and desires of the people who live in it? And what is the goal of activist economics, if not to help people get what they want?

So what does Paul Krugman do?

He urges the government to raise consumer prices – to consciously and intentionally sabotage the wishes of the people by raising the cost of living. That’s the point of QE: to put more money in circulation so that prices rise. Then people will get less for their earnings and savings… and be more eager to spend now, rather than saving for later (rightly fearing that their dollars will lose value over time).

And that’s why Krugman prefers to think of an economy as a machine. Machines can be manipulated and controlled. Real economies can’t.

The Best of Bill Bonner

The financial news is getting boring. The Dow goes only one way – up. But gold fell below $1,400 per ounce yesterday.

Rather than trying to figure it out, yesterday evening we drove down to Zombietown. A friend in Washington had promised to introduce us to Neil Barofsky, inspector general of the TARP program.

You remember TARP? It was the feds’ $700 billion program to rescue the US economy from a correction. Neil Barofsky was in charge of it. So we decided to go down and ask him how it turned out…

Meanwhile, in yesterday’s International Herald Tribune was a small note: “Economists agree that spending cuts and tax increases have slowed the US recovery.”

Readers will recognize this as the usual claptrap.

Government spending does not bring a genuine “recovery.”

C’mon… how many times do we have to explain? You take $5 worth of resources and give them to an armed 19-year-old in Afghanistan. He shoots a round or two into a mountainside… poof… the $5 is gone. Or you have an ATF official. He’s idling his motor as he stakes out a house believed to be used by a cigarette smuggler. In a few minutes, or even seconds, the $5 has vanished. Or give the money to a disabled person; he buys a MoonPie and a Coke. Economists may record the spending as part of GDP… But how are you better off?

You’re $5 poorer, not $5 richer.

But GDP growth is something economists feel they can control. So they go to work on it like a sex maniac strangling a prostitute. Nothing good comes of it. But at least they get results.

And here comes Paul Krugman with more garroting wire! The New York Times Magazine:

Keynesian economics rests fundamentally on the proposition that macroeconomics isn’t a morality play – that depressions are essentially a technical malfunction. As the Great Depression deepened, Keynes famously declared that “we have magneto trouble” – i.e., the economy’s troubles were like those of a car with a small but critical problem in its electrical system, and the job of the economist is to figure out how to repair that technical problem.

Back to Neil Barofsky…

Rewarding Mistakes

So… where did the $700 billion go? Did that fix the magneto trouble?

“I wondered the same thing,” he said (from memory). “It was amazing to me that no one knew. We gave it to the banks. But no one knew what they did with it. I proposed to Tim Geithner that we find out. He was outraged. He cursed me out, using the F-word. He said it would bring the whole banking system down, if I asked.

“I went ahead and sent out a letter. I didn’t really have the authority or the staff to insist. But all of the big banks wrote back. And most of them gave me dodgy responses or gave me the brush-off.

“What did they do with the money? They were supposed to increase lending to help bring about a recovery. None of them did that. Instead, they used it to repay each other’s loans. In other words, they used it to reduce the amount of credit available… not increase it. And they bought US agency bonds… just as you’d expect. And they paid out their bonuses.

“In other words, they looked out for themselves… just as you’d expect. I didn’t know this information was going to bring down the banking system…

“The whole thing was so perverse, I can barely believe it. In a normal financial system, if a bank made a bad bet, it would pay a penalty. Counterparties might lend more money to it, but they’d want higher rates of interest to protect themselves.

“But here, in the bubble years, all the big banks made some of the worst bets in history… and what happened? The government stepped in… and lent them money… at lower rates of interest. They were rewarded for their mistakes. The good banks – that didn’t have the backing of the government – actually paid higher rates of interest to borrow money than the bad banks.

“Another thing I wanted to know was exactly how much money was really at risk. We gave away $700 billion. But we also guaranteed loans… and gave lines of credit… and stood behind various financial transactions. I asked how much was at stake… how much was at risk. No one seemed to know. So we added it up. We found a total of $23 trillion. That’s ‘trillion’ with a capital ‘T.’

“Again, I’m not saying that we would ever have to pay out that much. Some of this was guarantees on top of guarantees and cross-guarantees… very murky… very difficult to disentangle. But I thought it was worth knowing how much we had at risk. And again, the banks didn’t want to tell. And the people in the Treasury department didn’t want to know.

“The more questions I asked, the more I found myself isolated… and at odds with the Treasury Department, as well as the banks. I was having shouting matches in the Treasury. The banks hated me. And then the undersecretary of the Treasury called me into his office.

“He explained that if I eased up on the banks, I could have a very nice career after the TARP appointment expired. If I didn’t play ball with them, I would find it hard to find a job.

“That’s how it works. You go along and you get along. If you don’t go along with the scams and the technical mumbo jumbo… you’re out.”

That’s how a zombie economy works, dear reader. The zombies throttle the girls. You look the other way. Or else…

The Best of Bill Bonner

Whoa! Investors are acting as if it were 2007 all over again.

USA Today has the story:

Emboldened by soaring stock prices and record-low borrowing costs, stock investors are taking out loans against their portfolios at the fastest pace since before the Great Recession hit.

So-called margin debt hit $379.5 billion in March, the highest level since July 2007 when such debt hit an all-time record of $381.4 billion, according to the most recent data available compiled by the New York Stock Exchange.

The trend signals that investors are more comfortable with stocks and are more willing to use borrowed money to buy more securities in hopes of garnering fatter returns in a hot market that has pushed the Dow Jones industrials up more than 15% in 2013.

Why are investors so bullish? Because the economy is coming back? Because the future is rosy? Because stocks are going to earn even more?

Nah… What do you take us for, dear reader? We know the story. Stocks are going up because the Fed is making them go up.Here’s David Rosenberg in Canada’s Financial Post:

The US Fed has always been important in influencing trends in the financial markets, even if the economic effects have been far less than dramatic. This influence has actually strengthened in recent times to the extent that the correlation between the Fed’s balance sheet and the direction of the stock market, which was barely 15% before all these rounds of quantitative easings began four years ago, is 85% today.

By way of comparison, the timeworn correlation between the market and corporate earnings has remained unchanged at around 70%.

The Fed is trying to bring the overall cost of capital down to a level that would be consistent with a -2.2% Fed funds rate, which is where the rate actually should be based on current inflation and the still-huge amount of excess capacity in the economy.

But the funds rate has been at zero for more than four years. The Fed cannot magically create a negative nominal interest rate, so it is using the powers of its balance sheet to achieve the same result.

This then brings me to my very last point, which is what I think was a critical inflection point when the Fed said in its December post-meeting press release that it will not budge from its 0% policy rate until the US unemployment rate drops to 6.5%. It is currently around 8%.

We have done estimates based on various assumptions and found that achieving this holy grail likely takes us to the opening months of 2018 or another five years of what is otherwise known as financial repression.

No Exit

But wait a minute. If the Fed continues goosing up stock prices for another five years, isn’t that going to put stocks in “irrational exuberance” territory?

Won’t artificially low interest rates – over such a long period – create the same sort of distortions and bubbles that led to the crisis of 2008-09 in the first place?

Well… yes… of course.

But the Fed is on the case. It says so right there in the paper. The Fed governors “are considering an exit strategy.” Exit from what? They are trying to figure out how to get down.

For four years, they have been climbing up and up – offering loans at negative real interest rates – trying to encourage people to borrow and spend. They want people to part with their money, not save it. And they’ve also significantly boosted the monetary base through QE1, QE2 and now QE3. In the current version of QE alone, they print up an extra $85 billion per month and pump it into the banking system!

That money hasn’t done much for the real economy (the unemployment rate has gone down, but only because people have left the workforce), but it’s done wonders for stock prices. The Dow has more than doubled since 2009. It’s up this year too – hitting record after record.

Ben Bernanke says he wasn’t targeting equities with his QE program. But that’s what he hit… climbing higher and higher to get a good shot. Now he’s sitting on top of a monetary base (the “stock” that is four times as tall as it was in ’07).

And now how will he get the Fed down without getting hurt? If stock prices are so closely correlated to Fed money printing, won’t stock prices go down if they turn off the presses? And how will the Fed react when it sees stocks go into another major bear market?

Our guess is that as soon as Bernanke hints at cutting off the presses, stocks will begin to slide. Then, when the presses really stop, they’ll fall hard. That’s when it will get interesting. If the Fed can’t cut back now… how will it do so when the markets and economy are even more dependent on it?

Instead, the Fed will panic… and climb even higher.

The Best of Bill Bonner

Today, we interrupt our regular coverage of markets, morons and mush-head economics to give you a heads-up:

We may all be doomed!

Not just you… not just us… but the whole friggin’ human race may soon be on the endangered species list. Boohoo! We’re going extinct. So says an article in Newsweek. (More below…)

Okay… so you don’t care, right? After all, we all have to go sometime. But think of the poor voters with no one to lie to them… the poor stockbrokers with no suckers to call… the empty bars… the jails left idle and abandoned after their prisoners have paid for their crimes.

It brings a tear to our eye. No illegal aliens to mow our lawns. No lobbyists to stab us in the back. And no one to watch reality shows. Reality will no longer exist!

Just when everything was going so well, too. The Dow had climbed above 15,000. Everybody said it was going higher. The New York Times:

“It seems we’re somewhat ahead of schedule, but I think we’re still on track for Dow 20,000 by the end of the decade,” Mr. [Seth] Masters [the chief investment officer of Bernstein Global Wealth Management] said last week. “The odds have just gotten better.” And despite the stock market’s recent meteoric rise, he said, stocks still look relatively cheap, certainly compared with bonds.

“It’s not that the expected return on stock right now is really that high,” he said. “It’s that the return on government bonds is indubitably very low.”

That unfavorable verdict on bonds is no accident. In a sense, it’s the policy of the Federal Reserve. Ben S. Bernanke, the Fed chairman, says he is trying to make traditionally riskier assets like stocks relatively attractive, increasing investors’ wealth and in that way stimulating the economy.

Well, that’s one thing we won’t miss. Mr. Bernanke wants people to buy stocks, rather than bonds. What’s he got against bonds? And who cares what he wants? If people want to buy bonds, why not let them?

Get Ready for the Sixth Major Extinction

No need to ask those questions… not when human beings are disappearing down the rathole of history. We just hope Bernanke goes extinct before we do!

The last major extinction took out the dinosaurs; 76% of all species alive at the time died out. And that was nothing, compared with the one that came before it, known as the Great Dying – 185 million years earlier. That wiped out 95% of all species. Like a stock market crash, an extinction takes out the most successful, most ubiquitous species.

So far, the planet has suffered five major extinctions. Newsweek says we may already be into the sixth:

Over the past four years, bee colonies have undergone a disturbing transformation. As helpless beekeepers looked on, the machinelike efficiency of these communal insects devolved into inexplicable disorganization. Worker bees would fly away, never to return; adolescent bees wandered aimlessly in the hive; and the daily jobs in the colony were left undone until honey production stopped and eggs died of neglect. Colony collapse disorder, as it is known, has claimed roughly 30% of bee colonies every winter since 2007.

If bees go extinct, their loss will trigger an extinction domino effect, because crops from apples to broccoli rely on these insects for pollination. At the same time, over a third of the world’s amphibian species are threatened with extinction, and Harvard evolutionary biologist and conservationist E.O. Wilson estimates that 27,000 species of all kinds go extinct per year.

Are we in the first act of a mass extinction that will end in the death of millions of plant and animal species across the planet, including us? Proponents of the “sixth extinction” theory believe the answer is yes…

The climate change that occurred during the Great Dying – most likely involving megavolcanoes that erupted for centuries in Siberia – was similar to the one our planet is undergoing right now. Regardless of whether humans are responsible, the sixth mass extinction on Earth is going to happen. We have ample evidence that Earth is headed for disaster, from elevated rates of extinction among birds and amphibians to superstorms and the recent Midwestern drought, corroborating the idea that we might be living through the early days of a new mass extinction.

Bummer. The bees are starting to act like Republicans: hopelessly disorganized… desperately short of ideas. And if they can’t get their act together, we are all going to hell.

But it was bound to happen, wasn’t it? Whenever there is a chart with a line that goes vertical… it invariably leads to a line that goes vertical in the opposite direction. What goes up must go down. What lives, dies. Bear markets follow bull markets. Busts follow booms. And ants follow picnics.

If it were up to us, it wouldn’t work that way. Neither death nor taxes would be inevitable. But we’re not the Decider. And whoever is the Decider seems to prefer symmetry over immortality. That’s just the way it is.

As you can see below, when you look at a chart of the growth of the human population over the centuries, you see a long, nearly flat line stretching from about 1800 back to the beginning of time. But after 1800, the line suddenly goes vertical.

What gives? Better food, better medicine, indoor plumbing. People stopped dying the way they used to. And the number of humans on Earth multiplied. Even in our lifetimes – from 1950 to today – the population of the planet has doubled.

Now comes the blowback… the bust… the downswing. If we’re lucky, 75-95% of the human population will die off. If we’re unlucky, it will be 100%.

But seriously, this is another reason for staying out of the stock market. We wouldn’t want to own a portfolio of growth stocks, not when a major extinction approaches. It would be embarrassing.

The Best of Bill Bonner

The Dow rose another 48 points yesterday. Gold was up $24 per ounce.

Nothing remarkable. Nothing illuminating, either.

The newspapers and TV channels all reported the Dow 15,000 story as though it were just a stepping-stone on the way to 16,000… or 20,000… or 30,000.

Heck, the sky’s the limit!

Investors have reached a new level of bullishness. They’re borrowing again to buy stocks, confident that prices go in only one direction.

Advisors, too, seemed sure that this was not the end of a trend, but the beginning of one. Just what you’d expect at a market top.

There’s also a swift current of economic analysis telling us that the commodities boom is over… that the Fed has the situation under control… and that the bull market in gold is finished.

All of which is amazing… and often breathtaking.

Between Improbable and Impossible

Stock market investors don’t seem to know or care that the main thing propping up their investments is the same thing that will ultimately destroy them. And that the longer the situation continues the bigger the mess will be when it finally blows up.

