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The Daily Reckoning | Friday, October 15, 2010 Why Ben Bernanke is rejecting his own advice, Turns out Keynes was right!...about one thing, Plus, Bill Bonner on the coming fire-show in the markets, what the world needs now and Zimbabwean-style riches... . From Dial-Up to Wi-Fi The lightning-fast pace of technological advancement Joel Bowman Reporting from a bus station in Colonia, Uruguay... We were stopped over a knee-high table in a dingy, all night video game parlor in Kuala Lumpur, Malaysia, at 3 AM on a Saturday night, desperately trying to finish our weekend column so we could send it, via a high-jacked, painfully slow-speed Internet connection, back to our Baltimore HQ on time. The joint was full of rancid cigarette smoke and the teenagers around us, mesmerized by the flashing lights of their online adventures, paid us no attention. They probably just assumed we'd lost our mind and/or wandered into the place by mistake. In actual fact, our bus had broken down earlier in the evening on the way to the airport and this was the only semi-reliable Internet connection we could find on the outskirts of what was then, and still is, one of Asia's more advanced cities. How different the scene is today, not just in KL, but all around the world. Before we get into today's regular reckoning, we pause for a moment to reflect on the remarkable advancements of modern technology...the kind that leads to material improvements in health and lifestyle, the eradication of debilitating disease and that inspires the exploration of new frontiers in both space and time. Not to mention, of course, the kind that allows your editor to write to you, as we do today, from a bus station while awaiting our (soon to arrive) ride to the nation's capital, Montevideo. "There has been more technological improvement in the last 50 years than in the previous 5,000," asserts Patrick Cox, co-editor of Technology Profits Confidential, our brand new research service. "Since you and I have been trained to think in linear terms, this isn't necessarily intuitive," continues Patrick. "However, a careful examination of history reveals that the rate of technological change actually accelerates over time. Due to this exponential rate of improvement, we are actually only seeing the beginning of disruptive, transformational changes in technology." Fellow Reckoners will no doubt recall the screeching, relative annoyance of dial up Internet from just a few years back (even if you experienced it in the comfort of your own home and not some dive gaming parlor in a random back alley while lost in Asia). Now, today, we hold the power of a wireless device in our hands...one with enough data storage capacity to shame even the most advanced military computing system of just a few decades ago. You've no doubt heard of Moore's Law. Back in the 1960s, Intel founder Gordon Moore noticed that the density of transistors on an integrated circuit was doubling every two years. And the cost fell in half during the same time. Now, according to Ray Blanco, Patrick's co-pilot over at Technology Profits Confidential, we're on the verge of the next computing revolution. "This next breakthrough could multiply that power by 100 times or more overnight," says Ray. "In fact, it could very quickly jump to thousands of times faster than even the best laptop or desktop computer on the market today. And not just computers - cellphones, supercomputers and just about every other 'information' device that you can imagine. If it processes data, you could soon see it replaced by this technology. "Imagine how fast you could read if you could start at the top of the page...the bottom of the page...in the middle of this article...and at the back and front...all at the same time," Ray continues. "That's the level of breakthrough we're talking about. You don't have to be a science geek to 'get' what that will mean." As Ray and Patrick announced in an email sent earlier this week, one company is leading the way in this field. "A few of this small company's lucrative patents could turn into kingmakers. A few of these patents could turn you into a tycoon - even if you own just a few shares." If you happened to miss their email (or just deleted it by accident), we've posted their entire report online for you to review. Ray and Patrick also have five other breakthroughs on the same scale in their quiver for you to check out. Ought to be worth a few minutes of your time. The rest of your regular reckoning, you'll find below... The Daily Reckoning Presents Plaza II Bill Bonner Keynes was right about one thing... Peace talks broke down last weekend. Observers had expected the IMF meeting on the weekend to result in the equivalent of the Peace of Amiens or the Surrender at Appomattox. But Treasury secretaries and central bankers went home, unpacked their bags, and resumed their premeditated mischief. The dollar went down. Why would anyone pay 100 cents for an old, worn out greenback when the Fed promises to create trillions more of them, brand spanking new? Europe and Japan resumed firing with