However, some critics say they were surprised that the proposal is more ambitious – and more expensive – than initially expected, and includes controversial changes to bankruptcy laws that could cause the mortgage market to freeze up.

In fact, an Obama administration official told Reuters the total plan commits up to $275 billion for housing, including $50 billion from funds already committed in the country’s financial sector bailout.

Headlining the plan is a $75 billion Homeowner Stability Initiative, aimed at helping 4 million to 5 million struggling homeowners refinance their mortgages which are owned or guaranteed by mortgage giants Fannie Mae (FNM) or Freddie Mac (FRE).

A second piece of the program would help 3 million to 4 million additional homeowners cut monthly mortgage payments to sustainable levels by providing incentives to any participating lender to lower monthly interest rates.

Obama billed his two-pronged effort as critical to stanching the relentless run of foreclosures, which is key to turning around the recession-bound economy.
“In the end, all of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to deepen,” President Obama said while announcing his plan in Arizona, a state hard hit by the housing crunch.

But critics feel the proposals will have a minimal impact on homeowners who are behind on their mortgage. And most say Obama’s plan won’t make banks more willing to lend to consumers with less-than-perfect credit scores or meager downpayments.

“It’s like a new captain of the Titanic after it has hit the iceberg,” Guy Cecala, publisher of Inside Mortgage Finance, told MSNBC. “What can he do? Rearrange seating on the lifeboats?”

Housing Crisis Key to Recovery

Obama’s plan was created comes in response to a housing crisis that has acted like an anchor on U.S. growth, spawning a recession that started last December and shows no signs of letting up.

The housing crisis has played a central role in the financial and credit turmoil now spread across the globe, with many U.S. homeowners hamstrung by mortgages they cannot pay.

That has led to record foreclosures in the past year, swelling the glut of properties on the U.S. market, forcing down home values and crimping the wallets of homeowners unable to refinance or sell their homes. For instance:

• The housing market lost an estimated $3.3 trillion in value last year and almost one in six owners owed more than their homes were worth, according to online data provider Zillow.com.
• At the end of last year, slightly more than 9% of all home loans in the United States were in arrears, or already in foreclosure, according to the Mortgage Bankers Association, Reuters reported.
• A total of 8.1 million U.S. homes, or 16% of all households with mortgages, could fall into foreclosure by 2012, according to a report by Credit Suisse Group AG (ADR:CS).

The President says his program will finally stop the bleeding and help turn around an economy staggered by a withering recession.

“It will give millions of families resigned to financial ruin a chance to rebuild,” Obama said. “By bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”

The plan exists in several key parts.

Boost Funding for Fannie & Freddie

The first part of the President’s plan calls for the Treasury Department to double its financial support for Fannie and Freddie to allow them to refinance homeowners with mortgages valued at more than 80% of the homes’ values.

The Treasury plans to provide as much as $200 billion in capital to ensure that Fannie and Freddie, the government-sponsored enterprises (GSEs) that guarantee home loans for millions, can stabilize markets and hold loan rates down.

In order to assure adequate funding, the Treasury said it was increasing its preferred stock purchase agreements with the two government-controlled companies from $100 billion to $200 billion, Bloomberg News reported.

It also said it was taking the limit on the size of the mortgage portfolios the two companies can hold and boosting the cap on each to $900 billion, an increase of $50 billion. It’s also increasing their debt ceilings.

This part of Obama’s plan is designed to give relief to homeowners struggling with deflated property values and/or interest-rate “re-sets,” by allowing the big mortgage companies financing leeway.

“The plan I’m announcing focuses on rescuing millions of families in traditional mortgages who are under water or close to it … and to keep mortgage rates low so that families can secure loans with affordable monthly payments,” Obama said.

$75 Billion Incentive for Lenders

A key second part of the plan involves providing $75 billion in incentives to lenders, making them responsible for lowering interest rates so a borrower’s monthly mortgage payment is no more than 38% of his or her pre-tax income.  After that the government program would match the amount reduced by the lender to bring a homeowner’s payments down to 31% of their pre-tax income, MarketWatch reported.

If a lender is unable to get a homeowner’s payment down to 31%, it can also lower the principal owed on the mortgage and take advantage of government assistance.

As part of the initiative, servicers will receive $1,000 for each loan modification, as well as additional government funding for each month the borrower stays current on the loan. Homeowners can also receive $1,000 annually for five years as part of the program, as long as they stay current on their loan payments.

Funding of $50 billion for this part of the program will come from the Troubled Asset Relief Program (TARP) and $25 billion will come from Fannie Mae and Freddie Mac, said a Treasury official.

Overall, the Obama administration’s summary of the plan said the plan could offer a buffer of as much as $6,000 against declining value on the average home.

Fight in Congress Looms Over Bankruptcy Law Changes

One controversial part of the plan is a proposed law that allows judges to rewrite the terms of a mortgage for homeowners who land in bankruptcy court – changes in law that can be made only by Congress.

