Popular government has two major parts. One part is fraud. The other is larceny. As to the first, it is like a professional wrestling match – full of lurid threats, spilled beer, sacred cows, gaudy uniforms and self-delusions; the fans feel their private parts shrink when their man loses. If he wins, they feel they are winners too. But it is the other part, the more rational part – a balance of larceny and bribery – that interests us today.

Serge Dassault miscalculated. One of the richest men in France, he was stripped of his position as mayor of a Paris suburb this week. A court found he had made cash payments to voters in Corbeil-Essones, east of Paris, which could have influenced the outcome of a mayoral election.

We stand dumbfounded…mouths wide open…our fondest hopes for the progress of humanity dashed to pieces. How could an experienced, well-informed man of mature age and sound finances, have made such an amateur’s error? He bribed the voters unfairly – that is, with his own money – but apparently not enough of them!

Mr. Serge Dassault, meet the late Mr. Bongo. France included in its ‘mission civilisatrice’ the cultivation of various public officials throughout Africa. Bongo was one of them.

The moment when destiny stuck her nose into Mr. Bongo’s affairs was probably in 1964, when Mr. Bongo had gotten himself into the post of Minister of Tourism in the government of President Mba. That year was the one chosen by Jean-Hilaire Aubame to launch a coup against Mba’s regime, which saw both Mba and Bongo confined together until French troops came and bailed them out. Being locked up with the president of a country can be good for your career; at least it was for Bongo. His ties to Mba were strengthened by the ordeal, says the TIMES, and he was subsequently made Vice-President, succeeding to the top post itself when Mba’s last cartridge had been spent.

The TIMES described Bongo as “one of the world’s richest heads of state.” The Financial Times provided details: “An indictment…listed 39 properties, mostly in the chic 16th arrondissement of Paris, nine cars worth nearly $2 million, and 70 bank accounts.”

And so the familiar question: “how is this possible?”

Mr. Bongo’s percentage of Gabon’s output must have been substantial. He took over the government of Gabon in 1967 at the age of 31, making him the world’s youngest head of state. “For the next two decades,” continues the obituary, “Bongo was able to rule Gabon almost as a personal fiefdom. With a relatively small population and benefiting from abundant natural resources – principally oil, but also uranium, manganese and timber….”

The man mastered both carrot and stick. With revenue from Gabon’s natural resources flowing into his coffers, he was able to hand out lavish favors. “He placated students in 2000 by providing hundreds of thousand of pounds for the purchase of the computers and books they were demanding,” says the TIMES. He could spend his own money when it suited him too – for he had so much of it. And when the working classes took the streets in 1990, he had plenty of goons in uniform to beat them with sticks.

Bongo did not suffer from the typical financing problem of modern democracy. When you rob Peter to pay Paul, Peter gets cheesed off about it. The next thing you know he’s voting against you or plotting a coup. That is why it is better to bribe Paul with money Peter never earned. And do it on a large scale. That is how Bongo won an election as recently as 2005 with nearly 80% of the vote. Not even Obama can match that.

But politicians in modern, developed democracies are now bribing voters on a breathtaking scale – protecting their bank accounts, shoring up their houses, giving them jobs and health care. In the US alone total US government debts, obligations and commitments now come to $112 trillion. Congressmen risk neither jail nor insurrection. Cometh the old question; how do they get away with it?

Currently, 50% of every dollar spent comes from borrowing. This week brought news that the developing countries – led by China – are still adding to their positions in US Treasury bonds. The funds are spent immediately. The payer and the payee – neither of whom vote in current US elections – can worry about settling the debt later. What a marvelous invention is inter-generational government debt, funded by foreigners! Even Mr. Bongo, RIP, must have been impressed.

Enjoy your weekend,

Bill Bonner

Source: Kleptocracy in America

I ended that with an exclamation point because when I multiply $26 billion a week times 52 weeks, I get $1.352 trillion, a headache and a feeling of impending doom, which I figure in some primordial, primitive way MUST be significant, thus explaining my use of the exclamation point.

The new total holdings of these foreigners, in that one account alone, is a huge clot of debt for which they have paid a cumulative $2.710 trillion, although with interest rates trickling upwards, they surely lost some money as the prices of bonds went down. Hahaha! Morons!

And so with all of this foreign money flooding into Treasury and agency debt, and all the new money pouring out of the Federal Reserve spigots, and then all this new money pouring out of the government spending spigots, it is not too surprising – although still more than merely terrifying – to see the monetary base jump to $1.801 trillion from $1.706 trillion just a couple of weeks ago.

