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The Daily Reckoning Tuesday, September 22, 2009 All signs point in the direction of social change towards thrift... Mortgage delinquencies hit a new record...homeowners walk away... The dollar's days are numbered... Bill Bonner and Addison Wiggin with an excerpt from Financial Reckoning Day Fallout... There's No Flu Shot for the Thrift Bug by Bill Bonner London, England You wanna know what is going on? David Rosenberg explains... "US consumers are cutting back, and where they are not cutting back, they are scaling down. This new cycle is all about 'getting small' and it is deflationary. For yet another in the litany of signs pointing in the direction of social change towards thrift, have a look at what is transpiring at the upper echelons of the income strata - Now Even Millionaires See the Benefits of Budgeting on page B5 of the Saturday NYT is a must read. "Not only are the rich trading down, but the article quotes a high net worth financial advisor who said 'many of our clients are very happy to be sitting on bond portfolios and cash reserves.' And see the article on page 2 of the Sunday NYT - Beauty Products Lose Some Appeal During Recession. According to the NPD Research Group, total sales of department store beauty products are down 7% from year-ago levels. Women are apparently opting for the 'natural look' - "some people are selectively replacing higher-priced items with cheaper products from drug stores and discount stores." Right on, David! And here's the CEO of Pepsico: "The age of thrift is here." Even in Japan, after 20 years of coughing and sneezing, people have caught "the thrift bug," says The New York Times. What's a consumer economy need in order to keep growing? Uh...it's needs consumer spending. What do consumers need in order to boost spending? Uh...they need more money! Oh, there's where it all starts to come apart, doesn't it? Where do they get more money? They either earn it...or they borrow it. And right now, they can't earn it - not with 12% unemployment in California! Workers have no bargaining power. And they can't borrow it either. The banks won't lend - not with the value of their collateral still falling. Word comes this morning that mortgage delinquencies have hit a new record. And here's a headline warning of worse to come: "$30 billion home loan time bomb set for 2010." Even solvent homeowners who aren't forced into foreclosure still find it beneficial to walk away from their houses. "Strategic defaults,' says The Los Angeles Times, are becoming a problem for mortgage lenders. We didn't read the article. Instead, we began to think. What if we owned a house worth $200,000 with a $300,000 mortgage? What would be the smart thing to do? Easy...walk away from it. Then, buy it back at auction! Desperate consumers do what they have to do. Canny consumers do what's smart. And now it's smart to walk away from any debt that you don't actually have to pay. As for adding more debt, you can gage yourself from the comments above, consumers are not eager to borrow. They've seen what happens when they go too far into debt. They're older and wiser than they were in the bubble years. It's been 10 years since the tech bubble exploded. Since then, stock market investors have made nothing - zero. And now houses are falling too. So, if a fellow needs money for his retirement, where is he going to get it? Not from his house. Not from a pay raise. And not from his stocks either. He needs savings. He needs real money. Americans aren't so stupid after all. When they need to stop spending, they stop spending. When they need to save, they save. Too bad about the economy. Yes, what is good for individuals seems to be bad for the economy. When people save instead of spend, the consumer economy stalls. And then economists think there is something wrong. They think an economy needs to expand constantly. And so, they try to find 'solutions' to the 'problem.' Actually, there is no problem at all. It's just the way capitalism works. There are booms. And there are busts. Periods of growth...and periods when the mistakes made during the boom are corrected. There's a time for every purpose under heaven. That's the way it works. The economy breathes in and it breathes out. And there's always some dumb economist trying to smother it with a pillow! [No matter what the government does, this 'recovery' is nothing but a fraud - and you are losing money because of it. The government is robbing you blind - dipping into your savings and retirement accounts...and the average American is none the wiser. You can still take charge and protect your assets with this five-part financial defense strategy, found here.] More news, from The 5 Min. Forecast: "Yesterday we reported, with a little unease, one of the biggest gold sales in history. The IMF is looking to get rid of an eighth of its reserves - over 400 metric tons worth $13 billion. They'd been publicly mulling it for a long time, but still...can't be a positive for gold prices. "Today, some