Without such a law, people are being forced into foreclosure, even though they would be “potentially … better off, and the bank would be better off, and the community would be better off, if they’re at least making some payments, but they’re not able to make all the payments necessary,” President Obama said.

But some in the mortgage industry – and many on Wall Street – say that such a law, known as “cram down” in bankruptcy lingo, would cause the mortgage market to seize up, because investors would stop buying mortgage-backed securities out of fear a judge could unilaterally change the terms of the deal the securities were created around, MSNBC reported.

“It could significantly destabilize the marketplace,” Steve O’Connor, the Mortgage Bankers’ senior vice president of government affairs, told reporters.

Builders Confirm Need for Action

Meanwhile, as if to underscore the timing of Obama’s plan for an ailing housing market, U.S. builders broke ground in January on the fewest number of houses on record, as housing starts plunged 17% last month to an annual rate of 466,000, Bloomberg reported.

If nothing else, the new housing program signals the Obama administration plans to take a more aggressive stance on foreclosure relief than the Bush administration, which supported voluntary efforts by the mortgage industry to ease the housing crisis.

“The problem with the build-up in inventory is coming from the increasing number of foreclosures,” Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies in Cambridge, Massachusetts, said in a Bloomberg interview. “It’s about time the government intervened so directly in the problem.”

Source: Bankruptcy Law Changes Part of Obama’s $275 Billion Housing Plan

• With inflation easing, China has lifted temporary inflation controls on key commodities such as liquefied petroleum gas, power-station coal, grains and cooking oil. Ten months ago, China was facing inflation at a 12-year high, Bloomberg reported. Now it’s slowed to the weakest pace in nearly two years.

• India’s rupee slid 19.2% in 2008, its worst annual performance since 1991, and the second-worst among the 10 most-active Asian currencies excluding Japan. “It has been ecstasy to agony for the rupee this year,” K.V. Mallik, treasurer at state-owned UCO Bank, told Bloomberg. “The outlook isn’t any better as it appears far from certain as to when the financial markets will stabilize. I expect the rupee to be under pressure in the next few months.”

• Rates on 30-year mortgages fell to 5.1% this week, down from the previous record of 5.14% set last week, Freddie Mac reported. Mortgage rates have plunged by about 1.3 percentage points since late October.

• Online holiday sales fell 3% from last year, marking the first decline in online spending since comScore Inc started tracking online sales in 2001, Reuters reported. Online spending totaled $25.5 billion between Nov. 1 and Dec. 23.

• UBS AG (UBS) the Swiss banking giant struggling to rebuild its balance sheet after taking $49 billion in losses form writedowns, has sold its stake in Bank of China, Reuters reported. UBS said it offloaded about 3.4 billion Bank of China H-shares through a discounted placing for at a profit of “a few hundred million dollars.” The bank had paid $500 million for a 1.6% stake in Bank of China in 2005.

Source: Global Investing Roundups Friday, January 2nd, 2009

More from Investor’s Daily Edge:

Equities aren’t the only markets acting strangely these days. The bond markets are acting even stranger.

For both bond and equity markets the cause of this strange behavior is the same: Piecemeal government actions in the U.S., Europe and Asia culminating in massive intervention.

The U.S. government is trying to nurse the economy back to health. And like a doctor who has a pill for anything that ails you, the U.S. government is trying to find a cure for practically every ailment afflicting the economy.

Sometimes when you’re on a lot of medication, you don’t know if it’s the symptoms or side-effects which are causing the most pain.

One thing is sure, the government has flung open the doors of its heavily stocked pharmacy and has emptied its shelves on the poor economy.

And when the meds don’t work, they simply put the targeted patients on life support – as they did with Freddie, Fannie and AIG.

Well … except for that one patient that got away … Lehman Brothers. At the time the government more or less said, “We can’t save them all.”

Now the government is more or less saying, “let’s save them all.”

No wonder the markets are confused. These government prescriptions are having all kinds of confusing side-effects…

Like when the government decided to lend to banks in return for asset-backed commercial paper. Investors were soon favoring the higher-yielding asset-backed debt of these banks over corporate and European bank debt which did not enjoy such government backing.

It’s no coincidence that the European bank crisis began to accelerate about this time.

And when the FDIC guaranteed bank deposits of up to $250,000, money-market funds cut back their investments in short-term commercial paper and held on to more money for themselves. Why? They feared that savers would begin leaving money-market accounts for safer (but lower-yielding) government-backed bank accounts

---

INTERNAL ENDORSEMENT The Great CEO Tip-Off… . . . Could Have Been Profitable Over 92% of the time . . . . . . And Could Make You Up to $65,907 in the Next 12 Months The Next Ultra-Profitable Alert Could Come as Soon as Next Week.

---

The government may have eased the concerns of bank customers, but for a time it helped make credit markets even tighter.

Every time the government gave the economy a remedy that worked in theory, more unforeseen symptoms appeared.