(Editor’s note: There was a long silence on the tape, until finally it continues) “I hope that you can still hear me, as I am now in full lockdown mode in the Fabulous Mogambo Bunker (FMB), suddenly scared out of my mind in a panic attack because the money supply surged 5.6% in two weeks, a cancerous growth rate that, if annualized, suggests that the money supply will grow to $7.426 trillion in One Freaking Year (OFY)! OFY!”

And if you think that such terrifying increases in the money supply are not possible because responsible, intelligent people will not allow it, then I laugh – hahaha! – at your childish optimism and point out that the money supply, now $1.801 trillion, is monstrously up from one year ago when the monetary base was a mere $825 billion! Wow!

If the money supply can double in one year, why can’t it quadruple in one more year? Who’s going to stop them? You? Hahahaha! We’re so freaking doomed!

On the other hand, from another perspective, John Williams at shadowstats.com figures things the “old-fashioned” way, which is to say, in this case, the pre-Clinton way, and he figures that the M3 money supply is – sacrebleu! – falling, and is now down from its high of about 17 percent growth in 2008 to only about 7 percent now, which is still “terrifying”, but down from “suicidal.”

Then I read that Mr. Williams figures that the unemployment rate, measured the old fashioned way, is about 20 percent!

Naturally, my heart is thumping and I am panicked at the thought of 20 percent unemployment, which means either that I will soon probably be fired, too, or that I will be pestered by relatives who were fired and who now want to borrow money, like they have some secret plan to pay me back or something, and when I politely ask, “Where is all the gold, silver and oil that I told you to buy all those years, you morons?” they will say how they did not buy any gold, silver or oil, and then I will laugh – hahahaha! – in their stupid faces and tell them, “Then your misery is your reward for being stupid!” which will doubtlessly cause already-hateful family members to be even MORE hateful, like their incredible stupidity is MY fault or something! See the kind of crap I have to put up with around here all the damned time?

Desperate for better news, even in comparison, I am strangely relieved that shadowstats.com calculates that the inflation in consumer prices (when measured the pre-Clinton way) has plummeted from a blistering 9 percent in 2008, and now inflation has fallen to about 2.5 percent, which is still Very, Very Bad (VVB) in both absolute terms and historical precedent, but it’s at least a meager straw at which to clutch in panic and desperation.

Fortunately, by buying gold, silver and energy, you are never in a panic and you are never desperate because by owning them you are thusly guaranteed – guaranteed! – by 4,500 years of human history to be holding the only things that will hold their value as the idiotic ruling class destroys a fiat currency by creating too much of it simply because they want to and there is nobody that can stop them.

And that is also why it is all so, so easy, and why you, too, will say, “Whee! This investing stuff is easy!”

Source: The Reliable Money Supply Spigots

So far, not a single major university has asked us to make the commencement address. Nor a minor college. Not even a school of cosmetology or taxidermy. But here at the Daily Reckoning headquarters in London, protected by a broad ocean and a narrow reading of the First Amendment, we will give them – and UK graduates too – advice no one asked for.

“Plastics,” was the advice given to college graduates in Mike Nichols’ ’67 film. But that was when there was still hope for America’s manufacturing sector. Even then, it was too late. The percentage of GDP from the manufacturing sector fell for the next four decades, from over 20% in the last ’60s to barely 12% last year. Better advice would have been ‘derivatives.’ They stank just as bad, but they were much more profitable. While only 8% of GDP, finance accounted for 40% of corporate profits in 2007. And derivatives grew from nothing to a face value of 16 times the GDP of the entire planet.

But your elders are always giving you bum advice.

“You cannot decline the burdens of empire and still expect to share its honors,” said Pericles to the class of 430BC. He lived during a time not unlike your parents’ era in the USA – when Athens was on top of the world. But vanity got the better of him. He launched an attack on Sparta that backfired badly. He soon died of plague and Athens was not only ruined, but enslaved. Athens’ ‘golden age’ turned to lead. Young Athenians should have shrugged off the burden rather than accept it. You should do the same.

When you were born 20-some years ago, the nation’s total debt per person was less than $90,000 – adjusted to ’09 dollars, of course. While that was a lot of money, it was nothing compared to what was coming. Now it’s $186,717 per person – more than twice as much, in real terms. Fortunately, private debt is not inheritable. But it comes to you as a lien against property. Instead of paying off their mortgages and leaving you a house, free and clear, the baby boomer generation spent the ‘equity’ in their houses even faster than they got it. House prices rose. But mortgage debt rose faster. While your grandparents owned 80% of their houses, by 2007, the typical homeowner only really owned 4 rooms of an 8-room house. And then, when house prices fell, so did his remaining equity…to the point where one out of six homeowners in America is now underwater. You could still eventually inherit a house, but you may have to scrape the barnacles off the front porch.

