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The Daily Reckoning | Monday, December 13, 2010 Goldman's covert bailout - 212 helpings from the Fed buffet, Does China have the capacity to consume its own growth? Plus, Bill Bonner on the totality of a lie and plenty more... Lies, Lies, Lies The New Foundation of the Financial System Bill Bonner Reporting from Baltimore, Maryland... Let's begin by thinking about this, a quote from The Daily Bell: "The problem with where America is now is that the country has been built on one lie after another for the past decade and the lies show no signs of slowing down." And then, there's this from Charles Hugh Smith via Marc Faber: "[T]he status quo would collapse were systemic fraud and complicity banished... They have become the foundation of the US economy and financial system..." You will recall how Goldman Sachs wowed the whole world with its dazzling trading. Day in, day out...the traders at Goldman made money. The firm turned in "perfect" trading quarters, with not a single day showing a loss. Surely, one of the junior traders would have miscalculated at least once? Or a seasoned old pro, after a well-irrigated lunch, take his fat finger and hit the wrong button? Nope. Not once did Goldman's trading machine err. It was uncanny. Almost unnatural. Who was on the other side of those trades, we wondered? Trading is a zero sum game. One side wins. The other loses. So some poor schmuck must have taken a loss for every gain earned by Goldman's geniuses. Imagine him taking his lumps day after day...and still coming back for more. How could anyone stand so many losses? What kind of fighter could take that kind of beating and still be on his feet? And yet, there were no major new bankruptcies announced during that period. How was it possible? Who was losing all that money? We were perplexed. But now we know who the schmuck was...the poor sap was us! Had it not been for Senator Bernie Sanders from the Green Mountain State, who insisted that the Federal Reserve expose its shenanigans to the outside world, we would never have known what had happened to the Fed's $3.3 trillion in bailout cash. Now we know. Goldman helped itself 212 times - roughly every business day - during the 12 month period beginning in March '09, all the while telling the world that it needed no bailout. Lies, lies, lies... Corruption is not only at the top. Like a Christmas pudding steeped in rum, the whole economy - from top to bottom - reeks of it. Here's the latest proof from Bloomberg: Americans want Congress to bring down a federal budget deficit that many believe is "dangerously out of control," only under two conditions: minimize the pain and make the rich pay. The public wants Congress to keep its hands off entitlements such as Medicare, Medicaid and Social Security, a Bloomberg National Poll shows. They oppose cuts in most other major domestic programs and defense. They want to maintain subsidies for farmers and tax breaks like the mortgage-interest deduction. And they're against an increase in the gasoline tax. Let's see, how does that work again? Yeah, balance the books...says the noble citizen...but make sure it's at someone else's expense. Make the rich pay. That's how corruption works. People want something for nothing all the time. But only some of the time are they able to get it. Now, Goldman gets free money from the Fed. The taxpayers expect free money too. And so, the whole society lives a lie - that each man can live at the expense of someone else. But why CAN'T people live by taking money from the rich? Well, of course they can. For a while. Maybe even a long while. But not forever. And every time they spend someone else's money the less money there is left to spend. The rich are just as self-interested as everyone else. Take away their money and they dodge. They feint. They play dead. They hire lobbyists, bribe Congressmen and play the game. If that doesn't work, they hide their loot and flee. The problem with trying to live at the expense of others is that others don't like it much. They stop producing and try to live at someone else's expense too. And pretty soon, you have a nation of poor zombies...feeding on the little living flesh still left alive. "The idea that we can solve our structural-deficit problems merely by asking more of the well-off is totally unrealistic," said David Walker, who was US comptroller general from 1998 to 2008 and now leads a group advocating against deficits. "The math simply doesn't work." But that never stops the rabble from attempting it. "The one place Americans are willing to see sacrifice is in the wallets of the wealthy and Wall Street," Bloomberg News relates. "While Americans say they strongly support balancing the budget over the next 20 years, when offered a list of more than a dozen possible spending cuts or tax increases, majorities opposed every one of them except imposing a bigger burden on the rich. "A