We’re talking, of course, about Fed, Bank of England, Bank of Japan and People’s Bank of China monetary policy. It is “experimental.” It is “bold.” It is also reckless and potentially catastrophic.

Lending money at negative real interest rates creates grotesque distortions in the market.

Savers get nothing for their trouble. In fact, they lose money in real (inflation-adjusted) terms. So they shift to speculating on stocks. The stock market goes higher… but it is not a market you can trust.

It is being driven by the printing of trillions of dollars, yen, pounds and renminbi. But central bank policy hasn’t been able to budge slumping economic fundamentals. And any attempted exit by central banks in the absence of a genuine economic recovery will be, in the words of hedge fund manager Paul Singer, “somewhere on the continuum between problematic and impossible.”

It is also unnatural for a central bank to print up new money and use it, indirectly, to pay for government operations. If you could do that without penalty – that is, if you could pay for real things with fake money – you would do it all day long.

Normally, central banks don’t even try. They know the penalties make it not worth the fleeting enjoyment.

Do you see any penalties, dear reader? We don’t.

But the fact that the penalties have not yet been assessed doesn’t mean they don’t exist. And the longer we go without paying them, the greater they will eventually be.

What’s Not to Like?

At present, the feds get only rewards.

First, lower interest rates make it easier to finance federal debt.

Second, low debt interest payments reduce the outstanding debt in real (inflation-adjusted) terms.

Third, Fed Treasury bond buying indirectly funds government spending – to the tune of about $45 billion per month.

Fourth, the lack of yields in the bond market corrals investors into stocks. This pushes stock prices higher. Rich bankers and rich campaign contributors get richer.

What’s not to like?

For the moment, nothing.

But the markets won’t stay in this “sweet spot” for long. The time will come when the Fed will have to reverse its policies or face substantially higher inflation.

But how? Instead of buying bonds, the Fed will have to sell them. But to whom?

Fortune magazine reports:

Warren Buffett has a piece of advice for Ben Bernanke: It’s easier to buy than it is to sell.

Buffett, speaking on Saturday at Berkshire Hathaway’s annual meeting in Omaha, said he is worried about what will happen when the Federal Reserve tries to wind down its recent efforts to stimulate the economy. Via a program nicknamed “QE,” short for “quantitative easing,” the Fed in recent years has bought up over $2 trillion in bonds in order to lower interest rates and promote borrowing and investment.

Some have warned that when the Fed decides to sell its trove of bonds, or even just stops adding to it, stock markets could tank. Rising interest rates could cause banks to lose billions, perhaps igniting another financial crisis. Buffett says we don’t know what will happen, but he is concerned.

“QE is like watching a good movie, because I don’t know how it will end,” says Buffett. “Anyone who owns stocks will reevaluate his hand when it happens, and that will happen very quickly”…

“People make different decisions when they can borrow for practically nothing… It’s a huge experiment.”

Charlie Munger, Buffett’s long-term chief lieutenant, who was also talking at the meeting, says he worries about more than just inflation.

“What has happened in macroeconomics has surprised pretty much everyone,” says Munger. “Given that history, economists should be more cautious when they print money in massive amounts.”

US stocks continue to climb. The Dow has passed the 15,000 milestone. Gold, meanwhile, got smacked yesterday. It sank back to $1,448 per ounce.

What’s ahead?

A mood of prophecy, perhaps brought on by a large helping of osso bucco from our local Italian restaurant, came over us last night. We looked into the future. And there we saw a grim world.

As we reported last week, public life bumbles along under a combination of false pretenses and self-imposed delusions. Monday’s news told us that the worst enemy Americans now face is themselves. For every one of them bumped off by a terrorist, nearly a thousand more do themselves in – using everything from pistols to automobiles, to household cleaners. But instead of declaring war on themselves or even turning in their firearms – which would be the logical response – they hire armies of guards, gumshoes, cops and spooks to protect themselves… from someone else!

The enemy is invisible, they argue. Their champions must be invisible too. After all, they are engaged in a hidden war with an enemy who can’t be seen by the naked eye. In fact, he can’t be seen with telescopes or microscopes either. Because he doesn’t much exist.

Even those few crackpots and malcontents who might want to strike a blow against the US lack the organization, training, tanks, missiles, computers, artillery, ships, guns, trucks… and all the other paraphernalia that might make even a tiny dent in the imperial armor.

So the “war” must remain a secret. It takes place in the shadows… a kind of imaginary battle… in which thousands of make-believe soldiers pretend to protect Western civilization from millions of fantastic foreign fiends.

Sorry – It’s Classified

How many combatants? How much military hardware is on the field? How much will this war cost?

We can’t tell you. It’s classified! The Washington Post told the tale:

The top-secret world the government created in response to the terrorist attacks of Sept. 11, 2001, has become so large, so unwieldy and so secretive that no one knows how much money it costs, how many people it employs, how many programs exist within it or exactly how many agencies do the same work.

These are some of the findings of a two-year investigation by The Washington Post that discovered what amounts to an alternative geography of the United States, a Top Secret America hidden from public view and lacking in thorough oversight. After nine years of unprecedented spending and growth, the result is that the system put in place to keep the United States safe is so massive that its effectiveness is impossible to determine.

The investigation’s other findings include:

• Some 1,271 government organizations and 1,931 private companies work on programs related to counterterrorism, homeland security and intelligence in about 10,000 locations across the United States.
• An estimated 854,000 people, nearly 1.5 times as many people as live in Washington, DC, hold top-secret security clearances.
• In Washington and the surrounding area, 33 building complexes for top-secret intelligence work are under construction or have been built since September 2001. Together they occupy the equivalent of almost three Pentagons or 22 US Capitol buildings – about 17 million square feet of space.
• Many security and intelligence agencies do the same work, creating redundancy and waste. For example, 51 federal organizations and military commands, operating in 15 US cities, track the flow of money to and from terrorist networks.
• Analysts who make sense of documents and conversations obtained by foreign and domestic spying share their judgment by publishing 50,000 intelligence reports each year – a volume so large that many are routinely ignored.

In the spirit of civic improvement and solidarity, we offer a modest suggestion. Instead of screening people in airports to find those who forgot to take the mouthwash out of their hand luggage, why not ask travelers if they have considered blowing their brains out? Those who answer in the affirmative could be assigned three or four federal employees with security clearances to watch them day and night. The suicide rate would plummet.

As it is, our spook resources are clearly underused. There are probably 10,000 security personnel for every potential terrorist. What do all these people do? What will happen to a nation that devotes so much of its resources to fighting a war with largely imaginary enemies?

“You get what you pay for,” said Milton Friedman.

Spending billions on terrorism is bound to produce terrorists. How long will it be before the clandestine terrorist agencies begin their own campaigns of terror? Perhaps they already have.

With so many secret agencies plotting, conniving, enticing, luring, fomenting, and sowing their evil seeds, it won’t be long before something takes root.

One group of spooks will lay a trap… and catch another group… and accuse a third group, whom they will mistake for real terrorists. One bomb will go off. Another attempt will be thwarted at the last minute. Still another group – led on a double agent and financed by secret funds provided by the taxpayer – will be hauled in front of the TV cameras…

The public (the same people whose most lethal enemy stares at them from the mirror) will panic. Convinced that a hell-bent terrorist hides behind every bush, they will demand even more protection… more lockdowns… more secret programs… and more jackbooted spooks.

The harder we looked… the more we didn’t like what we saw.

Public life bumbles along under a combination of false pretenses and self-imposed delusions.

At the start of last week, it was widely reported that US central bankers had gone as far as they were willing to go. There were voices in the Fed, said the news, urging caution. There would be no further monetary stimulus measures, said the commentators.

Investors grew cautious.

But by the end of the week, they were rolling the dice again. The Fed was working hard to fight the impression that it had either lost its nerve or recovered its senses. From The New York Times:

The Federal Reserve said Wednesday that its economic stimulus campaign would press forward at the same pace it has maintained since December, putting to rest for now any suggestion that it was leaning toward doing less.

The Fed emphasized that it was ready to increase or decrease its efforts to spur growth and reduce unemployment as necessary, a more balanced position than it took earlier in the year, reflecting the reality that a strong winter has once again yielded to a disappointing spring.

It was the first time that the Fed had explicitly mentioned the possibility of doing more in a policy statement, although officials, including the Fed’s chairman, Ben S. Bernanke, have made the point repeatedly in public remarks.

With the wind of the Fed at their backs, investors put out full sail. On Friday, they were skimming along nicely, riding high on a tide of “EZ” money. “Don’t fight the Fed,” said the analysts. The Fed is pumping… stocks are going to rise.

Of course, it’s not that simple. Zimbabwe pumped. Stocks rose… for a while. But ultimately, it takes more than cheap money to make businesses more valuable. And too much cheap money is contagious; stocks become cheap too.

The Rich Get Richer

Some investors are cynical about it. They know the Fed’s easy money will have negative consequences for almost everyone. But they also know how the game works – money printing may be bad for the economy and the little guys, but it can be good for the rich guys. They’re the ones who own stocks! From Bloomberg:

The world’s 200 richest people added $44.6 billion to their collective net worth this week as the Dow Jones industrial average reached 15,000 for the first time.

Alisher Usmanov, 59, whose fortune rose $61.2 million during the week, according to the Bloomberg Billionaires Index, said in an interview at Bloomberg’s Moscow offices that he recently spent about $100 million buying Apple Inc. shares in anticipation they will rise.

Cynical investors know it’s a game. But a lot of people believe the claptrap. They think that the Fed – through some magic never fully explained or demonstrated – helps make people better off.

The Fed did not exist for the first million or so years that proto-humans have been walking on two legs. It is only in the last 100 years – a blink of an eye, in evolutionary terms – that the Fed has been around… and only little more than half a century since it took up today’s activist theories. And it’s been scarcely four years since it began to apply them so aggressively.

Is there any evidence that modern central banking makes things better over the long run? Has one sou or farthing been added to the world’s wealth as a result of the Fed’s policies? If so, everyone is keeping quiet about it…

Instead, central banks seem to have done something that most people would have considered impossible: They seem to have stopped progress.

Maybe it’s a coincidence. But it’s as though time stopped dead when the Fed took up its role of improving the economy.

If you adjust GDP to inflation and calculate it the way the federal government did when Jimmy Carter was president, you see that the real, disposable income of the average American has not improved since the first Eisenhower administration.

That’s more than 50 years with no real economic progress… almost exactly the same 50 years in which the Fed has been so actively trying to make the economy work better.

Go figure…

Last night, six of us went out to dinner at one of the nicest restaurants in Salta. We ordered two bottles of good Laborum cabernet sauvignon. We had beefsteaks, dessert and coffee. The bill came to 1,058 Argentine pesos (about $200).

Was that a lot… or a little?

It depends. If you traded your money at the official rate, the meal would have been priced at around $200. Very reasonable.

But if you had traded your money at the rate quoted yesterday on the black market, the dinner would have been even more reasonable – barely more than $100.

This morning, the cab ride from the airport into Buenos Aires cost 50 pesos. At the official rate, that’s about $9. At the “blue” – or free-market – rate, the ride cost only $5.

The alert shopper can save a lot of money. The dull one gets ripped off.

All governments engage in larceny and fraud, using their authority to transfer wealth and power from the outsiders to the insiders. But the clever government does so by deception… while the clumsy one does so with no pretense or excuses.

In the US, for example, the feds deny savers any financial return from their economies under the pretense of “economic stimulus.” Wage earners get nothing, while bankers, speculators and zombie grifters are rewarded with ultra low-cost financing, capital gains, bailouts and giveaways.

The scale of this wealth transfer is the greatest in all history. Trillions of dollars are changing hands… But not one voter in 1,000 understands what is happening to him.

Writes Tyler Durden of Zero Hedge:

Curious where the always elusive “wealth effect” is going? It’s going here:

PORSCHE REPORTS BEST SALES MONTH IN HISTORY; DELIVERIES UP 29%

The typical American is not buying a Porsche. Relatively, he’s getting poorer. But his brain has gone soft, shrunken by TV news, elections and deadhead commentaries.

He believes Hillary Clinton when she says, “The government is all of us.” He thinks the Fed really is bringing a “recovery.” And he imagines that an economy can get richer when it prints more money and gives it to other people.

Sharpened by Adversity

Here on the pampas the Argentines know better. Their brains have been sharpened by adversity and enlarged by necessity.

“Every day, it is a struggle to keep up with it,” says a friend who runs a small business in Salta. “You have to figure out what the peso is worth… and you have to decide if you’ll do a deal in pesos or dollars. And if you do it in pesos, you have to figure out how to trade dollars for pesos… or vice versa.”

This week, the peso dropped to nearly 10 to the dollar. Officially, the rate is only 5.5 to the dollar. Big difference.

We need to buy a new hay baler. The price is quoted in dollars – about $50,000. You pay in pesos at the official rate… so that’s about 250,000 pesos. But wait – if you have dollars and can trade your money on the black market, you will save $25,000.

“The trouble is, the government is watching,” says our informant. “They’ll want to know where you got the 250,000 pesos… it can get very nasty if you don’t have your paperwork in order.

“But there are ways.”

The Argentines know they’re getting ripped off by the government. They find ways to protect themselves.

“There are invoices… and there are invoices. You can get an invoice at the official rate… or one at the unofficial rate. Or one that is not at any rate at all. The government rigs the system to cheat us. We rig it right back. You just have to make sure you have the right invoice for the right transaction. At the end of the year, people buy and sell invoices…

“I bought a new truck recently. But I made a bargain with the dealer. He delivered a new truck to me. But then he waited eight months to write up an invoice. By then, he was able to call it a used truck… and cut the invoiced price by half. It looked like I was paying full price for a used truck… I was actually paying full price for a new truck, but with money traded at the unofficial rate.

“Everybody’s got a trick or two. You have to. Otherwise, you’re a sap.”

The Argentines know they can’t trust their money… or their government. In comparison, Americans are saps. They don’t know whom to trust.

But we’ll make a prediction: Americans will be a lot less sappy… and a lot less wealthy… when they finally realize what the feds are doing to them.

