Invited Address
Delivered on November 18, 2007, in Torrance, California,
to a Joint Session of the Positive Deviant Network
and the Flight to Genius movement

Antal E. Fekete
Gold Standard University
aefekete@hotmail.com

Dear Fellow Deviants,
Dear Fellow Travelers standing by for the next flight to Genius,
Ladies and Gentlemen:

Synergy Be With You!

One of the truly spectacular sights is from the airplane as it makes its approaches to Los Angeles International Airport at dusk. Down below is the illuminated “live” map of Los Angeles with its winding and intersecting freeways, with an endless flow of white headlights and an opposite flow of red tail-lights. It reminds me of the human bloodstream with its flow of white and red blood corpuscles. As I was flying in the other day I could not help but contemplate that possibly just a handful in a million people down there may realize what a fatal year 2007 has been, as the rest are completely oblivious to the great dangers awaiting the world on this Thanksgiving Day.

Over the last thirty-five or so years people have been de-sensitized to the ‘chill-and-fever’ syndrome epitomized by the gyrating value of the dollar. It had its ups and downs but, here we are, still doing business using the services of ‘Old Trusty’. People appear to be forgetful that the dollar is steadily losing value, losing purchasing power, losing the all-important respect of foreigners. They have been brainwashed into thinking that inflation, like continental drift, is God-ordained. There is nothing human beings can do about it. It would never occur to people that they are victims of deliberate plundering by their own government, and deceitful pilfering by their banks, covered up by the mendacity of academia and the financial media.

By this fall we have reached the threshold, we have crossed the continental divide, we have passed the ‘point of no return’ as it is becoming obvious that bad debt in the system has reached and surpassed ‘critical mass.’ The chain reaction has started. In the fullness of time the nuclear explosion is bound to occur.

The history of the dollar boasts two Waterloo’s. The first one was in 1933. That year marks the default of the U.S. government on its domestic gold obligations, accompanied by the confiscation of the people’s gold by F.D. Roosevelt. He appealed to patriotism saying that in complying with his Executive Order people were saving the country from economic ruin. The bad faith behind this capricious and unconstitutional act was shown by the fact that no sooner were people forced to give up gold in their possession than the government would write up its value by 69 percent, pocketing the difference as ‘profit’. So much for the provision of the Constitution that “…nor shall private property be taken for public use without just compensation.”

The monetary bloodstream of this nation was given the cancerous qualities that characterized the currency of both Soviet Communism and Nazi Socialism, neither of which has survived the test of times. Nor will the irredeemable dollar.

There was a second Waterloo for the dollar, in 1971, marking the default of the U.S. government on its international gold obligations. In economic terms this event was even more devastating than the first. It triggered a snow-balling process as revealed by the price charts of commodities such as wheat, sugar, copper, not to mention crude oil, and the destabilization of foreign exchange and interest rates, making debt proliferate and rendering government bonds totally unsuitable for the purposes of saving.

I have been often asked the question: “why gold?” I avoid giving an answer in terms of the physical or chemical qualities such as weight, inertness, and the like. My answer usually refers to the nation’s monetary bloodstream which becomes corrupted as the disease-fighting gold corpuscles are removed.

Debt is an indispensable economic instrument. It has a great beneficial impact on human welfare. But like fissionable nuclear material, it is shot through and through with extreme danger. If its quantity exceeds critical mass, then chain reaction is bound to set in causing a nuclear explosion. The role of gold is precisely to prevent that from happening. Gold is the agent that can detect bad debt and stop its proliferation in good time. Thanksgiving 2007 is special because we are just re-learning the ancient lesson that no banking system can safely operate without gold. You cannot measure the quality and quantity of debt in terms of another, just as you cannot measure the length of an elastic band in terms of another.

What has happened this fall is that the presence of bad debt in the economy has been established. However, bad debt is in hiding. Who is hiding it? “Nobody alive is above suspicion!” One bank can no longer trust another in accepting an overnight draft. Maybe the other feller is trying to pass on bad debt. True enough, banking is based on trust. But if you are not allowed to test debt, or to spot bad debt through demanding payment in gold, then trust is not justified. All debt becomes sub-prime. Why should a client trust his bank, if banks cannot trust one-another?

Thus, then, my answer to the question “why gold?” is that the gold corpuscles fight incipient leukemia in the nation’s monetary bloodstream. It’s not that withdrawing them causes sudden death. But it inevitably causes death in the long run. A rather painful and ugly death.

