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Those darn Asians are saving so much money - someone has to borrow it.

Thank God for Americans! Without our willingness to consume more than we produce, the whole planet might go into recession.

That, dear reader is Ben Bernanke's idea of the real problem in the world - a 'global savings glut.'

He is right...in a way.

One could, after all, describe the Battle of the Little Big Horn as 'General Custer's men helping the Sioux recycle their surplus arrows.'

But, there would be more to the story. And there is more to this.

One part of the story Ben Bernanke fails to tell is that of the rising role the oil exporters play. As the price of oil rises, so do cash surpluses in the hands of oil producers - such as Saudi Arabia and Russia.

This year, the total amount of net oil exports are expected to rise to over $800 billion - about the same amount as America's current account deficit. Last year, Asia's current account surplus came to $263 billion, while the oil exporters brought in $242 billion. And this year, the oil exporters should enjoy a current account surplus greater than Asia - around $311 billion.

And so we have to ask - what do they do with all this money? Truth is, nobody quite knows. Some of it, of course, is traceable. While China now has $1 trillion in official dollar reserves, so do the oil exporters.

Hundreds of billions more are unaccounted for.

But here's a thought. If the fundamentals are as weak as we say they are, why are the Dow and the dollar so strong?

Ergo, much of it must be finding its way into the world's leading brand-name investments - namely dollar-based assets, including U.S. stocks.

A recent report from UBS Investment Research helps explain it. "Sustained high oil and gas prices are giving oil exporters a financial status previously reserved for Asian central banks. Their reserves, however measured, are growing rapidly and their influence over the [United States] and other capital markets has grown in tandem."

Imagine you are controlling a huge pile of money for Nigeria or Norway or any other oil producer. Are you going to invest in start-up car wash franchises? Or strip malls on the outskirts of Omaha? No sir. You're going to buy T-bonds...and the Dow!

That's why George W. Bush can go on TV and tell the rubes that the economy is doing great. Just look at the Dow! Look at long-dated Treasuries! Look at the dollar! Yes, look. But then look again. People are not really getting richer when foreigners lend them money or buy up their factories and businesses. While Asians have been able to pay for higher priced oil with their own exports of manufactured goods, and Europe, too, has been unhurt since it exports luxury goods while limiting its consumption of oil, the biggest loser from the trend is the United States, says the UBS study.

But as oil exporters' assets rise, so does America's current account deficit. Oil costs money, and the United States - with no way to pay for it - sells off its assets and borrows money. The U.S. current account position, at minus $800 billion, tells us in bright, shining red letters, how fast Americans are going broke; it almost doesn't matter what the level of the dollar or the Dow is.

Think about it. The global money system is now supposed to be a gleaming, state-of-the-art machine - with so many hedge-funds...so many derivatives...so many investors and so many investment opportunities - all now shock-proofed against the accidents that damaged them a few years ago.

But all the different people in all different places with their fingers wrapped around so many different instruments, still all read the Economist, the Wall Street Journal and the Financial Times. And they all attend the same conferences...and all think much the same things. On top of that, the decisions that really affect world markets are made by very few people...and we know who they are: they control Asian and oil exporters' surpluses.

So it boils down to this. It will only take those few people, in deciding to dump the dollar or to change the whole picture...overnight.

More news:

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Mike Shedlock, reporting from Illinois...

"...Enquiring minds might be wondering how it is remotely possible for a government bond fund to be up only 2.16-2.5% so far this year. After all, anyone parked in three-six-month Treasuries would be up 5% annualized or so..."

For the rest of this story, and for more market insights, see today's issue of

Whiskey & Gunpowder

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And more views...

*** Are oil importers' great surpluses just a fluke? Not likely, says the UBS report. Oil consumption is rising at a 2% annual rate - or about two million barrels per day. Meanwhile, oil from existing fields is being sucked out at the rate of four million bpd. So, six million bpd need to be discovered and brought on line in order just to stay even. But new discoveries have topped out. There is less new oil being discovered now than there was in 1930. And if projections are correct, production will soon begin to fall...and keep falling into the indefinite future.

