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The Daily Reckoning Tuesday, September 8, 2009 Macroeconomics: 95% claptrap...5% fraud... Consumers under-consume to make up for the bubble years... Gold touches $1,000...frugality is the new normal... Jim Nelson on how to protect against a falling dollar...and more! The Boomers are Out of Time - and Out of Money by Bill Bonner London, England Clowns to the left of us...jokers to the right... The Simpleton's Analysis: Consumers cut back. The economy sank. Now, government must take action. It must help people out and take up the slack. The downturn took $12 trillion off Americans' net worth. The feds have pledged about $12 trillion to fix the problem. But wait, where does government get any money? Hey, they borrow it, just like consumers did. And besides, it's ultimately the same money - taxpayers' money. So what's the big diff? The big diff is the subject of today's Daily Reckoning. The first big diff is that the feds don't spend your money the way you would. Private citizens spend money they don't have on things they want but don't need. The feds spend money that doesn't belong to them on things that the rightful owners don't even want. Wait a minute. Markets were closed yesterday. With no figures to report, we should talk about something important. What's important about macroeconomics? Nothing. It's 95% claptrap. The other 5% is pure fraud. At least as practiced by the leading macroeconomists of our time - such as Ben Bernanke, Tim Geithner and Larry Summers. It's just a show-off sport...the idea is to impress the world with some fancy data-heavy formula...win the Nobel Prize and save the world. That way, you get what all men crave...money and power. Why do men (and women) want money and power? Aww, c'mon...we explained it already. Because it improves their chances of survival and procreation. In a DNA study, for example, they found that Genghis Khan, today, has something like 6 million male descendants. Is that success or what? The great Khans of today are no longer the steppe warriors on horseback. They're basketball players, rock 'n' roll stars, actors, and hedge fund managers...and, oh yes, occasionally - economists. The link between economic theory and procreation is probably very weak; but that doesn't stop economists from wanting to strut around and show off. And the way for an economist to show off is to get himself appointed to the President's Council of Economic Advisors...or to the central bank...or get a professorial post at Princeton...etc. etc. This you do by producing tomes, formulae and hypotheses. And, don't forget to write a piece for The Wall Street Journal from time to time. Another important hint: your work has to suggest that you can manipulate the business cycle, control the credit cycle, or generally make things turn out the way people want. If you are a Daily Reckoning-type economist, you can forget fame and fortune completely. Who wants to hear from a macroeconomist who tells people to leave well enough alone...and to let the forces of natural economics sort out their own problems? No one...at least no one who is running for public office. Instead, they want someone who will promise to "Save the World." Save the world from what? Why...from the damage done by other economists! Two generations of American economists thought the way to bring prosperity was to encourage consumption. On the face of it, the idea is absurd. Classical economists...and Daily Reckoning commentators...laugh at the idea. You don't really get rich by consuming; you get rich by saving and investing. But they had their charts and graphs...their theories and their jobs teaching economics at prestigious universities. Naturally, they had the feds' ears too - since every politician wants to promise more consumption. The feds favored home ownership, for example...even by people who were bad credit risks. They set up Fannie and Freddie to make it easy for people to buy houses. They even passed a law requiring banks to lend to people who weren't likely to pay them back; that was the origin of the sub-prime mortgage market! They kept interest rates low, too, so people could borrow at affordable rates. And they inflated the currency, so consumers would want to spend their money rather than save it. They also opened the world to free trade, so Americans could buy more, cheaper stuff made by foreigners. For 50 years, they cultivated consumption and let production go to seed. And now...wouldn't you know it...Americans have over-consumed. Personal expenditures per capital rose 25% between 2003-2005. Personal debt soared to over $13 trillion...about $124,000 per household. Total debt/GDP tripled since 1980. And now, it's payback time. The private sector has cut back. Consumers need to under-consume to make up for the over-consumption of the bubble years. Savings rates are rising. Spending is falling (see below)... And so what do the simpletons do? Private citizens are unwilling to consume...so they push the government to consume their money for them! [Even though the government is spending your money hand-over-fist, it's not all bad news...really. It turns out that the very takeover of Fannie Mae and Freddie Mac...coupled with the massive government bailouts...has created an astounding "loophole" that could pay you as much as $17,500 this year. Learn how to get your share. See here.] More news from The 5 Min. Forecast: "The story Friday was gold, on the verge of $1,000 an ounce," writes Ian Mathias in today's issue of The 5 Min. Forecast. "Now well rested thanks to our holiday weekend, we focus on the larger issue - in part, the cause of $1,000 gold: The dollar. "At 77 and change as we write, the dollar index is at a 2009 low and about a point shy of a 52 week low. But as you can see above, while we appear on our way back down to historic lows, the