US stocks are turning down this morning, following news that private-sector job growth in the US slowed the most in seven months.

We’ve already recommended you exit US stocks and buy gold on the dips.

Nothing has changed our view… So we’ll get back to where we left off yesterday – making camp for the night after a long horse trek into the distant reaches of our remote Argentine ranch…

The night was cold. The floor was hard.

There were three of us in a tiny room of a small, bare stone house – our accommodation for the night. Elizabeth and I together on one side. On the other was our friend Sophie, a young French woman who was eager to make the trip with us.

Sophie is a model, actress and swimming teacher. She had no practice on horseback before arriving at the ranch two weeks ago. But she is young and athletic… and seemed to catch on fast.

In the night, the only sound heard was the gentle breathing of the two women. Snug in their sleeping bags, they didn’t move…

But each time I started to doze off, I woke up gasping for oxygen. The air was too thin.

In the daytime, I had no problem. But my nighttime breathing rhythm, which I had adapted to cope with being 9,000 feet above sea level, was not quite enough for 10,000 feet.

Also, the inflatable mattress we had pumped up before going to bed had deflated during the night. We turned in at about 9:30 p.m. By about 3 a.m. I felt the hard stones pressing into my back. But it was too cold to get out of bed to inflate the mattresses again.

At about 6:30 a.m., the light coming through the holes in the roof and the cracks in the door changed color. No longer was it just the white light of the moon. It began to have a yellowish… then reddish… hue.

Out of our sleeping bags, it was freezing cold. There was frost on the ground and ice on the shallow lakes in the valley.

Jorge, who runs our ranch, and who slept in the room next door, made a fire in the “kitchen” and put water in the hanging can above it to make morning tea.

We pushed out the little air left in our mattresses and rolled up our sleeping bags while Jorge saddled up the horses. Then, trembling in the cold morning air, we stood by the kitchen door and drank our tea.

Sophie wore a poncho. On her head, she had wrapped a scarf, giving her a strange and exotic Berber look. Her mother’s family is Algerian… and for the first time, we saw the North African in her face.

“That’s a nice style for you,” we told her.

“Style? I don’t care about style. I’m just trying to keep warm.”

A Treacherous Trail

We were eager to mount up – hoping that some heat might rise from the horses. But by that time, the sun was breaching the top of the mountains to the east of the valley. Within minutes, we felt it on our faces and on our backs. The sun, which we ducked and dodged in the middle of the day, was a welcome visitor in the morning.

We set out. Elizabeth, Sophie and I were mounted on horses – mixtures of Spanish and criollo – and Jorge on a mule, pulling another mule packed with our supplies behind him. We headed east across the rivers and lakes of the valley floor to a quebrada – a break – in the mountains that surround Compuel.

Turning to look back, the moon was still out over the gray-brown mountains to the west. The cattle watched us go. Ducks rose from the marshes and flew away from us. The horses bounced their way toward the quebrada, eager to get back to their corrals.

But the going was a lot harder than the coming. The pass between the mountains was scarcely more than 30 feet wide. The river was swift and full of huge boulders. The only way forward was up the mountain along a track worn over centuries. We had been on this trail for only a few minutes when we began to realize what a difficult route we had taken.

“I haven’t been over this trail in 10 years,” Jorge told us.

Even in the best of times, the trail was treacherous. High above the river, on the side of the mountain, the horses’ hooves slipped and slid on the granite rocks.

Our lead horse fell hard while trying to jump down from one rock to another. We dismounted… leading the horses, rather than trying to ride them. This left us all scrambling over the rocks, trying to make progress over what appeared to be an increasingly impassable and dangerous path.

Jorge was worried. He said nothing, but we could see it in his face. Frequently, he got off his mule to help encourage a reluctant horse down from the rocks… to cinch up the saddles… or to just check on us.

He had led us into a tough spot. Not only was the trail more difficult than he remembered, but much of it was missing. We would head in one direction… and the trail, such as it was, would disappear. The horses would have to turn around on the narrow ledge and backtrack.

More than one time, it looked as if there were no going forward or backward. The horses, bruised and scratched… with bleeding hooves and cactus needles sticking their legs… had to be coaxed and threatened to make them continue.

But it was not only the horses who suffered. Dismounting, we lost our footing and fell down the hill, hitting a hip on a granite boulder. Our elbows bled. Our hip was painful… but only when we walked. We got back on the horse and let him do the walking.

When the ride began, we felt the sting of the thorn bushes. But after an hour or two, we scarcely noticed them. We rode right through them; only potentially lethal dangers concerned us now. We kept an eye on Sophie. It was easy to get hurt.

Amid the Ruins

After two or three hours, we had worked our way down to a slightly lower level. On the right and left – on the mountains on both sides of the river – we noticed rectangular stone walls… hundreds of them.

“The Incas lived here,” Jorge explained. “You can see their aqueduct high on the mountain. They used it to water all these fields.”

“Incas” is the word used by the locals for all the peoples of the area before the Spanish arrived. Archeologists say the Inca had outposts here. But this was the southern edge of the Inca Empire. And the local people – known as Diaguitas – were in these valleys thousands of years before the Incan conquest in the 13th or 14th centuries.

Whoever was responsible for it, their system of irrigation was much more extensive than it is today. The ranch still uses many of the same trails and irrigation ditches that the Diaguitas developed long before the Spanish arrived, but they are lower down and less technologically impressive. The abandoned aqueducts we were looking at would require far more maintenance, labor and engineering know-how than we would attempt today.

And why did they bother? Why not do their farming lower down in the valley, where we still farm today?

No one knows.

We came to an abandoned homestead.

“This is a place that used to be lived in… but a long time ago. When I was a boy, there was someone here. But it hasn’t been farmed since.”

There were the remains of a stone farmhouse, like the one in which we had just spent the night. Several other buildings… including a beehive-shaped oven… were still intact, but without roofs. Pottery fragments were everywhere. So too were the terraces built by the Indians long ago.

“What happened? How come this was abandoned?” we asked.

“Probably, we had a couple of dry years. The people here probably moved down to a lower level. This is just too high. Too dry. And that’s why this path is not used anymore. It used to be used all the time. People in Pucarilla had cattle in Compuel. They traded their onions and corn for goats and wool. Believe it or not, there was a lot of traffic here… on foot and on mules.”

The Death of an Ancient Culture

Jorge got a smile on his face.

“But that was a few years ago. Things are changing. People today don’t want to work as hard as they did long ago. Life up here is hard. Now, they can just go to Molinos or Cafayate. They can get money from the government for not working and sit in their houses and watch television.

“Two of the worst things to happen to our area are electricity and those family assistance payments. The government came in and put in solar power in all these rural houses.

“We don’t get television reception up here, but the gente buy DVD players so they can watch movies and TV shows. Then they see a different way of living. They want different things. They don’t want to spend their lives cut off from this life they see on television.

“The government also gives out money to people who don’t work – particularly to unmarried women with children. So now they don’t want to do the hard work they used to do.

“It’s a lot of work to keep goats or llama or cattle up in the mountains. You have to take care of them every day or the puma will eat them. And then you have to milk the goats and make cheese… and turn the wool into threads so you can knit sweaters. And people up here in the mountains used to grow all their own food or trade their animals for it.

“But I’m afraid all that is going to be a thing of the past soon. You know, if you look at the way I lived as a child… and the way most of the gente still live… it’s not much different from the way our ancestors lived thousands of years ago. We raised animals. We grew crops. We lived on what we produce ourselves. And we watered our fields using the same aqueducts… and we get around on the same paths… as our ancestors did.

“Now that life is starting to disappear. Natalio, Nolberto and Pedro – who work for us – they’re all about my age. They’re used to working hard. They grew up like I did. They can’t imagine not working hard.

“But their children are different. They watch television. They don’t want to stay here and work hard. That’s why I’ve got Christian… and Pablo working for me and not Alejo and Bartolomo. Christian and Pablo come from families high up in the mountains. They still know how to work. Christian’s family lives at Atacamara… it’s at 13,000 feet. Life there is very tough.

“Bartolomo left for Cordoba. I don’t know where Alejo is. They know they can go to the city and get jobs. Or collect money from the government. And maybe get a truck, rather than riding on a mule. They know they don’t have to work so hard. They can work eight hours a day… and then watch television. Or not work at all.

“Electricity and welfare payments are ruining this country.

“This life… the life in these mountains as it has been for maybe thousands of years… is now disappearing. In a few years, I reckon only a few old people will remember how to make raw wool into a poncho… or how to collect herbs in the mountains to make tea… or how to make their own cheese and mill their own grains.

“You know what gualfin really means? It means the ‘end of the road’ or the ‘place at the end.’ That’s where we are. The end of the road. I’m 62. In a few years, I’ll retire. So will Nolberto, Natalio and Pedro. Then a new generation will take over. It will be very different.”

Gold seems to be coming back fast. It rose $38 per ounce yesterday.

Of course, the Fed’s monetary meddling doesn’t work. And it will most likely cause a financial disaster.

But the biggest scandal of today’s central bank policy is that it is essentially the grandest larceny of all time.

The normal ways in which wealth is distributed may not be perfect, but they are the best nature can do. People earn it. They save it. They steal it. Or they get richer by investing.

Or they just get lucky…

Normally, in other words, wealth ends up being distributed in an unplanned and uncontrolled way. People do their best. The chips fall where they may.

But along come the central banks. They’re creating a new type of wealth. It is not wage income. It is not the product of capital investments. It is not the result of technology or productivity increases or hard work or self-discipline… or any of the other things that lead to wealth and prosperity.

Instead, it is created by the central bank “out of thin air.”

Not Your Grandfather’s Wealth

This new wealth is not like the regular kind. These chips don’t fall where they may; they get pushed around first.

The Fed creates new money (not more wealth… just new money). This new money goes into the banking system, pretending to have the same value as the money that people worked for. And people with good connections to the banks take advantage of the cheap credit this new money creates to aid financial speculation.

That’s what we’ve been watching in the financial markets for the last four years.

From Chris Martenson at PeakProsperity.com:

The central plank of Bernanke’s magic recovery plan has been to get everybody back borrowing, spending and “investing” in stocks, bonds and other financial assets. But not equally so, as he has been instrumental in distorting the landscape toward risky assets and away from safe harbors.

That’s why a two-year loan to the US government will net you only 0.22%, a rate that is far below even the official rate of inflation. In other words, loan the US government $10 million and you will receive just $22,000 per year for your efforts and lose wealth in the process because inflation reduced the value of your $10 million by $130,000 per year. After the two years are up, you are up $44,000 but out $260,000, for a net loss of $216,000.

That wealth, or purchasing power, did not just vanish: It was taken by the process of inflation and transferred to someone else. But to whom did it go?

Where do the chips come to rest?

While the Fed punishes honest savers, stocks and bonds rise every time a hint of more money printing is announced. And the yacht sales continue to rise, too, as long as the Fed promises more.

A Recovery for the Rich

The result? From Pew Research:

During the first two years of the nation’s economic recovery, the mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%, according to a Pew Research Center analysis of newly released Census Bureau data.

From 2009-2011, the mean wealth of the 8 million households in the more affluent group rose to an estimated $3,173,895 from an estimated $2,476,244, while the mean wealth of the 111 million households in the less affluent group fell to an estimated $133,817 from an estimated $139,896.

These wide variances were driven by the fact that the stock and bond market rallied during the 2009-2011 period while the housing market remained flat.

Affluent households typically have their assets concentrated in stocks and other financial holdings, while less affluent households typically have their wealth more heavily concentrated in the value of their home.

From the end of the recession in 2009 through 2011 (the last year for which Census Bureau wealth data are available), the 8 million households in the US with a net worth above $836,033 saw their aggregate wealth rise by an estimated $5.6 trillion, while the 111 million households with a net worth at or below that level saw their aggregate wealth decline by an estimated $0.6 trillion.

There may be a “recovery” going on. But it is a recovery for the rich, not for the middle class.

Advisors are too bullish. Investors are too complacent. The financial authorities are too confident.

All up and down Wall Street… in central banks and in Washington… the stuff that goeth before the fall is thick, sticky and stinky.

The economy is recovering, they say. The Fed has the situation in hand, they add. Don’t worry… we know what we’re doing, they assure us.

Barron’s magazine says the Dow is going to 16,000, illustrated with a picture of a bull on a pogo stick.

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Prime Minister Abe says he’ll revive the Japanese economy by printing yen to buy Japanese bonds. And speculators take each hint from the Fed as though it were a whisper from God Himself.

And all around them, the real economy struggles to stay even. Here’s David Rosenberg of Gluskin Sheff with 12 signs that the economy is weaker than we think:

• Household employment (-206,000 in March, the steepest decline in well over a year).
• Real retail sales (-0.3% in March, down for the second time in three months).
• Manufacturing production (-0.1% and also down in two of the past three months).
• Core capex orders (-3.2% in February and, again, down in two of the past three months).
• Single-family housing starts (-4.8% in March and negative for two of the past three months, as well).
• New home sales (-4.6% in February).
• Philly Fed for April down to 1.3 from 2 .
• NY Fed Empire manufacturing index down to 3.05 from 9.24.
• NAHB Housing Market I ndex down to a six-month low of 42 in April from 44.
• Conference Board C onsumer C onfidence I ndex down to 59.7 in March from 68.
• University of Michigan consumer sentiment down to 72.3 for April from 78.6, the lowest in over a year.
• Conference Board leading indicators down 0.1% in March, first decline in seven months.

Markets Make Opinions

Facts, figures, statistics…

Do you believe them, dear reader? We don’t. We’re just giving the dreamers a little taste of their own medicine.

“Markets make the opinions,” say the old timers. When prices are up, people share the opinion that they are going up. When prices go down, opinions change with falling prices.

And when prices rise, the opinion mongers look for reasons to explain why they have become so bullish. They find indexes, statistics, numbers – all the “facts” confirm their opinion. When prices fall, their opinions grow dark and they need to find new facts that they can use to justify a counter view.

Get a feeling. Form an opinion. Find a fact and pretend that you are a rational, reasonable investor. That’s the name of the game.