Since currency touches practically all our people, everybody is contaminated by a corrupted monetary bloodstream. The effects of monetary leukemia are many and in some respects subtle. The withdrawal from the monetary bloodstream of the gold corpuscles which, within broad limits, keep other money and credit corpuscles in good order, has produced the typical results: profligate government spending, extravagant growth in public and private debt, the monetization of government debt, extensive socialization, artificial exhilaration (not to say irrational exuberance), bloating, intoxication, fever, chills, nervousness, irritability, irresponsibility, dishonesty, immorality, decline in the purchasing power of the currency and, characteristically, the insane fear of gold ― as the drug addict fears the withdrawal syndrome. All these mixed with elements of a pronounced monetary revolution and the scattering of dollars and other resources among the nations of the world. The dishonesty involved in, and flowing from, the use of irredeemable currency permeates practically all aspects of our economic, social, and political system and provides yet another instance of how “corruption grows as naturally as fungus on a muck heap” (Andrew Dickson White in his classical book Fiat Money Inflation in France).

The pulsation of this corrupt monetary bloodstream through an economy finally weakens and undermines the nation involved; and unless removed before the logical and final consequences are reached, eventually brings destruction ― economic, political, and social.

When the people of a nation operate with a redeemable currency every individual is able to exercise direct control over the government’s use of the public purse to the extent of his purchasing power. If he is disturbed by government profligacy or unsound banking practices, he can conserve his purchasing power by converting it into the gold coin of the realm. He is not compelled to join forces with others to form a third political party in an effort, usually futile, to protest the profligacy of government and the duplicity of the banks. But if a considerable number of people demand redemption of non-gold currency in gold, the banks experience the impact in the form of diminishing bank reserves which is passed on to the U.S. Treasury and thence to Congress. These demands for redemption are the flashing red lights on a central signal-board ― signals the banks and the government respect. The wires were crossed at the signal-board when gold corpuscles were removed from the monetary bloodstream. Ever since signals deliver the wrong message.

It is true that a redeemable currency may, and frequently does, depreciate in a pronounced degree because of the misuse of credit and debt; but it cannot depreciate to the same extent irredeemable currency can. The limit in case of the latter, as it will be most dramatically demonstrated by the dollar, is zero.

When the government cut all the wires from individuals to the central signal-board in Washington, it opened the way to an orgy of profligate spending, to an unlimited depreciation of the dollar, to the ultimate destruction of this nation, and to the overthrowing of world order. The government and the banks, freed from their proper responsibility of meeting their promises to pay, now have an unrestrainable control over the lives of the people of this nation. Freedom is lost. We have all become slaves. It is this control that the government and the banks want to perpetuate through the regime of the irredeemable dollar.

The fact that the people have lost control over the public purse constitutes a mortal danger threatening the well-being of the United States ― and that of the world as shown, for example, by the usurpation of war-making powers by the president.

The proof, if one is still needed, that the removal of gold corpuscles from the monetary bloodstream ultimately leads to cancer, is the exploding derivatives market. Its size has exceeded the $ ½ quadrillion (500 trillion) mark. Compare this with the annual GDP of the U.S. at about $ 14 trillion. Worse still, the derivatives market is growing at a pace of 40 percent per annum, roughly doubling in size every other year. This is cancer, which mainstream economists and politicians want you to ignore.

What is the solution? The answer is obvious. Put the gold coins back into circulation. Restore a healthy monetary bloodstream. Unfortunately, this is easier said than done. The failure of the initiative of Malaysia to revive the Islamic Gold Dinar is a case in point. Mainstream economists call me an old foggy-bottom and an unreconstructed belly-acher. They point to the Gold Eagles, Gold Maple Leafs, Gold Pandas, and Gold Koalas, in addition to the Islamic Dinar. “See, they are all sitting out there and refuse to circulate. They go into piggy-banks and cookie-jars. Gold just does not behave as it used to, they say. Gold is passé. You can’t put spent tooth-paste back into the tube”.

I want to explode this kind of disingenuous reasoning for once and all. The gold coins which governments have sold for profit were not meant for circulation. Governments don’t want them to circulate. They are souvenir coins, conversation pieces that people will not spend, and for a very good reason, too. People are not sure they can get them back on the same terms.

By contrast, gold coins issued constitutionally will circulate. The Constitution mandates the striking of the coin of the realm free of seigniorage. People surrender the exact weight and fineness of gold at the Mint in exchange for the coin of the realm free of charge. The right to convert is unlimited. If the government opened the U.S. Mint to gold, then people would start spending their Gold Eagle coins because they would know they had a constitutional guarantee to get replacement for their coin on the same terms. This is the wisdom of Isaac Newton, Master of the Royal Mint in London, who put England on the gold standard.

We may take it for granted that usurpers at the Federal Reserve and the U.S. Treasury have no use for Newton. They will not relinquish without a fight their monopoly of charging 100% seigniorage, as against the constitutionally mandated 0%, on issuing new money.