dollar is still a ways away from 71. In more tangible terms, the euro is as high as $1.45 today, it's priciest of 2009. "Ironically, we're not as enthused about the dollar's decline this time around. As the Bloomberg explained this morning, 'The dollar declined to the lowest level this year against the euro as equity markets rose on speculation the global recession is easing, sapping demand for the currency as a haven.' That's the best reason to sell the ol' greenback? We could think of better...like voracious money printing at the Federal Reserve, a national debt like no nation has ever suffered in history, or this: "'An initiative equivalent to Bretton Woods or the European Monetary System is needed,' said Heiner Flassback over the weekend, director of the United Nations Conference on Trade and Development. Essentially, the UN has called for a new global reserve currency. The global group wants for a reserve note that's composed of many worldly monies - a complicated array of currencies with adjustable pegs and variable exchange rates. It isn't clear exactly what they would want, but its quite clear what they don't...dollar watchers take note." 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 special report details what is sure to be the story of the decade - and one that will make you a fortune. Learn all about it here. And back to Bill's reflections: Gold futures tapped the $1,000-an-ounce mark in early morning trading, a level the precious metal hadn't reached since February. "As long as the Federal Reserve and the US government take actions that debase the dollar, the dollar price of gold will rise," says GoldMoney.com's James Turk. "Similarly, as long as the Bank of England and the UK government take actions that debase the pound, the Sterling price of silver will rise. It is a certainty, just like night follows day. "Years from now we will look back at today's action with amazement at how low the price of gold and silver were, just like I can today look back to my college years when gold was only $35 and an ounce of silver could be had for 46 pence. It is a distant memory - and those prices will never again be seen. Eventually a three-digit dollar gold price and single-digit Sterling silver will never again be seen, as long as those currencies continue to be mismanaged and continue on the path to the fiat currency graveyard. "...the dollar and pound are being debased, and in the absence of any policy advocating sound money in the US and the UK, inevitably gold will hurdle $1,000 and silver will clear £10." [Our intrepid correspondent Byron King is sure that gold is going to surpass the $1,000 mark by leaps and bounds. Learn how you can pad your portfolio with our favorite yellow metal...while the price is still relatively low. See how here.] "Frugality is the new normal," says an Associated Press report. One study suggests that consumer will spend 14% less - even AFTER the recession is over. Boomers are out of time. Out of money. And they'll be out of luck unless they trim expenses and begin saving. They've figured it out. Personal spending has fallen in 4 of the last 6 quarters. It hasn't done that since 1947 - when they first began tracking it. Consumers' net worth has taken a big hit - down $13 trillion, from $62 trillion to $50 trillion. And so, the simpletons think the government has to rush in where fools foundered...that is, they rush in with more money. But where do the feds get any money? They have to borrow it...or print it. There's a big difference between federal borrowing and private borrowing. When the private sector borrows the risk is that people won't be able to pay back their loans. That is a risk that lenders live with. They know the risk; they factor it into their decision-making. Sometimes they're right. Sometimes - such as when economists mislead them with a lot of gibberish numbers - they're wrong. And when they're wrong, borrowers default...and lenders lose money. The feds, on the other hand, can't default. At least, not when their debts are calibrated in money they control. But there's the risk right there. And it is a different kind of risk. It's the risk that the feds may choose to pay back the loan in much cheaper currency. Or merely make a mistake that results in much cheaper currency. Imagine a private borrower who could print up a few extra bills in his basement to pay his monthly mortgage. He may not do so...perhaps his sense of honor would prevent him. Or maybe he would fear that he wouldn't be allowed to borrow again. But if his back were to the wall, there is little doubt that he'd soon be in the print shop. The feds are in the print shop already. They're printing up more dollars intentionally - to try to get inflation rates up...and to finance federal borrowing. It will be a miraculous thing if their new dollars don't eventually cause inflation. But the macroeconomists who run the print shop tell us not to worry. They've got it all under control. They're already talking about when and how to withdraw the dollars they so helpfully provided during the crisis period. [Unfortunately, the average American doesn't have access to a print shop like the feds do. But you don't have to print out more money to make sure you are protected from this economic downturn - you just have to set up your own 'personal bailout.' What have everything you need to get started here.] The simpletons - who had no idea that the crisis would come...and then thought it could be easily contained...and then mistook it for a monetary, banking crisis...and then judged it over before it had really started... ...these same simpletons still do not understand that the problem is not a lack of money, it's a surplus of debt... ..they now reassure us that they know just how much money to put into the system...and just when to take it out. If you believe them...you might want to