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The Daily Reckoning Weekend Edition Saturday, March 13, 2010 Taipei, Taiwan Discontent spreads across Europe as thousands take to the streets, What China's tough military talk means for LA lovers, Plus, all the past week's reckonings, archived for your responsible consumption... Joel Bowman, reporting from a hotly contested island in the South China Sea... Only the dead have seen the end of war. ~ Plato Although history is not totally devoid of examples to the contrary, it is a rare case indeed when a free and prosperous nation sees fit to take up arms against its neighbors. We must be especially cautious, therefore, during a time when freedom is under constant attack and the fragile prosperity of once powerful nations hinges on the finite faith of the many in the moribund currency of the few.  We began our little Seeds of War mini-saga a couple of weeks back with an analogy borrowed from our friend and colleague, Chris Mayer. In a recent article, Chris astutely observed how the period of the roaring 1920s closely resembled the story told by F. Scott Fitzgerald in his classic novel The Great Gatsby. Call it art imitating life...imitating art. (Or, is it the other way around?)  To quickly recap: An exuberant time of easy money and speculative excess, the '20s witnessed a rise in living standards approximately commensurate to the rise in women's hemlines. Toward the end of the decade, when the party was in full swing, you might even have been lucky enough to see a lady's knee as she danced the Charleston. (See George Taylor's wacky Hemline Theory for more.) More important than even the length of women's skirts, the period also saw the proliferation of, among other things, low cost automobiles - the makers of which are now mostly defunct or government owned - and the emergence of the United States as a political force on the world stage.  But the decade that began with a post-war, can-do attitude eventually devolved into a post-bash, can't-do hangover. By 1929, the last of Gatsby's champagne was emptied and the world set in for the long and painful road of depression. This next decade, Chris noted, was more akin to John Steinbeck's Grapes of Wrath. The modern chronological overlay, in case it isn't already apparent, can be found in the Gatsby-like excesses of the late '90s-early '00s...through to the age of the stricken Joads, on which we have recently, regrettably, embarked. What then, we wondered aloud in Part I, comes next? In the fertile plains of social and economic discontent, the seeds of war begin to take root... We first mused on the growing turbulence on the European continent, a politically fractured landmass seldom far from the precipice of military conflict. News this week tells us that some 60,000 Greek malcontents took to the streets there to torch German cars and generally make a nuisance of themselves. They are revolting against the "austerity" program implemented by the cash-strapped Greek government...and against Germany's refusal to undermine the flimsy common currency by bailing them out. The problem with Greece's national cash flow is that it hasn't got one...or, more correctly, that it is flowing in the wrong direction, and quickly. Simply put, the state is broke. It couldn't pay its workers more even if it wanted to. The case there is a classic example of too many living off the work of too few; too many public expenses leeching on too few private incomes. Unfortunately, with a deficit hovering at some 13% of GDP, Greece's public balance sheet is not the only highly combustible euro-trash to be found in the region. Ireland too is facing strikes at schools and hospitals after it announced a round of pay cuts for public workers. The government there is trying to rein in spending and curb a deficit that reached 11.7% of GDP last year. (Remember, these EU members were supposed to keep their deficits to within 3% of GDP. Not even Germany, the best of a bad bunch, managed that.) Similar social sores afflict Portugal, where civil servants walked off the job on Thursday, hoping to close schools, courts and hospitals as they protested against their own "austerity" measures. One could reasonably hit "find and replace" on the proper nouns in the past couple of paragraphs and drop in France, Spain, Iceland, the UK and half a dozen more drowning nations from around the world. Closer to home - your Taipei-based editor's home, that is - tensions are again heating up over the sovereignty of this tiny, though hotly contested, subtropical island.  Following the recent decision by the United States to sell arms to Taiwan, three senior People's Liberation Army (PLA) officers - including two majors and a senior colonel - told Xinhua News Agency that China should begin selling off US debt to punish the Americans, and that it was in the Middle Kingdom's best interests to increase defense spending and expand its deployments of military forces.  And the rhetoric doesn't cease there. In his new book PLA Air Force Colonel Dai Xu, a widely quoted Chinese military analyst, leaves little room for interpretation when describing his thoughts on the possibility of a looming international conflict. "China cannot escape the calamity of war," he writes, "and this calamity may come in the not-too-distant future, at most in 10 to 20 years... If the US can light a fire in China's backyard, we can also light a fire in their backyard." This kind of political jousting from outspoken members of the PLA is nothing new. Fifteen years ago, General Xiong Guangkai made headlines when, after a meeting with former US ambassador Chas Freeman, he warned: "And finally, you do not have the strategic leverage that you had in the 1950s when you threatened nuclear strikes on us. You were able to do that because we could not hit back. But if you hit us now, we can hit back. So you will not make those threats." With some $2.4 trillion of foreign reserves, Xiong Guangkai's message is a whole lot more potent today than it was a decade and a half ago...or, perhaps, ever. The last time an international trade balance so tipped in the favor of the Chinese exporters, back in the mid-1800s, the western empire of the day, Britain, flooded the Middle Kingdom with opium. Today, the Chinese are drowning in a sea of steadily depreciating greenbacks. This brings us to the next question: When will the world's greatest savers de-peg their currency from that belonging to the world's greatest debtors?  "The answer has always been simple," writes Dan Denning, the Melbourne- based editor of The Australian Daily Reckoning, "When it is in China's interests to do. To us, that means China will de-peg when the benefits of increased purchasing power in the currency are more important that dwindling export profits. "In other words," continues Dan, "we think China is close to a new phase of growth that's driven by consumer demand, domestic consumption, and more mature Chinese capital markets open to foreign investment. A de-pegging of the currency would see a much stronger yuan. This would give Chinese savers a lot of spending power on global markets. They would also be able to buy more Chinese goods, which might lead to higher wages in China too (and more stoking of consumer demand)." It also means less tolerance for provocative acts (whether perceived or actual) from foreign governments. In all of this, it is important to remember that the China of today is not the China of the mid-1800s...or even the China of a decade and a half ago, when Xiong Guangkai first stirred up the press. Similarly, neither are her political adversaries, like those in Washington who think it prudent to sell $6 billion worth of arms to Taiwan, in the same position to bargain. "In the end," General Xiong Guangkai waged after that meeting with Freeman, "you care more about Los Angeles than you do about Taipei." Nobody doubts that is true. We only hope the world doesn't have to find out the hard way. After all, as Bertrand Russell one remarked, "War does not determine who is right - only who is left." No doubt we'll revisit this topic again in the future. For now, though, we're out of time. If you'd like to comment on the today's essay, or any of the columns below, feel free to send your thoughts to the address at the bottom of the page.  --- China is Buying Gold...Maybe You Should Too --- From Hulbert's #1 Ranked Advisory Letter Over a Five-Year Period... Even if Gold hits $2,000 by the end of this year... here's a hidden way you can get in for less than one cent per ounce Over the next two years, you'll witness the greatest surge in gold prices in market history - at least 119% above where gold sits today, as I write this. But even better, I've just discovered a way for you to sneak into the soaring gold market for next to nothing, with what I call "penny-per- ounce" gold. That is, doing this is a "backdoor" way to own as much of a position in gold as you like... for the equivalent of paying a single cent per ounce. Details in the Exclusive Report. --------------------------------------------------------------- ALSO THIS WEEK in The Daily Reckoning... Why The SEC Sued Me - And Why You Should Care By Porter Stansberry Baltimore, Maryland  The reason you might have heard about my Securities and Exchange Commission (SEC) lawsuit is because I didn't settle the case. When most people are sued by the SEC, they do their best to put the matter behind them - as quickly and quietly as possible...But I didn't settle when they sued me. Buy Cockroaches, Get Rich By Chris Mayer Gaithersburg, Maryland  The lowly cockroach has a tough chin. It's survived all kinds of shocks over the years. Jungles gave way to deserts. Flatlands succumbed to urban habitats. Predators came and went over many millennia. Yet there the cockroach stood, undaunted upon its six spindly legs. Investors could learn a few things from the cockroach... A Few of My Favorite Things, Part I By Chris Mayer Gaithersburg, Maryland  Water - I've been urging my subscribers to invest in water stocks for several years...and Hyflux is one of my favorites. Hyflux (HYFXF: OTC Bulletin Board) operates in China, Southeast Asia, India, the Middle East and North Africa. It is involved in a variety of water projects, from desalination to recycling. It was among the first stocks ever recommended in my investment service, Mayer's Special Situations, when I launched the "Blue Gold Portfolio" back in the summer of 2006. Since I recommended it, Hyflux is up 75%, while the S&P 500 is down 10%. A Few of My Favorite Things, Part II By Chris Mayer Gaithersburg, Maryland  Uranium - One of the best investments you can make right now is to pick up relatively secure, low-cost uranium - the feedstock for nuclear reactors. The demand for uranium is building in intensity like a heap of hot coals. There are already 436 reactors up and running today. And there is a surge in demand coming in the next decade from the hundred or so new reactors expected to come online. Yet the industry is about 400 million pounds short of meeting that demand, as shown in the chart below. The Patsy Revolt of 2010 By Bill Bonner  Mumbai, India There are more clowns in economics than in the circus. They invented an economic model that has been very popular for more than 50 years - particularly in the US and Britain. It began with a bogus insight; John Maynard Keynes thought consumer spending was the key to prosperity; he saw savings as a threat. He had it backwards. Consumer spending is made possible by savings, investment and hard work - not the other way around. Then, William Phillips thought he saw a cause and effect relationship between inflation and employment; increase prices and you increase employment too, he said. --- You Can Leave Your Retirement Up To The Government, Or... --- Enroll today and immediately start collecting "pension paychecks" every 15 days, for the rest of your life. Introducing... Retirement, Plan B: Without doing a single moment's work, now you can legally sneak onto the "payroll" of nearly 1,000 of America's best companies... And collect a regular "Plan B Pension" check as often as every 15 days... At any age and for as long as you like, even after you've already retired... With nonstop annual incomes running as high as $120,000 or more... Take control of your own retirement with this Step-by-Step Guide. --------------------------------------------------------------- The Weekly Endnote: Our Reckoner-in-Chief was in India this week, gathering some boots-on-ground information about the place and generally telling the local media a few things they didn't necessarily want to here. If you missed Bill's interview on CNBC India, you can access it here.  And remember, Bill will be joining us again for this year's Agora Financial Investment Symposium in Vancouver. If you haven't already secured your spot, here's the page with all the relevant info.  That's all we've got for today.  Until next time... Cheers, Joel Bowman Managing Editor, The Daily Reckoning   The Daily Reckoning - Special Reports: The US Trade Deficit: Fort Sumter...And The U.S. Trade Deficit US Recession: By far the Weakest Recovery "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.