But that’s not even the half of it. While your parents had control of the US government they allowed themselves a little larceny. Add the unfunded retirement and healthcare benefits they voted for themselves to the official national debt, and together they are scheduled to cost your generation 4 times the total annual output of the US. This is over and above the private debt they accumulated.

Some of this debt can be carried. Some will have to paid down. But as it stands, as much as $77 trillion of post-’09 earnings must be stolen from the future in order to pay for the liquor your parents drank…the bombs they dropped on god-forsaken foreigners…and the interest on their debts. So, forget about saving for a European vacation or a house of your own. Even if every penny of your savings – and every other American’s savings – are put to the task you will still be paying for your parents’ expenses all your life.

But wait, there’s more! The burden is getting heavier. Federal budget projections show an additional $7 trillion in deficits over the next 10 years. Described as the cost of fighting recession, the present generation buries its own mistakes under cash that the next generation hasn’t even earned yet. Today’s bankers, businessmen and speculators are being bankrolled by you – tomorrow’s bankers, businessmen and speculators. Today’s homeowners get a helping hand…from whom? Tomorrow’s homeowners – you. Today’s employees get a boost too. Same story. Where do you think the money came from to pay Wall Street bonuses this year? How do you think GM stays in business…and Fannie Mae…and AIG… Who pays those salaries? Who pays to keep troops all over the world and keep old people supplied with new drugs? Who pays for hundreds of billions’ worth of ‘shovel ready’ boondoggles? You will. At least, that’s the plan.

The luck of one generation is the curse of the next. Like Pericles, your parents inherited a dollar; they leave you a peso. They took over the strongest, richest, most competitive nation in the world. And like Pericles they minded everyone’s business but their own. Now, not only does the US owe money all over town, its government puts out trillions more in IOUs every year – each one with your name on it. You’re not even out in the real world yet, and you’re getting the bill for 50 cents of every dollar the feds spend – almost none of it earmarked for you. But that is the thing about the real world your teachers probably forgot to tell you about. It is more unreal and fantastical than anything you studied.

Here’s what’s real: You’ve been dealt a bad hand. From the bottom of the deck…your parents have slipped you some nasty cards. Our advice? Fold ’em. Get up from the table before they clean you out.

Enjoy your weekend,

Bill Bonner

Source: Class of ‘09: You’re Screwed

And there are lots of them, as I gather from Jim Willie at GoldenJackass.com, who is warning us to keep an eye on the Chinese, and that we should expect them to move “toward creation of the Chinese yuan as a global reserve currency,” which is certainly interesting from a geo-political perspective, but which becomes Very, Very Interesting (VVI) when he cautions us to also “watch their simultaneous moves away from the USDollar and toward gold for reserves management,” a phrase that is rated “VVI” by the Mogambo Intergalactic News Service because it means that gold will positively soar in price, meaning (in turn) that my pathetic little store of gold will be my ticket out of this dump, speeding me posthaste to wonderful, new, bright city lights and adventures where nobody knows me and nobody can credibly threaten “I’m going to tell your wife/boss/galactic overlord what you did/said/downloaded onto your computer!”

Until then, we have the same responsibilities, and so this next part I carefully wrote down in my notes because it sounds like it will appear, perhaps as an essay question, on the mid-term exam. Mr. Willie said, “The merger of the two important strategic initiatives is a gold-backed yuan currency.”

This “gold-backed” Chinese currency is more than mere grubby speculation by a couple of guys who know that gold will soar as a result of the supreme stupidity and corruption of the world’s governments, and who are getting tired of waiting for gold to soar so we can get started with developing a sensory overload of wicked, licentious, hedonistic over-consumption, sort of like Sodom and Gomorrah if they had had enough money! Hahaha!

Captivated and distracted by such dreams of glorious, gluttonous excess, I was startled by Mr. Willie saying that a gold-backed Chinese currency is “precisely what was stated openly by Zheng Lianghao, managing director of the World Gold Council’s Far East division. That news came out this week.”

Even more telling, I think, is when he reported, “The Germans have demanded all of their gold held in custodial accounts inside the United States to be returned to German soil.”

