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The Daily Reckoning Friday, August 31, 2009 The big picture shows that the credit cycle is contracting... The upward trends of the last 50 years have been reversed... A look at struggling US banks... The Mogambo on the inevitable crash of fiat currencies...and more! A New Model for the World Economy by Bill Bonner Bedford Springs, Pennsylvania Actually, we haven’t gotten to Bedford Springs yet. We’re still sitting in the airport lounge in Paris. Summer is over. It’s back to work...12 hours a day...just like we’ve worked for the past 39 years. When we were in college we had no money. In the summer we had to work two jobs to try to save enough cash to continue. One summer, we worked in a boatyard in Annapolis early in the morning...then, we did an evening shift painting television towers. Painting the towers was such dangerous work our poor mother begged us to quit. But the money was good – $5.25 an hour – so we had to keep at it. More about that in a minute... We’ve only got a minute before they call our flight, so we’ll make this short. Nothing much happened in the markets on Friday...except that the price of gold rose $11. Gold seems ready for another attack on the $1,000 level. Will it get there? Maybe...maybe not. Humility! Humility! We have to remember that the world economy has never, ever been in a fix like this. We don’t know where it will lead. The big picture is that the credit cycle – expanding since the end of WWII – seems to be contracting. “The joy of buying falls victim to recession,” says a headline in today’s International Herald Tribune. The article tells us how people are planting gardens again...saving money...making do. This is likely to be a fundamental shift, not a transient one. But – humility! – what do we know? What we suspect is that the upward trends of the last half a century have now reversed. We’re in a period when the excesses and mistakes of the boom/bubble period must be corrected. A new model for the world economy must be found – because China can’t continue to sell products to Americans if Americans can’t continue to buy them. But there’s more to this big picture. Never before in history have so many government officials been so sure they could stop a correction. And never before have they had more ammunition at their disposal. The numbers are all over the place. And they’re huge. The Obama administration, for example, expects to run $9 trillion in deficits over the next 10 years – and that number is based on a recovery! Imagine what will happen if the economy doesn’t recover? Here at The Daily Reckoning, we don’t expect a recovery, not now...not never. Because the old model no longer works. Debt got too big...too expensive...too risky. Something had to give. But what gives now? What happens when a world economy of $50 trillion per year tries to correct and governments try to stop it? What gives when the world’s largest debtor borrows $9 trillion trying to prevent nature from taking her course? [We don’t know...but we do know that you, dear reader, ought to look out for yourself. And lucky for you, there is a little-known ‘loophole’ in all the bailout money the government has been throwing around. A loophole that could allow you to make over $17,000 in ‘bailout’ income checks over the next year – and every year – until the US economy recovers. Get your first check now...] More news from The 5 Min. Forecast: “China has once again set the tone for our Monday market forecast,” writes Ian Mathias in today’s issue of The 5. “Roll the videotape: “Chinese traders dumped shares early this morning after a popular magazine rumored that the booming Chinese loan market is cooling off. Caijing magazine guessed that the Chinese loaned about $29 billion in August, a 43% crash from July. While that number isn’t official, traders around the red nation raced for the exits. The Shanghai Composite closed down 6.7%, its worst day in over a year. 16% of the stocks on the Shanghai Composite fell 10%, the daily limit down. “Thus, as we charted above, Chinese stocks are in a textbook bear market. In fact, down 23% since its 2009 peak earlier this month, the Shanghai Composite will be the worst performing major national index in the world for the month of August. “But still up around 50% for the year, is this the time to pile back into China – the great hope of the global market rebound? With the Shanghai Composite still priced 29 times earnings, it’s hard to be too enthusiastic. According to Bloomberg, the MSCI Emerging Markets Index is going for 19 times earnings. “If you’re debating buying this dip, you should check this out: Earlier this year, Addison Wiggin penned a report that spelled out a ‘triple timebomb’ that would derail the global rebound...one of which was a faux boom in Chinese stocks." Wanna make sure you get The 5 – in its entirety – sent to your inbox, every Monday through Friday? You can...by becoming a subscriber to one of Agora Financial’s paid publications, such as Bulletin Board Elite. Their latest special report details how you could reach your retirement goal in as little as one month – starting with only $500. It’s possible...see for yourself. And back to Bill, with more thoughts: Banks in the United States are having a tough time...and that’s putting it lightly. One in four US banks have announced an unprofitable quarter. “Friday’s edition of The Wall Street Journal picks up on the theme of the long road of pain ahead for bank shareholders in the US,” colleague Dan Amoss tells us. “In ‘Banks on Sick List Top 400,’ the WSJ details several ugly highlights from the latest FDIC Quarterly Banking Profile, published last Thursday. “Here are a few: “1. The FDIC’s Deposit Insurance Fund is now promising to insure $6.2 trillion in deposits with just $10.4 billion in reserves. Expect to see another “special assessment” cutting a few billion dollars out of bank earnings later this year. “2. Credit card losses are at a record: 9.95% “3. 