majority backs raising the cap on earnings covered by the tax on the Social Security retirement program above the current limit of $107,000. Two-thirds would means test Social Security and Medicare benefits. Six of 10 would end tax cuts for the highest-earning Americans. And 7 of 10 favor a tax on Wall Street profits. " Taxing the "rich" to fix the budget deficit is a ruse, a charade, a something-for-nothing game. Lies, lies, lies... The first lie was the biggest whopper of all - that you could get rich by spending money rather than saving it. The second was that the stock market would make you rich. All you had to do was to buy a well-balanced portfolio and hold for the long run. When that one ran into a wall, along came the lie that you couldn't lose money in real estate. There was also the lie that the free market would make people rich...and if it didn't, the authorities would force it to do so! Then there was the lie that an economy saturated in debt could be stimulated to heights of prosperity by splashing on more debt. And then there was the lie that you didn't need real money in the system; the authorities could manage a flexible, paper money system so as to help maintain full employment. And then, after half a century of adding cash and credit, when the Wall Street speculators cried and moaned, we were told that they were "too big to fail." They needed to be saved. Then came the lie that monetary and fiscal stimulus would lead to "recovery." When recovery didn't come, we were told that "quantitative easing" would do the trick - so they pumped hundreds of billions of dollars into Wall Street's failed institutions. When it didn't work, we got QEII. And now, the federal government is headed to bankruptcy. We are told not to worry. No need to change course. Tax. Spend. Overspend. Stimulate. The same goofballs, liars and incompetents who have brought us this far say they'll take care of us. Which is what we're worried about. The Daily Reckoning Presents Buy Silver...Again! Byron King With the ongoing recession looming over the US and foreign economies, China seems to be coasting through with continuing growth through its exports. This trend does not seem likely to continue in the coming months. Below I will explain why and what steps you can take to secure your investment portfolios. A couple of weeks ago I was in Hong Kong attending the Roskill International Rare Earths Conference. I was "only" in Hong Kong, or "China Lite," as one jaded acquaintance put it. There's just no pleasing some people. It's as if the new airport, new bridges, new roads, new train station, new buildings and hustling, bustling, export-driven economics of Hong Kong just don't tell you enough. No. By some peoples' standards, you have to see the new airport, new bridges, new roads, new train station, new buildings and hustling, bustling, export-driven economics of Shanghai if you really want to experience the China story. Hong Kong offered plenty of stimulus for one long trip. So do I have any takeaways, besides a couple of nice suits from my new Hong Kong tailor? You bet! Over the past 20 years, the key enabler of China's development was strong, export-led growth. With Hong Kong handling much of the cargo, China exported its way to dramatic prosperity, fueled by boatloads of imported Western currency - dollars, yen, euros, etc. But that good fortune, and easy money from overseas, has come to a screeching, grinding halt. The global financial crisis has moved in for - apparently - the long haul. Here in the United States, we're not enduring a typical, post- World War II, run-of-the-mill business cycle recession. It's not just the economic equivalent of a "standing eight count" in boxing. No, I'd say that the US economy is hard down on the mat. Indeed, I believe that the current US economic situation is far graver than even the much-advertised Great Recession. When something recedes, that implies that it'll come back. If something recedes a lot, then it should come back in a big way, right? Thing is, I can't see how the US economy will come roaring back in any big way, and not anytime soon. During a US recession in the olden days, for example, businesses would lay people off from a plant and then call the workers back when times were better. Today, businesses have laid people off, but then, in many instances, closed the plant for good and sold all the machinery for scrap. Under these circumstances, there won't be any recalls. And if history is any guide, the United States cannot have an economic rebound without something like a recovery in housing. That's not happening, what with the banks still broken, lending stingy and the mortgage industry a total mess. Nor is there significant evidence that other Western economies are poised for a major comeback. Really, which other economies are rebounding? Ireland? Italy? Britain? Japan? Nope. Even the mighty German economy isn't growing fast, and they brag about