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The Daily Reckoning | Thursday, December 23, 2010 A short summary of the war between paper and gold, The first in our 2010 Daily Reckoning "Best Of" Series, Plus, Bill Bonner with something extraordinary...amazing...incredible, even... The Religion of Consumerism Continuing a holiday tradition, even if it’s fiscally imprudent Joel Bowman From Buenos Aires, Argentina... Cricket in the park...beers in the sun...outdoor cafes and pretty girls in summer dresses. We're getting an early jump on the holiday season here atThe Daily Reckoning...at least so far as it's conducted south of the equator. Last year your editor celebrated the occasion with Buddhist friends in the Far East. The year before, with Hindus in Mumbai. And before that, with Muslims in the Middle East. This weekend, we'll have Catholic buddies around for an Argentine asado. We'll drink Malbec and yerba maté and listen to Carlos Gardel belt out some old classics from the rooftop terrace. That's the wonderful thing about the holiday season. It's a time of year when people of all faiths set aside their differences to worship a common higher purpose: the religion of consumerism. Flocks of all colors and creeds make their annual pilgrimages to consumerism's many temples - sometimes known as "malls" - to prostrate themselves at the discount aisle and to sacrifice the balance of their credit cards. Indeed, people who don't even believe in Jesus Christ or the virgin birth can still be found queuing up for two-for-one tie sales and half- off kitchen appliance clearances. We remember reading somewhere, a highly regarded scientific journal perhaps, that the sound of the collective global credit card swipe around this time of year is audible even in the outer reaches of space. "But wait a minute," we hear some Fellow Reckoners complain. "Isn't this precisely how we arrived in this mess in the first place? By overspending on junk we didn't need and couldn't afford? Shouldn't we be paying down our debts and practicing some fiscal responsibility?" Oh bah humbug! Don't be such a Grinch! Nobody likes a stickler for inconvenient facts while the eggnog is still flowing. Besides, Christmas isn't about spending money we don't have on things we don't need...it's about spending money we don't have on things other people don't need. The net effect might be the same, but at least the soundtrack to financial ruin is a feel-good one. Christmas is also a time to gather with friends and family and to reflect on the year gone by. Who got married? Who graduated? Which currency narrowly escaped collapse? That sort of thing. With that in mind, we present the first installment of our 2010 Daily Reckoning "Best Of" Series. Your editors sifted through both the column archives and the reader mail to come up with a selection of essays that, we hope, provide you with some interesting discussion topics for your holiday season family gatherings. First, let's go back to the beginning... Way back in January, Bill Bonner penned the following essay, a kind of "ghost of currencies past," if you will. Please enjoy and send your comments to the address below... Five Market "Wealth Quakes" Could Land You 10,720% Gains in the Next 13 Months New presentation reveals shocking 2011 predictions! These five "Wealth Quake" events could make you 10,720% richer in the next year...just for starters. But you must hurry! This epic presentation expires soon. For the biggest shot at huge wealth - watch this right now. The Daily Reckoning Presents The Descent of Money Bill Bonner [Reckoning on January 29, 2010 from Paris, France] Science and technology have produced many wondrous breakthroughs. But there are some things it cannot improve. A kiss from natural lips is still the lover's choice. Baby formula proved no match for the real thing. Ersatz money is a flop too. That last item is not so much a fact as a prediction. The first modern competition between gold and paper money ended like the pre-modern ones. Gold won. Herewith, a short summary: A rogue, John Law, was the protagonist of the story. He killed Beau Wilson in a duel. Then, he went on the lam...first to Scotland...then to Amsterdam...and finally to Paris. Like Alan Greenspan or Ben Bernanke, he made himself useful to people in high places - in this case the Duke d'Orleans, who needed money. Law had a way to get it: "I have discovered the secret of the philosophers' stone," he is said to have remarked, "it is to make gold out of paper." We need to look no further. Law may have been good with figures; it was at philosophy that he failed. A thing cannot be both one thing and a different thing at the same time. It is either gold. Or it is paper. Rarity and durability give gold value - as money. Paper's most conspicuous properties are just the opposite - it is common...and has a tendency to curl up and blow away. Law's new, easy money helped France to an economic recovery - or so it seemed. But in the end, the philosophical error caught up with him. Gold has real value. If you can create it at will, why not create more of it? It was just a matter of time before he had created too much. Soon, there was an angry mob outside Law's office on the Rue Quincampoix. People who held his paper gold had come to see it in a different light. Where once they cherished it as paper gold...now they despised it as nothing but paper. Law's scheme increased France's money supply - including banknotes and shares in his Mississippi company - by 300%. Prices in Paris doubled between 1718 and 1720. Then, when the new money system began to give way, the