He admits, “The story is not public, but details have come to me from a private source close to the action.” But if I know Germans, and I don’t, they are not going to sit around waiting for America to steal their gold, if indeed there is any left after the criminally-incompetent Federal Reserve and Treasury encumbered thousands of tonnes of gold by leasing it out, which was immediately sold into the market by those borrowing the gold, massively depressing the price of gold (which was the whole purpose of the exercise) so that bubbling inflation in prices from the floods of money and credit coming from the Federal Reserve to finance massive, long-term deficit-spending by the federal government was effectively disguised by making gold ridiculously cheap, which made guys like me, whose familiarity with the Austrian school of economics allows us to see through this despicable scam, and we begin to accost strangers on the street in a heroic attempt to save them, and we say to them, “Buy gold now, you moron, because it will never be this cheap again! And if you don’t buy gold even after being told, point-blank and right to your face, to buy gold as your only rational response to massive government incompetence and corruption that will destroy the dollar, then you are as stupid as you look! Hahaha! You’re a moron! Hahaha!”

Interestingly, he adds, “The Germans have also given counsel for Dubai to demand all of their gold held in custodial accounts inside London to be returned to Dubai, where a new gold trading center will spring up. In my view, THIS IS THE BIGGEST NEWS FOR GOLD THIS ENTIRE YEAR.”

Careful readers looking for “news behind the news for news you can use” will no doubt notice his use of all-capital letters with which to indicate particular emphasis, perhaps along this very line, which must be important as hell, for whatever reason, because the year is not quite half over and we already have the best news? Wow!

Then I learned that I did not even suspect that “the hidden arch-enemy for the US-UK on all matters pertaining to gold bullion is Germany.” He admits that this “is not a well-known concept,” letting me save a little face, although Germany is “also advising the Chinese on currency and gold matters. Can one detect some coordination?”

To this I say, “Yes, and it’s about time, too, that smart people came together to do something good, like putting their currencies on a strict adherence to gold and thus getting rid of price inflation once and for all instead of a lot of stupid people coming together, like in Congress, to deficit-spend zillions of dollars to do things that sound good to a bunch of nurturing wet-nurses, which is what we have become, but are guaranteed to fail with disastrously inflationary results!”

It is only after I have had a few drinks, and am now despondent and self-pitying after having been rejected by all the good looking girls in the room, mostly responding with variations either on the theme of “Ewww! Go away, creepy old man!” or “Okay, but it’s gonna cost ya triple because you are such a creepy old man!” that I admit that I don’t know why I am complaining about such irresponsible, stupidity in government because I am doing exactly what history says to do in order to capitalize on it: Buy gold, silver and oil to personally capitalize on loathsome governmental incompetence, blatant corruption, and now the legitimization, not to mention the incredible institutionalization, of outright stupidity.

But I have to laugh at the linguistic problems, since I know a little German, no Arabic and only enough Chinese so that I can order dinner (“Gimme a Number 7 combo and a couple of egg rolls, chop chop!”), so it will be comically confusing since I will not know what in the hell they are talking about.

And although I am the perfect guy to advise these guys on gold, I realize it will be hard for me to communicate with them since I don’t speak their languages and they don’t speak English except with funny-sounding foreign accents, so I cleverly decide to speak to them all with the universal American Indian language that everyone understands (as I gather from watching old movies on TV), and I say, “Gold! You get-um! Heap big wampum!”

And, if you are wondering, advising foreign governments to adopt a gold standard for their money is just ONE of the many, many happy reasons why I say to them and to you, to buy gold, a chore made easy because, “Whee! This investing stuff is easy!”

Source: Yuan to Jump on the Golden Bandwagon?

From this, he calculates that $33 trillion is equal to “about a third of total global savings,” which is one hell of a lot of money, which is more than my wife can spend in a whole weekend.

Of course, this brings us to “Why You Should Be Worried About The Bond Market” by Dominic Frisby at Money Week, and instead of going over that old stuff about how bond prices move inversely to interest rates, I will skip right to the crux of the matter, which he notes is that “A collapsing bond market means higher interest rates,” which is weird because I just said I would skip that part!

It must be more important than I thought!

Anyway, one of the Big Freaking Mysteries (BFM) that I ponder when I lock myself in the Big, Beautiful Mogambo Bunker (BBMB) while I am idly looking out of the periscope to survey the perimeter (and keep an eye out for my wife because that last fluorescent light in the bathroom burned out and she is probably wanting me to go to the store and get more bulbs and fix the damned thing and waste my Whole Freaking Day (WFD)) is, “How can bond yields can be so low? What kind of moron would be bidding up the prices of bonds so high that the yield is driven to insignificance?”

Jim Grant of Grant’s Interest Rate Observer says, “The long bond is a better short than a long,” to which he adds “and gold is a better long than a short.”

Sure enough, the long bond fell and saw its yield jump 18 bps to 4.26%, and the 3.3% yield on the 10-year Treasury note is more than a full percent above its low, which corresponds to yields jumping by almost a third since the low!

