First, a quick look at what happened in the markets yesterday.

The Dow rose 57 points. Oil held steady - but at a near record price of $136 a barrel. The dollar rose…and gold dropped $10.

The big news this morning is that retail sales actually went up last month - at 1%, twice what economists expected.

What? How can consumers continue to spend? They're supposed to be cutting back. Maybe they're spending those rebate checks.

Meanwhile, we find import prices up 2.3% in May, mostly because of higher oil prices. And the NY Times tells us that commodity price increases show "no let up." Floods in the Midwest are aggravating the situation - driving up corn prices to new record highs.

"Inflation expectations rise sharply," says the Financial Times.

The Fed's 'Beige Book' tells us that the economy is "generally weak."

We spent the week with a group of Internet marketers. The financial publishing business has gone electronic in a big way. In this business, you either learn how to publish on the Internet…or you fail.

Your editor, who grew up without air-conditioning, let alone without the Internet, finds it hard to keep up.

"You've got to understand the semantic dynamic of the bot-driven crawlers," said one of the speakers. We had no idea of what he was talking about, but the others present nodded their heads in approval.

That is just one of the problems with growing older; you grow wiser…but wiser about things that no longer exist. When the car is slow to start, for example, we naturally think we need to clean the carburetor or check the points. Then we realize that there isn't a carburetor and there aren't any points. The cars have gone electronic too.

The other thing that has gone electronic is money.

In our decaying wisdom, we're suspicious of the new electronic money. The old paper money was bad enough. Given the opportunity, central banks would print it up…far more of it than they should. Soon, there would be a lot more pieces of paper than there were things that it would buy. Now, the authorities who control money don't even have to get ink on their hands. They can create money electronically. In fact, there is no limit on how much they can create - theoretically. Just add zeros. Add them electronically. The sky's the limit.

But real wealth is not created so easily…

Real wealth is not electronic. It's not just 1s and 0s - not just digital…not just phantoms that disappear when the power goes out. Real wealth is physical…things you can touch, eat, drive around in, and live in.

Real wealth and "money" are connected. But this new electronic money has plenty of stretch in it. Houses, for example, are real wealth. But in money terms, their value varies. In the ten years - 1996-2006 - for example, the price of America's houses almost doubled. Of course, they were essentially the same houses…a little bigger perhaps…with a few more marble countertops, but otherwise not much different. What had happened that made them more valuable? Well, they weren't really more valuable…just more expensive. America's elastic money had stretched out to make them more expensive.

But now the elastic is snapping back. Houses are down 13% - according to Case/Shiller - from a year ago. And now an analyst at JP Morgan says they'll probably go down about 30% before the snapback is finished in 2010.

This, he says, will cost Wall Street about $1 trillion in losses on mortgage-backed securities. It will cost the nation $4 trillion in "lost access to capital."

Whoa! That's the trouble with stretchable money - when the elastic snaps, it can hurt.

*** The other trouble with these new electronic systems is that they are hard to fix. When your car wouldn't start in the '60s, you lifted the hood…took off the distributor cap and checked for sparks. Or, you removed the carburetor and made sure it was working properly. Even when you didn't know what you were doing, skinning your knuckles once or twice seemed to cure most minor mechanical problems.

But when an electronic system breaks down, it's hard to figure out what is wrong…and almost impossible to fix. When money is in paper form, it is pretty easy to understand how it works. Simply count up the bills in circulation. If the supply is going up…prices are likely to follow. But this new electronic money has most people stumped. The Fed sends an electronic credit to the Bank of America, which in turn gives an electronic credit to its credit card holders. Now, they can go out and buy things. Do they have "money?" How much "money" is in circulation?

Then, the American shopper buys something made in China - where else? - so that the Chinese producer ends up with a credit in his account in dollars…which he trades with the Bank of China for yuan. The BoC doesn't want the yuan to go up…so it creates more yuan, electronically, to trade for the electronic dollars it has received.

This was the 'great money machine' - an electronic machine - that was responsible for creating so much of the world's liquidity…and the world's bubbles.

But as we said yesterday, this machine seems to be slowing down…maybe even breaking down. America's trade deficit is shrinking. In fact, it seems to us that the elastic currency is snapping back in America's face. Its import prices go up…while its major asset - housing - goes down.

The import that people care most about is oil. It's causing the highest gasoline prices Americans have ever had to pay. And it's calling into question the whole 'car culture' society. In America, much more than in Europe, people live in individual, standalone houses - which are much more expensive to heat and maintain than row houses or apartments. They also live far from their work…their schools…their restaurants…and their shops.

Here in Europe, big shopping malls have become common. The small shops couldn't compete with them on price or choice. Still, now that the price of oil has gone up so dramatically, the latest reports tell us that shoppers are turning their backs on the big malls; they prefer to walk out to neighborhood stores.

But in the United States, there are few neighborhood stores left…in fact, there are few neighborhoods. Instead, in many areas, houses were flung out like confetti from a parade float. They may have fallen a mile from a major shopping mall…or the wind might have carried them 50 miles away.

"Oklahoma's painful car culture," is changing the way people live, says an article on CNN Money. Out on panhandle, it is not unusual to drive 70 miles to get to work. In their big SUV and pickups, commuters might have to spend $50 a day - just to get to work. It's not surprising that they are looking for alternatives - bikes, carpools, and buses.