Duke d'Orleans "cranked up the printing press." By 1721, Law's money was worthless. "Banque" was a dirty word in France for the next 200 years. The current experiment with paper money began on the 15th of August 1971. Henceforth, said Richard Nixon, foreign countries that wished to exercise their right to trade US dollars for gold could drop dead. From that point forward, the dollar was worth only what someone would give you for it. Philosophers held their breath. But nothing happened. Many have died since, waiting for the dollar to succumb first. Still, the millstones of monetary history may grind slowly, but the more slowly they grind, the more fingers they pinch. The new paper money standard allowed for a worldwide credit boom - just as in Paris following the establishment of Law's scheme. The US created dollars. Its citizens spent them. The dollars accumulated as reserves all over the world...and every central bank raced to keep up. Soon, the exporters were producing too much. The importers were consuming too much. And there was too much money and credit everywhere. The Japanese economy was the first to blow up - in 1989. The tech sector on Wall Street was next to go - in 1999. Finally, in 2007, the planet-wide bubble popped. Suddenly, the whole world was Japan. And now, every nation in Christendom, to say nothing of the others, is following Law's example. All issue paper gold - in the form of bills, notes, and bonds - as if they were the Banque Royale. Europe is estimated to need $2.2 trillion in deficit funding this year. America will need at least a trillion more. If the depression deepens, maybe $2 trillion. How long can this go on? Where will it lead? "There are no means of avoiding the final collapse of a boom brought about by credit expansion," wrote Ludwig von Mises. "The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." On Tuesday, the S&P rating agency issued a warning. If Japan continues in the direction it is going, it will have Hell to pay. Japan leads the way into the future. And into a monetary minefield. Her current deficit - a record - is more than her tax revenue. And her public debt is nearly 7 times as great. Her feet grow larger. No natural life survives the lifecycle. And no paper currency standard has ever survived a complete credit cycle. It is just a matter of time until we hear the explosion and see body parts flying. Regards, Bill Bonner, for The Daily Reckoning Joel's Note: Addison tells us they're putting the final touches on a collection of Bill's various reckonings from over the past decade, titled "Dice Have No Memory: Big Bets and Bad Faith from Paris to the Pampas." At this stage, we're looking at a March release. Keep a look out for it. In the meantime, we're still accepting applications to partner with Bill in his latest project, the Bonner & Partners Family Office. If you haven't seen the invitation yet, here's a link with all the information you need. Bill Bonner Economic Outlook: 5 Things that Could Happen in 2011 by Bill Bonner Reckoning from Los Perros, Nicaragua... Nothing comes from nothing. But what comes from something? Did you see what happened? The Fed's holdings topped $2 trillion for the first time ever. It took 95 years to get the Fed's holdings to $600 billion. In the space of 3 years, it has added $1.4 trillion more. That's something. Extraordinary, no? Amazing, n'est-ce pas? Incredible, huh? And yet, the feds expect this explosion of Fed assets to produce an ordinary firecracker of a recovery. They expect - or hope - that this fantastic increase in the base money supply of the US banking system will result in a rather run-of-the-mill rebound in the US economy. The inflation rate (CPI) is only 1%...they think it will go to 2%. Long bond yields are expected to go up a little too - but not too much. Investor experts are predicting a 10% increase in stock prices in 2011. Almost every economist is talking about a "gradually strengthening recovery." Unemployment is supposed to go down a little. House prices are expected to stabilize...and even rise. In other words, an out-of-control monster of monetary inflation is expected to sire a pipsqueak of a recovery. We've talked in the past about how nothing comes from nothing...and how you can't produce real wealth with ersatz money. But what about this? Here we have the Fed doing something really big. Three times as big as anything they did in all the years since 1913. And yet, economists expect nothing much to happen. How likely is that? The feds don't know what they are doing. They are juggling nuclear bombs...and testing runaway viruses on an unsuspecting population. What might happen? Here are some guesses: 1) It will create more speculative bubbles. We wouldn't be at all surprised to see oil go to $100 and above, for example. The Fed's money is, so far, not making it into the real economy. But it is available to speculators. And speculators are betting that they can make more money in commodities than in US T-bills. So, keep an eye open. Most likely, you'll see some bubbles in 2011. 2) Emerging market stocks could soar. Imagine that you're 'trading' for Goldman Sachs. You can borrow dollars for nothing. What do you do with them? Invest them in the world's fastest growing economies! If you're lucky, you'll get 10%...maybe 20% return - on someone else's money. And if you're unlucky? Who cares? It's not your money. And you won't go broke. The Fed will give you more money. 