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The Daily Reckoning | Thursday, May 20, 2010 Eurocrats take their notes from the Americans' political playbook, Potential implications of the "mark to model" suspension, Plus, Bill Bonner on China from the ground up and the big shakeout in the gold market... How to Spend Money in the Western  World Taking a few pages from the American Economic Playbook Eric Fry Reporting from Laguna Beach, California... Well, well, well...the Eurocrats dusted off the "American Playbook" again this week, as they stepped up their efforts to contain the euro crisis. Chapter One of the playbook didn't work: "Dismiss the Crisis as a Localized Problem." Chapter Two also failed: "Deny Any Risk of Contagion." Chapter Three didn't work either: "Vow to Defend the Status Quo at Any Cost." At that point, the Eurocrats had no choice but to implement the tactics detailed in Chapter Four: "Announce a $1 Trillion Rescue Plan." After announcing the rescue plan, the Eurocrats declared victory and checked the playbook back into the library. But alas, victory over the crisis was not to be. So back into the Playbook we go with Chapters Five and Six: "Blame Speculators, Ban Shortselling," and "Legalize Selective Fraud (for the benefit of 'normal market operations')." Chapter Six is a particularly potent weapon...and the recent American experience with this tactic offers some encouragement for the Eurocrats. About one year ago, American regulators legalized the fraud that near- worthless mortgage-backed securities might actually possess some value. American regulators did not admit to encouraging fraud, of course, they merely suspended the imperative that banks "mark to market" all of their mortgage-backed securities. "Mark-to-model" would become the accepted practice. The problem is that models lie; markets never do. Investors did not seem to care about the nuances between markets and models. The stock market has been rallying ever since "mark-to-model" became the new accounting protocol. This fact has not been lost on the Eurocrats. Since this scam worked so spectacularly in America, some European officials are reasoning that a similar policy could work in Europe. As yet, no official decrees have surfaced...only rumors. The rumors are that various banking jurisdictions in Europe would suspend mark-to-market pricing of sovereign debt. In other words, banks would not be forced to recognize their unrealized losses on their holdings of Greek, Portuguese and Spanish sovereign debt. It's just a rumor for now. But don't be surprised if rumor becomes fact. Such is the way of the Western World: "Extend and pretend." The governments of the West are so busy devising ways to kick the can down the road that they can't even begin to consider ways to stop playing this hopeless game. The Western economies know better than any other how to make a buck. Unfortunately, the Western politicians know better than any other how to spend a buck...especially a buck they don't have. The resulting system is a fraud, based on a mass deception. The resulting system promises an elaborate menu of services and benefits that tax revenues cannot possibly finance. The "system" is an Easer Bunny...without the chocolate eggs. It is, in short, a lie. But it is not the only important lie of our era. Read on... The Daily Reckoning Presents The Economic Recovery Myth Eric Fry "Beauty is truth; truth beauty," the poet, John Keats famously mused in his "Ode on a Grecian Urn." Neither Greece nor Goldman Sachs can seem to get the hang of this concept. Grecian finances, for example, illustrate an opposing principal: deception is ugly. For more than a decade, the Greeks have engaged in a mass deception - that a revenue-starved nation could finance generous social programs. The idea was never viable, feasible or legitimate. But the Greeks wanted to believe it...and so did the rest of the European Union. They all wanted to believe that Greece's last six defaults were a fluke - that the new and improved Greece would behave nothing like the old, profligate one. The truth would have been better. Greece would have been better off if it had never started its game of make-believe. If, instead of pretending it could afford the unaffordable, it had devised a plan for maintaining legitimate solvency. The Greeks didn't do that. Instead, they joined the euro bloc and pretended to "act German." For eleven years this charade succeeded. But the Greeks are not German. (They aren't even French). Like many American marriages, Greek finances inhabit a chronic state of crisis, interrupted by brief interludes of calm. But the Greeks are not unique. The nations of the West are full of deadbeats. The Spaniards and Portuguese play make-believe as well as the Greeks. And so do the Italians. But make-believe is not just a Mediterranean game; it is an international game. And no one plays it better than Uncle Sam. He also pretends to possess the means to "make good" on his debts. And so far, his creditors believe him. Your editors don't. We think the guy is "all hat and no cattle." We don't think Uncle Sam can actually afford to pay the debts he's got already, much less the trillions he's adding to his debt load year by year. Based on raw numbers, Uncle Sam belongs in a debtor's prison. But that doesn't stop him from borrowing even more