The ugly side of this is that guys who already owned these kinds of bonds lost money. And with the incredible amounts of leverage that these guys use, where they buy the bonds by putting up only one dollar of their own and borrowing another twenty or a zillion dollars, they not only lost plenty, but are on the hook for twenty times or a zillion times more! Hahaha! What morons!

And it is not just bonds that are going to need a lot of money to be created with which to buy them, but corporations are issuing lots and lots of new shares to get (I assume) enough money to keep going and pay themselves princely sums until inevitable bankruptcy, and, so far, the leader seems to be General Motors, which “announced in a filing with the SEC that it is issuing 60 billion new shares, a move which, if it meets with US Treasury approval, would dilute common shareholders into oblivion.”

Sixty billion shares? Sixty billion shares? That’s ten shares of GM for everybody on the planet! Hahaha! That’s going to take a lot of money!

And if it is money you need, Bill Bonner here at The Daily Reckoning reminds us that “Normally, in a correction, the supply of money – M1 – falls. Asset values are destroyed…borrowers default…money disappears into vaults and mattresses. But this time, so vigorous has been the authorities’ response that M-1 is actually increasing at about a 14% annual rate.”

He then ominously notes that all of this new money sloshing around already has significant portent, as “The money’s got to go somewhere…” with an ellipsis at the end to add that subtle spooky undertone to the whole thing.

With nerves on edge because of that ellipsis thing, I gotta ask, “So what in the hell is going on? And I thought there was going to be a free buffet and an open bar!”

Ignoring my rude outburst, he noted, “Equity losses last year were worse than those of ’29. It stands to reason that the next phase – the economic decline – will also be worse than the ’30s,” mostly because “the U.S. economy carries about $20 trillion of excess debt. Until that debt is eliminated, the idea of a healthy boom is a mirage.”

To my horror, he went on, “Getting rid of that debt either involves a long, hard period of work and sacrifice – as debts are paid down. Or, it involves something much worse.”

Now you suddenly remember his use of an ellipsis! “A long, hard period of work and sacrifice”! Yikes! What in the hell could be worse than “a long, hard period of work and sacrifice” you want to know?

Well, now that you ask, many things instantly come to mind, such as the inflation in consumer prices that all this new money will create, most of them highly reminiscent of the French Revolution, only worse.

And then there is the horror of having teenage children, to name two!

Mr. Bonner says that he figures that I have nothing to worry about because “the feds – who still have no idea what is going on – will choose the second solution…something much worse.”

I gulp in dismay, as he did NOT rule out the possibility of more teenage children screaming at me that I am stupid, that I don’t know anything about anything and I am wrong about everything.

But I am, secretly, not stupid, nor am I wrong about everything, as I can easily prove by just buying gold, silver and oil, waiting a little while until prices soar because of all this money being plowed into the world economy to produce Mr. Bonner’s “something much worse,” and then shaking all that money in their smarmy little faces and yelling into those same smarmy faces, “Who’s stupid now, ya nasty brats?”

Whee! This investing stuff is easy! And sometimes fun, too! “Nasty brats”! Hahaha!

Source: The Long and Short of Bonds and Gold

Mind you, this is if you want to be in the equity market at all. There is a very good case to be made for NOT being in the equity market this year, or only being in those asset classes and single stocks you think will appreciate (or grow earnings) faster than the rate of inflation.

But let’s be more direct and say that this is still a bear market. The bear market began in 2000 with the popping of the tech bubble. The Fed fought back in 2003, setting a low-interest rate policy the rest of the dollar-pegged world followed. This kicked of leveraged booms in residential housing, credit derivatives, and stocks, bonds and commodities.

All those bubbles are popping. You do not wipe out twenty five years of credit and leverage excess in a mere eighteen months. We are barely halfway through the liquidation/loss realisation phase. The essential question is which assets are going to perform the best as governments inflate and create a new bubble in government debt? And by the way, it’s going to be very large bubble.

Forget the $1.8 trillion deficit the Obama White House admitted to today. Forget the A$60-$70 billion deficit Wayne Swan is going to shove down your face tonight. The true scope of government borrowing is breathtaking, and rather sickening. More importantly, you have to wonder where the money is going to come from, and what will happen when it’s not forthcoming from private investors.

Consider the chart below, courtesy of Niels Jensen, writing in John Mauldin’s “Outside the Box” e-letter. Niels shows that according to IMF estimates, twelve governments around the world (the ‘Dirty Dozen’) will have to issue $10.2 trillion in bonds to cover future banking losses and funding requirements in the credit markets as a result of the ongoing financial crisis.

