First, the basic facts:

The Dow rose a bit yesterday. The dollar went up too.

Commodities hit a new all-time high, with the CRB at 509 and wheat over $10 a bushel. U.S. stocks of spring wheat are expected to go down 25% compared to last year.

Gold rose $10 - to $910, and then went up another three bucks after the market closed.

From an inflationary point of view, these are all positive signs. The feds are desperately afraid prices will fall. They're doing all they can to keep the party going.

It's either "inflation…or the peace of the cemeteries," an Argentine official once remarked. Inflation or death! Boom…or bust! Well…er…yes.

Still, the revelers seem to be putting on their coats, one by one, and heading for the door. A Wall Street Journal poll of economists gives dead even odds of a recession in 2008.

If the peace of the cemeteries is really creeping up on us, we should see consumers cutting back. And the giant retailers ought to confirm it. Sure enough, China's American outlet store - Wal-Mart (NYSE:WMT) - tells us that sales are not as good as it has expected. Wal-Mart "leads the parade of sales misses" says a report on CNNMoney.

"I think its results show that its core of low-income shoppers and now the middle class households who shop there are cutting back," remarked an analyst.

"Retailers struggle as Americans pull back," is how the International Herald Tribune sees it. "You're seeing the continuing unfolding of the consumer spending slowdown," said another expert on retails sales.

It's the next big thing, dear reader - downsizing, cutting back, making do. Barely on the radar screen now, thrift is coming into focus more clearly day by day. So far, people are a bit embarrassed about it…a bit ashamed that they have had to cut back. But soon, it will be popular…fashionable…and finally, almost obligatory.

Capitalism is a moral system, not an economic system. It rewards virtue and punishes error…and after punishment…atonement…and then, a new appreciation for virtue.

"Virtue is what used to pay," said an economist with a shrewd eye and a forgettable name. And if the economist whose name we can't remember didn't say that, we'll say it. Saving money, self-discipline, forbearance - they're all virtues because they paid off in the past. Not every year…not in every trend…but, generally, over the long run they pay off. They will be virtues again because they will pay off again. Wasting money…spending recklessly…and going into debt will soon be seen as social gaffes…as errors…and as bad taste.

Of course, the feds are doing all they can to prevent saving. Lower interest rates and rising consumer prices discourage saving. But the struggle between Mr. Market and the market manipulators is as old as the struggle between vice and virtue. Sometimes one side wins. Sometimes the other. But in the end, what must happen sooner or later does happen. When consumers must cut back, they do cut back. People do what pays.

But what pays now?

What pays is saving money. But not in dollars…and not in any other paper currency. The market manipulators are in charge of them all…and they're all determined to see them go down.

"ECB stands pat, but signals a new line of thinking," is the headline in today's International Herald Tribune. Recently, the dollar has been rising against the euro (EUR). Speculators thought the ECB wouldn't follow through on its threat to raise rates to fight inflation. They were right. Instead, the ECB stood still - acknowledging that a slowdown in the United States may reduce demand and thereby slacken inflationary pressure in Europe.

The Bank of England, on the other hand, cut its key rate by a quarter point. And the ECB said it might do the same. Both the pound (GBP) and the euro fell against the dollar.

*** Prices are rising in Europe as in America. Bread is up 12% in Germany over the last 12 months. Butter has gone up 45%. Milk 25%.

By the time the average European has finished his breakfast, he is feeling a little queasy. And by the time he has driven to work, after filling his gas tank with fuel that costs about four times as much as it does in the United States, he is sick.

The Europeans have been caught by the dollar too. As America emitted more pieces of green paper, foreign banks had to emit their own colored paper to keep up with it. Otherwise, their currencies would have gone up against the dollar…making their economies less competitive on the world market. It was a cycle that appeared virtuous for quite a while. More and more money in circulation had the effect of boosting up share prices…and house prices. People thought they were better off.

But now, assets are falling in price…consumer products are going up. Now people are getting the kind of inflation that they don't like…and now they want someone to do something about it. Opinion polls show that purchasing power is one of the main complaints of voters. Politicians are talking about solutions. And central bankers are under pressure to raise rates, not lower them.

At the same time, the pressures from deflation are mounting too. A spokesman for Price Waterhouse Coopers says the subprime debt problem has still not fully expressed itself.

