An empire is, fundamentally, in the business of providing protection. People in America applauded when the Soviet Union collapsed and China took the capitalist road...but it practically put them out of business. There was nothing to provide protection against.

All bubbles end in busts...and the perp walk.

Two hedge fund managers were arrested yesterday. It was claimed that
the two Bear Stearns boys deceived customers.

Oh stop it! We’re going to break a rib laughing....

Deceived customers? What is a hedge fund anyway? It’s a way for Wall
Street to take money from investors who can’t do math. There’s no
deception required. In fact, the funds’ names – High Grade Structured
Credit Strategies Fund and High Grade Structured Credit Strategies
Enhanced Leverage Fund – told investors all they needed to know. They
practically screamed out: ‘SAY GOODBYE TO YOUR MONEY...IF NOT NOW,
LATER.’

So, imagine that you have money invested in the fund that advertises
itself as offering “enhanced leverage” from “structured credit
strategies.” Now, imagine that you read in the paper that houses are
going down in price...and that subprime mortgages are going belly up.
Couldn’t you put two and two together? Well...duh... but that’s just
it, people who invest in hedge funds can’t do math. The managers
didn’t have to deceive them. They just had to keep their mouths
shut...which they did.

But this is the way bubbles end...in losses...in anger...and in jail.
The losers always think someone else is to blame. It’s not long before
they have a CEO, a speculator, or a fund manager mounting the
scaffold.

Let’s leave that thought on the shelf and get on with our reckoning.

Oil lost $4 yesterday. The Dow rose 34 points. The euro slipped a
little. No biggie.

But look at this: “Inflation now enemy #1 for the Fed,” says the Wall
Street Journal . This sort of thinking sent the price of gold up $10
yesterday; it’s now back over the $900 level. And one of the key
fellows at Schroder Investment Management told a crowd in Hong Kong
that he thought gold could go to $5,000 before this run of inflation
is over.

$5,000? Who knows? But, the poor saps at the WSJ are missing the
point. No central bank keeps rates 2.2% below the level of consumer
price inflation if it is really fighting inflation. Enemy Numero Ono?
What are they thinking? Why are all the Fed’s guns facing deflation,
not inflation? Sure, there’s been some blabbing about turning
around...about switching sides in the war between inflation and
deflation. But so far, it’s just talk.

Talk is cheap. It’s action that is dear. And the action the Fed needs
to take – raising rates – will be so potentially costly for the lame
U.S. economy that Bernanke and Co. are afraid to do it. They’re hoping
inflation will go away so they can continue the battle against the
slump, without having to worry about their unprotected flanks. Most
likely, they will make a gesture towards raising rates – perhaps a
quarter of a point. But then, when the mob starts howling for his
head, Ben Bernanke will drop them again.

Henry Paulson has been gurgling about a strong dollar. Yesterday, he
gave voice to a contradictory notion – that the Chinese should let
their currency rise (and the dollar fall).

The problem for the Chinese is that they have too many dollars,
furnished courtesy of the Fed, while Americans have too few. In the
United States, the average household barely has enough dollars to fill
its gas tank and pay its bills. But the Middle Kingdom is flooded with
them.

If you don’t watch out, you’re going to drown in them, said Paulson –
or words to that effect. China’s economy continues floating higher and
higher. But all these extra dollars are pushing up wages and prices as
well as the economy.

And then, wouldn’t you know it, Chinese export prices go up too. And
pretty soon, prices are up all over the world.

Which is why the WSJ thinks it’s the top problem for the Fed too. Of
course, it is a problem. But with the official CPI at 4.2% it’s not
enemy number one. Maybe it’s Enemy Number Two. Most likely, it will
stay there for a while longer. We still haven’t seen a big drop in
commercial property...or in consumer spending. Those are probably
still ahead...and will give the Fed a reason to continue blasting away
at a deflationary slump. Consumer prices will continue to rise, too.
Eventually, they will become so high that inflation really does become
Enemy Number One.

By that time, the price of gold could be $500 higher.

*** An empire is, fundamentally, in the business of providing
protection. People in America applauded when the Soviet Union
collapsed and China took the capitalist road...but it practically put
them out of business. There was nothing to provide protection against.

The sensible thing for the United States to do, following the fall of
its one and only major enemy, would have been to cut the defense
budget down to a nub...and invest the money in infrastructure and
capital improvements, so Americans would be able to compete on better
terms with the rising economies of their former enemies. It was
obvious that with billions of people entering the modern economy for
the first time, the world was beginning a new, more competitive phase
of development...and that without huge capital investment, labor rates
for marginally skilled workers were doomed to fall.