So how are we to restore gold corpuscles to the monetary bloodstream? It may well be that the solution is in the hands of minorities such as native Hawaiians, American Sovereign Indian Nations, or the First Nations of Canada, to establish a Mint on their reservations or territory. They don’t need more gambling casinos or more liqueur outlets. They need a Mint in order to open it to gold. The police scientists at the Federal Reserve and the U.S. Treasury may stop short of putting the Mint owned and operated by minorities out of business using Waco-type violence.

If the minorities did open a Mint to gold, it would be “their finest hour.” A grateful posterity would remember them for their heroism in defying slavery insidiously imposed by a reactionary monetary regime on them as well as on the rest of the world.

If they did that, we could truthfully say that “never have so many owed so much to so few”.

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By Kathy Chu with Sharon Silke Carty, Greg Farrell, Barbara Hagenbaugh, Edward Iwata, Noelle Knox and Adam Shell
Posted on: 2007-11-25

If you haven’t yet felt the impact of the nation’s credit crisis, just wait. Chances are, you won’t have to wait long.

So far, the turmoil may feel a bit remote for average people: Failed mortgage lenders. Gargantuan write-downs by banks. Foreclosures for people who couldn’t really afford the mortgages they got.

What about the rest of us? Are we in danger? No one knows for sure, but quite likely, yes.

As the credit crisis seeps into farther-flung corners of the economy, more of us will find it harder — and costlier — to borrow money. The value of the funds in our retirement accounts could shrink. People with subpar credit will likely find it more difficult to qualify for auto and home-equity loans. Even consumers who make the cut may need higher credit scores and more documentation.

With loans harder to get, people will hesitate to buy cars, boats and other big-ticket items. The gravest fear? That weak consumer spending — along with surging energy prices, a long housing slump and sluggish job growth — will plunge the economy into a recession.

Even if a recession doesn’t occur, “We’re going to be in for a rough ride,” says Robert Kuttner, a senior fellow at Demos, a New York policy organization. “With job creation slowing down, credit standards being tightened and housing values not going up anymore, the consumer is under pressure to tighten his or her belt.”

Becki Carr, 28, of Detroit, says she’s growing gloomier about the economy. Her reasons: rising home foreclosures in Detroit, rising heating and gasoline prices and a cloud of insecurity over the area’s job market. As a result, Carr says, she’s watching her money more closely.

“Pretty much everyone around me is unemployed or they are having to travel down South to do contract work,” she says. And “Every other house on our street is for sale, and they’ve been for sale for the last year and a half. … It makes me double-check my costs and things.”

Tighter credit and falling home prices top the reasons why the economy could slip into a recession, according to 50 economists surveyed in late October and early November by the National Association for Business Economics.

Most economists still don’t foresee a recession. But the risk of a downturn is growing with each bout of bleak news. About 18% of economists who responded to NABE’s survey put the probability of a recession starting within the next 12 months at 50% or greater. That’s up sharply from the 11% of economists who said so in August.

A recession would inflict pain on a majority of Americans as unemployment rose and the stock market sank further. In a recession, “Investors have to be prepared to absorb a 20%-plus decline in the value of their portfolios,” says Ed Yardeni, president of Yardeni Research, an investment research firm in Great Neck, N.Y.

The benchmark Standard & Poor’s 500-stock index hit an all-time high of 1565.15 on Oct. 9, but since then, it’s fallen nearly 8% to 1440.70. The S&P index, which tracks large-company stocks and accounts for about 75% of the market’s value, is up 1.6% for the year.

What’s managed to help prop up the stock market so far is the sinking dollar, which has nourished companies that depend on foreign sales, says Gregory Peters, chief credit strategist at Morgan Stanley.

Peters says the indicator he’s watching most closely, to gauge the likelihood of further economic deterioration, is the labor market. Job growth has clearly slowed but has still held up “reasonably well,” he says. U.S. employers created an average 118,000 jobs in the three months through October, down from 142,000 during the first three months of 2007, the Labor Department says. The jobless rate last month was 4.7%, up slightly from the recent low of 4.5% in June but far below the 6.3% of June 2003.

Still, what began as a housing industry downturn more than a year ago has widened into a broader financial industry crisis. Too many risky mortgages were made to people who eventually couldn’t afford their payments. Many such mortgages were bundled into securities that were sold to investors who were often unaware of the risk they were absorbing.

Every week, more bad news

The initial low rates on adjustable-rate mortgages are resetting to higher rates. And with housing prices in many markets falling, overextended buyers can’t refinance. Delinquencies and foreclosures are rising. Banks and other investors holding downgraded securities tied to risky mortgages are writing down their values billions of dollars at a time.

Each week brings fresh evidence of how the credit crisis is causing damage. Last week, for example, the stock market fell after Goldman Sachs downgraded the nation’s largest bank, Citigroup, to a sell. Goldman said the bank would likely have to write down $15 billion over the next two quarters, mainly because of its exposure to risky mortgage securities.