3) Gold to $1,500. Why not? The IMF just completed selling. China, India and other emerging economies are adding to their stash. Speculators are getting in on the biggest and most reliable bull market in the financial world. Heck, even individual investors are catching on. Passing through the airport in Miami last week, we noticed a gold vending machine! We had heard they were around. But this was the first time we saw one. How surprising would it be if more and more ordinary people started imitating the rich, who've been buying gold for years? Suppose people realize that their central bank is now working against them...and that they have to maintain their own real money reserves? We could easily see gold over $1,500 in 2011. 4) US bond yields rise; the bond market begins to break down. It looked like it was beginning a week or two ago. Bonds were going down just as Ben Bernanke was trying to push them up. Sooner or later, it's bound to happen. Investors must eventually realize that buying US debt is a dangerous proposition; the Fed is actively trying to reduce its value. And if there is one thing the Fed ought to be able to do it's to undermine the value of US debt. After all, the feds control the currency it's calibrated in. 5) In contrast to this bubbly and bodacious outlook is a not- insignificant risk that the whole shebang will blow up. US stocks could crash. Bubbles can explode. Unemployment, housing, sales, consumer price inflation - all could get worse. Then what? Then, the US dollar and US debt will go up! Well, which is it, you're probably wondering. Inflation or deflation? Boom or bust? Our answer? Yes! It's all coming. If not in 2011, then...later. And more thoughts... When we arrived in Nicaragua, a group of Dear Readers was already at the house. They were having a dinner party on the lawn. Tables had been set up...looking out over the ocean. By 6 PM it was dark. A full moon arose in the East. It had been windy earlier in the day, but now the wind had eased into a gentle breeze. Joselito brought out his guitar. "Besame. Besame mucho..." "You must love it here," said a young woman. "This is about the most beautiful place in the world, isn't it?" The next day, we took a tour of the development here in Nicaragua. Housing is in a slump in the US. Developments in Latin America and the Caribbean have fallen on hard times too. Especially here in Nicaragua, where president Daniel Ortega has driven off foreign investment. "I think he's becoming paranoid," reported our local contact. "He doesn't want to go anywhere. And when he goes out, he has a whole team of bodyguards. He's afraid someone is going to kill him." But Ortega or no Ortega...real estate bust or no real estate bust...Rancho Santana is booming. There is a new pool at the clubhouse and a new clubhouse under construction. New condos. A huge new woodshop. New heavy equipment. A team of 250 workers...some of them working day and night. What's going on? "This is the only project in Nicaragua that is still doing well," explained a sales agent. "It's practically the only project in Latin America that is still solvent. Down the coast, several of them have gone bust. In one, the owner just left. The homeowners tried to call. But he just packed up and left the country, leaving them without roads or water. "And that's not that uncommon. These guys sold lots during the boom years. Then, when the bust came they didn't have the money to complete the projects. Lot owners were left holding the bag. "Developing is a tough business, even in the best of times. And developers are generally a stupid bunch. If not actually criminal. Either they are dreamers who keep investing in their own projects. Or they are schemers who take the money out. The dreamers go bust in hard times. The schemers high tail it out of the country. "You need a serious developer. One who's been through a couple of complete cycles. One with enough money to survive. And one with enough integrity to do what he's promised. Unfortunately, there aren't many like that. Not down here. "You can buy very cheap property here now. But you have to be careful." Regards, 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 atjoel@dailyreckoning.com Just Print More Money: The Easy Way to Manage and Economy There’s no lack of liquidity. It’s solvency that the market lacks. Adding more credit (liquidity) just makes it worse. But no point in telling Mr. Siegel or Mr. Bernanke that. They’re convinced that if they can just stuff enough new money into the system, everything will be all right. Isn’t that amazing? Just print up money. Just add cash. Just put in more paper money. Printing Money Not Actually in Bernanke’s Bag of Tricks Debt at Every Turn: New Governors Attack the Debt Crisis How to Double the Debt in 5 Years As a paranoid and angry lunatic, I am always nervous and on the suspicious lookout for subtle signs of danger that I know are all around me because the foul Federal Reserve has created, and is still creating, So Freaking Much Money (SFFM), which means that the terror of ruinous inflation in prices is a dead-bang, take-it-to-the-bank, guaranteed certainty. Money Creation Home Invasion Bernanke Denies Printing Money. Mogambo Not Convinced. Bargain Shopping in Peru, Chile and Brazil Global Strategist Jacek Dzierwa has just returned from another research trip to Latin America where he visited Peru, Chile and Brazil. Travel is important for our tacit knowledge because many of the world’s best opportunities aren’t discovered behind a Bloomberg terminal or an earnings report. We venture to visit as many companies as possible before investing in them. Is A Police State Worth Fighting For? Wake-Up Call: Top 10 Trends of 2011 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