their new QE guns. Asian nations sent out snipers to intervene in the currency markets directly. And China and the US resorted to "trench warfare," reported The Financial Times, neither apparently ready to give up an inch; that is, neither was prepared to allow its currency to buy more today than it did yesterday. In America, China has become an election- year bogeyman. The electorate seems convinced that any nation that stockpiles $2 trillion worth of America's I.O.U. greenbacks must be up to no good. So, the war goes on. But it is an ersatz war. All the combatants really want the same thing - to debauch their currencies at the expense of savers and creditors. Sooner or later, they'll conspire to get the job done. A full 93% of US financial professionals believe the Federal Reserve Bank is on the case. It is expected to launch major debauch in November. Investors have run up almost all asset classes in anticipation. The Dow passed 11,000 on Friday. Soft and hard commodities hit new highs. And if, on a given day, gold does not set a new record, it is probably because the markets are closed. What a remarkable period in financial history! We can hardly believe our luck. Absurd things are happening. John Maynard Keynes was wrong about practically everything. But he was right about this: There is no subtler, surer means of overturning society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a way that not one man in a million is able to diagnose. And we get to see it live. And probably dead. The US dollar fell under the control of the debauchers, partially, in 1913...when America's central bank was formed...then fully, in 1971, when gold backing for the dollar was completely eliminated. In the 100 years before the Fed was formed, the dollar lost not a penny of its value. In the almost 100 years since, it has lost almost all of them. If the greenback were to lose another 5% of its 1914 value, there would be nothing left at all. Such slow larceny bothered no one. As long as the dollar slid gradually, and peacefully towards worthlessness it seemed almost natural, even healthy. Central bankers could mix with polite company and hold their heads up. None was arrested, as far as we know. None was so tormented by his crime that he had to be restrained or sedated. But now central banks are committing their felonies in broad daylight. Economists argue for more. But investors are confused and worried. Today, they buy gold. Tomorrow they may buy shotguns. But what else can the managers do? After increasing for 61 years, the volume of credit in the US - and hence, the volume of sales - is no longer expanding. This leaves householders with debt to pay down and exporters with no alternative but to fight for market share. What to do about it? Lower the value of the currency! But in a correction, the natural thing is for prices to go down with a decline in demand. So, money tends to become more upright just when the managers would most like to see it slouch. The poor central bankers. They are victims of their own delusions of competence. They have never actually managed anything successfully. When the economy is expanding, they exacerbate the boom. When it is contracting, they slow down the correction. And now, they fight a currency war not of their own choosing, but of their own making. The war is their response to the correction, which results from the bubble, which was caused largely by the managers themselves. And now they're looking for a hotel where they can do it again. It was at the Plaza Hotel in New York in 1985 that they managed their Treaty of Versailles. It ended the currency war of the early '80s...and prepared the way for an even bigger war later on. Back then, Japan was the go-go economy. Like China today, Japan was the world's leading exporter. It wanted to keep the yen low. The US meanwhile, was losing market share. James Baker and the other US managers threatened sanctions. Japan gave in. By early the following year, the yen was 40% higher against the dollar and Japan's GDP growth rate had been cut in half. But the managers fixed that problem as they fix them all. In Japan, they cut rates 4 times in 1986, creating a flood of hot money. Four years later, Japan was the envy of the entire world. In January of 1990, the Nikkei Dow hit a new record - 4 times higher than it was when the Plaza Accords were signed. Then, the bubble popped. You don't need to be reminded of what happened next. The Nikkei crashed. Real estate crashed. Everything crashed. The economy went into a 20-year tailspin, failing to create a single new job in two decades. Neither stocks, nor real estate, nor the economy ever recovered. No one wants to follow the Japanese down that road. Ben Bernanke manages the dollar, desperately trying to avoid it. And Premier Wen of China said it would be "a disaster for the world" if Western nations tried to force China in that direction. He's right. But he needn't worry about it. Disaster is coming anyway. The managers will make sure of it. Regards, Bill Bonner, for The Daily Reckoning Joel's Note: So where is Bill putting his own money? It's a question