Now we have an economy reeling from both the original causes of the crisis – reckless lending by banks and interest rates that were way too low – and some very clumsy moves by the government.

You can tell from the markets’ crazy swings that it doesn’t know what to make of all this.

And, sure you can argue that it’s created some bargains in the stock market – a lot of companies are going at half price.

But with money still tight and revenues falling off, the key question for these companies isn’t how cheap they are, but how much cash they have. In other words, can they survive without having to sell all the furniture?

The bond market is also obviously affected by concerns over survival. The price of corporate junk bonds has fallen to record lows.

On the other hand, bank bonds are selling like hotcakes. Can you guess why? Yep, it’s the government stepping into the breach once again. To help banks raise much-needed capital, it has guaranteed bank bonds.

You hear of lots of money pouring into the safety of Treasuries. That’s fine. That’s bond investors reacting to risk. That’s NORMAL.

But lots of money is also fleeing Freddie and Fannie bonds into government-guaranteed bank bonds. For decades Freddie and Fannie bonds were the safest bond investments next to Treasuries. And, then, on September 7th, the government announced its promise to safeguard Freddie and Fannie’s $3 trillion bond market.

So what’s happening now is very ABNORMAL.

Freddie’s and Fannie’s bonds get about a percentage point more in yield than Treasures. Investors liked getting the extra yield while accepting very little risk.

But why settle for those yields when you can get even better ones from bank bonds. Not only that, you can also get a government guarantee that is just as strong if not stronger than the ones covering Freddie and Fannie.

So investors are selling off Freddies and Fannies and going to greener pastures sprinkled with government manure (all you have to do is hold your nose). That naturally has driven down the price of Freddie and Fannie bonds while raising their yields.

And that’s great news for a group of companies which invest almost exclusively in the bonds of Freddie and Fannie.

They’re very conservative in using leverage but they do use it. Then they simply apply the time-honored formula of borrowing low and investing high. Freddie and Fannie bonds give them more than enough spread to enable these companies to give their investors up to 8-10 times more money than your current savings account is probably earning. Plus, there are no minimums and no extra charges or fees to pay.

A couple of the companies that are investing in the debt of Freddie and Fannie and other GSEs are MFA (NYSE:MFA), and Anworth (NYSE:ANH). The long hand of Uncle Sam is making them and companies like them big winners.

Source: Boring Bonds Offering Great Deals

The Federal Deposit Insurance Corp. said in a statement it will take over operations of IndyMac, which will open for business on Monday as IndyMac Federal Bank. The thrift – the fifth U.S. bank to fail so far this year — had total assets of $32.01 billion as of March 31.

Much of IndyMac’s business was built on Alt-A single family mortgages, which were often made to borrowers with poor credit. As the secondary market for these loans collapsed, IndyMac’s financial condition became precarious.

“Often made to borrowers with poor credit.” Didn’t that worry anyone, even slightly?

“It’s bye, bye boomland,” said Bill Bonner in The Daily Reckoning on Thursday, the day before federal regulators shut down IndyMac. Investors should be aware that even U.S. Treasuries are no longer a safe haven…

Most of yesterday’s [Wednesday's] hard fighting took place in the financial sector.“Fed Sees Turmoil Persisting Deep Into Next Year,” saith the New York Times .

The New York press tells us that Steve & Barry’s, a clothing retailer with 200 stores, has filed for Chapter 11. And Fannie Mae and Freddie Mac got walloped again. The two Mississippi Companies [a reference to the government-chartered company in 18th century France that dominated a huge bubble, went broke and practically bankrupted the nation] desperately need to raise money. But even though the two are backed by the U.S. government and clearly “too big to fail,” investors are being a lot more grudging with their money these days. Fannie had to pay 74 basis points over the Treasury rate to get cash, much more than in the past. Freddie’s stock dropped to $10. Fannie’s hit $15. Both traded as high as $60, if we recall correctly.

IndyMac is in the news too. The big mortgage lender specialized in Alt-A loans – a step up from subprime, but apparently not a very big step. The shares traded at $50 in 2006. Yesterday, they were marked down to 44 cents.

Bloomberg tells us that Wall Street debt is being “downgraded by derivative traders.” They know the stuff better than anyone, of course.

What is surprising – to us, anyway – is that they aren’t downgrading government debt. We believe the credit cycle has turned. After a quarter century of falling yields, it looks to us as though yields have formed a major, triple-bottom. Which is to say, bond prices, (remember, they go up as yields go down) have hit three successive peaks, more or less at the same altitude, in 2003, 2005 and again in 2007.

But if we’re on the downward slope, so far it’s a gentle one. We looked yesterday and found the 10-year T-note yielding all of 3.88%.

We have to pause a minute and draw breath. What are bond buyers thinking? Of safety, surely. They see this latest assault of deflation – with falling stock prices all over the world…with Wall Street collapsing…the Fed nervously holding the key rate at 2%…oil slipping, possibly topping out – and they look for a hole to jump in. What better hole than U.S. Treasuries…dug deep by the full faith and credit of the U.S. government and denominated in the almighty dollar?