The ‘Dirty Dozen’ and $10.2 Trillion in New Bonds

Ten trillion is a huge number. But there’s every chance the number is, in fact, a conservative estimate of government borrowing requirements. It is based on smaller than expected losses in the banking sector (the bogus scenarios modeled in the U.S. Treasury’s ’stress tests’) and a lower-than-average increase in public borrowing to deal with a financial crisis.

The IMF estimate is that public sector borrowing will grow to an average of 27% of GDP in Western or industrialised countries. But according to a study by economists Carmen Reinhart and Kenneth Rogoff published last year, governments almost always underestimate the amount of public borrowing that takes place in the wake of a banking crisis.

They do because-as the government here in Australia has done-they underestimate the blow to tax takings that comes from lower bank lending and lower economic growth. Tax takings fall while spending generally increases, especially borrowing to subsidise lending in key sectors like say, high-risk mortgage lending and property development. Think of the AOFM’s role in buying securitised residential mortgage backed securities and Ruddbank.

So how big could government bond borrowing needs get? Under the ‘best case’ scenario (lower loan losses, quicker economic recovery) Rogoff and Reinhart say public sector debt would grow to an average of 40% of GDP, leading to global borrowing needs of $15 trillion-50% higher than the IMF’s estimate. But that’s just the best case scenario.

Using the chart below, Reinhart and Rogoff suggest that in previous banking crises, government borrowing as a percentage of GDP has risen to an average of 86%. Under that scenario, now you’re talking $33 trillion in global government bond issuance in the coming five years to deal with the rest of the losses in the banking system.

The Mother of All Bubbles in Government Debt

You can see why we think all this talk of recovery and rally is a bunch of hokum. Maybe it won’t be quite 86%. Or maybe it will be more. But we know for a fact that global governmetns are going to flood with world with bonds in the coming years. But will investors buy them? If they don’t, you can expect much higher bond yields and much more money printing. That means inflation.

If you think this is just an American problem, think again. Professor Paul Kerin of the Melbourne Business School says Australia’s government has already over-responded to the crisis with its policy response. Writing in yesterday’s Australian, he says, “I estimate the 2008-09 and 2009-10 deficits announced tomorrow [tonight] will exceed $32 billion and $55 billion respectively, and that net debt will exceed $250 billion by mid-2013.”

“In the past half-century, the cash deficit has never exceeded 4.1 per cent of GDP — that was in 1993-94, when unemployment was running in double digits. Net debt has never exceeded 18.5 per cent of GDP — that was in 1995-96, the sixth straight year of deficits run to fight high unemployment…Yet the 2009-10 deficit will exceed 4.5 per cent of GDP — topping our 1993-94 record. And net debt will exceed 17.4 per cent of GDP by mid-2013, beating the 1995-96 record.”

As you can see from the chart below, the government’s deficit spending and borrowing ambitions have already steepened the Aussie yield curve. This makes long-term debt more expensive for ALL borrowers in Australia and will probably push up mortgage rates too, gagging the rebound in the housing bubble and jeopardising the one sector that’s held up the economy through the early stages of this so-far mild recession.

Australia’s Yield Curve Steepens

One last note on this before we move on to the investment strategy. A lot of readers ask how hyperinflation can happen in Australia if the U.S. dollar is weakening against the Aussie dollar. Further, you might wonder how the expanding American deficit has any bearing on the fiscal stability of the Australian economy. They are great questions.

There are four factors that we believe will lead to an even weaker fiscal position in Australia and lead to more borrowing and a weaker Aussie dollar-despite the circumstances that are undermining the U.S. dollar. Or to be plainer, U.S. dollar weakness is not going to be enough to keep Australia’s currency sound.

So what are the four factors? First, government tax takings are going to fall more than expected. This is already the case. Lower commodity prices are going to compound the problem in the second half of the year. Barring a full recovery in the job market, the government is factoring in revenues that will not be there, while increasing spending.

But the big increase in Aussie government borrowing will come elsewhere. If indeed there is a “second half” to the capital crisis in American and European banks, it means financing needs for the Australian economy are going to have be backstopped by government guarantees or direct loans (Fed style, a la the TALF).

Sectors that the Australian government may have to borrow on behalf of or loan to include the commercial property market, the residential property market, and the corporate bond market. Right now the Australian Office of Financial Management reckons it won’t have any trouble selling $1.4 billion per day to finance growing government deficits. But how much larger will Australia’s borrowing needs become if the government must become the lender of last resort to all these other credit markets?

And if Aussie government-competing with all those other countries for global savings-can’t sell its debt abroad-how do you think it will pay for it? The Reserve Bank will do what the Fed, the ECB, the Bank of Japan, and the Bank of England are doing. It will print money to buy government bonds. It will monetise the debt. Quantitative easing will begin in Australia and inflation will have arrived.