better news and a sign of the times, wrapped into one: China is rumored to be a buyer of the IMFs stash for sale - maybe the only buyer. "'China will consider buying if the price is right and the return is relatively high,' a mystery Chinese central banker told Reuters. No telling just how much they'd pick up, but given their $800 billion in US treasury reserves, we're pretty sure they could afford as much as they want. "(For some perspective, go grab one of your one ounce gold coins. If you had 32,149 more, you'd own one metric ton. If China completes this purchase - all 400 tons - that'll be enough gold to fill a 8'x10' office to the ceiling.) "'China holds just over 1,000 tons of gold in its official state reserves,' notes Byron King, who always has a finger on the gold beat. 'Probably more, if you consider 'stealth' holdings categorized as industrial stockpiles. If China buys up to 400 tonnes of gold from the IMF, it'll increase China's reserves by 40% in one fell swoop. (And stick the IMF with a bunch of depreciating dollar-assets.) "'Will an IMF gold sale to China affect prices? If done correctly, no - or not much, in the short term. Because if done correctly, it'll happen quietly... there won't be any announcements beforehand, and we'll only find out about it when the IMF and China next report their gold holdings. It's not like any Chinese trucks will be showing up at the mines and refineries, taking 'current' production. That's exactly the way that the Chinese want this to happen. "'Still, it'll dramatically increase China's gold holdings, strengthening their long term monetary hand. China does NOT want to see the world go to a non-dollar 'gold-like' standard... not yet. "'Because China does not have enough gold in its vaults... not yet!' "'On that point, they're working on it. It'll take time. It's a long- term play, a long-term strategy. That's why investors have to keep an eye on the long term, and buy gold and mining shares now...for the future of inflation, and as the wheel of history turns towards China.'" 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 Breakthrough Technology Alert. Their latest report details an epic piece of news that could make life better for the entire human race - and could give you your shot at incredible wealth. But you must act before Wednesday, September 23 at midnight. Hurry - time is running out. Get all the details here. And back to Bill, with more thoughts: A report from the world's biggest bank, HSBC, tells us the dollar's days are numbered. "The dollar looks awfully like sterling after the First World War," said David Bloom, the bank's currency chief. "The whole picture of risk-reward for emerging market currencies has changed. It is not so much that they have risen to our standards, it is that we have fallen to theirs. It used to be that sovereign risk was mainly an emerging market issue but the events of the last year have shown that this is no longer the case. Look at the UK - debt is racing up to 100pc of GDP," he said The Telegraph reports: "Crucially, China and rising Asia have reached the point where they can no longer keep holding down their currencies to boost exports because this is causing mayhem to their own economies, stoking asset bubbles. Asia's 'mercantilist mindset' of recent decades is about to be broken by the spectre of an inflation spiral. "The policy headache was already becoming clear in the final phase of the global credit boom but the financial crisis temporarily masked the effect. The pressures will return with a vengeance as these countries roar back to life, leaving the US and other laggards of the old world far behind. "A monetary policy of near zero rates - further juiced by quantitative easing - is completely incompatible with circumstances in most of Asia, the Middle East, Latin America, and Africa. Divorce is inevitable. The US is expected to hold rates near zero through 2010 to tackle its own crisis. "What is occurring is an epochal loss in the relative wealth and economic power of the old G10 bloc of rich countries compared to rising regions of the world. The euro, yen, sterling, Swiss franc and other mature currencies will be relegated along with the dollar in this great process of rebalancing, but the Greenback will bear the brunt." That said, we repeat a headline from Seeking Alpha: "Dollar shorts should look out." We agree with HSBC and the Telegraph: the dollar will probably slide - especially against Asian currencies - for the next few decades. But that's the long term. In the relatively short term we still face the shock of another leg down of the credit contraction crisis. Risk is likely to make a comeback. When that happens - and it could happen in a 'Red October' - the dollar will seem like a relatively solid refuge. This is what happened last year. We wouldn't be surprised by a replay of that 'flight to safety' we saw at the end of last year. But we know what you're thinking: what? When did the dollar become a 'safe currency?' Of course, it's not safe. But when the end of the world