Well, ahem…that there is the problem. The hole may be deeper than they think.

Conventional wisdom holds that inflation will not be a lasting threat. The experience of the last quarter century is that short bursts of rising prices are soon replaced by another longish period of stable ones. But this was the period when the Chinese and Wal-Mart were lowering prices on manufactured goods…when labor rates were held down by the influx of millions of people into the modern economy…and before the cycle of commodity prices turned up. This was also the period in which interest rates were falling…and almost infinite amounts of money were available to increase consumer spending and production. That period is over.

Nevertheless, millions of investors expect it to continue. They believe that a cooling world economy will bring the forces of inflation back to their barracks and that they can go on collecting 3.88% coupons without feeling like chumps.

Who knows? Maybe they’re right. Still, we think they are morons. Even if they turn out to be right, the margin of safety on U.S. Treasuries is so razor thin they’re bound to cut a vein.

The real issue for us here at The Daily Reckoning is how the world ends. The world as we know it…Boomland…the world of constantly expanding credit and rising asset prices…is finished, we think. Does it end with a bang or a whimper? Does it end with the bang of inflation? Or the whimper of dying prices?

“Both” is still our best guess.

The New York press tells us that Steve & Barry’s, a clothing retailer with 200 stores, has filed for Chapter 11. And Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) got walloped again.

The two Mississippi Companies [a reference to the government-chartered company in 18th century France that dominated a huge bubble, went broke and practically bankrupted the nation] desperately need to raise money. But even though the two are backed by the U.S. government and clearly “too big to fail,” investors are being a lot more grudging with their money these days. Fannie had to pay 74 basis points over the Treasury rate to get cash, much more than in the past. Freddie’s stock dropped to $10. Fannie’s hit $15. Both traded as high as $60, if we recall correctly.

IndyMac (NYSE:IMB) is in the news too. The big mortgage lender specialized in Alt-A loans – a step up from subprime, but apparently not a very big step. The shares traded at $50 in 2006. Yesterday, they were marked down to 44 cents.

Bloomberg tells us that Wall Street debt is being “downgraded by derivative traders.” They know the stuff better than anyone, of course.

What is surprising – to us, anyway – is that they aren’t downgrading government debt. We believe the credit cycle has turned. After a quarter century of falling yields, it looks to us as though yields have formed a major, triple-bottom. Which is to say, bond prices, (remember, they go up as yields go down) have hit three successive peaks, more or less at the same altitude, in 2003, 2005 and again in 2007.

But if we’re on the downward slope, so far it’s a gentle one. We looked yesterday and found the 10-year T-note yielding all of 3.88%.

We have to pause a minute and draw breath. What are bond buyers thinking? Of safety, surely. They see this latest assault of deflation – with falling stock prices all over the world…with Wall Street collapsing…the Fed nervously holding the key rate at 2%…oil slipping, possibly topping out – and they look for a hole to jump in. What better hole than U.S. Treasuries…dug deep by the full faith and credit of the U.S. government and denominated in the almighty dollar?

Well, ahem…that there is the problem. The hole may be deeper than they think.

Conventional wisdom holds that inflation will not be a lasting threat. The experience of the last quarter century is that short bursts of rising prices are soon replaced by another longish period of stable ones. But this was the period when the Chinese and Wal-Mart (NYSE:WMT) were lowering prices on manufactured goods…when labor rates were held down by the influx of millions of people into the modern economy…and before the cycle of commodity prices turned up. This was also the period in which interest rates were falling…and almost infinite amounts of money were available to increase consumer spending and production. That period is over.

Nevertheless, millions of investors expect it to continue. They believe that a cooling world economy will bring the forces of inflation back to their barracks and that they can go on collecting 3.88% coupons without feeling like chumps.

Who knows? Maybe they’re right. Still, we think they are morons. Even if they turn out to be right, the margin of safety on U.S. Treasuries is so razor thin they’re bound to cut a vein.

The real issue for us here at The Daily Reckoning is how the world ends. The world as we know it…Boomland…the world of constantly expanding credit and rising asset prices…is finished, we think. Does it end with a bang or a whimper? Does it end with the bang of inflation? Or the whimper of dying prices?

“Both” is still our best guess.

Source: The End of the Boomland Economy

We are sitting here this morning, in our office, looking at a fat woman – stark naked – sleeping on a couch.

Of course, how rich people spend their money has always been a source of interest and entertainment. That an apparently sane and sensible man like Roman Abramovich spent $33,641,000 for the painting of the “Benefits Supervisor Sleeping,” must also be a comfort to the poor. At least, they don’t have to look at it.

But the world of money is a world of wonder…today, as everyday. We could begin today’s reckoning wondering why the rich are so eager to part with their money, for example…or why the poor are so eager to have it; they can see that it clearly impairs one’s judgment and degrades ones tastes.