Does that seem impossible to you? Is it just Doom and Gloom pornography? We’re certain a lot of people will find this scenario absolutely unbelievable. But in a worldwide credit depression where government borrowing needs amount to nearly one third of all global savings, you have to wonder how Australia is going to raise money against the likes of the U.K., Japan, and the U.S. If it can’t do it, it’ll have to print.

So back to the question. What does an investor do? Well it’s worth noting that Microsoft (NASDAQ:MSFT) appears to be preparing for massive inflation by borrowing. The company is selling $3.75 billion in debt in order to buy back some of its own shares. Obviously Microsoft reckons the real value of the debt will diminish with inflation while the current purchasing power of the borrowed money allows it to buy back its own shares.

It’s a nifty trade and provides the example of buying equity in world-class businesses at cheap prices. There have to be a lot of investors in the world out there who see the end-game of this explosion in government debt and would much rather buy equity. That alone means the “weight of money” argument for equities could send shares higher.

We have to admit we are extremely dubious of this strategy because it says nothing about how these businesses will perform in a world saddled with so much debt. But we suppose if you are a truly a long-term investors and have decades to wait, buying equities at these lows is, a) a much better idea than buying government bonds, and b) about the only sensible investment strategy if you’re going to stay in the equity markets.

Incidentally, Swarm Trader Gabriel Andre has been thinking along these lines himself lately. He’s applied his Swarm system to the ASX/200, looking for entry and exit points on Australia’s largest stocks. His aim is to find which Aussie blue chips present long-term buying opportunities and which are looking mighty over-bought.

Mind you, Gabriel is a technician. He doesn’t look at fundamentals at all. Still, we’ve been reviewing the early results of testing the Swarm on blue chips for the purpose of issuing buy, sell, and hold recommendations. And we have to say, it’s looking pretty intriguing.

But let’s say you don’t want to buy-and-hold blue chip stocks. And let’s say you want to be in the market and not just in gold, vodka, bullets, and canned goods (although if you are preparing in that way, you should check this out). If you’re a “financial survivalist” what else can you do?

Try uranium and lithium (as investments, not meals). In late November, we tipped an Aussie-listed uranium producer in Diggers and Drillers. The stock is up 90% since then. And this was a relatively “safe” stock because it’s already producing from mines in Africa, with plans for a joint venture in the Northern Territories. It also owns some excellent ore bodies in Queensland, if the government there ever decides that it would like a uranium mining industry.

We reckon the government WILL decide that because energy is an industry that’s going to survive the credit crisis. In a recent Diggers and Drillers weekly update, we reported that China is building twenty one-gigawatt nuclear reactors at the moment. China will not be able to supply its own uranium needs. Australia, with over 30% of the worlds proven uranium reserves, is in position to capitalise, should it so choose.

According to Scotia Capital Inc. China strategist Na Liu, China’s nuclear industry will consume 15,700 tonnes of uranium per year by 2020. “At this rate,” she writes, “China’s currently known uranium resources can only last for five to 10 years. Clearly, in our opinion, it is imperative for China to secure long-term supply through imports or investment.”

That “other investment” is why we’ve drilled down further into the roster of junior explorers in the coming issue of D&D. The explorers and prospect generators are starting to look interesting. We’re also going to have another look at lithium.

Back in May of 2008 we profiled the rare earths industry, including Australia’s two best rare earth stocks (both of which became recommendations, both of which got slaughtered in the market correction, and both of which have doubled from the lows after partnering up with Chinese investors).

In that report prepared for subscribers, we also looked at lithium. Enhanced battery life and power is becoming a key issue for a world filled with mobile telecommunications devices. It’s also critical for hybrid-electric cars that can store an electric charge. One of the stocks we profiled in that report has just signed a letter of intent to build a lithium carbonate processing plant…in China.

So you see, for the resource speculator, an inflationary boom can be the best of times. It is a high-risk exercise. But junior resource stocks are one of the asset classes the CAN go up faster than the rate of inflation. And if, as we believe, the explosion in government bond issuance is going to lead to an inflationary rally in stocks, then dabbling the junior resource stocks and small caps is like hitching a front seat on a rocket.

Remember, this is pure speculation. You only hope your rocket is like Richard Branson’s new Virgin Galactic space plane, and note the nuclear missile Slim Pickens rides in Dr. Strangelove.

And what about red wine? The bottle shop across the street from the Old Hat Factory is closed for renovations. In its clearance sale, we were able to pick up a few bargain bottles of Penfolds Bin 389 Cabernet Shiraz. That is wealth you can either drink or store. We’ve done a little of both.