But what kind of world would it be if people always behaved sensibly?
Instead, it was party time in the U.S. of A. Americans went on a binge
of spending, borrowing and soft-headed thinking. Colleges switched
from teaching engineering to letting students emote on subjects such
as gender and racial equality. The leading profit makers switched from
manufacturing to finance...from making things to lending money...from
Detroit to Wall Street. New regulations imposed higher operating
costs...and more lawyers and more delays. And lobbyists got billions
in special favors.

No lobbyists were as successful at squeezing the public tube as those
who work for the defense industry. People come to believe what they
must believe when they must believe it. The United States is an
imperial power with one major leading industry: defense. But with no
enemies capable of inflicting real damage to the country, the defense
industry had to invent one: terrorism...and the people had to believe
it.

Readers typically want to argue this point. “What about 9/11?” they
ask.

Of course, terrorists always pose a danger to individuals. And if they
are daring and determined enough, they pose a danger to many
individuals. But they pose no real danger to the state...and none to
the Pentagon. You could put all the world’s terrorists together in a
single army...they would still stand no chance whatsoever of defeating
the United States of America.

Normally, it is the police who are charged with protecting citizens.
The fuzz fight crime and criminals...even gangs of criminals.
Terrorists in the U.S.A., as near as we can tell, are practically non-
existent. They don’t seem capable of breaking into a parking meter,
let alone challenging the U.S. Army. There must be 10,000 paid cops
for every one of them. Why bring the Pentagon onto the case?

As mentioned in these reckonings, the feds are adding to the official
national debt at the rate of $1.5 billion per day. Still, neither
Democrats nor Republicans dared challenge the Pentagon’s latest $600
billion spendfest. No one wants to audit the Pentagon. No one wants to
oppose it. The Pentagon is in a bubble of its own.

The average man is no genius. And half the population is even dumber.
He responds to popular issues by instinct. He’s not going to spend his
leisure time thinking about how the military industry complex works.
Instead, he’s going to get behind the man in the crisp uniform. He’ll
support America’s leading industry – until it ruins him.

Yes, dear reader...every empire is a kind of bubble in power...an
extraordinary, temporary thing. And like every bubble, empires end in
bankruptcy...disgrace...and the perp walk.

All bubbles end in busts...and the perp walk.

Two hedge fund managers were arrested yesterday. It was claimed that
the two Bear Stearns boys deceived customers.

Oh stop it! We’re going to break a rib laughing....

Deceived customers? What is a hedge fund anyway? It’s a way for Wall
Street to take money from investors who can’t do math. There’s no
deception required. In fact, the funds’ names – High Grade Structured
Credit Strategies Fund and High Grade Structured Credit Strategies
Enhanced Leverage Fund – told investors all they needed to know. They
practically screamed out: ‘SAY GOODBYE TO YOUR MONEY...IF NOT NOW,
LATER.’

So, imagine that you have money invested in the fund that advertises
itself as offering “enhanced leverage” from “structured credit
strategies.” Now, imagine that you read in the paper that houses are
going down in price...and that subprime mortgages are going belly up.
Couldn’t you put two and two together? Well...duh... but that’s just
it, people who invest in hedge funds can’t do math. The managers
didn’t have to deceive them. They just had to keep their mouths
shut...which they did.

But this is the way bubbles end...in losses...in anger...and in jail.
The losers always think someone else is to blame. It’s not long before
they have a CEO, a speculator, or a fund manager mounting the
scaffold.

Let’s leave that thought on the shelf and get on with our reckoning.

Oil lost $4 yesterday. The Dow rose 34 points. The euro slipped a
little. No biggie.

But look at this: “Inflation now enemy #1 for the Fed,” says the Wall
Street Journal . This sort of thinking sent the price of gold up $10
yesterday; it’s now back over the $900 level. And one of the key
fellows at Schroder Investment Management told a crowd in Hong Kong
that he thought gold could go to $5,000 before this run of inflation
is over.

$5,000? Who knows? But, the poor saps at the WSJ are missing the
point. No central bank keeps rates 2.2% below the level of consumer
price inflation if it is really fighting inflation. Enemy Numero Ono?
What are they thinking? Why are all the Fed’s guns facing deflation,
not inflation? Sure, there’s been some blabbing about turning
around...about switching sides in the war between inflation and
deflation. But so far, it’s just talk.