But are we any different?

Not at all. We’re just crankier. More cynical. And less impressed by authority in all its forms. Besides, we’ve been living in Argentina.

If a Nobel Prize-winning economist tells us that the economy is improving, what do we really know? We know he can talk!

If the president tells us that he and his friends are making the world a better place, what do we do? We laugh!

If a leading financial magazine tells us that the “Big Money” firmly believes the Dow is headed higher, what do we do?

We seriously consider selling!

From bearish fund manager John Hussman: “Rule o’ Thumb: When the cover of a major financial magazine features a cartoon of a bull leaping through the air on a pogo stick, it’s probably about time to cash in the chips.”

“You Americans don’t understand anything. You have to come to Argentina and live here for a few years. Then you’ll understand America.”

We had to ask, “Huh?”

“When you’re here, you can see more clearly how things really work… and don’t work. You see the real nature of things… especially government. Believe me, you Americans have all sorts of delusions.

“A government ‘by, for and of the people’? Or, as Hillary Clinton put it, ‘The government is all of us.’ Not quite. And when you’ve been here for a while, you’ll see your own institutions more clearly.”

Our Man in Argentina

The speaker was a friend of ours. An American from Alabama who has lived in Argentina for 30 years. He lived through the hyperinflation of the 1980s… the boom of the 1990s… and the crash of the 2000s.

He saw corrupt presidents. Honest presidents. Competent presidents. Bumbling presidents. Lots of presidents. In a two-week period in 2001, Argentina had four different presidents. Each one tried to stop the financial meltdown. None could.

“Hey, that’s nothing,”; continued our friend. “During the military regime we had four de facto presidents in a single day.

“I remember when I got here. I felt so superior. Because our system in the United States worked so much better. But now I see it differently. Because I now know that there are some things that are better when they don’t work so well. I’ll tell you a story to illustrate.

“Two guys die. A German and an Argentine. Both of them go to hell. But after they’ve been there for a couple of weeks, the German guy is in a gutter… all bruised… with sores and burns all over his body.

“The Argentine still looks pretty good. When the German sees him, he says, ‘Hey… how come you’re still in good shape? They get us up at 5 a.m…. and the little devils start to torture us by beating us with iron rods. Then, at 8 a.m., they turn us over to the real devils. They whip us with barbed wire and then put cattle prods to our private parts. Then they throw buckets of sh*t on us… and waterboard us all afternoon. Aren’t you getting the same treatment?’

“‘Well, yes,’ says the Argentine, ‘but you’re in the German section of hell. We’re in the Argentine section. The rules are the same. But they’re not applied in the same way.

“‘The little devils are supposed to get us up at 5 a.m. so they can begin torturing us. But they don’t get up that early. And they don’t come to work very often. They’re all unionized. So they go on strike all the time. And then the real devils are meant to whip us with barbed wire. But there’s a shortage of metal… so they don’t have any whips.

“‘They put the cattle prods on us sometimes too… but the power doesn’t work. Or the cattle prods are missing. Nobody seems to know why. And they’re also supposed to throw buckets of sh*t on us too. But sometimes they’re out of sh*t… and other times they can’t find the buckets.

“‘As for waterboarding, the plumbing isn’t working. So they strap us to the rack and pretend to dunk us… and warn us that when they get the plumbing working, we’re not going to like it very much.

“‘But so far, it isn’t bad.’”

Some Things Are Best Done Badly

The Japanese faced huge logistical challenges when they bombed Pearl Harbor. Who thanks the staff officers who overcame them?

Imagine what a feat of monetary engineering was accomplished by Gideon Gono when he flooded the Zimbabwe economy with 100 quadrillion dollars. But does anyone stop him in the street and commend him?

Some things are best done badly or not at all, we conclude. If you’re sent to the gallows, you hope that the rope maker was having a really bad day.

And if your central banks have their hearts set on a program of financial doomsday… you pray they’re incompetent, not just stupid.

Gold seemed to be stabilizing at the end of last week. Commodities remained weak. Steel has fallen 31% this year. Brent crude is off 17% since early February. And copper is down 15%.

Copper is the metal you need to make almost anything – houses, cars, electronics. When it goes down, it generally means the world economy is getting soft.

At the start of last week, the conventional analysis of the gold sell-off was that the central banks’ efforts to revive global growth were working. The feds had the situation under control. So who needed gold?

By the end of the week, it appeared that gold – and commodities – had sold off for the opposite reason: because central banks’ money printing wasn’t working and the world was slipping further into a period of slow growth and barely contained depression. From Business Insider:

Recent U.S. economic data has been disappointing, especially in the realm of housing, which is what the US bull case is all about.

In Germany, dubbed the strong arm of Europe, economic sentiment just fell.

Where’s the Growth?

And growth has begun to slow in China – still considered a global growth engine – as it continues to crack down on corruption, a property bubble and a bloated shadow banking business. China’s plan to shift its economic model away from exports to domestic demand-led growth has also contributed to the lower growth rate.

In the US, building permits are down… and foreclosures are up. There is no renaissance happening in manufacturing. Only half of the new jobs expected showed up in March. Retail sales are down, and consumer confidence is off.

And in Britain, the unemployment rate is rising. Retail sales are falling. And figures coming out this week will probably tell us that the country is in a triple-dip recession.

Here’s Ambrose Evans-Pritchard in The Telegraph:

It is becoming ever clearer that the roaring boom in global equities since last summer has priced in an economic recovery that does not in fact exist. The International Monetary Fund has had to nurse down its global growth forecasts yet again. We are still stuck in an old-fashioned trade depression, with pervasive overcapacity in manufacturing plant and a record global savings rate of 25% of GDP…

As you can see from the chart below, the divergence between stock markets and the Deutsche Bank index of raw materials is astonishing to behold, so like the pattern in early 1929…

The US economy is growing below the Fed’s own “stall speed” indicator. Half a million people fell out of the workforce in March. Retail sales fell in March. So did manufacturing…

“There is a threat of deflation almost everywhere. A lot of central banks will have to follow the Bank of Japan, whatever they say now,” said Lars Christensen from Danske Bank.

The era of money printing is young yet. Gold will have its day again.

Stocks down again yesterday. The Dow slipping 139 points. Gold down slightly.

Gold has fallen so hard so fast we can’t help but feel sorry for the losers. But who were they? Estimates of the total loss go upward from $1 trillion. Who has that kind of money to lose?

Who lost it? And whom did they owe money to?

We don’t know. It could be nothing more than a regular pullback in an overextended, otherwise healthy bull market. We’ll just wait and see… along with everyone else.

So let’s change the subject…

One of the things that vexes just about everyone in Argentina is money. The value of the peso changes rapidly. There is the official rate. And there is the unofficial rate. Nobody knows what a peso is worth. Many people – including your humble editor – have to do some pretty serious calculating. The parts of his brain that do math must be swelling from overexertion.

“We need gas for the truck,” said Elizabeth yesterday.

“Well, I don’t have any more peso cash. Let’s put it on a credit card.”

“They don’t take credit cards. Cash only.”

“Then let’s pay with dollars.”

“Don’t be silly. That would cost us 50% more. He won’t give us a good rate.”

“Then let’s get some pesos at the ATM.”

“That’s just as bad… we’ll get the official rate.”

Let’s see: We want to pay in pesos, but only if we get the pesos at the unofficial rate. Otherwise, it’s better to pay in dollars, but only if the person on the other side will take the dollars at the “blue” or free-market rate.

Usually, you end up somewhere in between. If you try to bring money into the country, the government insists you trade it on the official market. But you can still work out trades at the “blue” rate – either by bringing physical cash into the country or by working with an unofficial money changer.

The money changers buy bonds for you in Miami. Then they sell the bonds in Buenos Aires. The market for the bonds should be about the same in both cities. The money changer is happy to have his dollars. You are happy to have pesos that you can spend – or in our case, pay our farmhands and farm expenses.

Half-Mad Money

It is always a pleasure to visit Argentina. It is a country where economic disaster stories are daily life… where economists’ daffy theories are government policy… and where everyday citizens have to figure out how to deal with a monetary system that is half-mad… and half merely incompetent.

When we are here, we need to spend pesos… especially out in the country, where people’s math skills are not as well developed as they are in Buenos Aires. But any serious purchase – say, if you’re buying an apartment – requires dollars… either on top of the table or underneath it. So you have to be prepared.

Most people want dollars. But they can’t take them. Because the Argentine feds will ask a lot of questions. If a merchant takes dollars at the unofficial rate, the feds will give him a hard time.

That leaves buyers and sellers of dollars getting together in dark “caves.” Dow Jones reports:

Argentina’s foreign-exchange market is going underground. As the government restricts access to foreign currencies, Argentines seeking hard-to-get dollars have been pushed into cuevas, or caves – clandestine operations where customers pay dearly to exchange pesos for greenbacks.

Buying dollars for savings is banned, and authorities make only small amounts of foreign currency available for travel abroad. Travelers must submit an online request to the national tax authority just days before leaving, and they usually receive approval for much less than they requested.

Businesses need government approval to import equipment and materials at the cheap official exchange rate. The national tax agency has even posted dollar-sniffing dogs at border crossings to catch those traveling with undeclared currency.

A visit to Argentina is like taking a Ph.D. in monetary catastrophe and economic mismanagement. It reminds us how politicians can really make a mess of an economy when they put their minds to it.

Whoa! This is getting interesting…

Gold crashing on Monday. Slight recovery yesterday. Stocks crashed on Monday too. Now surging.

What happened to gold? No one knows. There were reports of a 124.4 ton sell order from an investment bank on Friday morning. But from whom? Why? Nobody knows.

From Bloomberg:

The CME’s Comex unit is making it more expensive for speculators to trade after gold fell the most in 33 years today, dropping to the lowest since February 2011, after prices entered a bear market last week. Silver, also in a bear market, slumped 11% today and extended the year’s loss to 23%.

In the financial markets, we spend most of our time waiting for something to happen. When years go by and nothing happens, we assume that nothing will ever happen. When it does happen, we are totally surprised.

Is something happening now? A major change of direction? Is another shoe dropping?

All Downhill for Gold?

A consensus is forming that the gold market has reversed direction. The bull market of the last 14 years has finally ended. It’s all downhill from here, say the mainstream pundits.

But if that is true, what else will have to be true? The last bull market in gold ended when the Fed dramatically changed course.

Paul Volcker replaced G. William Miller as chairman in August 1979. A loose money policy became a tight money policy. Volcker jacked up interest rates, which had trailed behind the inflation rate by such a degree that real interest rates (the difference between nominal interest rates and the rate of consumer price inflation) were as high as 5%.

“Don’t fight the Fed,” they say on Wall Street. Those who fought the Fed back in the early 1980s were wiped out. The Fed was tightening – sharply. Volcker was determined to bring inflation rates down. That was not the time to own gold. It was the time to own bonds. You could buy a 10-year T-note with an 18% coupon. And interest rates (along with inflation rates) were headed down. Bonds would go up in value for the next 30 years.

By contrast, gold went down… down… down. By the end of the bear market in gold, there was hardly a single gold bug who was still sober or still solvent.

But what’s the Fed doing now? Has it reversed course? Has Ben “Bubbles” Bernanke been replaced with a tough-as-nails inflation fighter? Has the FOMC vowed to stop printing money? Has the loosest monetary policy in US history given way to a tight policy?

Nope.

Has the bull market in bonds ended? Have the lowest interest rates in half a century suddenly started to turn up?

Nope again.

Bubbles, Crises, Booms and Busts

What has fundamentally changed to reverse the fundamental direction of the gold market? Nothing we know of. Instead, the Bank of Japan has recently joined the central banks of the US, the euro zone and Britain in promising to keep printing money ”as long as necessary” to get the inflation rate UP!

Every major government in the Western world is running a big deficit. Every major central bank is printing money. And every saver, as David Stockman put it, is being “crucified on a cross of ZIRP.”

That’s right, too. Savers had a field day when the Fed changed direction in the early 1980s. They were paid to save… and paid well.

Now savers are being punished. They earn less in interest than the real rate of inflation. Is that changing?

At the time the last bull market in gold ended, everything stopped in its tracks and turned around. Stocks had been going down for at least 16 years; they suddenly started going up. Bonds had been going down too, ever since the end of World War II; they too started moving in the opposite direction. Savers were rewarded; borrowers were punished.

And gold reversed course and began an 18-year bear market. Is there any major turnaround now that would justify or at least signify a historic turn in the price of gold?

Nope.

Central banks and central governments are committed to a particular course of action. Does it lead to more valuable paper money? Does it lead to price stability? Does it lead to growth and glory?

Or does it lead to bubbles, crises, booms, busts and an eventual blowup? As far as we can tell, central banks are looking for trouble.

We still want to own as much gold as possible.

We are delighted to see gold getting smacked down. From the International Business Times:

Gold prices posted their biggest two-session drop in 30 years Monday as retail investors and large institutional speculators capitulated to a six-month downdraft that accelerated in the last week into bear market territory. The violence of Monday’s plunge reinforced the view that the 12-year bull market in gold is finished.

In New York trading, a troy ounce of gold closed at $1,360.60, a more than 9% plunge and the most extreme drop since 1983.

By the close of trading Monday, the price was off more than 13%, or more than $200 per ounce, from last Thursday’s closing price of $1,564.90.

Why is this good news? It settles our nerves. And gives us an opportunity to buy more.

If you’re in a card game and you look around the table… if you can’t figure out who the fool is, he might be you. Then you get nervous. You start rubbing your hands or scratching your forehead. The other players will see that you’ve lost your nerve.

Then you’re finished…

We’ve been looking around the table of the investment world, too, wondering who’s the fool. The people who are buying stocks? Probably, but maybe not. The folks who are buying bonds? Yes. But who knows?

Then who is it? Are we the fools?

A lot of people think so. It was beginning to make us nervous.

Maybe there really is a recovery… however weak. Maybe the feds really do have the situation under control. Maybe the central banks are right to print money. Maybe it will be clear sailing from now until kingdom come. And we’ll be fools not to be on the boat along with all the other stock buyers and gold dumpers.