Instead, we will wonder why those who constantly praise the virtues of capitalism seem to have so little faith in it.

What brings this wonder to mind is the latest legislation to clear the Senate Finance Committee. Congress is preparing to improve the way capitalism functions, by authorizing the Federal Housing Administration (itself an improvement of an earlier Congress) to insure $300 billion worth of home mortgages. Up until now, federal housing agencies could work all sorts of mischief; you could argue that without the implicit guarantees of Fannie Mae and Freddie Mac, or the explicit efforts of these quasi-public companies to create a huge market for derivatives based on mortgage finance, the whole housing bubble would never have occurred in the first place. Now – if this legislation becomes law, that is – new mischief is about to appear on the scene. The FHA will be empowered to help patch up America’s housing bubble.

The goal, said Senator Chris Dodd, is to keep people in their homes. He did not mention that these are the same homes whose owners demonstrably cannot afford them. Nor was he especially concerned that his meddling with the corrective machinery of capitalism was likely to throw a monkey wrench into the gears. Instead, like God on the 6th day of creation, he looked upon his handiwork and thought it was pretty good.

Everyone is perfectly happy to let capitalism do its stuff – as long as they like the results. But cometh a correction and all of a sudden the press is full of whining pundits and meddling politicians. Every correction brings forth new improvements until there are so many of them the system collapses under the weight. That why we have revolutions and bankruptcies, after all, to blow away the accumulated impediments.

And that is why the emerging markets have such an advantage. In many ways, people swing their arms and their hammers more freely in, say, Russia or China than they do in the United States of America or Britain – simply because there is nothing to stop them. These countries have already had their moments of violent desperation…their bankruptcies…and their revolutions. Both tossed out their entire economic systems in the late ‘80s and early ‘90s. They’ve been rebuilding – fast – ever since. The leeches haven’t had a chance to get their suckers attached.

America’s war against Iraq had its roots in many improving impulses. According to John McCain and Alan Greenspan, however, the taproot sank into Iraq’s oil fields; America wanted to secure its access to cheap oil, they say. Unfortunately, this program – like all government meddling – backfired. The price of oil was only $25 a barrel when the war began in September of 2003. Yesterday, it hit $130 a barrel. And the war itself is expected to cost the nation $1 trillion or more. For all its efforts, the US secured the most expensive energy in world history. (And then pushed food prices up to their highest levels in modern times too – keep reading…)

China, meanwhile, decided to take the capitalist road. Instead, of using military force to get oil, it simply bought it on the open market. It has sent its agents to secure, peacefully and honestly, long-term contracts for oil and the other natural resources it needs to feed its ravenous economy. Its buying is driving up prices for everything. But what would you expect?

Meanwhile, having completely failed in the Mideast, America’s improvers turned to the Midwest. Yes, dear reader, if we can’t get oil from the sands of the Gulf and Mesopotamia, we will squeeze it out of our own farmland. At least, that was the promise of the program to subsidize the production of ethanol. Capitalism could not be relied upon to fill America’s energy needs, said the kibitzers.

Capitalism had already pronounced its verdict on corn-based fuel: it was a bad idea. Later, environmentalists came to the same conclusion; it actually caused more damage than petroleum. But the US Congress, in its majestic wisdom, saw something in ethanol that capitalists and environmentalists had missed – campaign contributions and votes!

And so it came to be that a large portion of the US corn crop is diverted into fuel tanks. And so it comes to be that a large number of the world’s people – including Americans themselves – find their food much more expensive than it used to be.

And more thoughts…

*** In Haiti, people are eating mud.

We’re not making this up. There’s a photo of a miserable woman making mud cakes in Port-au-Prince, in yesterday’s Daily Telegraph newspaper.

For the benefit of readers who wish to cut their food budgets, the Telegraph gives us the recipe: you simply mix clay with salt and vegetable fat and lay it out in the sun to cook – like mud pies. Then, you call them “biscuits.”

Last time we looked, mud was not one of the main food groups recommended by dieticians. But all over the world, poor people have to make do with what they can find. Rice is the staple food in Haiti, and it’s trebled in price in the last year, says the Telegraph. Other grains are not far behind. Since January of 2007, wheat has gone up 200% and corn 150%.

Desperate poor have already rioted in 34 countries this year. The ghost of Thomas Malthus, if he bothers to read the paper, must be saying “I told you so.” Malthus predicted that population would grow faster than food supplies. Millions of people would starve, he predicted. Now, it looks like he might have been too optimistic. He died in 1834. Since then, a series of happy events and technological developments greatly increased the supply of food…while war and family planning reduced the number of mouths to be fed. Now, it appears that the gains from mechanization, bio-engineering, chemistry and land clearing may have reached their limits. We may soon reach “Peak Food”…the point at which the world can produce no more food. But the human population – especially the part of it that doesn’t eat at the Tour d’Argent in Paris – keeps growing. Experts predict that the world’s population will grow by 3 billion people over the next 40 years – a 50% increase. Where will the world get 50% more food? At what price? Who knows…but one thing is sure: there will be plenty of opportunities for the world-improvers to make things worse.