Talk is cheap. It’s action that is dear. And the action the Fed needs
to take – raising rates – will be so potentially costly for the lame
U.S. economy that Bernanke and Co. are afraid to do it. They’re hoping
inflation will go away so they can continue the battle against the
slump, without having to worry about their unprotected flanks. Most
likely, they will make a gesture towards raising rates – perhaps a
quarter of a point. But then, when the mob starts howling for his
head, Ben Bernanke will drop them again.

Henry Paulson has been gurgling about a strong dollar. Yesterday, he
gave voice to a contradictory notion – that the Chinese should let
their currency rise (and the dollar fall).

The problem for the Chinese is that they have too many dollars,
furnished courtesy of the Fed, while Americans have too few. In the
United States, the average household barely has enough dollars to fill
its gas tank and pay its bills. But the Middle Kingdom is flooded with
them.

If you don’t watch out, you’re going to drown in them, said Paulson –
or words to that effect. China’s economy continues floating higher and
higher. But all these extra dollars are pushing up wages and prices as
well as the economy.

And then, wouldn’t you know it, Chinese export prices go up too. And
pretty soon, prices are up all over the world.

Which is why the WSJ thinks it’s the top problem for the Fed too. Of
course, it is a problem. But with the official CPI at 4.2% it’s not
enemy number one. Maybe it’s Enemy Number Two. Most likely, it will
stay there for a while longer. We still haven’t seen a big drop in
commercial property...or in consumer spending. Those are probably
still ahead...and will give the Fed a reason to continue blasting away
at a deflationary slump. Consumer prices will continue to rise, too.
Eventually, they will become so high that inflation really does become
Enemy Number One.

By that time, the price of gold could be $500 higher.

*** An empire is, fundamentally, in the business of providing
protection. People in America applauded when the Soviet Union
collapsed and China took the capitalist road...but it practically put
them out of business. There was nothing to provide protection against.

The sensible thing for the United States to do, following the fall of
its one and only major enemy, would have been to cut the defense
budget down to a nub...and invest the money in infrastructure and
capital improvements, so Americans would be able to compete on better
terms with the rising economies of their former enemies. It was
obvious that with billions of people entering the modern economy for
the first time, the world was beginning a new, more competitive phase
of development...and that without huge capital investment, labor rates
for marginally skilled workers were doomed to fall.

But what kind of world would it be if people always behaved sensibly?
Instead, it was party time in the U.S. of A. Americans went on a binge
of spending, borrowing and soft-headed thinking. Colleges switched
from teaching engineering to letting students emote on subjects such
as gender and racial equality. The leading profit makers switched from
manufacturing to finance...from making things to lending money...from
Detroit to Wall Street. New regulations imposed higher operating
costs...and more lawyers and more delays. And lobbyists got billions
in special favors.

No lobbyists were as successful at squeezing the public tube as those
who work for the defense industry. People come to believe what they
must believe when they must believe it. The United States is an
imperial power with one major leading industry: defense. But with no
enemies capable of inflicting real damage to the country, the defense
industry had to invent one: terrorism...and the people had to believe
it.

Readers typically want to argue this point. “What about 9/11?” they
ask.

Of course, terrorists always pose a danger to individuals. And if they
are daring and determined enough, they pose a danger to many
individuals. But they pose no real danger to the state...and none to
the Pentagon. You could put all the world’s terrorists together in a
single army...they would still stand no chance whatsoever of defeating
the United States of America.

Normally, it is the police who are charged with protecting citizens.
The fuzz fight crime and criminals...even gangs of criminals.
Terrorists in the U.S.A., as near as we can tell, are practically non-
existent. They don’t seem capable of breaking into a parking meter,
let alone challenging the U.S. Army. There must be 10,000 paid cops
for every one of them. Why bring the Pentagon onto the case?

As mentioned in these reckonings, the feds are adding to the official
national debt at the rate of $1.5 billion per day. Still, neither
Democrats nor Republicans dared challenge the Pentagon’s latest $600
billion spendfest. No one wants to audit the Pentagon. No one wants to
oppose it. The Pentagon is in a bubble of its own.

The average man is no genius. And half the population is even dumber.
He responds to popular issues by instinct. He’s not going to spend his
leisure time thinking about how the military industry complex works.
Instead, he’s going to get behind the man in the crisp uniform. He’ll
support America’s leading industry – until it ruins him.

Yes, dear reader...every empire is a kind of bubble in power...an
extraordinary, temporary thing. And like every bubble, empires end in
bankruptcy...disgrace...and the perp walk.

Until Monday,

Bill Bonner
The Daily Reckoning
.

Relevant Pages