stay in stocks and US bonds. If not, you should head for cover. The country is being run "by a gang of clueless bozos," says Lee Iacocca, in his new book. Until tomorrow, Bill Bonner The Daily Reckoning The Daily Reckoning PRESENTS: The US dollar isn't looking too hot, due to a skyrocketing federal budget, an out-of-control trade deficit and a major credit crisis. However, as Jim Nelson explains, below, there are ways to get out of the greenback. Read on... 4 Ways to Protect Against a Falling Dollar by Jim Nelson Baltimore, Maryland The US dollar is in bad shape. Over the past several years, the federal budget deficit has shot up like money is going out of style - and maybe it is. This caused the federal debt clock to add a 14th digit (by breaking the $10 trillion dollar mark). We've also got an out-of-control trade deficit. For having a 40% share of the world's economy, we certainly don't produce that many goods. Finally, we have a credit crisis that is causing many to worry that our lenders, like China and Japan, will turn off the tap. With this nightmarish scenario we find ourselves in, it wouldn't surprise us if the US' credit rating fell. That would cause an immediate panic in the currency markets and send the buying power of the dollar into a tailspin. I guess what we're saying is get out of the dollar as fast as possible! There are a couple of ways to go about this: Currency Protection Strategy No. 1: Sell the Dollar The easiest way to get out of the dollar is to trade in the cash you don't need to live on for another currency. You might even be able to hold other currencies in your brokerage account. Here at Lifetime Income Report, we don't recommend currencies directly. We're here to help you find income, not to pick currencies. Exchanging currencies is one way to protect your wealth from a potential dollar disaster. But it's not the only way... Currency Protection Strategy No. 2: Buy Precious Metals There's probably no safer way to protect your wealth in the world than to own gold and silver. There are many Web sites and exchanges where you can do this, as well as coin dealers that can help you make this move. While we personally think precious metals are going to continue increasing in value, you probably shouldn't just spend all your money on gold nuggets. There's a big difference between the spot prices and what you would pay. Gold coins, for instance, are trading at a hefty premium over spot. "...it wouldn't surprise us if the U.S.' credit rating fell. That would cause an immediate panic in the currency markets and send the buying power of the dollar into a tailspin." Currency Protection Strategy No. 3: Buy US Companies With International Exposure Again, this shouldn't be a surprise. We have many US companies in our portfolio. After all, we are here for income, not to be global traders. But you'll probably notice that most of our US companies have plenty of international exposure. Currency Protection Strategy No. 4: Buy American Depositary Receipts We saved the best for last. This is the theme we have been hitting the hardest in recent months. ADRs have been a cornerstone of this newsletter. From the very first issue, we had at least two ADRs in our portfolio. This month, we are adding another. There's a huge reason why we buy ADRs instead of the currencies themselves. Instead of just the upside of foreign currency to US dollars, we also get the benefit of fast-growing emerging markets and mega income from international players. You see, foreign markets, especially now, have huge dividend yields. The US is near the bottom of the list of places for income investors to look. The smart money is in companies staying out of the dollar. Regards, Jim Nelson for The Daily Reckoning P.S. If you've been reading Lifetime Income Report for the past few months, or if you've just taken a glance at our open portfolio, you can probably tell we have a serious theme developing. We're moving out of US stocks. Instead, we've been investing in areas like Indonesia, Brazil, Great Britain, and, this month, Spain. In this letter, we're going to show you exactly why we're doing this and how you can increase your international exposure. In addition, in our latest report, you'll find a way to cash in on YOUR share of the bailout. Get it all here. Editor's Note: Headed by Jim Nelson, Lifetime Income Report exclusively recommends companies that are cash-rich, well-established, well- positioned, safe and fundamentally solid. These companies have to be in the right industries at the right time. They must have a long history of doing good business, taking care of customers, and looking out for their shareholders. Otherwise, they won't make the cut. To find investments like these, Jim uses a special seven-point filtering strategy to find his readers the best income streams possible. ----------------------- Special Offer ------------------------- Quadruple Your Money with a 231 Year-Old Discovery Every country in the developing world needs this 231-year-old discovery, but... Only 10 companies in the world have it... Only 3 of them are pure plays... Only ONE can actually deliver... Turning every one of your dollars into four by this time next year! Keep reading for the story...   The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future Introducing the Single Best Way to Make Sure You'll Never Run Out of Money...

AGORA Financial Resources: The Daily Reckoning Is: Economics & Politics Crisis & Opportunity Gold, Oil & Energy Growth, Tech & Medical Options Investing Founder: Bill Bonner Editorial Director: Addison Wiggin Publisher: Rocky Vega Managing Editor: Kate Incontrera Web Editor: Greg Kadajski About The Daily Reckoning: Now in its 10th anniversary year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. For additional articles and commentary follow The Daily Reckoning on Twitter and Facebook.