And darker days probably lie ahead: Mortgage-related losses industrywide are likely to mount through 2009 and further bruise financial institutions, says Mark Zandi, chief economist at Moody’s Economy.com.

Such losses eat away at banks’ capital reserves. That means they can’t lend as much money. Goldman Sachs analysts predict that, overall, banks’ exposure to risky mortgages could reduce the credit available to consumers and businesses by a staggering $2 trillion.

Even the $2.5 trillion muni bond market hasn’t escaped the credit crunch’s damage. Muni bonds are issued by cities and states to raise money for projects such as schools, highways and airports. Historically, they’ve been relatively safe investments because it’s rare that governments default on their debts.

But worries about the companies that insure hundreds of billions of dollars in muni bonds are rippling through to muni bonds and rattling investors. The insurers, which have exposure to risky mortgages, could see their credit ratings reduced. If that happened, the muni bonds they guarantee would be downgraded, too. Cities and states would find it harder to raise money. Projects would be delayed. Taxpayers could face higher taxes.

Miami-Dade County and Puerto Rico have postponed bond issues totaling $1.5 billion in recent weeks because of credit concerns.

In the housing market, tightening credit has shrunk the pool of potential buyers for homeowners such as Glynnis Fairbanks, who wants to sell her four-bedroom home in Broward County, Fla.

Fairbanks had a deal to sell her home in May; she thought the sale would be finished by August. But the buyers, she says, had to back out because their lender, Countrywide, tightened its standards on their subprime loan. She’s cut her price to $325,000 from $348,000. But only one other potential buyer has peeked at the house.

By the end of 2008, more than 1 million homeowners with adjustable-rate mortgages will see their rates reset higher. Meantime, many people who want to refinance can’t because they lack the credit scores or the home equity to meet lenders’ tighter standards. This is especially true in neighborhoods where prices are falling. Some people who bought homes with little or no down payment now owe more than their homes are worth.

Investors, too, have been unnerved by the turmoil. Take Doug Breitenbach, 63, who pared back on his investments in financial services this month because of banks’ exposure to risky loans.

Since June, “I have lost on paper about $18,000 in my 401(k) fund,” says Breitenbach, a retiree in Silver Spring, Md. Though his portfolio is still up for the year, “I’m quite concerned about future drops.”

As mortgage-related distress spooks the markets, lenders are becoming “more sensitive” to the risks of other loans, says James Chessen, chief economist of the American Bankers Association. Banks may require higher credit scores now to qualify for loans, he notes.

At the moment, though, many businesses say the credit crunch still feels a little remote. In an October survey of small-business owners, only 6% said loans had become harder to get, in line with survey results over the past two years, according to the National Federation of Independent Business. Only 3% said credit availability and interest rates were their top concerns.

A Federal Reserve survey last month showed little change in banks’ lending standards for small businesses. But the same survey also detected a more ominous sign: On most consumer loans, 14 of the 50 banks surveyed had tightened their standards by October. That was up sharply from six out of 50 banks in July. Banks are starting to do the same with credit cards.

Gary Perlin, Capital One’s chief financial officer, said at an analysts’ conference this month that the company has become more selective about granting credit cards and auto loans. And JPMorgan Chase says it’s being more careful about issuing home-equity credit lines and auto loans, mainly for consumers with poor credit.

“When there’s less credit extended,” says Jack Malvey, chief global fixed-income strategist at Lehman Bros., “it reduces world economic growth and puts the U.S. at risk of recession. The real damage of that could be measured in hundreds of billions of dollars and, depending on what happens to the world economy, it could be $1 trillion.”

Discover Financial has jacked up the rate it charges to risky new credit card customers and has raised late fees for all customers. Some banks are likely to consider raising fees or rates on credit cards — one of their most profitable products — because they’re under “that much more pressure” in an uncertain economy to recoup mortgage losses, says Edward Woods, senior analyst at Celent, a market research firm.

That means that even those with pristine credit aren’t likely to escape the spreading credit crisis. Curtis Arnold, founder of CardRatings.com, says he’s seeing more credit card issuers shrinking consumers’ credit lines.

“They try to lower it typically where it’s within $100 or $200 of your balance,” Arnold says. “If you’re revolving a balance, you’re vulnerable. Just because you have a good credit score, you’re not out of the woods.”

Eddie Ward of North Little Rock worries that any change in his credit card terms would make it harder for him to pay back $20,000 in debt. “I haven’t seen much change yet, but I’m sure there will be over the next few years,” says Ward, 31.

Credit bureau TransUnion’s TrueCredit.com division has begun recommending that consumers maintain a credit score of at least 680 to qualify for prime rates. For years, TransUnion had recommended a score of only 650 or above.