The race for the next big thing in energy is on…and some investors are poised to take some real profits. Don't miss out:

A Crude Awakening

*** Art investors are the biggest numbskulls. At least, that's our conclusion. While other asset classes have mostly topped out - except for commodities - art buyers continue to pay incredibly high prices for incredibly low pieces of 'art.'

We mentioned Lucien Freud's blubbery 'Benefits Supervisor' painting, which separated $33 million from its previous owner - making Freud the world's most expensive living artist. But that was just one of the many works that changed hands at fabulous prices last month. Kenny Schachter, courtesy of Marc Faber, elaborates:

"…a [Francis] Bacon triptych from only the 1970s for a grand total of $86,000,000 (that had to be depicted with all the resplendent zeros). I have been in the art world for 20 years, but can someone please explain that to me? A bird eating the neck of a torso, distorted faces, and an abortion gloating nearby - maybe he just couldn't paint faces. I like to be shocked as much as the next person, but…what is the concept of a painting worth the GDP of a small country?"

Or how about a couple of Hoover vacuum clearners for $11,801,000?

It could be yours, dear reader…

The Daily Reckoning PRESENTS: Every generation faces the furnace at least once or twice before it finally gets fried. Apocalypse comes and goes. Barely had Christ shaken the dust from his sandals when Saint Clement I predicted the second coming; the world would end at any moment, he said. Read on…

THREE LITTLE FACTS AND THE END OF THE WORLD
by Bill Bonner

We left off last week staring into the gates of Hell. Today, we go back to laugh at the devil.

Let us look at our first fact. It is about us - the growth in human population. While the rate of growth has gone down since the 1960s, the actual number of humans is increasing faster and faster. The world's population was only about 3 billion in 1970. Now, it adds that many new faces every 30 years.

If it continues at the rate - which demographers say it will - we will soon run out of food, water, and parking places.

But every generation faces the furnace at least once or twice before it finally gets fried. Apocalypse comes and goes. Barely had Christ shaken the dust from his sandals when Saint Clement I predicted the second coming; the world would end at any moment, he said. Many were those who expected the world to end in 666, a year that carried the 'mark of the beast.' And in the early 19th century, the Millerites believed the world would end precisely at the close of October 22, 1843. They gave away their property and gathered on hilltops to await the end. At least one man with an extraordinary confidence in his pocket watch leapt off a barn roof at midnight, expecting to be taken up to Heaven in the moment of rapture. Like an investor, he got what he deserved, not necessarily what he expected. The night became known as the "Great Disappointment."

Near the end of the first millennium, German Emperor Otto III interpreted a solar eclipse as an exterminating omen. At the end of the second, it was a computer glitch that spelt annihilation. If the computers failed, said the doomsters, the control systems for trains and trucks wouldn't work. And the banks wouldn't be able to honor checks or pay out cash. No money. No food. Millions would starve.

The history of the financial markets, too, is full of great disappointments. In Britain's commercial property market, for example, developers thought they were in heaven just two years ago. Hammerson's share price more than tripled in the 3 years from '03 to '06, as the City seemed ready to take up every new square foot - at a premium price. Higher prices begat further construction which begat more commercial space, which begat a glut, which begat a bust.

Strutt & Parker says commercial property prices in the Southeast are down 25% in the last 6 months. Turnover in the commercial property market fell 75% from the levels in early '07. And Hammerson has seen its shares nearly cut in half.

The same process of over-doing it led to the current correction in America's residential housing market…and will probably hit its commercial property market soon too.

And there you have both the good news and the bad. Delusion is self-limiting. Success is self-correcting. And prosperity brings its own punishment.

Today, the mother of all bubbles is expanding fast; the gates of Hell open wider than ever. Humans are replicating like plastic bags. They blow across the streets and accumulate in bad neighborhoods. Many experts a Malthusian catastrophe; they see it as a mathematical certainty that food and water cannot keep up. From Nature's point of view, mankind is destroying the planet - by over fishing, over consuming, over producing, and over doing it generally. Bad news for glaciers and sea turtles. From man's perspective, it is the planet that is letting him down. He goes about his business - begetting all he can - and then he discovers his car is out of gas. Another fact:

Oil output is expected to decline at about 2% per year beginning in 2010, while population grows at 1% per year.

Of the world's 65 leading oil fields, 54 are now in decline. And the rate of discovery of new deposits of petroleum that can be accessed by conventional means has collapsed. In the early '60s, the world's drillers were finding nearly 60 billion barrels of new oil deposits each ear. In the early 2000s, the rate had fallen to less than 10 billion per year.

Finally, here is another fact: Over the next 2 decades, the average supply of water per person, worldwide, is expected to drop by a third.

Is that how we will meet the devil? With our throats parched, our stomachs empty, and an empty gas can in our hands? Maybe. Maybe not. But one way or another supply and demand will come into balance - perhaps disastrously.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

Editor's Note: Don't forget - you can hear Bill speak at this year's Agora Financial Investment Symposium in Vancouver, British Columbia. This year's theme is "View from the Peak: Seeking Profits in a time of Risk and Scarcity" - and it's your first look at investment opportunities, global market concerns, and the best investment bets across the globe.

The Symposium takes place July 22nd and July 25th, 2008…but tickets are sure to sell out, so secure your spot today by clicking here for all the details:

Agora Financial Investment Symposium - July 22-25

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, 13 June 2008 | Digg This Article