“America’s triple-A credit rating may be in danger”, says Standard and Poor’s.

If the country has to bail out Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) through a prolonged recession, it could cost the nation’s treasury as much as 10% of GDP.

We’re beginning to see the whole world financial situation as a U.S. problem. There is a lot going on…but the big story seems to be about America (and Britain, to the extent it shared the Anglo-Saxon economic model)…its money, its wealth and its place in the world.

The plot is simple enough. After an extremely successful run, the United States is struggling to maintain its edge. Its people are deeply in debt. Its currency is being sold off. Its labor…its capital markets…and its technological lead are all being challenged by faster, more youthful competitors.

Like any Greek tragedy, the hero is a victim of his own hubris. He thought he could steal the gods’ fire and get away with it.

Americans thought they could do things that have always been off-limits to mortals. They believed they could operate a financial system based entirely on paper money, for example. They believed they could spend money they hadn’t earned – and live off credit forever. They believed the myths of the Efficient Market Hypothesis and Benign Capitalism…the Black Scholes Option Pricing Model and the Great Moderation…that Deficits Don’t Matter and the War on Terror does.

And now…the whole society is being marked down – by inflation, deflation and a trillion-dollar, unwinnable war.

On the surface, it is merely another chapter in the world’s financial history. George Soros elaborates:

“The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years. However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.”

Those last 60 years were the 60 glorious years in which the United States was on top of the world. It’s the period roughly corresponding to Baby Boomers’ lives. Born after WWII…growing up in the ’60s…taking command in the ’80s…and now looking forward to retirement. Was there any better time to be alive? Was there any better place to be alive in than the United States of America? Its money was the world’s best. Its economy was the most dynamic and productive. And its people were the world’s richest. Full employment. Full stomachs. Free love and open bars…what more could you ask for?

Yesterday, the dollar hit another record low against oil. It now takes $111 to buy a barrel of oil…and, in Atlanta, $3.36 to buy a gallon of gasoline.

“That’s nothing,” said our driver in Manchester yesterday. “Here, the price of gas is nearly $10 a gallon. Of course, you don’t see any big American gas guzzlers either.”

Our driver showed us the instrument panel of his 2-year-old Skoda. It revealed an average fuel consumption of 56 mpg.

The car was comfortable and reasonably large. It didn’t seem to lack power.

“Here in England, we couldn’t afford to drive your cars,” he concluded.

Our guess is that Americans can’t afford to drive American cars either. The latest numbers show consumer spending rising – but only because consumers are forced to spend more on fuel. And experts believe that the summer of ‘08 will be the first in which Americans actually drive less – forced off the road by high fuel prices.

Most people think of inflation as affecting prices they pay for bread and magazines. But inflation has a bigger agenda; it adjusts the wealth of whole societies.

The problem for Americans – and many others in the developed world – is that their wages are too high. They are used to earning a lot more money than their counterparts in, say, China or Vietnam. But why? Only because they have more capital and more skills, so they can produce more. But that situation is changing fast. Capital is piling up in China, Russia, Brazil and India – and elsewhere. As a result – wages in those places are soaring. Nestle just agreed to a 16% wage increase for its St. Petersburg, Russia, staff. In China, urban wages rose 18.7% in 2006. Ten percent annual increases in India are said to be the average.

In the United States, the last real, hourly wage increases came in the 1970s. Since then, adjusted for inflation, wages have been flat. But we Baby Boomers scarcely noticed. Because we were entering our peak earning years, our assets (stocks, then houses) were rising in value, and the expanding credit cycle left us with more money to spend.

But now, as Soros points out, that credit cycle has turned against us. The super boom is over. Our houses are going down. And the value of our labor and our stocks – which have held fairly steady – are being marked down by inflation. We are not becoming a Third World country…but we are becoming a poorer one…with a labor force that is less and less overpriced each year. Seems like a good time to retire. But forget the Winnebago – with gasoline at $3.36 a gallon, who can afford to cruise around on the wide-open spaces?

“Inflating is immoral in a sense because it steals,” Ron Paul said to us in an interview for I.O.U.S.A. “It steals value if you double the money supply and your prices go up twice as much…it’s an invisible hidden tax. But the real immorality here is that some people pay higher prices then others. So if you’re in the middle class, or especially low middle income, your prices might be going up fifteen percent a year. Somebody on Wall Street working leverage buyouts doesn’t have to worry about the rising cost of living. This to me is a immoral act, that is prohibited by the Constitution, and the outcome is always tragic.”

Could it be downhill from here on out – to the end of our lives?

Maybe…

[For your updates on I.O.U.S.A. see here.]

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

The U.S. stock market enjoyed a hell of a rally yesterday. The S&P 500 had its best start to the second quarter since 1938, up 3.6%.