it. So looking ahead, where's the continuing export-led growth for China? How can past patterns of trade and prosperity continue for China - and, by extension, for Hong Kong? Or stated differently, what does this mean for the future? It's likely that the slowdown of external demand will throttle back China's ability to grow at its recent, historic rates. But is the Chinese leadership prepared to process and adapt to this new reality? In the best light, the decline of foreign demand means the Chinese should channel less investment into their export model. The Chinese should redirect more investment toward internal consumption. That's easy to say. But will this happen? Can China internalize its growth? Well, to be fair, it's already happening to some extent. Many China-based operations - for example, companies like Foxconn and Toyota - are paying Chinese workers higher wages. This translates into more purchasing power at the Chinese grass-root level. But then we're also seeing stories about raging inflation in prices for food and energy at the Chinese retail level. And the vast multitude of Chinese people without the pay raises, who do not work for foreign companies, are stuck with the inflation as well. Point is, there's nothing easy for China in making the transition from massive investment in formerly booming export-led growth to a new focus on internal consumption. I believe that there's still a lot of thinking and planning in China that's stuck in the mind-set of economic boom times from the early part of this decade. We'll probably still see gross overinvestment in obsolete economic ideas coming out of China. Entire industries will pursue growth and expansion in markets that are no longer there. The world will face the consequences of resources filtering through a trade model that's no longer valid. So what does all this mean for investors? Well, it means that there's even less reason to trust in national currencies over the long haul. Sure, the local currency is how you keep score. It's what you get paid in. It's what you use to buy a house, pay bills, buy groceries, take a trip, etc. But looking forward, in any and every currency, inflation will nibble away at your wealth and savings. What can you do? You can't change the world, right? No, but it gets back to that idea that you still want to own physical gold and silver as core holdings in your portfolio. For the past couple of years, I've been saying "5-10% in precious metals, or more if it helps you sleep at night." I'm going to change that to "At LEAST 10% in precious metals, or more if it helps you sleep at night." I believe silver is probably a better play right now, with more upside than gold. I'd go for silver coins, without seeking any numismatic value. Just go for the Silver Eagles - bullion value - or any other high-quality metal issue from reputable mints. Regards, Byron King, for The Daily Reckoning Joel's Note: Did you happen to catch Byron's "Serbian Gold" presentation? It's a fascinating story about an opportunity that truly rests where others fear to tread. The presentation goes offline on December 21...or when all the limited release reports are spoken for. Whichever comes first. Have a gander for yourself, here. Byron King's Outstanding Investments Precious Metals Report BETTER THAN GOLD! One investment should rocket even faster than gold over the next 12-24 months... yielding at least 3-to-1 gains on every dollar invested... GUARANTEED. In fact, I'm so sure of this, I won't charge you a penny to show you how. Click Here Now For Your Report. One Word of Advice For Those Playing the Australian Boom The boom has been going on Down Under for the last 19 years. Not even the Great Correction is stopping it. Each year, it sells more dirt to Asia... from 40% of its exports 10 years ago to 72% today. It should probably just sell all of Western Australia to the Asians and be done with it. Bernanke Meddles as Bondholders Exit the Market A Report on the Tax Deal Effects When the Government Demands More Debt The GDP, the total of all the goods and services produced in the Whole Freaking Country (WFC), is only $14 trillion, and yet here are these Federal Reserve weenies printing up a massive, monstrous $1.2 trillion in new money! This is an unbelievable 9% of GDP, for crying out loud! High Long Bond Yield Good News for Gold Holders Bernanke Ignores 4,500 Years of Failed Monetary Policy Ron Paul: The Fed Spends “More Money Than the Congress Does” This morning, Dr. Ron Paul (R-TX) held his first interview since being appointed chair of the House Monetary Policy Subcommittee. From what he says in the video below, he’s going “to think things through and not overdo things too soon,” but ultimately plans to stick to his guns... Dr. Ron Paul Takes Over Chair of Domestic Monetary Policy, Including Fed Oversight Congress Growing up, Putting Away Childish Things... Sort Of 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