Why is the price of gold falling? The papers say it’s because speculators fear that China is slowing… or that Cyprus will dump its holdings. From British newspaper The Guardian:

The price of gold fell to its lowest level in more than 18 months on Friday night amid fears that sales of the precious metal forced on Cyprus by its desperate financial plight would lead to wholesale dumping by hard-pressed countries in the coming months.

At the end of a week dominated by the plight of the troubled Mediterranean island, gold slid below $1,500 per ounce for the first time since July 2011 in anticipation that Cyprus would seek to raise 400 million euro by offloading a chunk of its reserves.

The False Premise

“Find the trend whose premise is false,” says George Soros, “and bet against it.”

And today, behind the drop in the gold price is a very foolish notion. The premise is that real money (financial reserves) can be replaced by credit and debt. People who believe this must be the real fools in the market. Which takes some of the pressure off us.

Imagine you are a major holder of, say, antique Buicks. Imagine you are in financial trouble. The market for antique Buicks anticipates the upcoming supply. Prices of old Buicks drop.

OK… but are Buicks the same as gold?

Imagine that, instead of Buicks, you held cash – a big wad of cash in your vault. Then, in financial trouble, you need to open the vault, get out your cash and use it to pay your creditors. Does the market for cash go down? Does the value of your cash decline because people know you will have to give it to someone else?

The premise is false. Real cash does not become less valuable when people find themselves in financial difficulty; it becomes more valuable. People scramble to get it. They need to pay their debts… settle their accounts… reduce their illiquidity by raising cash. They need cash. The demand for cash goes up, not down.

But wait. Today’s bills are payable in paper cash… not gold. Debtors must raise paper cash by selling their gold for paper. It’s paper they need… not real money.

That’s what makes this business so interesting, isn’t it? And so funny. The system runs on paper money. People spend it. People borrow it. Now people need more of it to pay their bills. So they sell their valuables – namely, gold – to get more paper money. Gold goes down, while central banks print up more paper money – just to make sure there’s plenty to go around.

But one day… and we won’t say when… (saying “what” seems like more than enough to ask from a free publication)… people will stop worrying about the quantity of the paper and begin worrying about the quality of it.

They will find that they have plenty of paper… and that more is coming all the time. They will look in their vaults and wonder what they will do with all this paper money.

They will have bills to pay then too… and creditors with sharper eyes and tougher standards. When they offer these new creditors more of their paper money, they will say, “Uh-uh.”

They’ll want some better cash. Gold, in other words.

Recently by Bill Bonner: The Lucky Country

We are delighted to see gold getting smacked down. From the International Business Times:

Gold prices posted their biggest two-session drop in 30 years Monday as retail investors and large institutional speculators capitulated to a six-month downdraft that accelerated in the last week into bear market territory. The violence of Monday’s plunge reinforced the view that the 12-year bull market in gold is finished.

In New York trading, a troy ounce of gold closed at $1,360.60, a more than 9% plunge and the most extreme drop since 1983.

By the close of trading Monday, the price was off more than 13%, or more than $200 per ounce, from last Thursday’s closing price of $1,564.90.

Why is this good news? It settles our nerves. And gives us an opportunity to buy more.

If you’re in a card game and you look around the table… if you can’t figure out who the fool is, he might be you. Then you get nervous. You start rubbing your hands or scratching your forehead. The other players will see that you’ve lost your nerve.

Then you’re finished…

We’ve been looking around the table of the investment world, too, wondering who’s the fool. The people who are buying stocks? Probably, but maybe not. The folks who are buying bonds? Yes. But who knows?

Then who is it? Are we the fools?

A lot of people think so. It was beginning to make us nervous.

Maybe there really is a recovery… however weak. Maybe the feds really do have the situation under control. Maybe the central banks are right to print money. Maybe it will be clear sailing from now until kingdom come. And we’ll be fools not to be on the boat along with all the other stock buyers and gold dumpers.

Why is the price of gold falling? The papers say it’s because speculators fear that China is slowing… or that Cyprus will dump its holdings. From British newspaper The Guardian:

The price of gold fell to its lowest level in more than 18 months on Friday night amid fears that sales of the precious metal forced on Cyprus by its desperate financial plight would lead to wholesale dumping by hard-pressed countries in the coming months.

At the end of a week dominated by the plight of the troubled Mediterranean island, gold slid below $1,500 per ounce for the first time since July 2011 in anticipation that Cyprus would seek to raise 400 million euro by offloading a chunk of its reserves.

The False Premise

"Find the trend whose premise is false," says George Soros, "and bet against it."

And today, behind the drop in the gold price is a very foolish notion. The premise is that real money (financial reserves) can be replaced by credit and debt. People who believe this must be the real fools in the market. Which takes some of the pressure off us.

Imagine you are a major holder of, say, antique Buicks. Imagine you are in financial trouble. The market for antique Buicks anticipates the upcoming supply. Prices of old Buicks drop.

OK… but are Buicks the same as gold?

Imagine that, instead of Buicks, you held cash – a big wad of cash in your vault. Then, in financial trouble, you need to open the vault, get out your cash and use it to pay your creditors. Does the market for cash go down? Does the value of your cash decline because people know you will have to give it to someone else?

The premise is false. Real cash does not become less valuable when people find themselves in financial difficulty; it becomes more valuable. People scramble to get it. They need to pay their debts… settle their accounts… reduce their illiquidity by raising cash. They need cash. The demand for cash goes up, not down.

But wait. Today’s bills are payable in paper cash… not gold. Debtors must raise paper cash by selling their gold for paper. It’s paper they need… not real money.

That’s what makes this business so interesting, isn’t it? And so funny. The system runs on paper money. People spend it. People borrow it. Now people need more of it to pay their bills. So they sell their valuables – namely, gold – to get more paper money. Gold goes down, while central banks print up more paper money – just to make sure there’s plenty to go around.

But one day… and we won’t say when… (saying "what" seems like more than enough to ask from a free publication)… people will stop worrying about the quantity of the paper and begin worrying about the quality of it.

They will find that they have plenty of paper… and that more is coming all the time. They will look in their vaults and wonder what they will do with all this paper money.

They will have bills to pay then too… and creditors with sharper eyes and tougher standards. When they offer these new creditors more of their paper money, they will say, "Uh-uh."

They’ll want some better cash. Gold, in other words.

Bill Bonner is a New York Times bestselling author and founder of Agora, one of the largest independent financial publishers in the world. If you would like to read more of Bill's essays, sign-up for his free daily e-letter at Bill Bonner's Diary of a Rogue Economist.

The Best of Bill Bonner

Nothing beats luck! Then luck beats you.

Want to know the secret of success? John D. Rockefeller explained it a century ago: “Get to work early. Work late. Strike oil.”

“It’s amazing how lucky I get when I work 14 hours per day,” said a famous workaholic.

But a lot of people who work 14 hours per day don’t get lucky. They just get tired. They drill dry holes. They run for president… and lose. They do careful stock market research… and the stocks go down, anyway.

What’s the real secret? Napoleon knew it. He said he didn’t want smart generals. He wanted lucky generals.

That’s not to say that luck is everything. You have to be ready for it… and worthy of it.

How? By working hard. There are certain basic requirements for anything. If you want to be a plumber, you’ve got to learn your pipes. If you want to be an economist, you’ve got to know your mumbo-jumbo. And if you want to win a Nobel Prize, you’ve got to do something that the Nobel committee might consider worthwhile.

All of those things are more or less under your control. And if you want to get lucky in your career or your investments, you have to lay the groundwork. You’ve got to put in the hours.

But then… it’s a matter of luck.

The Buffett Factor

Everybody knows Warren Buffett is a genius. But there are a lot of geniuses in the investment world. And not all of them are Warren Buffett. What makes the difference? You got it – luck!

He was buying solid stocks in an intelligent way in the middle of the biggest financial boom in history. Here’s Bloomberg, on the case:

Bill Gross, manager of the world’s largest mutual fund, said the most renowned investors from Warren Buffett to George Soros may owe their reputations to a favorable era for money management as expanding credit fueled gains in asset prices across markets.

The real test of greatness for investors is not how they navigated market cycles during that time, but whether they can adapt to historical changes occurring over half a century or longer, Gross, 68, wrote in an investment outlook published today entitled “A Man in the Mirror,” named after a song by Michael Jackson.

“All of us, even the old guys like Buffett, Soros, Fuss – yeah, me too – have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience,” Gross wrote. “Perhaps it was the epoch that made the man, as opposed to the man that made the epoch.”

What was unique about the epoch – 1980-2007 – was that it was the final stage of a huge private-sector credit expansion.

There were many reasons for this phenomenon, in which total US debt went from about 150% of GDP to over 350%. The main one was that the US was lucky. It has the world’s reserve currency. People used the dollar as they had once used gold. They thought they could trust it. So when the US sent a dollar overseas, the foreigners were happy to take it… and keep it. They still are.

This huge credit expansion meant that consumers could buy things without fully paying for them. The foreigners took their dollars… and held onto them. They never asked for anything else in return.

It also meant that businesses in the US were able to earn revenue with no offsetting labor cost. People were spending money they never earned… that is, money that US businesses never paid out in wages. They were living on credit – on earnings that were supposed to take place in the future. This meant business revenues were higher than usual… and their costs were lower.

Luck Runs Out

It was a great time to be an investor. It was a great time to be a consumer too. We were all lucky.

But luck runs out. For five years now, the US private sector has been trying to deleverage – as the public sector insists that it borrow more. Result: economic stagnation.

Also, US consumers have watched their wages and family incomes fall for more than 10 years. And US investors – led by Warren Buffett – have been unable to stay even. Adjusted for inflation (however you calculate it), investors are still below where they were in 2000.

And now the world has changed – it is now almost the opposite of 1980, when the big boom began. Today, stocks are expensive, not cheap like they were in 1980. Interest rates are low, not high like they were in 1980. Total debt is now around 350% of GDP, not 150% like it was in 1980.

Hope to make a lot of money in stocks or bonds now? Good luck!

Recently by Bill Bonner: Are We a ‘Criminal Element’?

Nothing beats luck! Then luck beats you.

Want to know the secret of success? John D. Rockefeller explained it a century ago: "Get to work early. Work late. Strike oil."

"It’s amazing how lucky I get when I work 14 hours per day," said a famous workaholic.

But a lot of people who work 14 hours per day don’t get lucky. They just get tired. They drill dry holes. They run for president… and lose. They do careful stock market research… and the stocks go down, anyway.

What’s the real secret? Napoleon knew it. He said he didn’t want smart generals. He wanted lucky generals.

That’s not to say that luck is everything. You have to be ready for it… and worthy of it.

How? By working hard. There are certain basic requirements for anything. If you want to be a plumber, you’ve got to learn your pipes. If you want to be an economist, you’ve got to know your mumbo-jumbo. And if you want to win a Nobel Prize, you’ve got to do something that the Nobel committee might consider worthwhile.

All of those things are more or less under your control. And if you want to get lucky in your career or your investments, you have to lay the groundwork. You’ve got to put in the hours.

But then… it’s a matter of luck.

The Buffett Factor

Everybody knows Warren Buffett is a genius. But there are a lot of geniuses in the investment world. And not all of them are Warren Buffett. What makes the difference? You got it – luck!

He was buying solid stocks in an intelligent way in the middle of the biggest financial boom in history. Here’s Bloomberg, on the case:

Bill Gross, manager of the world’s largest mutual fund, said the most renowned investors from Warren Buffett to George Soros may owe their reputations to a favorable era for money management as expanding credit fueled gains in asset prices across markets.

The real test of greatness for investors is not how they navigated market cycles during that time, but whether they can adapt to historical changes occurring over half a century or longer, Gross, 68, wrote in an investment outlook published today entitled "A Man in the Mirror," named after a song by Michael Jackson.

"All of us, even the old guys like Buffett, Soros, Fuss – yeah, me too – have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience," Gross wrote. "Perhaps it was the epoch that made the man, as opposed to the man that made the epoch."

What was unique about the epoch – 1980-2007 – was that it was the final stage of a huge private-sector credit expansion.

There were many reasons for this phenomenon, in which total US debt went from about 150% of GDP to over 350%. The main one was that the US was lucky. It has the world’s reserve currency. People used the dollar as they had once used gold. They thought they could trust it. So when the US sent a dollar overseas, the foreigners were happy to take it… and keep it. They still are.

This huge credit expansion meant that consumers could buy things without fully paying for them. The foreigners took their dollars… and held onto them. They never asked for anything else in return.

It also meant that businesses in the US were able to earn revenue with no offsetting labor cost. People were spending money they never earned… that is, money that US businesses never paid out in wages. They were living on credit – on earnings that were supposed to take place in the future. This meant business revenues were higher than usual… and their costs were lower.

Luck Runs Out

It was a great time to be an investor. It was a great time to be a consumer too. We were all lucky.

But luck runs out. For five years now, the US private sector has been trying to deleverage – as the public sector insists that it borrow more. Result: economic stagnation.

Also, US consumers have watched their wages and family incomes fall for more than 10 years. And US investors – led by Warren Buffett – have been unable to stay even. Adjusted for inflation (however you calculate it), investors are still below where they were in 2000.

And now the world has changed – it is now almost the opposite of 1980, when the big boom began. Today, stocks are expensive, not cheap like they were in 1980. Interest rates are low, not high like they were in 1980. Total debt is now around 350% of GDP, not 150% like it was in 1980.

Hope to make a lot of money in stocks or bonds now? Good luck!

Bill Bonner is a New York Times bestselling author and founder of Agora, one of the largest independent financial publishers in the world. If you would like to read more of Bill's essays, sign-up for his free daily e-letter at Bill Bonner's Diary of a Rogue Economist.

The Best of Bill Bonner

Back in the USA, stocks rose again yesterday. The Dow finished up 128 points. Gold fell $25 per ounce yesterday… and everybody seems to think it will be going down forever. (A word of caution: probably not.)