The Nasdaq followed suit, rising 3.7%, and the Dow shot up 3.2%.

The most hated of the financial sector stocks led the way. Fannie Mae, Freddie Mac, Lehman Brothers and UBS all registered 15-20% gains on the twisted logic that revealing massive losses is a bullish indicator.

In like fashion, as investors bought stocks yesterday, they sold commodities. Gold struck a new two-month low of $875. Oil dipped below $100 per barrel. A few grains — corn, for example — managed to rally… but when all was said and done, it was a down day for commodities across the board.

“Just in the last week, we heard from some of the usual suspects,” comments our resource trader Kevin Kerr, “who perpetually claim commodities are a overblown — oil is going to go back to $30, grains will sell off 50%, etc. In fact, Barron’s cover story last weekend was ‘Get out of Commodities.’ Doesn’t leave much room for discussion, does it?

“The idea that all commodities are in some sort of bubble and that no fundamentals exist for higher demand for grains, energy, metals, etc. is ludicrous. Sure, there is a ton of speculative money, and in some commodities much more than others, but the idea that only speculative money is driving the underlying prices is simply incorrect.

“No doubt we may see further corrections for many, if not all, commodities, especially as it seems that every branch of the government is attempting to prop up the dollar. But that would actually be great news for us. If some commodities pull back even more, especially oil, it will give us much better buying opportunities. The simple reality is that eventually, sooner rather than later, prices will skyrocket again, especially in energy and grains.

“Get out of commodities? I don’t think so.”

Like stocks, the dollar index staged a notable rally, up a full point to 72.4 this morning. The euro backed off to $1.55. The pound shed a cent too, now at $1.98. And the yen is back at 101.

We’re not nearly ready to call this temporary strength a trend reversal. If you’re ready to stand in front of this freight train, be our guest:

Merger and acquisition (M&A) activity just saw its biggest quarterly decline since the tech bust. According to a Wall Street Journal report, the value of deals around the world fell 24% in the first quarter, to a “mere” $736 billion in mergers and buyouts. The sheer number of those deals rose over the same period, up 14%, to 9,195, but the value dropped.

“It’s no surprise to see M&A slowdown,” says the commercial banker turned Capital & Crisis editor Chris Mayer, “especially given the unfolding credit crisis. M&A markets feed on easy money and, despite the Fed’s best efforts, money is not so easy right now.

“What’s interesting here, though, is how the M&A markets highlight where there is still strength. While the U.S. market slowed down big time, activity in emerging markets and Europe still rose. This indicates there is still a healthy environment in those markets. With the weak dollar, I’d expect to see some of these foreign acquirers go shopping in U.S. markets.”

Chris follows the M&A market closely, “because it’s where I get my cues for what’s cheap in the stock market,” he says. Capitalizing on the difference between “dealmaker” assessments of stock value and Wall Street pricing is a core premise of Chris book, Invest Like a Dealmaker.
The book is a must-read, especially if you’re looking to pick up some bargains in this market.

Blackstone, one of the nation’s biggest dealmakers, raised nearly $11 billion yesterday to launch Blackstone Real Estate Partners VI – the biggest real estate opportunity fund in history.

Coupled with its five other siblings, the family of Blackstone real estate funds now has $25 billion ready to snatch up distressed properties. In Manhattan… perhaps.

Manhattan apartment sales plummeted 34% in the first quarter, says the NYC real estate appraisers Miller Samuel. Sales fell by the biggest margin in 18 years. Inventory grew over 4%.

Still, as the number of sales shimmied southward, the median price of your dream Manhattan pad rose 13%, to a record high $945,000. Yeah. We’ll go out on a limb and say that NYC apartments are a tad overpriced. Beware.

Gas prices remain at their all-time high across the nation today, at $3.28 per gallon. Diesel prices have steadily crept up this week too, now less than a cent from their all-time high of $4.03.

Accordingly, independent truckers across the country organized an impromptu strike.

“People aren’t seeing that the more we pay, the more they’re going to pay,” a trucker warned the AP, suggesting the costs of consumer goods hauled across U.S. highways will soon spike. According to a variety of reports, many truckers are operating at a loss when diesel prices rise above $4 per gallon.

A group of big rig operators caused a massive traffic jam on the New Jersey Turnpike in the afternoon yesterday by occupying all lanes and crawling out of NYC at 20 mph. Similar protests occurred in Chicago and Atlanta, while elsewhere, hundreds of drivers pulled into rest stops and simply refused to work.

We’re sure these disruptions will both bring the price of diesel down… and win the hearts and minds of fellow travelers. Strikes work wonders in France, after all.

There is a 1 in 4 chance of a global recession, said the IMF today.

“The financial shock that originated in the U.S. subprime mortgage market in August 2007,” reads a report from the IMF leaked today, “has spread quickly, and in unanticipated ways, to inflict extensive damage on markets and institutions at the core of the financial system…The global expansion is losing momentum in the face of what has become the largest financial crisis in the United States since the Great Depression.”