money or dispensing more freebies to a populace addicted to "something-for-nothing" or enabling certain privileged financial institutions to leech from the taxpayers' jugular. This "system" won't work. It is not a system at all. It is half fairy tale, half scam. America's budget deficit, at 13% of GDP, is nearly identical to Greece's. And America's accumulated debts - at 86% of GDP - do not trail very far behind Greece's at 112% of GDP. But that comparison is hardly comforting. In absolute terms, no debtor can compare to America. As fellow Reckoner, Joel Bowman observed recently, "In a misguided effort to rescue the economy from the untold horrors of the 'abyss,' the prophets of modern central planning seek to transfer society's means of production from the most to the least productive class; from private fist to public mouth; from worker to moocher; host to parasite." In doing so, these charlatans shackle the current generation's liabilities to the income statements of futures generations. The nearby chart (which first appeared in the May 10, 2010 edition of The Daily Reckoning) shows the total "bare bones" funding requirement for various countries during the next three years. Specifically, this chart shows the amount of borrowing that would be required by each country to fund anticipated deficits during the next three years and to re-finance all government debt coming due in the next three years...America's three-year funding requirement is not nothing. And America is certainly not immune to the kind of investor scrutiny that could produce a debt crisis...or a currency crisis. In a pinch, Greece could probably borrow $30 billion here or there to plug its revenue shortfall. But in a pinch of similar relative size, the US might not be able to borrow $7 trillion...especially not when the US is unable to scrounge up cash from its own citizens. "For the 19th consecutive month, the national budget fell disastrously short of anything close to balanced," Joel recently observed. "According to the Treasury Department's own figures April's $82.7 billion deficit was almost four times the shortfall registered in the same month last year. The official tally only tells part of the story. Sadly, it was the best part." As Addison Wiggin observed last week in The 5-Minute Forecast, "That figure of $82.7 billion is merely the 'BS' figure the Treasury puts out there when it reports the deficit. The real tell is how much the national debt grew. And in April, that figure was twice the size of the 'official' monthly deficit - $175.6 billion. "Don't look now," Addison went on, "but we're just a couple of weeks away from the national debt breaking $13 trillion. If you must know, the exact number this morning is $12,931,157,737,293.42." Historically, April tends to produce a modest surplus (or at least a mitigated deficit), thanks largely to the influx of tax receipts due around the 15th of that month. But despite the administration's assurances that the employment landscape is steadily improving, receipts were down more than $20 billion from the same month last year (2010: $245.27 billion; 2009 $266.21). Despite the severity of America's indebtedness, most people in positions of power refer to this disaster as if it were merely a broken water pipe. "We really should fix it," they say, as if we could turn a valve here or replace a gasket there and get everything running smoothly again. But no quick fix is possible. In fact based on the numbers, no long fix is possible either. This, too, is a lie...and it's not pretty. Check in Monday for Part II of this essay, "Truth is Beauty." Eric J. Fry, for The Daily Reckoning Bill Bonner Beauty is Truth Bill Bonner Reckoning from Beijing, China... The primary trend is down... Stocks fell again yesterday. The Dow lost 66 points. The big shakeout was in the gold market - with a fall of $21. It is unusual for gold to fall more (proportionately) than stocks. So, what's the gold market trying to tell us? And why didn't it mention it before? As forecast, rates of delinquency and foreclosure are hitting new records. One of every 10 American homeowners is in trouble. Unemployment shows little sign of improvement, with hundreds of thousands of new college grads joining the jobless this month. And now this: prices are falling at the retail level too: The New York Times: Consumer prices fell in April for the first time since early last year, and inflation rose at its slowest rate since the 1960s, a new government report said. Energy prices led the decline, falling by 1.4 percent in April, the Labor Department said. Consumer prices over all fell in April by 0.1 percent, the Labor Department said in its monthly report on Wednesday. The decline was the first since March 2009. Prices rose by 0.1 percent in March 2010. The downturn was led by a decline in energy prices, especially for gasoline and natural gas, the report said. Energy prices fell by 1.4 percent in April, the department said. Food prices rose 0.2 percent, mostly because of higher costs for meat, poultry, fish and eggs. But without the volatile prices for food and energy, the core index for consumer prices remained flat, as they did in March. Over the 12-month period that ended in April, the core index rose 0.9 percent, which economists said was the lowest it has been since the 1960s. Everything is going