Its rival Equifax has introduced a service to analyze a lender’s portfolio to figure out the probability that existing customers or new applicants have adjustable-rate mortgages. Based partly on this factor, lenders could decide to withhold, or to increase, credit to certain consumers.

That service helps lenders “understand where the (potential) problem is,” says Dann Adams, president of Equifax Consumer Information Solutions.

As credit tightens, “The most overextended borrowers are going to be affected the most, and the hardest, then people on the cusp,” says Peters, the Morgan Stanley credit strategist. But even low-risk borrowers face “tougher times,” he says.

In recent years, consumers have borrowed record-high amounts from credit cards. Revolving balances on credit cards are at an all-time peak, with U.S. households owing a monthly average of $6,960 in the year that ended in September 2007, up 41% from four years ago, according to Synovate, a research firm in New York.

The danger is that households that rely heavily on credit “could get into trouble” as the economy slows, says Andrew Davidson, a vice president at Synovate. “Their incomes are low on average, and they’re more likely to get hit with late and over-the-limit fees.”

‘Wages are squeezed’

Consumers who pulled money out of their homes as the market soared in recent years will also be in for a shock as home prices fall during the worst real estate recession since the Great Depression.

Kuttner says he believes that consumers’ recent “reliance on home equity and credit card loans isn’t because middle-income people are going on shopping sprees, but because wages are squeezed.”

Home-equity withdrawals accounted for up to $324 billion a year in consumer spending from 2004 to 2006, according to estimates from Federal Reserve economist James Kennedy, based on a paper he wrote with former Fed chairman Alan Greenspan. These withdrawals and related consumer spending plunged in the first half of this year as the housing market weakened, according to updated estimates from Kennedy.

In many parts of the country, home prices are expected to drop through next year, with the biggest discounts in Florida, California, Nevada and Arizona. Those declines will curb consumer spending.

By the time the housing slump bottoms out, $1.7 trillion in housing wealth will have been lost, economic consulting firm Global Insight estimates. For each dollar that a home falls in value, consumer spending falls by 4 cents to 9 cents, Fed Chairman Ben Bernanke recently told Congress. That could lead to a drop in consumer spending of as much as $153 billion over several years. While that’s no pittance, it’s only a fraction of the $9.2 trillion that consumers spent in 2006.

Consumers, in turn, are likely to have difficulty gaining access to money. Peters, the Morgan Stanley credit strategist, says the “virtuous cycle of packaging and selling credit has turned vicious.”

“The impact on the economy and consumers has yet to fully play out,” he says. “We’re still in the early stages.”

Very cool interactive chart at the top of this article
http://www.usatoday.com/money/economy/2007-11-25-credit-crunch_N.htm?csp=34

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Tom Petruno
November 24, 2007

Peter Schiff and David Tice don’t do what they do for the love it gets them.

They are two of the most bearish investment professionals in America. Their outlook for the U.S. economy and stock market is beyond grim.

Schiff, who heads brokerage Euro Pacific Capital in Darien, Conn., sees the dollar and stock market collapsing and the value of American per-capita economic output falling below that of Greece.

Tice, who manages the Prudent Bear mutual fund in Dallas, likewise predicts that U.S. markets will crumble and says the economy could face something akin to the Great Depression.

Of course, forecasts like these aren’t the way to make a lot of friends in this country, let alone on Wall Street. Some would call being bearish on America unpatriotic, even treasonous.

And that means many investors long have automatically tuned out the likes of Schiff and Tice. Besides, the doomsayers have been wrong forever, haven’t they?

Yet this year, with the debacle in housing and its toxic fallout in markets and in the financial system, the bears’ warnings about the future may no longer seem quite so far-fetched. The risks to U.S. prosperity have risen markedly — even many stock market bulls will admit that much today.

Schiff, 44, and Tice, 53, have no connection except for their outspoken pessimism about where the U.S. is headed.

They share the same basic thesis: America is facing its comeuppance for 25 years of borrowing and spending, saving little and relying increasingly on foreign capital to support its standard of living.

Now, the bursting of the housing market bubble, the surge in mortgage defaults and the plunge in the dollar have exposed what Schiff and Tice believe are serious structural weaknesses in the U.S. economy.

“Our economy is going to be a mess at the end of this,” Schiff says. “Our assets are going to get very cheap.”

His tactic for preserving his clients’ wealth, he says, is to send it all abroad. He hunts for dividend-paying stocks of large foreign companies that are focused on their home markets — names such as Swiss telecom giant Swisscom and the parent firm of Hong Kong utility China Light & Power Co.

In theory, Schiff’s strategy will protect the purchasing power of the money if the dollar follows his script and continues to melt down.

A former Shearson Lehman broker, Schiff went into the business for himself in the mid-1990s in Southern California and moved East in 2004.