But you can also sell it! There appears to be a roaring trade in Penfolds wines on e-Bay. There are certainly worse things you could spend depreciating paper money on. We’re also hearing that the 2004 vintage of the Penfolds Grange is the best ever. Can’t wait to find out.

Dan Denning

Source: Very Large Bubble of Government Debt

News about a planned U.S. stimulus package helped pull investors into the dollar on Monday but U.S. Treasury prices slumped on fears a price bubble is about to pop in the face of a massive wave of fresh debt.

European equities advanced for the fifth session in a row, spurred by gains in shares of oil companies on the back of rising crude prices. U.S. stocks were mostly lower as investors took profits on the rally that was racked up in thin trading last week.

Oil prices hit a three-week high as Israel’s deepening incursion into Gaza and a Russian gas dispute heightened fears about supplies.

Prospects for a swelling supply of government debt drove U.S. and euro-zone prices down. The U.S. Treasury said it would sell $16 billion of reopened 10-year notes and $30 billion in three-year notes this week.

While the issuance was broadly in line with market forecasts, it underscored this year’s looming surge of debt that will to fund government efforts to rescue the financial system.

U.S. President-elect Barack Obama plans $310 billion in tax cuts as part of a rescue package of up to $775 billion, senior Democratic aides said Sunday. German Chancellor Angela Merkel met her Social Democrat (SPD) coalition partners to discuss a second fiscal stimulus deal worth up to 50 billion euros ($68 billion).

The 30-year Treasury bond fell nearly three full points in price, pushing its yield up to 2.92 percent, up from a record low near 2.52 percent in December.

“The back-up in yields shows a growing sentiment toward questioning the lower rate environment we are in right now,” said George Goncalves, chief Treasury/TIPS and agency strategist with Morgan Stanley in New York.

The euro hit three-week lows versus the dollar, with weaker-than-expected Italian and Spanish inflation data and tax cuts in Germany expected to pressure the European Central Bank to soon cut rates further.

U.S. stocks fell as investors took profits following last week’s sharp gains.

“Right now we’re just watching and waiting to see if there is any news from the new administration and what type of news it will be,” said Frank Lesh, a futures analyst and broker at FuturePath Trading LLC in Chicago. “We got a little bit of profit taking here,” he added.

Shares of Apple Inc rose after chief executive Steve Jobs wrote a letter aimed at dispelling investor concerns about his recent weight loss. Shares of the iPod maker rose 4.4 percent to $94.75 in early afternoon trade.

Before 1 p.m., the Dow Jones industrial average was down 79.09 points, or 0.88 percent, at 8,955.60. The Standard & Poor’s 500 Index was down 3.27 points, or 0.35 percent, at 928.53. The Nasdaq Composite Index was down 8.52 points, or 0.52 percent, at 1,623.69.

European equity markets were buoyed by the anticipation of further fiscal stimulus, drawing flows away from the safer-haven of government bonds.

The FTSEurofirst 300 index of top European shares ended 1.9 percent higher at 873.01 points.

The telecommunications sector was one of the biggest gainers on the index on the first full day of 2009 trading for many, with Swisscom (SCMWY) rising 5.2 percent, Cable and Wireless adding 4.6 percent, Vodafone (VOD) up 4.3 percent and Portugal Telecom (PT) rising 4.6 percent.

Sharp losses for the euro, which was down 2.28 percent at $1.3559, also spread to euro/sterling, taking it to 0.9278, well away from record lows for the pound last week and easing momentum towards parity.

The dollar rose against a basket of major trading-partner currencies, with the U.S. Dollar Index up 1.74 percent at 82.923. Against the yen, the dollar rose 1.31 percent at 93.43 from a previous session close of 92.220.

Longer maturity government debt fell, but shorter-term debt was little changed to higher. The benchmark 10-year U.S. Treasury note fell 34/32 in price to yield 2.47 percent, and the 30-year U.S. Treasury bond fell 102/32 in price to yield 2.94 percent.

Oil rose, and has gained more than 35 percent since Israel launched its attack on Gaza on Dec. 27, increasing concerns about the supply of crude from the Middle East.

U.S. light sweet crude oil rose $1.11 to $47.45 a barrel.

U.S. gold futures dropped, breaking below $850 an ounce, as investors took profits on the back of a dollar rally and signs of slowing physical demand.

Spot gold prices fell $22.45 to $852.60 an ounce.

Asian stocks rose to a two-month high on hopes massive government spending programs will revive a global economic recovery later this year.

The MSCI index of Asia-Pacific stocks outside Japan climbed 1.6 percent to a two-month peak, while Japan’s Nikkei average gained 2.1 percent in a shortened session to reach a two-month high.

NEW YORK, Jan 5 (Reuters)