Last week, we went to São Paulo, Brazil. There, too, we found taxi drivers who knew a lot more about monetary crises than the typical US economist. Said one:

I remember. I was just a kid. But my father would call and tell us to run to the grocery store. He had just been paid. We’d dash for the grocery story, meet him there and buy everything we could. We spent every cent in just a few minutes.

Our friend was recalling what it was like in the late 1980s in Brazil. The government had caused inflation… then hyperinflation. Prices rose so fast that as soon as people got some cash they ran to the grocery store to spend it.

Later, there was no point. In 1990, hyperinflation in Brazil reached 30,000%. What cost 1 real (the Brazilian currency) in 1980 cost 1 trillion in 1997. The hyperinflation wiped out the middle class… and wiped the shelves clean.

“It’s hard to run a business when you don’t know what your money is going to be worth,” said our friend. “Businesses tended to just stop.”

From Harare to Buenos Aires…

And here in Argentina, there came an announcement this week. The government will freeze the price of gasoline for the next six months.

Price controls didn’t work for the Romans. They didn’t work for the Germans. They didn’t work for the Zimbabweans… or any of the other hundreds of governments that have tried them. But who knows? Maybe they’ll work for the Argentines…

Or gasoline will begin to disappear from the filling stations.

But inflation is just getting started here. The rate is officially about 10%. Unofficially, it’s about 30%. Officially, you can trade a dollar for 5.4 pesos. Unofficially, you’d be a fool to do so. The black market rate is eight pesos to the dollar – and more.

So what do we do? We stick with the “king of cash,” the US dollar.

Which explains why the dollar is so popular. Every time we come to Argentina, we bring the maximum – $10,000 – in $100 bills. Then, when we need to buy things, we trade our dollars on the black market.

Isn’t that illegal? We don’t know.

Criminal Cash?

We went to a money changer in Buenos Aires. At first, we couldn’t find it; there are no big signs to tell you where it is. So we asked a policeman for directions. Turned out, he was standing right in front of the money-changing shop.

It may be illegal. But it’s certainly popular… and, apparently, tolerated. If everyone were forced to use dollars and exchange them at the official rate, the economy would probably collapse tomorrow.

Instead, there is a whole subterranean economy that functions on dollars. Which explains this item in the US press, from former domestic policy advisor to President Reagan Bruce Bartlett:

A new report from the Federal Reserve Bank of San Francisco explains cash has not only held its own against competitors but continues to grow in popularity. Measured in dollar terms, there is 42% more cash in circulation today than five years ago.

Many economists believe that the rise in cash is strongly related to growth in the so-called underground economy – criminal activity such as drug dealing, as well as tax evasion by people working off the books for cash. Strong evidence for this proposition comes from examining the distribution of cash holdings by denomination.

Criminal? What’s he talking about? People are just trying to do business in a world where you can’t trust the local paper money or the people who control it.

Right now, many people trust the dollar more than their home currencies. So the foreigners suck up dollars created by the Fed.

The Great Money Migration

This explains why there is so little consumer price inflation in America – even while the Fed aggressively increases the money supply. They ship it overseas… in $100 bills. Bartlett continues:

As one can see, 84% of the increase in cash since 1990 has been in the form of $100 bills, which have risen to 77% of the value of cash outstanding in 2012 from 52% in 1990.

I seldom use $100 bills for anything except Christmas gifts to nieces and nephews, nor do I ever see people use them in stores. I suspect that most people have the same experience. For large purchases, most law-abiding people use checks or credit cards.

Not here they don’t. They use stacks of $100 bills! In Argentina, even if you buy a fancy house, you come with a suitcase full of $100s. More Bartlett:

One consequence of the rising share of US currency held abroad is that it may distort analyses of the relationship between the money supply and economic activity.

Incidentally, exports of cash appear in the Commerce Department’s data on international transactions (Line 67). It is recorded as an increase in foreign-owned assets in the US but is better thought of as an almost costless way of financing a good chunk of our current account deficit. It’s like borrowing money from foreigners that most likely will never have to be paid back, at zero interest.

We are proud to be a part of this great money migration…

But we fear the day when it comes home!

Recently by Bill Bonner: The Real Reason There Will Be No ‘Recovery’ in America

Back in the USA, stocks rose again yesterday. The Dow finished up 128 points. Gold fell $25 per ounce yesterday… and everybody seems to think it will be going down forever. (A word of caution: probably not.)

Last week, we went to São Paulo, Brazil. There, too, we found taxi drivers who knew a lot more about monetary crises than the typical US economist. Said one:

I remember. I was just a kid. But my father would call and tell us to run to the grocery store. He had just been paid. We’d dash for the grocery story, meet him there and buy everything we could. We spent every cent in just a few minutes.

Our friend was recalling what it was like in the late 1980s in Brazil. The government had caused inflation… then hyperinflation. Prices rose so fast that as soon as people got some cash they ran to the grocery store to spend it.

Later, there was no point. In 1990, hyperinflation in Brazil reached 30,000%. What cost 1 real (the Brazilian currency) in 1980 cost 1 trillion in 1997. The hyperinflation wiped out the middle class… and wiped the shelves clean.

"It’s hard to run a business when you don’t know what your money is going to be worth," said our friend. "Businesses tended to just stop."

From Harare to Buenos Aires…

And here in Argentina, there came an announcement this week. The government will freeze the price of gasoline for the next six months.

Price controls didn’t work for the Romans. They didn’t work for the Germans. They didn’t work for the Zimbabweans… or any of the other hundreds of governments that have tried them. But who knows? Maybe they’ll work for the Argentines…

Or gasoline will begin to disappear from the filling stations.

But inflation is just getting started here. The rate is officially about 10%. Unofficially, it’s about 30%. Officially, you can trade a dollar for 5.4 pesos. Unofficially, you’d be a fool to do so. The black market rate is eight pesos to the dollar – and more.

So what do we do? We stick with the "king of cash," the US dollar.

Which explains why the dollar is so popular. Every time we come to Argentina, we bring the maximum – $10,000 – in $100 bills. Then, when we need to buy things, we trade our dollars on the black market.

Isn’t that illegal? We don’t know.

Criminal Cash?

We went to a money changer in Buenos Aires. At first, we couldn’t find it; there are no big signs to tell you where it is. So we asked a policeman for directions. Turned out, he was standing right in front of the money-changing shop.

It may be illegal. But it’s certainly popular… and, apparently, tolerated. If everyone were forced to use dollars and exchange them at the official rate, the economy would probably collapse tomorrow.

Instead, there is a whole subterranean economy that functions on dollars. Which explains this item in the US press, from former domestic policy advisor to President Reagan Bruce Bartlett:

A new report from the Federal Reserve Bank of San Francisco explains cash has not only held its own against competitors but continues to grow in popularity. Measured in dollar terms, there is 42% more cash in circulation today than five years ago.

Many economists believe that the rise in cash is strongly related to growth in the so-called underground economy – criminal activity such as drug dealing, as well as tax evasion by people working off the books for cash. Strong evidence for this proposition comes from examining the distribution of cash holdings by denomination.

Criminal? What’s he talking about? People are just trying to do business in a world where you can’t trust the local paper money or the people who control it.

Right now, many people trust the dollar more than their home currencies. So the foreigners suck up dollars created by the Fed.

The Great Money Migration

This explains why there is so little consumer price inflation in America – even while the Fed aggressively increases the money supply. They ship it overseas… in $100 bills. Bartlett continues:

As one can see, 84% of the increase in cash since 1990 has been in the form of $100 bills, which have risen to 77% of the value of cash outstanding in 2012 from 52% in 1990.

I seldom use $100 bills for anything except Christmas gifts to nieces and nephews, nor do I ever see people use them in stores. I suspect that most people have the same experience. For large purchases, most law-abiding people use checks or credit cards.

Not here they don’t. They use stacks of $100 bills! In Argentina, even if you buy a fancy house, you come with a suitcase full of $100s. More Bartlett:

One consequence of the rising share of US currency held abroad is that it may distort analyses of the relationship between the money supply and economic activity.

Incidentally, exports of cash appear in the Commerce Department’s data on international transactions (Line 67). It is recorded as an increase in foreign-owned assets in the US but is better thought of as an almost costless way of financing a good chunk of our current account deficit. It’s like borrowing money from foreigners that most likely will never have to be paid back, at zero interest.

We are proud to be a part of this great money migration…

But we fear the day when it comes home!

Bill Bonner is a New York Times bestselling author and founder of Agora, one of the largest independent financial publishers in the world. If you would like to read more of Bill's essays, sign-up for his free daily e-letter at Bill Bonner's Diary of a Rogue Economist.

The Best of Bill Bonner

Nothing much happened on Wall Street yesterday. The Dow rose 56 points. Gold was flat.

From the Daily Mail in London:

US sees highest poverty spike since the 1960s, leaving 50 million Americans poor…

The number of Americans living in poverty has spiked to levels not seen since the mid-1960s, classing 20% of the country’s children as poor.

It comes at a time when government spending cuts of $85 billion have kicked in after feuding Democrats and Republicans failed to agree on a better plan for addressing the national deficit.

The cuts will directly affect 50 million Americans living below the poverty income line and reduce their chances of finding work and a better life.

As President Barack Obama began his second term in January, nearly 50 million Americans – one in six – were living below the income line that defines poverty, according to the bureau. A family of four that earns less than $23,021 a year is listed as living in poverty.

The newspaper illustrates its bleeding-heart story with a ridiculous example, taken from the streets of Baltimore. A Mr. Antonio Hammond abandoned his children for 20 years… and stole copper pipes and other things to support a full-time drug habit.

“All I wanted to do was to get high,” he told the Daily Mail.

Then Hammond kicked the habit and got a job at $13 per hour. Now he’s a success story. And if you believe the Daily Mail, cuts to the federal budget may make it harder for people like Hammond to escape from poverty.

Seems much more likely to us that cuts to federal spending will help people like Hammond get back on their own two feet; the feds won’t have the funds to keep him in poverty.

Baltimore has been fighting poverty for the last 50 years – ever since President Johnson declared a war on poverty in the 1960s. Spending has gone up and up, blasting away at poverty with hundreds of billions of dollars.

But now Baltimore has more poor people than ever – one in four residents is below the poverty line, according to the Daily Mail. And no wonder. When poverty pays, why take up something else?

No Brave New World

We wonder how come there are so many poor people? Wasn’t the Internet supposed to make us all rich?

Even Hammond can now go online and discover the secrets of business and science. He can know as much about economics as Ben Bernanke. He can know as much about politics as Nancy Pelosi. He can know as much about journalism as Tom Friedman.

So how come they get the big bucks and he doesn’t? How come a man who can know almost everything settles for just $13 per hour? Is that all omniscience is worth?

Back at the end of the 1990s, we ran into people who thought the Internet changed everything. With so much information at everyone’s fingertips, they thought they saw a brave new world coming.

We would all have access to the information we needed to increase productivity and add wealth. No one would be poor again. All they would have to do is to go on the Internet to find out how to get rich.

We were suspicious of these claims back then. Information is cheap, we pointed out. It’s wisdom that is precious, and you don’t get much of that on the Internet. You have to pay for it… with bitter experience.

In fact, information – unless it is exactly what you need, exactly when you need it – has negative value. It distracts you. It must be applied. And stored.

How much good would it have done Napoleon – on his disastrous retreat from Moscow – to have the plans for a nuclear weapon? Suppose Louis XVI, mounting the scaffold to the guillotine, had had proof that Sacco and Vanzetti were innocent! Imagine whispering to Hugo Chavez, as he lay on his deathbed: “Studies show that people who eat less meat have less cancer.”

No, dear reader, information is like manure. A little, at the right time, is a good thing. Pile up too much, and it stinks.

Productivity Falls

And now we have proof… that the Internet did not add to the wealth of the US… or apparently anywhere else. From The New Yorker:

For a time, the Labor Department’s productivity figures appeared to support the idea of an Internet-based productivity miracle. Between 1996 and 2000, output per hour in the non-farm business sector – the standard measure of labor productivity – grew at an annual rate of 2.75%, well above the 1.5% rate that was seen between 1973 and 1996.

The difference between 1.5% annual productivity growth and 2.75% growth is enormous. With 2.75% growth (assuming higher productivity leads to higher wages), it takes about 26 years for living standards to double. With 1.5% growth, it takes a lot longer – 48 years – for living standards to double…

Since the start of 2005, productivity growth has fallen all the way back to the levels seen before the Web was commercialized, and before smart phones were invented.

During the eight years from 2005-2012, output per hour expanded at an annual rate of just 1.5% – the same as it grew between 1973 and 1996. More recently, productivity growth has been lower still. In 2011, output per hour rose by a mere 0.6%, according to the latest update from the Labor Department, and last year there was more of the same: an increase of just 0.7%. In the last quarter of 2012, output per hour actually fell, at an annual rate of 1.9%. Americans got less productive – or so the figures said…

If the sluggish rates of productivity growth we’ve seen over the past two years were to persist into the indefinite future, it would take more than a hundred years for output-per-person and living standards to double.

How about that? The Internet. A big dud. A time waster, like television, not a wealth booster, like the internal combustion engine.

Recently by Bill Bonner: Is It Time To Sell Your Gold?

Nothing much happened on Wall Street yesterday. The Dow rose 56 points. Gold was flat.

From the Daily Mail in London:

US sees highest poverty spike since the 1960s, leaving 50 million Americans poor…

The number of Americans living in poverty has spiked to levels not seen since the mid-1960s, classing 20% of the country’s children as poor.

It comes at a time when government spending cuts of $85 billion have kicked in after feuding Democrats and Republicans failed to agree on a better plan for addressing the national deficit.

The cuts will directly affect 50 million Americans living below the poverty income line and reduce their chances of finding work and a better life.

As President Barack Obama began his second term in January, nearly 50 million Americans – one in six – were living below the income line that defines poverty, according to the bureau. A family of four that earns less than $23,021 a year is listed as living in poverty.

The newspaper illustrates its bleeding-heart story with a ridiculous example, taken from the streets of Baltimore. A Mr. Antonio Hammond abandoned his children for 20 years… and stole copper pipes and other things to support a full-time drug habit.

"All I wanted to do was to get high," he told the Daily Mail.