He concedes he was too early with his overseas-only stock strategy in the late 1990s.

With the dollar’s slide since 2002, however, foreign stocks have been spectacular performers for U.S. investors. Schiff says his firm’s client base has grown to more than 8,000 individuals with a total of $1 billion in assets. He and his brokers make money off the commission income from the trades they make, he says.

The idea of global portfolio diversification is one that many people have taken to heart in the last few years. Month after month, the lion’s share of Americans’ net new investment in stock mutual funds goes to foreign portfolios, not domestic.

Even so, most U.S. investors aren’t abandoning their domestic holdings. That’s where Schiff’s acerbic views diverge from the mainstream.

The common perception is that the rest of the world needs the U.S. economy as a growth engine. Schiff says that is outdated thinking, given the rise of emerging-market economies such as China, India, Russia and Brazil. Because of America’s heavy borrowing needs, “We’re a burden on the rest of the world,” he asserts.

“China is not export-dependent,” he says. “They’re exporting because Americans are consuming.” Ultimately, Schiff says, “the Chinese are going to buy more of their own products.” As their consumption rises and their savings rate falls, “they’re not going to lend to us anymore.”

http://www.latimes.com/business/la-fi-petruno24nov24,1,2196088.column?coll=la-headlines-business&ctrack=2&cset=true

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London, England
Monday, November 26, 2007

Oil is About to Hit $100 a Barrel…

This could be it, dear reader. This could be the week when three important milestones are reached.

When we left you last week, the unstoppable force of inflation seemed to be hurtling towards the immovable object of deflation.

This morning, we check the headlines. What happened?

First, let’s look at inflation.

The most inflationary price of all is the price of oil. And guess what? Oil hit a new all-time high on Friday – at $98. The hundred dollar mark is less than the cost of a cup of coffee away.

What will $100 oil mean? Use your imagination, dear reader.

Over the weekend, we went back to France to celebrate Thanksgiving at our old country house. We drive a Nissan Patrol, which Elizabeth uses to pull a horse van. Filling it up, we watched the numbers fly around on the pump; we thought we were watching the world population counter. By the time the figures came to a rest, we owed the station nearly 140 euros – or more than $200. The high price comes from several sources. Gasoline is always more expensive in Europe than in America; the Europeans tax it more heavily. Plus, oil itself is more expensive worldwide. Finally, the euro is a much stronger currency. Result: pain at the pump.

In America, as in Europe, the rising price of gasoline is much more painful at the bottom of the income pyramid than it is at the top. It’s at the bottom where inflation is most keenly felt. That’s where people who spend more on gas have less to spend on other things.

Meanwhile, the euro traded Friday at a new all-time high…$1.4966. Yes, we’re about to hit another milestone there too. Here at The Daily Reckoning we predicted that the dollar would fall to $1.50/euro. That was when the dollar was still trading at less than $1.30. Now, it looks like our target could be hit today or tomorrow. (Is it too late to move money into euros? More below…)

A lower dollar is inflationary . On world markets you get less for your money. Meaning, prices rise. Since so much of what goes around the world eventually comes around to the U.S. domestic market, soon consumer prices rise in the United States, too.

There was also a back-eddy in the stock market on Friday. The Dow gained 181 points. We call it a “back-eddy” because it looks to us as though the tide is running in the other direction – but we could be wrong.

And gold – the ultimate measure of paper currency inflation – shot up $26. Ooh la la. We saw the correction in the gold market coming; our problem was that we didn’t see it going. Gold was clearly ready to do some backing and filling a couple of weeks ago – when the price shot up over $830. We knew we would soon have an opportunity to buy it more cheaply. Trouble was, the correction was so fast and so short; it came and went before we had a chance to react. Last week, gold had practically already recovered. And this week, we wouldn’t be surprised to set it hit that old milestone from 27 years ago – $850. In fact, we wouldn’t be too surprised to see it knock over the milestone and keep on going.

Nevertheless, this morning, the force of inflation looks less unstoppable than it did last week. Up against the immovable object of falling prices, inflation looks like it might come to a halt.

Everywhere we look; there are more signs of a slump. Two year Treasuries have been having a nice bull run; they’re now yielding less than 4%. Holiday shopping fell short of last year’s binge by 3.5%.

“Don’t look now; here comes the recession,” says Fortune .

Finally, the press is putting two and two together:

Americans owe more money than ever before – including $11 trillion of mortgage debt. And their #1 asset – the main collateral behind all this debt – is falling in price. Housing prices are down 5% so far, nationwide. Robert Shiller, whose index tracks the housing market, says this could turn out much worse than people expect. The last major downturn in housing was ’25-’33, when prices fell 30%. A 30% drop in the value of America’s housing stock today would turn the immovable object of deflation into something closer to a black hole.

