Election Day. Pity the poor fellow who wins.

A Swiss banker wrote to tell us that according to his proprietary indicator of World Economic Health "conditions are shown to be some 2.5 times worse" than the last recession which occurred in the 1990s.

We would say that they are worse than any we can recall. First, we have never seen such a violent, worldwide correction. Second, we have never seen such a foolhardy effort on the part of the world's governments to prevent a correction.

It's a war. It's worldwide. It's going to catch almost everyone in the crossfire - business, investors, consumers, and retirees. And it's going to end in a worldwide depression. (We're going to change our designation of this coming depression to WDI - Worldwide Depression I - to make it easier to remember.)

But wars take time. Most likely, Mr. Market's blitzkrieg of September and October will give way to a calmer winter campaign. It may even appear that we have entered another period of peace in our time…like the "Great Moderation" the world enjoyed for so many years. If so, dear readers are advised to use this as another opportunity to get out of stocks and other speculative positions.

The time will come to buy back into the stock market…but maybe not for a long time. The average dividend yield of the Dow stocks has risen (because prices have fallen) to 3.7%. When we can get a safe dividend yield of 6%, it will be time to buy back into the stock market.

Yesterday, the Dow and gold both held steady. Oil slipped $3.90 to $63.91. And the dollar rallied to $1.26 per euro.

For the moment, Mr. Market is winning this war…and Mr. Market likes cash.

"I called my mum over the weekend," said an English colleague. "I explained that with her old savings account she had outperformed practically every investor in the world in the last quarter. She seemed quite happy about that. "

Eventually, Mr. Government will have his day. Governments' attempts to stop the correction…and re-inflate the credit bubble…will eventually create another bigger, badder crisis - a monetary crisis. Then, cash will be trash. When that happens, you will want to have gold coins in your safe, not pieces of paper. You'll want to be looking at images of Canadian maple leaves and American buffaloes…not dead, green presidents. Yes, when the shooting stops, and the dust settles, the last thing standing will be gold.

So why not stock up now - when the price is low? And, even better, you can get the precious metal for just a penny per ounce…get all the details here.

But that day is somewhere in the future. Here in the present, cash is king and the dollar is golden, as Mr. Market blasts away at the whole structure of the global economy.

Chinese manufacturing just suffered its worst contraction on record, according to today's paper.

America's factory index is also at a record low.

In China, manufacturing is critically important. Without it, hundreds of millions of people will lose their jobs. What will happen when Chinese factories go silent and Chinese workers go hungry? We don't know…and we don't even want to know…

In America, factories are less important. The U.S. economy depends on the slurp consumption, not on the hum of factories. Of course, if they're going to consume, Americans need money. And there's the rub; they don't have any. They have no savings. Credit is getting tight. And now…whoa!…the job market is tightening too.

As a result, U.S. consumer spending is not just declining…it's collapsing.

Auto sales, for example, are running at their slowest rate in 17 years.

Circuit City says it is closing 155 stores.

And oil consumption in the United States is slipping more than analysts believed possible - down 9% from last year.

So you see, dear reader, markets work. Raise prices and, ceteris paribus, you will reduce sales. Increase production and, ceteris paribus, you will lower prices. Bring on a correction and people will change their feckless ways.

But one scam gives way to another. During the Great Moderation we were assured that our financial authorities had found the magic formula; henceforth, enlightened economic management, along with sophisticated, risk-dispersing financial instruments, would practically eliminate recessions and crashes. There was no need to save for a rainy day, we were assured; because it would never rain! But now we have a downpour…with markets crashing and the world facing its biggest slump ever. And now we are told that markets have failed. Now, we need Barney Frank, Ben Bernanke and Hank Paulson to run our financial system.

Wait a minute…we don't recall Ben Bernanke warning that the world faced a meltdown when he took over at the Fed in Feb. 2006. And wasn't Barney Frank the chairman of the House Financial Services Committee even as Wall Street was running amok, inflating the biggest asset bubble in history? We don't remember him holding hearings about the dangers it presented until after the thing blew up. And wasn't Hank Paulsone the head of one of Wall Street's most go-go, derivative saturated, billion-dollar-bonus-driven firms while all of this was going on?

Well, never mind…

But now we are supposed to believe that markets don't work…and that these well-meaning public servants are going to save us from the evils capitalism…and that bureaucrats will be able to fix prices and allocate capital better than Mr. Market.

Deception gives way to hallucination…correction is followed by depression.

*** "I went to a celebration on Halloween," said another colleague in the London office. "I don't know who organized it, but they had built a platform in the shape of a coffin…and it was marked 'capitalism.' They were dancing on capitalism's grave. I don't know what the significance of it was, but everyone seemed to having a good time.

*** "Whoever wins the US Presidential election, America is in big trouble," writes Ben Traynor at Contrarian Profits. "It will be hard to resist calls to whack up tariff barriers, and protect domestic jobs from foreign competition. A weakening dollar may help US exports a bit…but the US is in a bind.

"If the dollar falls too much, foreign dollar holders (eg China and the oil-rich Gulf nations) will start dumping it. The US does well out of being the world's reserve currency. Such a move would threaten that.

"So what will the US do? It could pursue a strong dollar policy… But that would hit exporters, and hit jobs. So, in response, some bright spark will start banging the drum for protectionism.