Then Hammond kicked the habit and got a job at $13 per hour. Now he’s a success story. And if you believe the Daily Mail, cuts to the federal budget may make it harder for people like Hammond to escape from poverty.

Seems much more likely to us that cuts to federal spending will help people like Hammond get back on their own two feet; the feds won’t have the funds to keep him in poverty.

Baltimore has been fighting poverty for the last 50 years – ever since President Johnson declared a war on poverty in the 1960s. Spending has gone up and up, blasting away at poverty with hundreds of billions of dollars.

But now Baltimore has more poor people than ever – one in four residents is below the poverty line, according to the Daily Mail. And no wonder. When poverty pays, why take up something else?

No Brave New World

We wonder how come there are so many poor people? Wasn’t the Internet supposed to make us all rich?

Even Hammond can now go online and discover the secrets of business and science. He can know as much about economics as Ben Bernanke. He can know as much about politics as Nancy Pelosi. He can know as much about journalism as Tom Friedman.

So how come they get the big bucks and he doesn’t? How come a man who can know almost everything settles for just $13 per hour? Is that all omniscience is worth?

Back at the end of the 1990s, we ran into people who thought the Internet changed everything. With so much information at everyone’s fingertips, they thought they saw a brave new world coming.

We would all have access to the information we needed to increase productivity and add wealth. No one would be poor again. All they would have to do is to go on the Internet to find out how to get rich.

We were suspicious of these claims back then. Information is cheap, we pointed out. It’s wisdom that is precious, and you don’t get much of that on the Internet. You have to pay for it… with bitter experience.

In fact, information – unless it is exactly what you need, exactly when you need it – has negative value. It distracts you. It must be applied. And stored.

How much good would it have done Napoleon – on his disastrous retreat from Moscow – to have the plans for a nuclear weapon? Suppose Louis XVI, mounting the scaffold to the guillotine, had had proof that Sacco and Vanzetti were innocent! Imagine whispering to Hugo Chavez, as he lay on his deathbed: "Studies show that people who eat less meat have less cancer."

No, dear reader, information is like manure. A little, at the right time, is a good thing. Pile up too much, and it stinks.

Productivity Falls

And now we have proof… that the Internet did not add to the wealth of the US… or apparently anywhere else. From The New Yorker:

For a time, the Labor Department’s productivity figures appeared to support the idea of an Internet-based productivity miracle. Between 1996 and 2000, output per hour in the non-farm business sector – the standard measure of labor productivity – grew at an annual rate of 2.75%, well above the 1.5% rate that was seen between 1973 and 1996.

The difference between 1.5% annual productivity growth and 2.75% growth is enormous. With 2.75% growth (assuming higher productivity leads to higher wages), it takes about 26 years for living standards to double. With 1.5% growth, it takes a lot longer – 48 years – for living standards to double…

Since the start of 2005, productivity growth has fallen all the way back to the levels seen before the Web was commercialized, and before smart phones were invented.

During the eight years from 2005-2012, output per hour expanded at an annual rate of just 1.5% – the same as it grew between 1973 and 1996. More recently, productivity growth has been lower still. In 2011, output per hour rose by a mere 0.6%, according to the latest update from the Labor Department, and last year there was more of the same: an increase of just 0.7%. In the last quarter of 2012, output per hour actually fell, at an annual rate of 1.9%. Americans got less productive – or so the figures said…

If the sluggish rates of productivity growth we’ve seen over the past two years were to persist into the indefinite future, it would take more than a hundred years for output-per-person and living standards to double.

How about that? The Internet. A big dud. A time waster, like television, not a wealth booster, like the internal combustion engine.

Bill Bonner is a New York Times bestselling author and founder of Agora, one of the largest independent financial publishers in the world. If you would like to read more of Bill's essays, sign-up for his free daily e-letter at Bill Bonner's Diary of a Rogue Economist.

The Best of Bill Bonner

Recently by Bill Bonner: Is It Time To Sell Your Gold?

Gold got whacked again – down another $22 yesterday. Stocks fell too. The Dow fell 111 points.

Is it the start of another correction? Or just a hiccup? Stay tuned!

Meanwhile, independent Sen. Bernie Sanders from Vermont is up in arms. He demands that the White House and the House of Representatives say no to benefit cuts for Social Security recipients and disabled vets.

He got the Senate to express itself on the issue too. Not surprisingly, the senators are opposed to any cutbacks that would fall on their voters’ heads. No senator dared raise his voice against it.

What exactly has been proposed?

Simple enough: more fudge.

Special Numbers

Anyone who has read our Diary for very long knows that the numbers used by the federal government… and by economists, generally… are special numbers.

They look like normal numbers. They use the decimal system. You can add them. You can subtract and multiply them. But they are imposters… crooked… bent… perverted. They do not mean the same thing as stand-up, normal numbers. They may not mean anything at all.

If you look in a basket of apples, you will find a certain number of them. You might have one. You might have six. But whatever number you have, it will be an actual, real number. It will accurately describe what’s in your basket.

But what if the feds tell you the unemployment rate is 7.6%? What if they tell you that GDP is growing at 2.5% per year? What if they insist consumer prices are rising at a 2% annual rate?

What do you know? Nothing!

These are public numbers, not private numbers. Like public information, generally, they are low-quality numbers… with little real information content… and, often, negative value.

They may have meaning, but it is not the same meaning that you expect from other numbers. Often, they lead you to believe something that isn’t true. And you can never trust them.

The Feds’ Latest Scam

What got Sanders worked up was the latest attempt to use these scammy numbers to lower US deficits. The idea on the table is a plan that probably originated here in Argentina. It is shifty enough.

The feds propose to change the way they calculate the CPI – a so-called "chained dollar" inflation rate – so that they will get a lower reading and, thereby, send less money to the old folks.

Heck, the number can be almost anything you want! Why not make it convenient for the feds?

On the surface, it appears to be the rarest sort of government initiative – the kind we can approve of. After all, the feds spend too much. Cutting back would allow more people to keep more of their money.

But isn’t it cheating the graybeards and the cripples?

Yes, of course. They were promised money that does not belong to them. As it turns out, they will get less than they expected. But so what?

The politicians promised to adjust payments to the CPI. As we’ve discussed at length, the CPI was fudge from the get-go. It already understates real price increases substantially. According to John Williams of ShadowStats.com, the real CPI – calculated as the feds did in the Carter administration – is 9.6%, not 2%.

So they’re already cheating retirees and veterans. Might as well cheat them a little more…

Bill Bonner is a New York Times bestselling author and founder of Agora, one of the largest independent financial publishers in the world. If you would like to read more of Bill's essays, sign-up for his free daily e-letter at Bill Bonner's Diary of a Rogue Economist.

The Best of Bill Bonner

Dear readers ask about gold. Is it time to sell? To buy? To forget about it?

Gold fell $25 yesterday; it now stands at $1,575 per ounce. The gold price could break all the way down to $1,000. But we don’t expect it. Gold is not in a bubble.

As you have seen, gold is neither overpriced nor underpriced. It buys about what it should buy. Maybe a little less. Maybe a little more.

How do we know what gold “should” buy?

We don’t, really. But gold is a natural thing. It is pulled from the earth by people, using the technology and resources available to them. As their productivity in other areas goes up, so does – generally – their ability to extract gold from the ground.

If GDP goes up 10%… the quantity of gold usually goes up about the same amount. If the economy goes into a decline, so does the gold mining industry… reducing the rate of growth of the gold supply.

For these reasons, the supply of gold is usually more or less in sync with the supplies of other goods and services. And the exchange rate between gold and other goods and services is usually stable.

This was also the observation of Roy Jastram, who wrote The Golden Constant in 1977. Jastram looked at 500 years of British history. He found that prices – in terms of gold – were remarkably stable.

And here we see that prices for stocks, too, were also stable… as long as gold – rather than an economist – stood behind the currency.

You can see for yourself from the above chart of the Dow/gold ratio going back to 1800. Prices for stocks went haywire in gold terms only after Congress created the Federal Reserve System in 1913.

Then the world went off the gold standard during World War I. (It was partly the struggle to get back on the gold standard that set off the bubble of the 1920s.)

Then there was another big run-up of stock prices – in terms of gold – in the 1950s and 1960s… and again in the 1980s and 1990s. The chart also shows the Dow/gold ratio heading down for the last 13 years… with no clear sign that it has reached the bottom.

But wait. Hasn’t most of the profit for gold buyers already been made? Tekoa Da Silva from BullMarketThinking.com explains:

In response to that, the Pareto Principle suggests that 80% of the gains are found in the final 20% of the bull market. As it currently stands, the Dow/gold ratio is sitting at roughly 9-to-1. A move to a 5-to-1 ratio would require a $2,907-per-ounce gold price, a 3-to-1 ratio $4,845 per ounce, and a 2-to-1 ratio would require a stunning $7,268-per-ounce gold price.

A 2-to-1 ratio move from here equates to a 400% move higher in gold, and of course, a 1-to-1 ratio ($14,500 per ounce) would equate to an over 900% move left remaining in the gold bull market.

Be Happy

Da Silva does not say so, but the Dow/gold ratio could come down in another way. Gold does not have to go up in price; stocks could fall. If the Dow were to slip to 8,000, for example, this would be equivalent to a 5-to-1 ratio.

When the stock market cracked in 2000… and gold continued to rise… we thought the two were headed for a historic conjunction. Perhaps at 2-to-1. Perhaps at 1-to-1. Where would the two meet?

We guess it would happen at about 5,000. Gold would rise to $5,000 per ounce… and the Dow would fall to 5,000.

Or at 2-to-1 – the Dow could fall to only 10,000… while the gold price rose to $5,000 per ounce.

Who knows? But there is no reason to think that things have changed in any fundamental way.

Gold is still real money. It is still brought forth only with much effort and investment. And the Dow stocks still represent a certain group of publicly listed, US-domiciled companies from which you can expect a certain earnings stream. There is no reason to think that the basic relationship between the Dow stocks and gold has been altered in any fundamental or everlasting way.

For practically the entire 19th century… many years of the 20th century… and as recently as the 1980s, the ratio of the Dow to gold was 1 to 5 or less. Investors paid 5 ounces of gold to buy the Dow and its earnings.

Will the Dow once again trade for 5 ounces of gold or less? Almost certainly. And it will probably happen before this historic drop in the Dow/gold ratio has reached its final bottom.

Hold your gold. Sell your stocks. Floss your teeth. And be happy.

Recently by Bill Bonner: Will Your Bank Account Be ‘Cyprused’ Next?

Dear readers ask about gold. Is it time to sell? To buy? To forget about it?

Gold fell $25 yesterday; it now stands at $1,575 per ounce. The gold price could break all the way down to $1,000. But we don’t expect it. Gold is not in a bubble.

As you have seen, gold is neither overpriced nor underpriced. It buys about what it should buy. Maybe a little less. Maybe a little more.

How do we know what gold "should" buy?

We don’t, really. But gold is a natural thing. It is pulled from the earth by people, using the technology and resources available to them. As their productivity in other areas goes up, so does – generally – their ability to extract gold from the ground.

If GDP goes up 10%… the quantity of gold usually goes up about the same amount. If the economy goes into a decline, so does the gold mining industry… reducing the rate of growth of the gold supply.

For these reasons, the supply of gold is usually more or less in sync with the supplies of other goods and services. And the exchange rate between gold and other goods and services is usually stable.

This was also the observation of Roy Jastram, who wrote The Golden Constant in 1977. Jastram looked at 500 years of British history. He found that prices – in terms of gold – were remarkably stable.

And here we see that prices for stocks, too, were also stable… as long as gold – rather than an economist – stood behind the currency.

You can see for yourself from the above chart of the Dow/gold ratio going back to 1800. Prices for stocks went haywire in gold terms only after Congress created the Federal Reserve System in 1913.

Then the world went off the gold standard during World War I. (It was partly the struggle to get back on the gold standard that set off the bubble of the 1920s.)

Then there was another big run-up of stock prices – in terms of gold – in the 1950s and 1960s… and again in the 1980s and 1990s. The chart also shows the Dow/gold ratio heading down for the last 13 years… with no clear sign that it has reached the bottom.

But wait. Hasn’t most of the profit for gold buyers already been made? Tekoa Da Silva from BullMarketThinking.com explains:

In response to that, the Pareto Principle suggests that 80% of the gains are found in the final 20% of the bull market. As it currently stands, the Dow/gold ratio is sitting at roughly 9-to-1. A move to a 5-to-1 ratio would require a $2,907-per-ounce gold price, a 3-to-1 ratio $4,845 per ounce, and a 2-to-1 ratio would require a stunning $7,268-per-ounce gold price.

A 2-to-1 ratio move from here equates to a 400% move higher in gold, and of course, a 1-to-1 ratio ($14,500 per ounce) would equate to an over 900% move left remaining in the gold bull market.

Be Happy

Da Silva does not say so, but the Dow/gold ratio could come down in another way. Gold does not have to go up in price; stocks could fall. If the Dow were to slip to 8,000, for example, this would be equivalent to a 5-to-1 ratio.

When the stock market cracked in 2000… and gold continued to rise… we thought the two were headed for a historic conjunction. Perhaps at 2-to-1. Perhaps at 1-to-1. Where would the two meet?

We guess it would happen at about 5,000. Gold would rise to $5,000 per ounce… and the Dow would fall to 5,000.

Or at 2-to-1 – the Dow could fall to only 10,000… while the gold price rose to $5,000 per ounce.

Who knows? But there is no reason to think that things have changed in any fundamental way.

Gold is still real money. It is still brought forth only with much effort and investment. And the Dow stocks still represent a certain group of publicly listed, US-domiciled companies from which you can expect a certain earnings stream. There is no reason to think that the basic relationship between the Dow stocks and gold has been altered in any fundamental or everlasting way.

For practically the entire 19th century… many years of the 20th century… and as recently as the 1980s, the ratio of the Dow to gold was 1 to 5 or less. Investors paid 5 ounces of gold to buy the Dow and its earnings.