It could “create a nightmare effect,” says an Associated Press report.

“Subprime mess to worsen,” says the Wall Street Journal .

“Subprime woes leaking into economy,” says another article.

Let’s see, a 30% drop in housing prices is equal to, more or less…$6 trillion down the black hole of deflation. Hey…a trillion here…a trillion there…

*** Is it time to buy euros? A quick answer: we don’t know. The rise of the euro was a cinch…from 88 cents to $1.50. Now, it’s not such a cinch. The euro is a paper currency too. The ‘esperanto currency,’ we called it when it first came out. We know who backs the U.S. dollar – that’s why we mistrust it!

But who stands behind the euro? And how long will the Europeans accept a rising currency? A strong euro makes it hard for them to export to the United States. And while the European Central Bank is less concerned with full employment than its U.S. counterpart, Brussels has windbag politicians too – just like Washington.

What’s more, there are powerful, natural mechanisms that tend to keep currencies from diverging too much, one from another. How much higher will the euro go? We don’t know. But it’s no sure thing. As a hedge against the dollar, gold is probably a better bet .

*** And a note from our intrepid correspondent, Byron King…

“We note with sadness the passing of Ali Samsam Bakhtiari (1948 - 2007), of Tehran, Iran. Mr. Bakhtiari was a former director of the National Iranian Oil Company, and a vocal proponent of the Peak Oil school of thought. I was a regular correspondent with Mr. Bakhtiari, and Agora Financial was privileged to publish a number of articles based on material that Mr. Bakhtiari forwarded to me.”

Mr. Bakhtiari died suddenly. Byron will publish a more detailed obituary in the next few days. Meanwhile, we express our condolences to the Bakhtiari family.

*** We don’t really have any more thoughts about the markets.

We spent the weekend in the French countryside, getting together the two branches of the family for a Thanksgiving feast on Sunday.

The two girls and their father came from London. Two boys and their mother came from Paris. And what a glorious weekend it was! The sun shone so bright on Saturday, we couldn’t bring ourselves to go inside. So, we whipped up a batch of cement and worked on one of the stone walls.

Poor Henry. He almost immediately hurt his back and had to withdraw from the masonry trade at a very young age, without pension benefits.

Then, on Sunday, the weather changed completely. We worked again on the stone wall, but we were working in soup. The fog was dense, with a light drizzle all day long. Perfect weather for cement and ducks.

For Thanksgiving dinner, we built a roaring fire in the dining room – which was otherwise as cold and damp as a taxman’s tomb. The fire took the gloom off the room…that, and a bottle of champagne.

Your editor is not a cook. He knows nothing about it and is happy to leave it to others. But he likes seeing others cook. And he likes smelling them cook. They gave the whole house a festive air…bustling…stirring…bussing…fetching…and finally all sitting down to eat.

We had invited a couple of French friends. Soon, the conversation turned to the strikes. Your editor, arriving in Paris at the Gare du Nord, had to make his way across town. But the subway was barely running. Taxis were no where to be found. What could he do? He set out on foot, arriving at his apartment an hour and a half later. He enjoyed the walk. Then again, he didn’t have to be anywhere special at any special time:

“I’m sick of it,” said a young man. “It just makes daily life so difficult. Everything takes longer. What a pain. And for what? There are actually fewer French people in labor unions – as a percentage – than Americans. It’s a tiny part of the whole economy…but it causes trouble for everyone. The trains don’t run. They even sabotage the railroads. Why do people put up with it?”

“Yes…at the Sorbonne, it is even stupider; because the people causing the troubles are not even students. But every time there is a disturbance, they bolt the doors so you can’t get in or out. I went to school on Friday morning, after staying up half the night preparing my work. But the whole place was locked down for the weekend. What a drag.”

Until tomorrow,

Bill Bonner
The Daily Reckoning

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Alex’s Notes: What I find amusing about this article is that it positions what China is doing as some sort of mystical ancient Chinese secret. They are simply doing exactly what the United States was founded on, which was trade and diplomacy with all, staying out of entangling alliances, and no nation building (other than building their own).

Regardless, it just goes to show our founding fathers had it right all along, and we strayed from that path.

As Simon Heapes would say ‘nothing new under the sun mate’.

——————————————

By Ken Fireman

Nov. 27 (Bloomberg) — When Xu Jianguo, the Chinese ambassador to Nigeria, visited Nnamdi Azikiwe University in Akwa in February, he didn’t come empty-handed.

Xu brought a $10,000 contribution, which was used to buy equipment ranging from camcorders to overhead projectors to facilitate teaching Chinese at the school’s new Confucius Institute, according to Sam Omenyi, its deputy vice chancellor.