we get a lot here at The Daily Reckoning HQ. Well, now you have the answer. Bill's Family Office program allows you inside access to his international list of wealth-building contacts and shows you exactly what the Bonner family is doing to protect their own hard-earned money going forward. Check out your personal invitation to join them, right here. Bill Bonner Money Printing: How Counterfeiters Saved the World Bill Bonner Still Reckoning from Argentina... Now...back to our miserable beat...back to lies and vanity and foolishness. Back to the financial world! If you could really make a society prosperous just by inflating the currency, Zimbabwe would be richer than Switzerland...and the Argentines would all be driving Mercedes. They've got 25% inflation right now. But they're not getting rich. They're not driving Mercedes. They're just looking for ways not to get robbed, by buying apartments and opening offshore bank accounts. And yet, everyone seems ready to believe that monetary inflation will make things better. Even the most illustrious thinkers in the financial world. Here is George Soros, in The Financial Times: "What America needs is stimulus..." "Without a bailout," he says, re-treading some familiar ground, "the financial system would have remained paralyzed." Really? What makes him think so? It looks to us as if the bailouts themselves are the source of the paralysis. Rather than let the chips fall where they may, the bailouts left the chips more or less where they were. Failed bankers still run failed banks. Failed auto executives still run failed automakers. Failed regulators and policymakers regulate even more...and as for making policy...well, we now have QE! Printing up extra money - with no backing - used to be the sort of thing only counterfeiters did. Now it is done by the central bankers and Treasury Secretaries themselves. They don't apologize for it. They don't hang their heads and contemplate blowing their brains out. Instead, they're proud of it...announcing that they "saved civilization," or some such claptrap. It is all so amazing...it leaves us gasping for air... Everyone seems to think he knows better what people should do with their money than the people who own it. Businesses are building up liquidity, says Soros; they should invest. Consumers are paying down debt; they should spend, says Krugman. What? They don't want to spend or invest? Then, we'll steal the money from them, via inflation, and make them want to get rid of it. This makes no sense in theory. Why should people do anything with their money other than what they want to? What is an economy for, if not to serve the interests of the people in it? But the economic busybodies think they know better. They think an economy is supposed serve them - by doing as they demand. They want it to produce full employment, consumer price increases and positive GDP numbers - all the time. And they think they can get these things by increasing the supply of notional "money." It is swamp gas in theory...but maybe it works in practice? But where is the evidence? When has it ever worked? It hasn't. It never will. But it sure can touch off a fire-show in the market...before it blows up the economy completely. Enjoy your weekend. Bill Bonner, for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com Why Bernanke’s Money Printing Promises Spell Disaster Yes, the markets seem to be jumping for joy at the prospect. Ben Bernanke is supposed to announce a program of easy money...not just a little easy money...but a lot of it. Analysts are talking about the Fed buying between $100 billion and $1.5 trillion in bonds. Of course, investors have probably already priced that kind of QE into the price structure. So, what are they gonna do if Bernanke does the expected thing? The Argentine Boom...And Why It’s Killing the Peso The Illusion of Modern Money Why “Credible Programs” at the Fed are Anything But A “credible program!” Hahaha! It makes you want to scream out, “And just what in the hell would be a credible program to get out of a monstrous monetary inflation that has been raging exponentially for almost 50 years, which produced the economic disaster of constant, simmering inflation and the suicidal growth of a giant, bloated, twisted and disgusting government-centric economy supporting half the population... US Debt on the Shoulders of 90 Million People Bond Investors Are People Too Concrete Market-Based Evidence That the US’ AAA-Debt Rating is Unraveling Traders in the credit default swaps market are no longer showing the same faith in the USA that major credit rating agencies show. This past quarter, the price paid to insure against a US sovereign debt default recently jumped up nearly 30 percent. That spike in cost made the US the third worst performing nation in the derivatives market, after only Ireland and Portugal. Not exactly good company to be in. The Mystery of Rising Commodity Prices Tax Revenue’s Flat, Spending’s Out of Control The Daily Reckoning: Now in its 11th 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. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor