A lot to talk about today…

The "word" on the street is "subprime." According to the American Dialect Society, it's the most important new word this year. Along with "jingle mail," "exploding ARMs" and "liars' loans," it came into the popular language recently…and now everyone uses the term "subprime" to describe anything that is cheap, low down, or deceitful…says the ADS.

We also want to talk about the collapse of gold and commodities…

About the coming surprise to investors…

And more about the fraudulent economic model America has been flowing for the last quarter century…

But first…something important:

"You've ruined my summer," said Elizabeth over the weekend.

"Oh. How'd I do that?"

"You're just such a wet-blanket…such a fuddy duddy. You never want to go out and have a good time." More about that below…

But back to the news. On Friday, the meltdown of gold and commodities continued. Oil slipped $1.35. The commodities index, the CRB, fell below 500. The dollar rose to $1.46 per euro. The pound is losing value faster than at any time in 37 years. And get this - gold dropped $21 to close below $800, at $792.

So, what can we expect? Will everything go back to where it was in 2002? After climbing the mountain, will Jacks and Jills all over the world merely tumble down the other side? Oil - will it go back to where it was before the Bush administration attacked Iraq - at about $25 a barrel? Will the dollar go back to where it was just after the euro made its debut 10 years ago - at 88 cents? Will gold roll all the way back to where it was when George W. Bush was first elected president - at about $262 an ounce?

And maybe we'll all be 10 years younger too!

Nah, too bad…but it doesn't work that way. Every day, everything ages…changes…twists…corrupts…wrinkles…and decays. Nothing wrong with that, of course…that's just the way it works. But it's why, when you get a house, a wine, a stock or a woman, you want one that ages well - one that time improves.

But let's not get distracted…

The slump in the U.S. continues. Foreclosures are still rising in California.

There's "blood in the street," says Barron's of America's most famous street, located in lower Manhattan.

Fortune tells us that the "next wave of mortgage defaults" is coming.

And down in Flawda, the Miami Herald reports that the unemployment rate has risen over 6% - its highest level in 13 years. Florida, along with California and Nevada, is where house prices are falling fastest. Many of the people who used to work in construction, or real estate, or installing granite countertops, or financing houses are now looking for work.

And here, we pause a moment to remember what a joke of an economy we Americans have created. We mentioned it last week. Fortune magazine reported a study that compared Germans to Americans. It found that Americans did not work more hours, after all. We work about the same number of hours as Europeans, generally. But Americans tend to do their work at low-skill, service jobs - like flipping hamburgers or cleaning driveways. Germans work at real careers, cook their own hamburgers and clean their own driveways. Germans put in fewer hours "on the job," as a result.

But in the curious way in which statistics become confused with knowledge, the statistics on hamburger joint revenue get fed into the figures for GDP growth. Then, it looks like the U.S. economy is doing better than the German economy, even though both groups may be eating exactly the same number of hamburgers. And then, too, U.S. economists and politicians believe they have found the secret to economic success; because the US model puts people to work…and boosts GDP growth. Soon, they are giving advice to the Chinese and wagging their fingers at the Europeans. It's only later, when the credit runs out and their service industries go broke…that they get the punch line - good and hard. Then, they have to cook their own hamburgers again.

*** Occasionally you come across a small insect - a moth or a mosquito - fossilized in a drop of amber. The insect landed on bit of sticky tree say, millions of years ago, and then was covered by the flowing sap, which later hardened into amber.

The prices you see in today's markets reflect all the latest ideas, information, prejudices and hallucinations of investors - the sap at that moment. The next moment, they are history, past tense…and the investor, like that poor bug - is stuck. The sap looks attractive…but once he lights down on it…he's finished. He gets whatever he has coming.

The sap always keeps flowing…and saps are always surprised by it. So where is tomorrow's surprise coming from? There are two possibilities we can see. Either the global slump turns out to be much more punishing than investors expect. That is, instead of a soft landing for the world economy, there will be a smash-up that sends equities, property, and bonds a lot lower than people expect - with trillions of dollars in capital losses, tens of millions of families bankrupt, and a recession that is surprisingly deep and dreadful.

Another surprise might be that the reports of inflation's death were exaggerated. Inflation may not be dead at all - but just taking a rest. Oil may be going down, but it's not likely to go back to where it was in 2002. And since oil is so essential to the modern economy, higher priced oil is likely to continue working its way into consumer prices all over the world. And maybe China, India and Russia don't fall into such a deep slump that they stop using so much oil and other raw materials. And maybe their labor costs continue to rise at 10% per year - which then pumps up their export prices at double digit rates.