And "the credit crunch gets worse," writes Floyd Norris in the New York Times.

Bankruptcy filings by companies with leveraged loans outstanding are running more than four times last year's rate.

*** "McCain can never win," came the considered judgment of Henry, who will be able to vote for the first time in the November election. "He's too ugly."

"Oh Henry, don't be silly," said his mother. "You don't vote for people based on what they look like. Besides, whoever is elected is bound to be better than our current president."

What set off the remark was today's news. Mr. George W. Bush, president of the Land of the Free, 2000 years after the birth of Christ, and more than 200 years after the U.S. Constitution banned the use of 'cruel and unusual punishment,' said he saw no problem with waterboarding - even when used against people who had never been convicted of a crime.

"It is disgraceful," said Elizabeth. "Pretty soon the IRS will be using it in tax audits."

It may be disgraceful, but it is not illogical.

President Bush believes torturing prisoners by holding them underwater has provided useful intelligence 'and saved American lives.'

"Well, nailing Christ to the cross might have provided useful information," came the response, "but it was still wrong."

Capitalism is a moral system, we pointed out yesterday.

In the long run, it pays to save your money…make your investments carefully…work hard and avoid unnecessary spending. Capitalism will reward you. It is a 'system' that rewards virtue…and punishes lapses of judgment. But there are times when it seems like lapses of judgment pay off. When prices run up - as they did in the housing bubble of '97-'07 - you begin to seem like a bit of a fool if you stay out of it. It is as if a wild party was going on down the block…you feel left out if you don't go. And the people who are having the best time are the people who have let themselves go. They're drinking hard…and dancing on the tables. They buy houses they can't afford…and make money when prices rise. They buy subprime debt…and earn higher yields than more solid credits. They speculate on Chinese stocks…and they seem like geniuses.

"C'mon…get with the program," they say. "Get in the swing of things…buy a new house; just claim that you earn more than you really do…and don't worry, the appraiser will go along…and you'll be able to borrow as much as you want. Then, you can 'take out equity' just like everyone else."

The guy who sticks to his principles feels like a hopeless fuddy duddy…a loser and a chump. He saves…and his savings lose value to inflation. He looks for value in the stock market - and can't find a thing. He drives his old car…and holds on to his old house, while his neighbors splash out.

But then, comes the correction…and he doesn't look like such a dope after all.

Always and everywhere, you can do what seems convenient…or you can do what is right. Sometimes it is hard to tell which is which; often it is not.

When the Japanese invaded China in World War II they used waterboarding against their prisoners - holding them under dirty, soapy water until they were obliged to breathe the water into their lungs. Then, they hauled them out, punched the water out of them…and laughed at their prisoners gasping on the floor. What useful information they got from their victims, we don't know…but we have no doubt that they justified their tortures with the familiar excuse: it was useful.

In that same inglorious epoch, the Germans and the Soviets both invaded Poland. The poor Poles were doomed. The Bolsheviks rounded up the Polish officers and systematically murdered them…and then tried to pin it on the Nazis. It wasn't a very nice thing to do, but it would have been damned inconvenient to allow those officers to live…and possibly pose a danger to Soviet control later on.

Likewise, the Germans went to work on the Poles on their side of the frontier…and later in all of Poland. They rounded up the communists…the trade unionists…the religious leaders…the Jews…and the troublemakers. They did not hold back from torture either - not if it might save the lives of German soldiers! Then, they moved on - to murdering millions.

Once you allow yourself to do what is convenient…instead of doing what is right…you are on the road to Hell.

More below…                                   

The Daily Reckoning PRESENTS: Latin America is leaving its great northern neighbor in the shade. Bill Bonner looks to the former 'banana republics' for opportunity - and instruction. Read on…

SUNNY PLACES, SUNNY FINANCES
by Bill Bonner

In this issue of The Daily Reckoning we turn our eyes back to the former 'banana republics', partly for opportunity…and partly for instruction.

On the opportunity side, we find companies with little debt and huge potential. It is not exactly a virgin market - but more like one that has been in a women's detention center for the last five years; it's ready for a new dress and a drink.

But we first we take up our lessons:

Run huge deficits and borrow the money from overseas? "Si, we tried that…" Try to stimulate a debt-saturated economy by printing more money? "Si, that too." Bail out the banks…giveaway money to the people…hand out special favors to cronies and campaign contributors? "Doesn't everybody?"

Argentina tried a few other things too - such as locking up the banks…starting a war with England…and creating a whole new currency. The inflation rate hit more than 1,000%. Nicaragua brought in the Sandinistas, and sent the whole economy into reverse for an entire decade. Peru thought a Japanese president might give it some of Japan Inc's magic…then they chased him into asylum in the embassy. Strongmen…juntas…revolutions…mob democracies… defaults…devaluations…is there any trick the Latinos haven't tried?

But the world is a topsy-turvy place. The clouds of mismanagement that once cast such long shadows over Latin America have drifted into the higher latitudes. Suddenly, the banana republics look like good places for you money as well as your holidays.

In a nutshell: the United States and Britain have been victims of their own good luck; the banana republics had the good fortune of bad fortune. In the last twenty years, for example, the world rushed to lend the Anglo-Saxon tribes money. North of the Rio Grande and the Isle of Wight, credit was as abundant as calories. But when lenders visited the tropics, they hid their money in their underwear, and left their watches in the hotel safe. Our man in Rio sweated and counted his change. Our man in London or New York splashed out, and bought a $5 million house…and another one as an investment.

In the air-conditioner zone there was no one to borrow from. Residents of the banana republics were spared the lure of debt, thanks to the near universal agreement on the part of lenders everywhere, who wouldn't give them a dime.

And now, England and America are caught in the debt trap, while the Latinos swagger down their avenidas with hardly a care in the world. The price of soybeans is at an all time high…and their balance sheets have some of the lowest debt ratios in the world.

An investor in Latin America has the trade winds at this back; the rainbow currencies are rising; so is the price of food. Most of these countries are net exporters - of bananas and other agricultural commodities, often of metals as well. Like China and the oil exporters, they are building up large piles of dollar reserves and watching their own currencies go up against the greenback. Several have had to intervene in foreign exchange markets not to protect their local currencies…but to keep them down.

But nothing seems to be able to keep down the worlds growing appetite. There are more and more people in the world; most of them are getting richer. Naturally, they expect a little more butter on their cabbage…and a little more meat in their soup. But where will it come from? You can print as many dollar or pound notes as you want. Add a nought and you have multiplied the money supply by ten. But how fast can you increase food production? Where do you get the land? The water? Some analysts believe the world is already close to a peak in food production. For every new acre put into service, they say, another acre is taken out. In America, for example, farmers are switching from producing grain for food to planting grain - particularly corn - to be used as biofuel.

Thirty percent of the past summer's crop was thus destined for the gas tank rather than the stomach. In other parts of the world, notably China, farmland is being taken over for urban development, or destroyed by pollution, drought, or over use. Farm prices are at record levels…and may go higher. Corn stocks are nearing a 33-year low…wheat stocks are approaching 60-year lows.

What better time to invest in one of the world's top food producers? says legendary British investor Jim Slater. Writing in the Investors Chronicle, Slater says, "Brazil has an abundance of the four major commodities that the world is short of," which he identifies as water, arable land, energy, and mineral wealth. Brazil, he points out, has 90% more recoverable water than its nearest rival. It is the world's largest exporter of soybeans, beef, chicken, orange juice and sugar. Its leading oil company has recently struck a huge deposit. "Before long," he predicts, "Brazil will be a net exporter of oil." Finally, the country is also a huge producer of iron ore, quartz, chrome ore, industrial diamonds, gold, nickel, tin, bauxite, uranium and platinum.

Sell the gringos; buy the Latinos.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

P.S. ¿Habla español? ¿Quiere ganar dinero?

Latin America is booming. And our colleagues in Buenos Aires, Argentina are well placed to help you profit from the many value opportunities south of the border. They have launched an email report service entitled Informe Moneyweek that covers both Latin American and international investment opportunities. It's written daily in Spanish by South American market experts, Horacio Pozzo and Paola Pecora. If this is something you would be interested in, I encourage you to click here.

…and by the way, it's free!

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.

Bill's latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here:

Mobs, Messiahs and Markets

-- Posted Friday, 8 February 2008 | Digg This Article