Lovin' Spoonful - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 9 November 2010
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Baltimore, Maryland

Do you believe like I believe,
Do you believe in magic

Lovin' Spoonful

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Whew! What fun we had last week! It's the Magic Kingdom for sure.

The Fed pulled a white rabbit out of its hat on Wednesday - a $600 billion mad hare. Stocks soared on Thursday. Commodities soared. Everything soared. Except the dollar. People dropped the buck.

Then, on Friday there wasn't much follow through. The Dow rose only a few points. Gold continued going up -- $14.

What's ahead for this week? Heck, anything could happen. This is the Magic Kingdom.

What do we mean? Of course, counterfeiting is against the law.

The counterfeiter creates money that looks just like the real stuff, but it has no gold or other backing behind it.

The Fed creates money that looks just like the real stuff. It has no gold or other backing behind it either.

What's the difference? You go to jail for counterfeiting. But by some magic, it's okay when the Fed does it.

We have a suggestion. The Fed could save some money by giving up its monopoly on counterfeiting. Allow the private sector to create new money. There are probably plenty of people in jail today who could make useful contributions to our economy. These guys know how to print money. Let them out! They would create money - lots of it. At no cost to the taxpayer.

But wait, the feds want to control the counterfeiting process. They don't want too much or too little. But just the right amount of new money.

How much is the right amount? Who knows? Between now and June '11, the Fed will add another $600 billion to the $1.7 trillion it already put into the system. Is that enough?

Darned if we know.

We got a message from debt-tracker prof. Laurence Kotlikoff at Boston University. He told us that the money supply will be multiplied 4 times since 2007. Is that enough?

The whole thing would boggle our mind. But our mind was already boggled by the Fed's last trick.

The Fed increased the world's wealth by $1.7 trillion last year. That's a lot of money. What did it mean? Presto, the world was richer. Right? If the world wasn't richer, the extra money was a hoax, a fraud, and a scam, right?

But if it really did create $1.7 trillion worth of money...representing real wealth...well, it was...like magic!

We live in the Magic Kingdom. What a wonderful place to live in. We have a leader who is almost magical himself - Barack Obama. And we have a Congress that is expert at creating smoke and mirrors.

And the public? A bunch of yokels and rubes who will believe anything.

We can't wait to see what happens today. Anything is possible!

More news...

And more thoughts...

*** Hey...what's wrong with the foreigners? They don't seem to appreciate America's magic tricks.

"US feels backlash over Fed initiative" says Friday's Financial Times.

It may be our dollar...but it's THEIR problem. The Fed's new money doesn't really do anything for the US economy. The banks take it. They hold it. If it goes anywhere at all it goes into the hedge funds and the banks' own trading departments. Then, what are they going to do with it? US businesses don't want to borrow. Consumers are reluctant to spend. Who wants to build a new shopping mall? Who wants to hire a new employee? The Fed is printing money like there was no tomorrow...who's going to invest for the long term...when even tomorrow is in doubt?

The speculators borrow dollars at the lowest rates in three generations. What do they do with them? They invest them where they see growth - in the emerging markets.

Bloomberg explains:

"Emerging-Market Stocks Advance on 'Super-Goldilocks'

"Nov. 5 (Bloomberg) -- Emerging-market stocks climbed for a seventh day as Citigroup Inc. predicted a "super-Goldilocks" economy will send shares to record highs next year and investor Mark Mobius said the rally faces no risks any time soon.

"The MSCI Emerging Markets Index will jump 30 percent to an all-time high in 2011, Citigroup strategist Geoffrey Dennis wrote in a Nov. 4 report. The Federal Reserve's bond-purchase plan will fuel a global stock rally and emerging markets are the "bright spot," Mobius, who oversees about $34 billion at Templeton Asset Management Ltd., said in an interview.

The MSCI emerging-markets index increased 0.5 percent to 1,156.32 at 8:50 a.m. in New York, bringing its gain this week to 4.6 percent. The 21-country benchmark gauge has advanced 17 percent this year, extending a record 75 percent rally in 2009.


This is not exactly good news. Consumer prices in these emerging economies go up...their currencies go up...their stock and other asset prices go up.

This has several effects that the emerging economies don't like. It creates bubble-like conditions, raising their costs and making their products less competitive. Plus, it risks causing sell-offs and crashes when the foreign money leaves suddenly or over-capacity becomes a problem.

"China, Brazil and Germany criticized the Fed's action," reports the FT, "and a string of East Asian central banks said they were preparing measures to defend their economies..."

Then...in this morning's Financial Times:

"Zoellick [head of the World Bank] seeks gold standard debate."

It's coming, dear reader...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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