So, the real question is: what will the oil exporters do with their money?

How long will they continue to use it to support U.S. consumption? We don't know the answer, but the UBS researchers suggest an insight.

Consumption typically lags. It begins after the money comes in - with some delay. (We add that it continues after the money runs out - with some delay).

Many of the oil producers, Russia for example, have a long history of financial troubles. Others, such as Saudi Arabia, are well aware that the oil market goes through busts as well as booms. Both experiences make producers reluctant to increase spending recklessly. But if the oil revenues persist, the producers will get used to it and, like a woman whose husband has gotten a big raise, soon get used to spending it. Either way, prospects do not look good for homeland financial assets. If producers' incomes fall, they will have less money to recycle into dollar assets. If producers' incomes remain steady, they will soon find other things to do with it.

*** The latest news falls on ears that don't hear. "The total costs of the war, including the budgetary, social and macroeconomic costs, are likely to exceed $2 trillion," says the Milken Institute Review.

When we reported that the war in Iraq could cost $1 trillion or more the news was brushed off. Of course, we had no idea what we were talking about; we were just passing along estimates that appeared in the papers.

No one believed the war could cost that much. Donald Rumsfeld had put a price tag of only $50 billion on the war. One trillion - 20 times as much - was simply unbelievable.

But now a Nobel Prize-winning economist from Columbia, Joseph Stiglitz, has come out with a figure 40 times that of Rumsfeld's guesstimate.

Of course, the Secretary of the Treasury is entitled to make an error in math. We all do. But a 4,000% over-run is a bit much - even on a government program.

*** "You know why we don't live in Miami?" asked a friend at dinner last night. "Because it's just not the same. I mean, America has changed a lot in the last 20 or 30 years. I remember when I was a student in Nyack, New York, and the Nixon Impeachment was going on. At the time I was very impressed with America." Our friend comes from Venezuela and now lives in Madrid, we should note.

"Because, the senators on the impeachment panel seemed smart...and honest.

Sam Irvin, for example. He was an educated man with a real sense of integrity and history. Or at least you got that impression watching him on television. And there they were considering throwing Nixon out of office because his henchmen broke into the Watergate to steal political secrets.

It was not much of a crime. Really nothing, when you think about it.

Nobody was hurt. And Nixon didn't even authorize it. Still, he tried to cover it up...and got caught. And the whole thing made me think - great, here is a government that really works the way it is supposed to. America is where I want to live.

"But I don't know if it is me...or it is the politicians. But now when I hear a U.S. Senator speaking on TV, I cringe. Because he is so stupid, and obviously pandering to the voters. And now you have a president who has committed terrible crimes. He misled the entire nation in order to attack Iraq; he got more than 2,000 American soldiers killed; wasted billions of dollars, and he allowed U.S. employees to torture people. And now you have U.S. Senators debating on how much torture should be allowed. It's really unbelievable.

"I still have an apartment in Miami...but I really don't like being there; I don't want to have to listen to those guys."

*** "It's amazing how much things change, even in a single lifetime," continued our friend. "When I first came to Madrid it was a horrible city.

It was dead, near the end of the Franco years. It was not a place you would want to be. But Caracas was just the opposite. It was lively...prosperous...there was art, music. It was a great place to live.

"Now, it's just the opposite. Madrid is booming. It's unbelievable how much this city has changed. Construction cranes are everywhere. They're building new roads, new apartment buildings, new shops. It's a wonderful place to live now. And back in Caracas, it's depressing. There is so much crime you're afraid to go out on the street. There is no building going on. There is not much life of any sort...the whole place is dirty and depressing...and nothing works the way it is supposed to.

"Of course, much of that is the fault of Chavez. He's made a mess of the place."

*** Madrid is a very nice city. We went to a restaurant on Tuesday night and had some of the best meat we have ever tasted.