416 banks, or 5% of the nation’s banks, are on the ‘problem’ list. “4. FDIC-insured banks are sitting on $332 billion in loans more than 90 days past due, up from $290 billion in the first quarter. “5. Nonperforming loans now make up 2.77% of the entire banking industry’s assets. This is up from 1.4% in June 2008 and 0.47% in June 2006. As these loans get ‘worked out’ in today’s credit environment, the market will start to realize how severe net charge-offs will be. “In this new report, the FDIC published updated figures for the combined noncurrent loans and loan loss allowance at all FDIC-insured institutions. Here is an updated version of the chart we published in the Aug. 14 alert. The new figures – the moves from December 2008 to June 2009 – are highlighted in the dotted lines at the far right of this chart: “You can see how problem loans are increasing at a much faster rate than the rate at which the banking industry is adding to its loss allowance. This means that published capital ratios are misleadingly high.” [Dan’s latest short idea for Strategic Short Report is building up its loss allowance at a glacial pace compared with its skyrocketing delinquencies and nonperforming assets. Its management team likes to highlight its strong capital ratios. But when adjusted for the inevitable growth in provision expenses – and the leaner operating income that its shrinking balance sheet will generate – its capital ratios looking ahead to mid-2010 don’t look so strong. You can find all the details here.] And back to our story... There must not have been an Occupational Safety and Health Administration back then. We worked high in the air without harnesses. In fact, we were handicapped; in our right hand was a mitt that we dipped into a paint can. So our right arm was useless for holding on the to beams...which were usually slippery from the paint we had slimed on. Looking back, the whole thing seems suicidal. But hey...we needed the money. One day, a new kid joined the crew. He was a little overweight. We wondered how he’d be able to climb up a 500-foot tower and maneuver around with the painting mitt on his hand. It was work for monkeys, not for hippos. After much huffing and puffing he made it up to where we were painting. But then he made a near-fatal mistake: he looked down. The sight of so much distance between him and terra firma gave him a fright. He froze. He grabbed the I-beam with both arms and refused to budge. He couldn’t go up. He couldn’t go down. He couldn’t move at all. “Yust leave him dere...” was the advice of one of our co-workers, recently arrived from some country where people were apparently very blond and very stupid. The foreman, also a recent immigrant from some Eastern European country without the ‘th’ sound, was more sympathetic. “Idiot! C’mon down from dere.” But the poor kid couldn’t move. “Hey...calm down...you got up here...you can get down too.” We thought logic might succeed where threats failed. But it was hopeless. We decided that time, which heals all wounds, might also help this fellow overcome his fear. We left him alone and painted the tower. At dinnertime, he was still there. Still petrified. It looked like he would stay there until he died. But we knew we couldn’t leave him there. So, we all gathered around him. Hitched some ropes to him. Reassured him. Threatened him with castration...and worse. “If you don’t let go of dat beam, I’m gonna knock you off it,” said the foreman. Finally, he realized he had no choice. “Just don’t look down,” we suggested. After much coaxing...and much time...he was down on the ground. He got in his car and drove off. “Damned college boy,” said one of the Eastern European. “They’re always a pain in de ass.” Until tomorrow, Bill Bonner The Daily Reckoning The Daily Reckoning PRESENTS: Over the last century, excessive money creation has become so much a part of US monetary policy that it’s difficult to remember when our money was actually worth anything. This week, the Mogambo gives us a little history lesson...and some of his facts are pretty darn interesting. Read on... Driving a Fiat Currency into a Tree by The Mogambo Guru Tampa Bay, Florida Floy Lilley at the Mises Institute, in her essay at LewRockwell.com, notes that the gold-standard dollar “provided us with nothing less than relative peace and prosperity over a span of 136 years” until that fateful year, 1913. So how does she quantify “relative peace and security”? Well, one good way is to look at the value of the dollar, which would be strong if the country was a good investment, which it was, and in fact, “It had not only retained one hundred percent of its value, it had gained eleven percent. That’s right. The dollar we started with in 1776 bought us eleven percent more