The fund went on to lower its 2008 global growth forecast for the third time since July, now down to 3.7% global GDP expansion. The IMF defines a worldwide recession as annual global growth slowing to below 3%.

Secretary of the Treasury Hank Paulson called the IMF’s fears “overblown.” Of course, he did.

“It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly,” added Ben Bernanke today, testifying before Congress. The Fed chairman suggested that typical U.S. growth rates might return in 2009, but the “uncertainty attending this forecast is quite high.”

But, according to the World Bank, the financial crisis is only half the concern in the Far East.

“While the subprime crisis will have its impacts,” Jim Adams, a VP of the Bank, commented yesterday after a semi-annual report on East Asia and the Pacific region, ”the more immediate concern is that in virtually every East Asian country, inflation is climbing to uncomfortable levels.”

Citing inflation, the Bank cut growth rates dramatically… down to a stagnant 8.5%. Man, they’re hating it, aren’t they?

One factor in the increase is a rise in domestic demand. “Chinese retail sales have experienced a dramatic surge,” says our small cap advisor Greg Guenthner. “Domestic retail sales skyrocketed 20.2% for the first two months of 2008, to more than 1.74 trillion yuan, or about $248.1 billion. That’s more than 5% higher than last year.”

Gunner tells us that while the heavily inflated food and wholesale prices have been grabbing the headlines, non-essential goods are flying off the shelves too. Clothing sales in China are up 24%. Daily consumer goods are up more than 21%. Household appliance sales are up almost 19%.

“One of the true hallmarks of middle-class growth is the sale of these nonessential and luxury items. Even the poorest working members of a society will spend money on food staples. However, the working poor, especially in nations with less-developed economies, won’t be dropping big chunks of their paychecks at the Gap…

“Now that China’s economy is well into its adolescence, middle-class spending will continue to grow.”

One of Gunner’s favorite ways to play this trend is a small global garment manufacturer that’s “preparing to ride this “clothing boom” all the way to the bank.” You can currently try out Greg’s Bulletin Board Elite for a massive discount… $1,000 off for the next 48 hours.

Back here in the U.S., the Institute for Supply Management (ISM) did its part aiding the buying frenzy on the Street yesterday. The ISM’s monthly gauge of manufacturing activity rose from 48.3 in February to 48.6. Woo-hoo! While still in the sub-50 “contraction” range, market makers were pleasantly surprised to see the U.S. manufacturing sector halt (perhaps temporarily) its precipitous decline.

Skimming though the fine print, we note that the ISM’s gauge of material costs for manufactures shot up 10%, to 83.5, the highest since October 2005. New orders and production activity fell, while employment, exports and “supplier delivery” rose.

The private sector added a paltry 8,000 jobs in March, says today’s ADP National Employment Report. But it’s job growth all the same. Small and service businesses buoyed the survey in the face of big declines in manufacturing, goods producing and “big business.” The Labor Department jobs report comes out on Friday. If the quants at the BLS can engineer a positive number, we’re confident investors will take that number — any number — as a buy signal.

Add to the manufacturing and jobs reports this next bit… and we might be tempted to believe the U.S. is starting to get the warm fuzzies all around. “Might be” being the operative phrase here…

“The average percentage of people saying that the U.S. has a positive influence has risen to 35% from 31% a year ago,” says a BBC survey released this morning. Similarly, those who think the U.S. has a negative global influence fell 5%. Both trends mark the first positive reading in three years.

Still… in the eyes of the world, the U.S. is just above North Korea in positive feeling… and below them in negative. At least we’re in good company, yeah?

“What exactly is wrong with a Brit pointing out the problems afflicting the Mother Ship USA?” asks a reader from across the Atlantic. “As a British reader, I would have hoped you needn’t lean in this direction of becoming peeved at outside observers commenting on such matters. To be very fair to you all at AF, self-proclamation of these afflictions has been the norm and you are to be congratulated on front-running the theme for a long while, aiding, of course, my profit and loss along the way.

“What I find doubly ironic is that the U.K. is very likely to move, if it hasn’t already done so, in the same sorry direction because of the ostrich effect of hoping beyond hope things will get better soon. They won’t. The U.K. surrendered its Empire some time ago, and the U.S. is slowly going the same way. Its propensity to comment on everything worldwide from an “outside observer “perspective only serves to fuel the “clear your own backyard first” debate. Now the backyard is well and truly being cleaned with all those taxpayers depreciating dollars, rules being bent or ignored at will and politicians doing their absolute best to promote harmony and serenity during an election year.

“From an outsider perspective, it is tickling a lot of people pink to witness this debacle. But as a realist, I also see it affecting us outsiders negatively in the long run. Keep up the good, honest work. If nothing else, it makes for a good read each morning.”

The 5 responds: Amen. That’s really our point. It does take an observer from outside to highlight what most Americans would rather not see.

Cheers,

Addison Wiggin
The 5 Min. Forecast