And, perhaps most important, neither the people nor the theories in modern central banking have changed. They are committed to a system with the dollar as its foundation…a system that ALMOST guarantees inflation.

We don't know what will happen - every day is a new day, after all - but we know how these central bankers think. And the more a recessionary downturn grips the world, the more Bernanke & Co. will fight against it. And they fight dirty - with counterfeit money.

It's the "Endgame for Fannie and Freddie" says this week's Barron's. And the weekend news brought word that the "US Likely to Recapitalize Fannie and Freddie." We expected nothing less. The two lenders are said to be worth about a negative $50 billion each - for a grand total of $100 billion. Of course, the feds don't exactly have a spare $100 billion lying around. But so what…they've got plenty of funny money. As the endgame comes for more American businesses and households, you can expect to see a lot more funny money passing itself off as the real stuff.

So which surprise is it likely to be? A deeper deflationary slump? Or a wilder ride on the inflation roller-coaster?

Both is still our guess.

Buy gold on dips; sell stocks on rallies. We don't have much of a rally in the stock market, but we have a nice dip in gold. Take advantage of it…and buy gold with your pocket change. See how here.

*** "You are such an anti-social fuddy duddy…" said Elizabeth. "We are here in a country where we're not related to anyone…we have no natural ties with anyone. And we don't want to live like hermits cut off from the rest of the world. We need to get out and socialize. That's what makes like worth living - or at least, it's part of what makes life worth living.

"And since we've decided to live here…where we're not automatically or naturally part of the social scene - because we have no old friends or family here - we have to make a special effort to fit in. We have to work harder than most people just to have an agreeable social life, with friends and acquaintances whose company we can enjoy…

"But all you want to do is to write your Daily Reckonings, paint shutters and work on your various projects. You know perfectly well you actually enjoy going out…but you don't like being interrupted. And I feel like I'm interrupting you or imposing on you whenever I want to invite people over…

"It's just not a very pleasant way for us to live together. We're at odds. I know you have different ideas about how to live…but this is an important issue. We're going to be here - I guess for the rest of our lives. The children are leaving. It's just going to be the two of us. And we're going to be pretty lonely if we don't have friends in the area…"

By nature, your editor is only interested in two things - work and love. If he has his work to do…and his family around him…he is content. But there is more to life, or so they say - and even he feels a certain hollowness when the family grows up and leaves.

On Saturday, we went to a "dinner in white," on the night of the Assumption of the Virgin. We were instructed to bring a picnic basket, a folding table and all the accoutrements of an elegant dinner - including candlesticks.

Your editor was a bit grumpy about it…reluctant to leave his work and his family to spend the evening with strangers. But he set off without complaint.

We drove down small, oak-lined roads for about 15 minutes. Then, we saw a group of cars parked in a field and a group of people - all dressed in white - standing near a stone farmhouse. A young man appeared as we parked, offering to carry our table and chairs. These were placed in a row with others - out in a field behind the house. The table cloth was laid on…candlesticks set up…bottle of wine opened…

The group of people in white greeted us…we chatted with the few people we knew and enjoyed a glass of champagne. Then, after an hour or so, when a full moon was rising over a pond in the distance…and a haze appeared over the fields, we took our places at the table. Elizabeth and I sat at our table, next to a good-looking youngish couple. Then, our host spoke:

"All men stand up. Shift from where you are now down to the next row of tables."

So, as it turned out…we enjoyed a delightful, candle and moonlight lit dinner with a woman we had barely ever met. There were about 50 or so people in the group, but out in the dark of night, at our little portable tables, each group of 4 dinners was surprisingly cozy. Even more surprising, the Virgin herself must have smiled on the whole assembly. Almost every night in August we have had wind or rain - usually both. Saturday night, whilst we dined under the moon and stars, there not even a breeze…and not a cloud in the sky.

The woman opposite us was from a from a large family - with a big farm nearby. Her husband had developed the farm into a place for corporate retreats - with hunting…fishing…and team-building obstacles.

"Which one is your husband?" we asked, looking around.

"Oh, he died 4 years ago in a car accident."

"Very sorry to hear it."

"Well, life goes on. Is your wife here?"

The conversation was unexpectedly sweet, witty and intimate. We were still at our tables at midnight. Then, the children built a roaring fire. We stood around, talked…and drank…until it was time to go home.

Elizabeth was right, of course.

Bill Bonner
The Daily Reckoning

The Daily Reckoning PRESENTS: Thanks to the horrors of inflation (brought on by the despicable government), many people are turning to subsistence farming just to survive. Of course, the Mogambo has a few other suggestions. Read on…

UNEMPLOYMENT SURVIVAL GUIDE
by The Mogambo Guru

Judy Stark, the Homes and Garden editor for the St. Petersburg Times, writes that it is a "sign of the times" when a local county-sponsored workshop on vegetable gardening has suddenly hit the 200-person capacity of the room.

She says that this means, "there is great interest in growing your own food so you know what's in it or on it, and avoid high prices at the grocery store."

Fabulous! So now we know that the economic miracle that Alan Greenspan at the Federal Reserve was supposed to be delivering to us with all of that excessive creation of money and credit to finance the creation of permanent government programs, permanent inflation in the money supply, permanent inflation in consumer prices and permanent inflation in government employment has now required some people to take up subsistence farming to survive!

And it may be Canadians becoming small-scale farmers again, too, as Forextv.com reports that "Economists Say Canadian Labour Force Drop Shows Job Boom Is Over", which is the reaction to a CEP News report that "55,200 Canadian jobs disappeared in July, the largest monthly drop since the early 1990s. The unemployment rate actually shrank, dropping a tenth of a point to 6.1% as an even larger number of people - more than 74,000 of them - dropped out of the labour force during the month."

The numbers are similar in Quebec, as the unemployment rate there "edged up by two ticks to 7.4% while in Ontario, the rate fell to 6.4% from 6.7% in June as 42,000 people left the labour market."

It makes you wonder how people "left the labor market", as this would imply that their families did not constantly hound them and harass them to get another job right away, right now, now, now, now, and how me just sitting there on the couch in nothing but a pair of underwear and sucking down yet another bottle of cold brew proves that "Mom was right! You are a terrible, worthless, lazy father who doesn't care about us!" and I am screaming back at them, "I could have told you that, you stupid damned kids!"

As I interpret it, Forex.com figures that the government is gearing up for a frontal assault on the people, where they will herd us mercilessly into processing facilities to turn us into Soylent Green, as is suggested by the fact that "A gain of nearly 30,000 public sector positions partially offset the loss of 95,000 in the private sector."

In fact, "Since July of 2007, employment in the public sector has grown by 6.1% compared with +0.5% for the private sector." Yikes!

All of this unemployment must be impacting demand for goods and services, which may be what prompted Jim Sinclair of jsmineset.com to ask a lot of questions, including "Do you really believe that present inflation is demand driven?"

This is the crux of the argument by Mark Gertler, a professor at New York University, who unbelievably writes to the Financial Times to take issue with the whole idea "that monetary policy is the root cause of the recent increase in the relative prices of energy and food." Huh? Astonishingly, he says that concentrating on the increases in the supply of money "dismisses the critical non-monetary factors, including increasing commodity demand from strong capacity growth of the global economy, coupled with short-run supply constraints and various government distortions."

To this, I laugh out loud and make rude noises in his direction as if someone farted, which makes me laugh out loud some more, and so I make more farting noises, which makes me laugh even louder, and then I am laughing so hard that I actually fart for real, which makes it even FUNNIER and pretty soon I am laughing so hard I can't catch my breath, which is good because it smells like someone farted.

Well, I soon realized that the farting thing was not my most brilliant attention-getting device, as I can see the security guards gathering to plan their rush upon my position and hustle me out of here.

So, not wasting another precious moment and obviously without waiting to be asked why I am frantically waving my hand in the air like a lunatic and shouting, "Hey! Hey!" over and over, I instead shout out, "Hold on there, doofus! Demand is but desire made manifest, and there is no limit on desire! And if you don't believe me, take your New York University butt over to my house and ask my family something like 'Hey, how would you like a nice burrito?' and you will notice they all say they would love to have a burrito!

"Then ask them 'Hey, how would you like a new car?' and they will all say that they would love to have a new car AND a burrito! And when you ask them, 'And how are you going to pay for this stuff, you greedy little bastards?' you will learn the ugly fact (as they have learned the ugly fact), that without the money to finance infinite desires, 'demand' doesn't really mean squat.

"And so you can also forget about 'capacity growth', too, because without the money to fuel the demand growth, there ain't no stinking capacity growth, and thus there won't be any 'short-run supply constraints', although there will always be 'various government distortions.'"

In short, the availability of money (the increase in the money supply) must come first if you are going to get systemic inflation in prices, and not the other way around, which you would think some hotshot economist from New York University would know!

And I'll bet he doesn't know that gold and silver are the "investment of choice" in response to such monetary insanity, either, so he'll get his comeuppance, which pleases me greatly, for some reason! Hahahaha!

Until next time,

The Mogambo Guru
for The Daily Reckoning

Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications. Click here to visit the Mogambo archive page.

-- Posted Monday, 18 August 2008 | Digg This Article