after almost seven generations.” Then, on the “quiet 23rd of December in 1913”, J.P. Morgan and buddies got Congressional quislings to pass legislation authorizing the creation of the Federal Reserve, and to which I add that the jerk Woodrow Wilson then signed it, thus going down in history as the disastrous guy who set in motion the destruction of the dollar by the Federal Reserve creating excess money and credit. She doesn’t make a point of it, but back then, the dollar was still gold, and thanks to the loathsome Federal Reserve creating the money to finance the bubbles of The Roaring Twenties that resulted in the Great Depression, the despicable Supreme Court infamously ruled in 1933 (and upheld by every traitorous Supreme Court case since then) that, contrary to what the Constitution said, the dollar did not have to be made of silver or gold, and that a paper “fiat” currency could be created, without limit, for any reason, even at a mere whim, anytime, day or night, 24/7, including holidays, not realizing that they were the idiots that REALLY destroyed the dollar! Gaahhh! With this kind of disastrous stupidity, I dryly and humorlessly ask that you don’t talk to me about any “wisdom” emanating from the Supreme Court. I was hoping that Ms. Lilley would spontaneously pick up on the theme of “heap scorn on the Federal Reserve for creating too much money and credit out of thin air and the despicable Supreme Court for letting them.” "...achieving a ‘sound money’ is the easiest thing in the world! Just stop creating more of it! That’s all you need!" I was going to suggest that she could, you know, maybe even put in an endorsement for the Mogambo Mindless Mob (MMM) brand of products, like the popular Mogambo Pitchfork (very effective when brandished threateningly) and the classic Mogambo Flaming Torches that will be so hard to get when the proletariat bozos start forming mindless mobs bent on revenge after so much hurting from the horrifying inflation in consumer prices, the pervasive, lingering economic depression, ruination, bankruptcy and the embarrassment of realizing that it was caused by the people we elected to Congress, who picked the people to run the Federal Reserve, which is the biggest failure one can imagine and should be immediately abolished, how Ben Bernanke, its chairman, should be turned over to me for some sessions at my new Mogambo Re- Education Center, where our muscular, trained technicians will slap the hell out of his stupid face, and the stupid faces of Congresspersons (except Ron Pau l), and the stupid faces of anyone who still believes in getting, or giving, a free lunch to, or from, anyone, especially the government, which is so corrupt that it once gave smallpox-infected blankets to the American Indians, which is only marginally worse than destroying the currency of the country and makes you reflexively scream in horror every time you see the money supply go up. Well, it does me, anyway. Instead, she goes on that the result was that since then, “the purchasing power of a dollar has plummeted over 95%”, which means that “We now pay twenty times more than J.P. Morgan did for any item.” Yikes! Suddenly, my ears pricked up as she said, “Few have written on the mechanics of getting back to sound money”, which I immediately noticed makes me a genius, meaning that people should worship my gigantic brain, my wife and kids should stop calling me “idiot” and saying how much they hate me and maybe I should get a Nobel Prize. The reason I am suddenly so enamored of my intellect is that achieving a “sound money” is the easiest thing in the world! Just stop creating more of it! That’s all you need! It’s simple! It is my Profound Mogambo Genius (PMG) that has solved the puzzle! Okay, I am embarrassed that I got carried away there, and I admit that I am not very smart, and that is why I stole the whole idea from the fact that this is all the gold standard did; it prevented increases in the money supply, and the only thing that Congress had to worry about was doing smart things so that gold came into the country (increasing our money supply) and not doing something so stupid that it went someplace else better (decreasing our money supply). But those days are all over now, and the only people who are buying gold, along with silver and oil, are the people who know what happens to an unsound, fiat currency (like the dollar) in the hands of a government composed of a bunch of socialist, commie-think yahoos (like the US Congress) that willingly deficit-spends insane amounts of money thanks to a central bank (like the Federal Reserve) creating it and a population sitting around saying, “Duh! Okay with us!” Hahaha! We’re freaking doomed! Until next time, The Mogambo Guru for The Daily Reckoning Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications. Click here to visit the Mogambo archive page. --------------------- Special Offer --------------------------- Better Than Gold! You know, gold isn’t the only precious metal out there that can make you serious gains. In fact, during a ‘good’ year for gold, this other metal will do even better. Learn how to get richer on the epic metals boom ahead...see how here.   The Daily Reckoning - Special Reports: Investing In Silver: Conquistador Silver — Ours for the Taking History of Financial Disasters Will you be Wiped Out? Introducing the Single Best Way to