The source was China’s Office of the Chinese Language Council International, which has opened 135 Confucius Institutes worldwide. The office is part of a broad campaign involving investment and diplomacy as well as cultural outreach, all aimed at hastening China’s progress toward great-power status.

The campaign, combined with China’s economic growth and military modernization, forms a challenge that U.S. politicians are starting to notice and policy makers will likely be fending off for years. It is a classic example of what Harvard University professor Joseph Nye has dubbed “soft power”: building authority through persuasion rather than coercion.

“If you’re a rising power, as China is, with your military power increasing, one of your major concerns is that other nations don’t create coalitions to balance your power,” Nye said in an interview. “Soft power is a way to prevent that.”

Guan Anping, a Beijing-based lawyer and former aide to Vice Premier Wu Yi, calls it China’s “Tai Chi approach” to diplomacy. “When you fight Tai Chi, you use your opponent’s power against him,” Guan said. “It’s the soft approach to offense.”

U.S. Focus Elsewhere

The Chinese drive has benefited from a void created by what many nations see as a U.S. retreat from much of the world as it focuses on Iraq and the Middle East, according to analysts.

This was on display in August, when President George W. Bush postponed a summit with Asian leaders and Secretary of State Condoleezza Rice canceled a trip to an Asian security summit to focus on the Middle East.

“It is clear that the rise of China’s soft power — at America’s expense — is an issue that needs to be urgently addressed,” Nye wrote in December 2005. Success in a global information age, he wrote, “depends not only on whose army wins, but also on whose story wins.”

Edwards Takes Note

Some politicians, such as Democratic presidential candidate John Edwards, are taking note. “China is capitalizing on the United States’ current unpopularity to project its own `soft power,”’ Edwards, a former North Carolina senator, wrote in the September/October issue of Foreign Affairs. “In the coming years, China’s influence and importance will only continue to grow.”

And just yesterday, Defense Secretary Robert Gates called for “a dramatic increase in spending on the civilian instruments of national security,” including diplomacy, strategic communications, foreign aid, civic action and economic reconstruction.

“I am here to make the case for strengthening our capacity to use soft power and for better integrating it with hard power,” Gates said in a speech at Kansas State University in Manhattan, Kansas.

“We must focus our energies beyond the guns and steel of the military, beyond just our brave soldiers, sailors, Marines, and airmen. We must also focus our energies on the other elements of national power that will be so crucial in the years to come.”

Gates Trip

Administration officials deny that they are pulling back from Asia or other regions. “Far from neglecting Asia, we are more engaged than ever before,” Gates in a Nov. 9 Tokyo speech concluding a week-long trip to the region.

Still, China has made headway, in part because of the unpopularity of American policies, said Arthur Ding, an international affairs analyst at Nanyang Technological University in Singapore.

China has weakened the influence of the Western-dominated World Bank and International Monetary Fund in the developing world by providing loans that aren’t conditioned on the adoption of certain policies, as are funds from the bank and IMF.

In 2005, for example, the IMF was on the verge of a deal with the Angolan government for new loans in exchange for commitments to curb corruption and ensure that oil revenue went to social programs, according to Joshua Kurlantzick, an analyst at the Carnegie Endowment for International Peace in Washington.

No Policy Strings

The Angolans broke off the talks at the last minute, and the reason quickly became apparent, said Kurlantzick, author of “Charm Offensive: How China’s Soft Power is Transforming the World.” China soon offered Angola as much as $5 billion in financing — with no policy conditions attached.

It is no coincidence that Angola has emerged as one of the biggest sources of oil for China’s burgeoning, energy-intensive economy, Kurlantzick said in an interview.

China’s no-strings policies have great appeal throughout the developing world, according to Nye. He said governments are rejecting the 1990s-era “Washington consensus” of market growth and democratic governance in favor of what he called “the Beijing consensus” of a market economy controlled by an authoritarian government.

For all their success, the Chinese have had setbacks. One was the recent spate of safety-related recalls of Chinese-made products, which focused attention on the country’s environmental and workplace problems.

Achilles Heel

Another is Chinese human-rights policies, which Nye calls “their Achilles heel,” especially in Europe and the U.S.

One means of assuaging suspicions is the Confucius Institutes, which now exist in 51 countries. They promote Chinese language and culture, train language teachers — and project a Confucian philosophy that meshes with the Chinese government’s political priorities: just as a family should respect its elders, a nation should respect its leaders.

Nancy Jervis, who runs the Confucius Institute in New York, said some U.S. educators initially hesitated to join the program for fear that China would impose political or pedagogical requirements. That hasn’t happened, she said.

“People call it `soft power,”’ Jervis said. “I don’t know what soft power is, but it’s better than hard power.”

To contact the reporter on this story: Ken Fireman in Washington at kfireman1@bloomberg.net

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