"Oh...these people are a little fanatical about meat," explained our companions. "They buy their meat in Galicia, where they know how to raise it properly. But they don't think the Galicianos know how to butcher it properly. So they send it to another area to have it prepared.

"You know...you have to be a little fanatical to really get the best..."

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The Daily Reckoning PRESENTS: After yesterday's announcement that the Fed will not be raising rates for the third straight month, everyone assumes it's because the economy is in such great shape. But Dr. Richebächer recommends that Americans remove the rose-colored glasses to see the U.S. economy for what it really is...

RESTRUCTURING THE U.S. ECONOMY- DOWNWARD by Dr. Kurt Richebächer

The deficit country is absorbing more, taking consumption and investment together, than its own production; in this sense, its economy is drawing on savings made for it abroad. In return, it has a permanent obligation to pay interest or profits to the lender. Whether this is a good bargain or not depends on the nature of the use to which the funds are put. If they merely permit an excess of consumption over production, the economy is on the road to ruin.

- Joan Robinson, Collected Economic Papers, Vol. IV, 1973

Finally, the greatest boom in American housing history is going bust. The impact on the economy has only just begun to be felt. Demand for homes is sharply down, while the number of vacant dwellings is ballooning - up more than 40% for existing homes and more than 20% for new homes year over year. At issue now is the severity of the impending bubble aftermath.

It does not seem, though, that there is a lot of worrying around. There appears to be a widespread belief that the U.S. economy is now out of trouble because the Fed decided not to raise interest rates. We presume the following interpretation:

1. This is not just a pause, but the end of all rate hikes.

2. In the absence of an overheating economy, inflation is yesterday's issue.

3. Steady or lower interest rates will boost the stock market.

4. As the Fed no longer tightens, the possibility of a hard landing can be dismissed.

5. Abundant liquidity continues to underpin the markets.

Treating bad economic news as good for the financial markets, Wall Street is running wild with more aggressive speculation. "The world economy is on track to grow at a 5.1% rate this year, but the risk of a severe global slowdown in 2007 is stronger than at any time since the September 2001 terror attacks on the United States," said the International Monetary Fund in a report to finance ministers, mentioning two possible triggers: a sharp slowdown in the U.S. housing market or surging inflationary expectations that would force central banks to raise interest rates.

Taking this forecast into account, the sudden plunge of commodity prices may not be totally surprising. On the other hand, prices of risky assets and mortgage-backed securities have, despite the obvious problems in U.S. housing and consumer finance, held steady. Stock prices of U.S. lenders up to their necks in subprime, interest-only and negative-amortizing mortgages have been rising 5-10% since late August. Since hitting bottom in June, emerging stock markets have rebounded 20%. Developed international markets have risen by 12%, and U.S. stock markets by around 8%. A vertical slide by the yen since May suggests that yen carry trade is back with a vengeance.

Given the growing talk of impending recession in the United States, all this may appear rather surprising. The underlying rationale seems to be the assumption that this recession will be just another soft patch forcing the Fed to what the speculative community likes most: a return to easier money.

There is talk of recession, but definitely no recession scare. Popular perception appears to trust that the U.S. economy will again prove its outstanding resilience and flexibility. And are the balance sheets of private households not in excellent shape, as rising asset valuations have vastly outpaced the rise in liabilities over the years? The possible scary parts of the new development, a deeper recession and a precipitous decline in economic growth, have not yet come to the fore.

Over the past five years of recovery from the 2001 recession, U.S. economic growth has been "asset driven," according to colloquial language.

More to the point, protracted sharp rises in house prices served private households as the wand providing them with prodigal borrowing facilities to increase their spending. For years, it was the economy's single motor.

The Fed estimates that mortgage equity withdrawals exceeded $700 billion, annualized, in the first half of 2006.

In 2005, the last full year for which data are available, new borrowing by private households amounted to $1,241.4 billion. Now compare this with the following spending and income figures. Disposable personal incomes grew $354.5 billion in current dollars and $93.8 billion in inflation-adjusted dollars. Spending increased $530.9 billion in current dollars and $264.1 billion in chained dollars.