down. Stocks. Commodities. Real Estate. China. What happened to the recovery? Is it taking a breather? Is it just 'fragile,' as most economists believe? No. It hasn't slowed down. It isn't fragile. It just doesn't exist. Paul Volcker: "Any thoughts that participants in the financial community might have had that conditions were returning to normal should by now be shattered," he said. "We are left with some very large questions: questions of understanding what happened, questions of what to do about it, and ultimately questions of political possibilities." No return to normal. No recovery. No inflation. But before you get too comfortable with falling prices, remember that they can rise suddenly. Dear readers will recall our Daily Reckoning position in the inflation/deflation debate. Asked whether we are headed towards inflation or deflation, we reply: 'Yes!' Pressed to give a more helpful response, we elaborate: 'We will have both inflation and deflation. Probably in reverse order. Prices will fall as the private sector de-leverages. But they will eventually rise, as the public sector both leverages itself with debt and then monetizes the debt by creating more dollars.' We are still in the early stages of what is to be a long period of restructuring and re-adjustment - a Great Correction. So far, the private sector has begun paying down and destroying debt. And the public sector has begun to increase its debt and destroy its own credit. Falling prices tell us that the private sector de-leveraging is continuing...and that the public has not yet lost faith in the government's money. That will come. Paul Volcker also said that "time is running out" to save US finances. You can't go on a spree, spending trillions of dollars you don't have, and not suffer the consequences eventually. Unless action is taken quickly, says Volcker, it will be too late. The Wall Street Journal reports that state pension funds may already need a $1 trillion bailout. Europe just initiated the biggest bailout to date - almost $1 trillion to bail out Greece, and spare mainly French banks from taking the losses they deserve. But Greece is in no worse shape than the US. Deficits are about the same. So is total debt, when you include the debt of Fannie Mae and other enterprises, for whose debt the feds are now responsible. And how about funding those debts? Turns out, as a proportion of GDP, America's funding requirements for this year are actually 50% greater than the Greeks. One day, investors, householders and lenders will lose confidence in the full faith and credit of the United States government. Then, even in a slumpy economy, inflation will return. People will rush to get rid of their dollars. Prices will rise, fast. This crisis has a long way to go... And more thoughts... Last night, we got in a cab and went over to a restaurant near the Peoples' Bank of China and the old city gate. We ate outside, on a rooftop terrace, looking out over the city. We were struck by awe and wonder. In the space of two decades, Beijing has turned into one of the world's biggest, most dynamic, and most appealing cities. It is 4 times New York. And five times LA. But we measure everything against Baltimore...and compared to Charm City...well...nothing is quite like Baltimore. And it's probably better that way... Beijing is striking in many ways. Coming out of the Grand Hyatt, we hopped in a cab and were immediately stuck in a traffic jam. In front of us was a Mercedes Maybach. We have only seen one of these cars before - in Germany. They are such expensive automobiles you rarely see them. And yet, we realized that there was not just one of them in front of us. There was one behind us too. It was as if we had blundered into a government motorcade...stuck between the president of Russia and the president of Dubai (if Dubai had a president). But this was just an ordinary street scene. And all around were other black, luxury automobiles. In the shopping mall under the hotel you can find any luxury brand you want. Hermes, Louis Vuitton, Gucci. And you can find dozens of fancy shopping malls in Beijing. Maybe hundreds of them. Looking out on the city lights from our restaurant terrace, we could see the town stretching out for miles in every direction. Office towers, hotels, and apartment buildings - high-rise, low-rise, in between rise - north, east, south and west. At first, we thought the center of town had probably been the site of huge government-directed investment projects. We expected the rest of the city to be miserable and poor - like the slums of Buenos Aires or 'the projects' in Baltimore. Not at all. Everywhere you look you see new buildings...construction cranes...bridges and overpasses...new restaurants...new shops... When was the last time they built an important new building in Baltimore? We can't remember. Maybe it was the Ravens' football stadium. There have been a few piddly structures erected around the harbor. But most of the building stopped with the harbor renewal projects of the '80s and '90s. Even in New York, a new building rises from time to time. But the city hasn't changed much since the '20s. It has already been built up and built out. America is what it is...and what it has been. Now, it is trying to hold onto its place...while China shoulders its way up to the bar. Regards, Bill Bonner, for The Daily Reckoning