approaches, it will seem safe. For a while. Until tomorrow, Bill Bonner The Daily Reckoning The Daily Reckoning PRESENTS: It's no secret that the US dollar is in trouble - but the extent of the trouble could be much, much worse than previously imagined. Bill Bonner and Addison Wiggin explain in an excerpt of their recently released sequel to Financial Reckoning Day, below... Hegemony in Question by Bill Bonner and Addison Wiggin London, England Watch out, the greenback is going into the toaster oven...here's what Nouriel Roubini had to say in The New York Times: "We may now be entering the Asian century, dominated by a rising China and its currency. This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles. For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable." Yes, it could take more than a decade. But investors could take a big loss any day. All it would take would be a sudden move by China...or a shocking inflation figure in the United States...or a Treasury bond auction that doesn't go as planned. Everyone is watching the United States...carefully. And foreigners hold trillions' worth of dollar- based assets outside the United States. These are dollars that people hold, not to pay their bills or buy gasoline, but as a speculation. They're speculating the greenback will hold its value as well or better than the other things they might do with their money. Europeans hedge their bets against the euro - with dollars. Asians hedge their bets against falling stock prices. Russians hedge their bets against the ruble. Latin Americans hedge their bets against their own pesos, bolivars, and cordobas. Everybody likes dollars because they are the most trusted money in the world. For the last 50 years, nothing could compete with the dollar. (Even though the dollar lost value against a number of other currencies over long periods of time.) These foreign holders are already nervous. They've seen the mess the United States has gotten itself into. They read the headlines. They watch the news. They know that the United States is running a budget deficit this year equal to four times the biggest budget deficit ever - a record set just last year. It is as if a runner broke the record in the 100-yard dash...and then ran the course four times faster a year later. This is not progress. This is spooky. "China could dump enough U.S. dollars to set off alarms all over the world. All of a sudden, dollar holders would rush for the exits - each one trying to get out before the others. In minutes, the dollar market could collapse...taking down U.S. Treasury bonds with it." The Chinese already let the United States know they are worried. "We trust you to protect the value of our assets," they in essence said to the US Treasury Secretary. And in the middle of May 2009, from the Financial Times comes news that Brazil and China are working toward using their own currencies in trade transactions rather than the US dollar. This comes on the heels of the news that China's central bank governor Zhou Xiaochuan proposed to create a reserve currency "that is disconnected from individual nations. " What Mr. Zhou would like is to replace the US dollar as the world's leading currency with a new international reserve currency, possibly in the form of special drawing rights (SDRs), a unit of account used by the International Monetary Fund. Then in June, Russian President Dmitry Medvedev questioned the US dollar's future as a global reserve currency and said using a mix of regional currencies would make the world economy more stable. Russia may consider ruble-yuan swaps. The dollar "is not in a spectacular position, let's be frank, and its prospects cause various questions as do the prospects for the global currency system, " Medvedev said in an interview published by the Moscow-based Kommersant newspaper. Regarding the global financial system, "therefore our task is to make it more mobile and at the same time more balanced." But for now, as long as these countries trust the United States to keep its promises and protect its money, they continue to hold US dollar investments - notably, US Treasury bonds. But just wait until the United States loses their trust. In a matter of minutes, China could dump enough US dollars to set off alarms all over the world. All of a sudden, dollar holders would rush for the exits - each one trying to get out before the others. In minutes, the dollar market could collapse...taking down US Treasury bonds with it. Regards, Bill Bonner and Addison Wiggin for The Daily Reckoning Editor's Note: The above essay was excerpted directly from the newly- released sequel to Bill and Addison's first book (and New York Times bestseller) Financial Reckoning Day. You can get your copy of Financial Reckoning Day Fallout within a special "Rescue and Recovery" bundle by clicking here.   The Daily Reckoning - Special Reports: History of Financial Disasters: Will you be Wiped Out? US Recession: By far the Weakest Recovery Introducing the Single Best Way to Make Sure You'll Never Run Out of Money...