We have presented these figures to highlight the paramount importance of the large equity extractions on the part of private households for U.S. economic growth during the U.S. economy's current recovery. Plainly, it prevented a much deeper recession. Absence of any wealth gains could have easily induced private households to do some saving out of current income.

For the consensus, the U.S. economy's shallow recession in 2001 is the most splendid justification of Mr. Greenspan's repeatedly expressed idea that it is better to fight the bubble's aftermath with easy money than to prick it in its prime. This is plainly a gross misjudgment, because America's shallowest recession was followed by five years of the shallowest economic recovery, with unprecedented large and lasting shortfalls in employment, income growth and business fixed investment.

Actually, there have been major changes in the U.S. economy's pattern of employment and resource allocation, but altogether changes for the worse, not for the better. These structural changes are bound to depress U.S. economic growth in the long run.

The striking feature of the housing bubble - distinguishing it diametrically from an equity bubble in this respect - is its extraordinary credit and debt addiction. The reason is that it requires borrowing for two different purposes: first, for driving up house prices; and second, for the cash out of the capital gains. Every single dollar for this purpose has to be borrowed.

Since end-2000, American households have offset their badly lacking income growth with an unprecedented stampede into indebtedness, up so far by $5.3 trillion, or 77%. But as soaring house and stock prices added a total of $15.6 trillion to the asset side of their balance sheets, households miraculously ended up with an unprecedented surge in their net worth from $41.5 trillion to $53.8 trillion in the first quarter of 2006.

Referring to this fact, Fed Chairman Bernanke noted in a speech on June 13 that "U.S. households overall have been managing their personal finances well."

Manifestly, the rapid creation of the housing bubble in 2001 did prevent a deeper recession. But this should raise the further question of how the housing bubble and its financial implications have affected the U.S. economy from a longer perspective. In other words, are they in better or worse shape today than in 2001 to weather the aftermath of the housing bubble? Our answer is categorical: Underlying cyclical and structural conditions have dramatically worsened.

In 2001, the Greenspan Fed could cushion the fallout from the bursting equity bubble with the creation of the housing bubble. This time, manifestly, there is no alternative bubble available to be inflated to cushion the fallout from the housing bubble. Rather, there is a high probability that the popping housing bubble will pull the stock market down with it. That is the first ominous difference between 2001 and today.

The second ominous difference is that the economy and the financial system have accumulated structural imbalances and debts as never before in history. Vastly excessive borrowing for consumption and speculation has turned the U.S. economy into a colossus of debts with a badly impaired capacity of income creation.

And finally, equity and real estate bubbles are very different animals, of which the latter is manifestly the far more dangerous. In its World Economic Outlook of April 2003, the International Monetary Fund published a historical study, titled When Bubbles Burst, and explained differences in the effects between bursting equity and housing bubbles. It stated, in brief, the following:

First, the price corrections during housing price busts averaged 30%, reflecting the lower volatility of housing prices and the lower liquidity in housing markets. Second, housing price crashes lasted about four years, about 1 1/2 years longer than equity price busts. Third, the association between booms and busts was stronger for housing than for equity prices...

Fourth, all major bank crises in industrial countries during the postwar period coincided with housing price busts.

The severe cases of bursting housing bubbles badly affecting the banking systems in the late 1980s were in England, the Nordic countries and Switzerland, not to speak of Japan, where, however, commercial real estate played the key role.

Regards,

Dr. Kurt Richebächer

for The Daily Reckoning

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Countdown to Crisis

Former Fed Chairman Paul Volcker once said: "Sometimes I think that the job of central bankers is to prove Kurt Richebächer wrong." A regular contributor to The Wall Street Journal, Strategic Investment and several other respected financial publications, Dr. Richebächer's insightful analysis stems from the Austrian School of economics. France's Le Figaro magazine has done a feature story on him as "the man who predicted the Asian crisis."