Will the Dow once again trade for 5 ounces of gold or less? Almost certainly. And it will probably happen before this historic drop in the Dow/gold ratio has reached its final bottom.

Hold your gold. Sell your stocks. Floss your teeth. And be happy.

Bill Bonner is a New York Times bestselling author and founder of Agora, one of the largest independent financial publishers in the world. If you would like to read more of Bill's essays, sign-up for his free daily e-letter at Bill Bonner's Diary of a Rogue Economist.

The Best of Bill Bonner

Here in Argentina, most things were closed on Monday for the Easter holidays… and are closed again today, too.

What do these Argentines think they are? French?

We wandered the streets. Here in the Palermo Soho neighborhood of Buenos Aires, where we are staying, there were thousands of people window-shopping, eating in restaurants and drinking in outdoor cafes.

Inflation is running about 30% per year. The government is proposing to use citizens’ pension funds to pay off its creditors. You get 50% more for your money if you trade your dollars for pesos on the black market. And experts are predicting another big devaluation of the peso after the October elections.

“The Argentine economy has been supported by strong farm sector prices,” reports the local paper. “High agricultural prices should help support the peso and the Kirchner government.”

Eager to Spend

People on the streets seem to have money to spend. And they are eager to spend it.

“Are you kidding?” said an Argentine friend. “Nobody wants to save pesos. You get them. You spend them.”

“I’ve seen this show before,” said another friend. “I was here in Argentina in the 1980s, when we had inflation of 1,000% per month. And I was in Moscow when the Soviet Union fell apart. Inflation hit about 800% there in 1993. I see signs of a big takeoff in inflation again. Watch out.”

But for well-to-do Argentines, the quality of life here must be among the highest in the world. There are dozens of restaurants within a five-minute walk. You can sit outside. The weather is nice. And prices are cheap, if you convert your money on the black market.

But the quality of life is more than just sitting in outdoor cafes sipping a café con leche. Being able to work is important too… and so is being able to keep your money. You need to be able to save money… and then you’ll have enough money to be able to hang out in outdoor cafes!

The world is a rich place. It is so rich that it can afford more and more people who don’t have to work and more and more people – such as Ben Bernanke – whose work reduces standards of living for practically everyone.

The waiter who brings your morning coffee is providing a valuable service. The plumber who makes sure your water flows is also giving you something of value. So is the autoworker who welded together your automobile.

All increase the real wealth of the planet.

But Bernanke? Is there any evidence that any central banker from the dawn of time until April 2, 2013, added a centime or a farthing to the wealth of the world?

Not that we know of!

Instead, Bernanke fiddles with the monetary base… jiggles interest rates… and generally diddles the economy.

You might say, if it weren’t for his jiggling and diddling and so on, that the “crisis would be worse” or even that “we would have had a depression.” But you might also say that if he hadn’t been diddling and fiddling with it, we wouldn’t have had a financial crisis in the first place!

Subtracting Value

How about Nancy Pelosi or Lindsey Graham? Do they provide a useful service? Do they make the world richer… or better… in any way at all? Are they productive members of society or bloodsucking parasites?

It seems obvious here: Argentine politicians do not add value. They subtract it. They spend money that is not theirs and sap wealth they never created. They drain away the real wealth of the world by transferring money from those who earn it to those who consume it. Then it is gone.

Is it any different in North America?

“You get what you pay for,” said Milton Friedman. You pay for zombies, you get all you want – and then some.

What about tax lawyers? People on disability? Defense contractors?

Aha! You will say that defense contractors provide a useful service. Without their work, the U.S. would be attacked and invaded.

In the 1930s, major industrial nations were on the march… and there was at least some remote danger that they could march against the USA. Japan bombed Pearl Harbor, but it never posed much of a threat to the continental U.S. And Nazi Germany couldn’t even conquer Britain, let alone America.

Back then, the U.S. spent 1% of GDP on defense, which was probably more than enough.

Today, the Pentagon consumes nearly five times as much. There are no hostile, aggressive nations endangering the peace of the world – as far as we know. So, for our purposes, we assume that the Pentagon wastes an amount equivalent to about 4% of GDP.

That is to say, it takes wealth from the productive sector and destroys it. Maybe worse. By overspending on “security,” the U.S. armed forces may make Americans less secure.

But wait – we’re not going to spend our time complaining about the zombies. Instead, we’re going to come to the point…

Which is, no matter how rich a place is, it can always be impoverished by careful government planning!

Argentina is a rich country. It has boomed in spite of itself. Thanks to a productive agricultural sector, it earns enough revenue to keep the economy functioning and the government supplied with payoff loot.

But as revenues rise, so does the number of people who want to be paid off: unions, the poor, the rich.

No matter how much they get, the authorities will find ways to spend more. This is how they caused a disaster in the 1980s… and again at the end of the 1990s.

Is Argentina ripe for another financial crisis? Maybe.

The U.S. is an even richer country, but not so rich that a determined government cannot ruin it. Maybe it already has.

Recently by Bill Bonner: Will Your Bank Account Be ‘Cyprused’ Next?

Here in Argentina, most things were closed on Monday for the Easter holidays… and are closed again today, too.

What do these Argentines think they are? French?

We wandered the streets. Here in the Palermo Soho neighborhood of Buenos Aires, where we are staying, there were thousands of people window-shopping, eating in restaurants and drinking in outdoor cafes.

Inflation is running about 30% per year. The government is proposing to use citizens’ pension funds to pay off its creditors. You get 50% more for your money if you trade your dollars for pesos on the black market. And experts are predicting another big devaluation of the peso after the October elections.

"The Argentine economy has been supported by strong farm sector prices," reports the local paper. "High agricultural prices should help support the peso and the Kirchner government."

Eager to Spend

People on the streets seem to have money to spend. And they are eager to spend it.

"Are you kidding?" said an Argentine friend. "Nobody wants to save pesos. You get them. You spend them."

"I’ve seen this show before," said another friend. "I was here in Argentina in the 1980s, when we had inflation of 1,000% per month. And I was in Moscow when the Soviet Union fell apart. Inflation hit about 800% there in 1993. I see signs of a big takeoff in inflation again. Watch out."

But for well-to-do Argentines, the quality of life here must be among the highest in the world. There are dozens of restaurants within a five-minute walk. You can sit outside. The weather is nice. And prices are cheap, if you convert your money on the black market.

But the quality of life is more than just sitting in outdoor cafes sipping a café con leche. Being able to work is important too… and so is being able to keep your money. You need to be able to save money… and then you’ll have enough money to be able to hang out in outdoor cafes!

The world is a rich place. It is so rich that it can afford more and more people who don’t have to work and more and more people – such as Ben Bernanke – whose work reduces standards of living for practically everyone.

The waiter who brings your morning coffee is providing a valuable service. The plumber who makes sure your water flows is also giving you something of value. So is the autoworker who welded together your automobile.

All increase the real wealth of the planet.

But Bernanke? Is there any evidence that any central banker from the dawn of time until April 2, 2013, added a centime or a farthing to the wealth of the world?

Not that we know of!

Instead, Bernanke fiddles with the monetary base… jiggles interest rates… and generally diddles the economy.

You might say, if it weren’t for his jiggling and diddling and so on, that the "crisis would be worse" or even that "we would have had a depression." But you might also say that if he hadn’t been diddling and fiddling with it, we wouldn’t have had a financial crisis in the first place!

Subtracting Value

How about Nancy Pelosi or Lindsey Graham? Do they provide a useful service? Do they make the world richer… or better… in any way at all? Are they productive members of society or bloodsucking parasites?

It seems obvious here: Argentine politicians do not add value. They subtract it. They spend money that is not theirs and sap wealth they never created. They drain away the real wealth of the world by transferring money from those who earn it to those who consume it. Then it is gone.

Is it any different in North America?

"You get what you pay for," said Milton Friedman. You pay for zombies, you get all you want – and then some.

What about tax lawyers? People on disability? Defense contractors?

Aha! You will say that defense contractors provide a useful service. Without their work, the U.S. would be attacked and invaded.

In the 1930s, major industrial nations were on the march… and there was at least some remote danger that they could march against the USA. Japan bombed Pearl Harbor, but it never posed much of a threat to the continental U.S. And Nazi Germany couldn’t even conquer Britain, let alone America.

Back then, the U.S. spent 1% of GDP on defense, which was probably more than enough.

Today, the Pentagon consumes nearly five times as much. There are no hostile, aggressive nations endangering the peace of the world – as far as we know. So, for our purposes, we assume that the Pentagon wastes an amount equivalent to about 4% of GDP.

That is to say, it takes wealth from the productive sector and destroys it. Maybe worse. By overspending on "security," the U.S. armed forces may make Americans less secure.

But wait – we’re not going to spend our time complaining about the zombies. Instead, we’re going to come to the point…

Which is, no matter how rich a place is, it can always be impoverished by careful government planning!

Argentina is a rich country. It has boomed in spite of itself. Thanks to a productive agricultural sector, it earns enough revenue to keep the economy functioning and the government supplied with payoff loot.

But as revenues rise, so does the number of people who want to be paid off: unions, the poor, the rich.

No matter how much they get, the authorities will find ways to spend more. This is how they caused a disaster in the 1980s… and again at the end of the 1990s.

Is Argentina ripe for another financial crisis? Maybe.

The U.S. is an even richer country, but not so rich that a determined government cannot ruin it. Maybe it already has.

Bill Bonner is a New York Times bestselling author and founder of Agora, one of the largest independent financial publishers in the world. If you would like to read more of Bill's essays, sign-up for his free daily e-letter at Bill Bonner's Diary of a Rogue Economist.

The Best of Bill Bonner

U.S. stocks continued mostly going up last week. But European markets fell. Gold bounced up and down… but held above $1,600.

Most people would much rather own stocks than gold. Most of the time, they are probably right. Gold pays no dividends. Nor does it invent new things or open up new markets… or any of the other things that make stocks go up.

And now most people seem to think there is a “recovery” under way… and that the authorities have everything under control. So who needs gold?

According to Kim MacQuarrie’s book The Last Days of the Incas, a sailor in the 16th century earned about 8 ounces of gold for a year’s worth of service.

How much does a merchant seaman today earn? A quick Google search reveals a wage of about $2,500 per month… or about $30,000 per year.

That seems a little low. It probably doesn’t include health insurance and so forth. And maybe it includes all of those sailors from Indonesia and the Philippines who must earn less than the typical American mariner. So let us say $40,000, which is about the average wage in the U.S.

Hmmm… Eight times $1,600 (the current gold price) does not take us far. To about only $12,800. So either MacQuarrie is wrong. Or sailors make a lot more today than they used to. Or the price of gold is far too low.

Sailors were probably not well paid in the Age of Discovery. We will guess that the average wage was probably closer to an ounce of gold per month.

That would be a wage of $1,600 monthly… still low by U.S. standards, but not by the standards of most of the world! By world standards, a sailor probably earns about as much, in gold, as he did 500 years ago.

Those are the kinds of problems and questions you run into when you’re trying to figure out whether gold is overpriced or underpriced. All we can tell is that, on the evidence of the sailors’ wages, gold is probably not far from where it ought to be.

Pizarro hit the jackpot when he conquered the Incas and stole their gold. During a four-month period, from March-July 1553, the conquistadores melted down 40,000 pounds of Incan jewelry, art, tableware and religious items. They sent one-fifth of the loot back to the king of Spain. They divided up the rest among the 168 conquistadores.

It was a bloody business (killing thousands of unarmed Incas at Cajamarca, for example). But it paid well. The horsemen in the group each got 90 pounds of 22.5 karat gold, plus 180 pounds of silver. If they had just put the gold in a safe place, to be dug up by a distant descendant in the 21st century, the fortune would be worth about $2 million.

Getting “Cyprused”

Last week, gold got a little boost when it became apparent that (1) Europe still faces huge and disturbing financial challenges; (2) governments are ready, willing and able to steal money from bank accounts; and (3) governments are also preparing to put on capital controls to prevent you from moving your money to safety.

We maintain a small bank account in France. It is used just to make repairs and otherwise keep up our house there. The woman who handles it sent this message on Friday:

“Don’t put any more money in the account. We don’t want to get Cyprused!”

How likely is it that the French government will freeze the banking sector and skim 10% off the accounts? Not very. France is not in that kind of a cash-flow bind… yet.

But all the countries of the developed world are headed in that direction. They spend more than they receive in tax revenues. And as their debt increases, their interest payments increase too.

Of course, ultra-low interest rate policies – enabled by central bank monetizing of government debt – keeps interest payments low… for now. But low interest rates don’t stay low forever.

And as Greece, Spain, Portugal and other borrowers have already discovered, Mr. Market can be a real pain in the derriere. When he insists on higher rates of interest – fearing that he may not be repaid as promised – state budgets get shot to hell.

Then, like Cyprus, the feds get desperate for money. They will go after it wherever and however they must.

Which makes saving money dangerous, as well as unrewarding. First, the feds suppress interest rates so you get no return on your savings. Then, when they get in a jam, they “Cyprus” your savings directly.

The Cash Conundrum

We are not against holding cash. In fact, we recommend that members of our family wealth investment advisories, Bonner & Partners Family Office and Bonner & Partners Private Wealth, do exactly that.

As our old friend Rick Rule says, cash gives you the courage and the conviction to buy when everyone around you is selling. You can’t expect to snap up bargains in the market without it.

But cash also makes us nervous, thanks to central banks’ overzealous use of the printing presses. This is an important reason to keep your eye on gold (and own some too).

If the 16th-century sailor had taken his annual pay and buried it under a tree in Extremadura, it might still be there. The lucky treasure hunter would find himself as rich as the sailor who buried it five centuries ago.

The nice thing about gold is that not only does it hold its value over centuries, it is also a valuable that you can keep out of the banking system.

And like jewelry or antique autos, you can keep it at home. Bury some gold bars under your own tree. Keep them in your own safe. If the banking system freezes up or breaks down… you still have them. Pass them to your children. Give them as birthday presents. Or just lock them up and forget about them.

Gold is private money. Dollars, pounds and euros are public money.

Dollars, pounds and euros are given to us by governments and central banks. Gold is given to us by the gods.