"You see, those foreign dollar holders can see the currency's fundamentals are weak. They're sitting on all this money whose value is in the hands of a monetary authority (the Fed) and a government whose sole concern right now is fighting the downturn. The Fed has slashed rates, and there's a strong chance the printing presses will soon go into overdrive.

"So why are foreign dollar holders playing ball? Because, as things stand, it's still in their interests to do so. Why would they want to antagonise a nation they do so much business with? Why would they impoverish their best customers?

"But throw protectionism into the equation, and the incentives change. This is particularly true in the case of goods exporters like China. Overnight, the US market is less important to them.

"Now, will this be enough to tip the balance? Will it reduce their incentive to co-operate enough so that they take their ball back and stop playing? Hard to say… but I think we're going to find out."

*** It could be that America no longer needs Smoot and Hawley. China's sales to the United States are falling, simply because Americans no longer have the money to buy them. The Middle Kingdom has no choice, it has to shift production towards its own domestic market. One way or another, U.S. sales will become less important and China will have less of an interest in financing U.S. consumption and less interest in supporting the US dollar.

Until tomorrow,

Bill Bonner
The Daily Reckoning

P.S. Today is the last day you can get the I.O.U.S.A. DVD, and its companion text - be sure and order before midnight tonight! Click here for the full scoop…

The Daily Reckoning PRESENTS: Today, we bring you another exclusive interview from the companion text to the documentary I.O.U.S.A., with Congressman Ron Paul. Read on…

AN INTERVIEW WITH RON PAUL
From the companion book to I.O.U.S.A.

Rep. Ron Paul (R-TX) has been shaking up the political arena since 1976, when he first ran for Congress as a proponent of free market economics and started railing against the Federal Reserve system. In 2007, Dr. Paul turned heads once again with his grassroots presidential campaign by breaking two fund-raising records: one for the largest single-day donation total among Republican candidates, and twice receiving the most money received via the Internet in a single day by any presidential candidate in history. 

Q: How did a very well-liked doctor find his way to Washington?

Ron Paul: In the early '70s, the breakdown of the monetary system excited me enough to want to speak out because I had been studying Austrian economics for a good many years, and there were a lot of predictions made about the inevitability of the breakdown of the Bretton Woods Agreement. When that happened in 1971, it confirmed my beliefs in what I had been reading, and in 1974, on a lark, I ran for Congress - and the following year I was elected in a special election. My main motivation in the early 1970s was to talk about economic policy from an Austrian viewpoint, and from the viewpoint of sound money and a Constitution that rejects the whole notion of the paper money system and the Federal Reserve System that we have today.

Q: Why is it that a family or a company has to stay on budget? They can't run deficits forever, otherwise they're going to end up in jail or living at home with their parents or something. Why is it that the government gets away with running deficits?

Ron Paul: Well, they do it because they have power, more power than they should have and certainly more power than the Constitution gives them. Our country was supposed to be designed not to have this type of authority, and we didn't have the authority to tax before 1913. But they spend too much because they have taxing authority, and it seems to be part of human nature that politicians like more authority. And a lot of them are motivated by good intentions; they always want to take care of people and manage their lives. Most politicians enjoy being somebody important, and the best way to do that is promise people something for nothing and not have to worry about really paying for it.

Today, if we had to pay for fighting this war and financing our welfare state, there would be a tax revolt in this country because it would cost so much. But they can delay this by borrowing, by inflating. That is literally just creating money out of thin air to pay the bills and delaying the payment. So the whole idea of these deficits we run up and the fact that we have a financial monetary system that helps encourage politicians to do exactly the wrong thing instead of working to limit the size of government and maximize individual liberty and maximize the marketplace… Politicians end up doing the opposite because they get rewarded. Most incumbents win by being errand boys, coming to Washington and delivering the goods. But my point over the years has been that eventually that system breaks down, and it's very, very dangerous and very harmful to everybody concerned.

Q: Have you ever met a parent or grandparent who has admitted to you that they wanted a better life for themselves than they wanted for their children? If not, then why are we doing that?

Ron Paul: Well, the children are starting to recognize that there's a tremendous burden placed on them and they will be taking care of those in retirement years. The old saying used to be that we always wanted a better life for our children, yet literally in the last 60, 70 years it's been reversed: that the young people finance those in retirement. And it's a mixed bag because a lot of people have paid into Social Security, and they make token payments for their medical care and they think that they're getting their own money back, but their money has already been spent. I've been finding out lately that a lot of young people are coming to the realization that they're getting stuck with the bill.

Q: Can you characterize what happened in the last six or seven years here in Washington? What would be the grade that you would give our current administration and current group of leaders in Washington?

Ron Paul: Financially, we're doing a lot worse than we were in 1999 or 2000. The deficits have exploded and we got involved in a war that has drained us because we're spending so much, and although Republican conservatives were in power, they never held back on passing more entitlements - whether they were education or medical entitlements.

But quite frankly, there was a lot of deception in 1999 and in the 1990s. Yes, the deficit during that decade was lower; we were never in the black, as they said, because we kept borrowing from our trust funds. So, although it looked a lot better, it really didn't solve the problem because government kept growing. It was almost deceptive in the sense that "uh-oh we're managing this, maybe the supply siders are right, maybe cutting taxes raises revenues and if we hold back a little bit, everything is gonna be okay." But I don't like that approach because even if you could make a tax rate at 10 percent and it increased the revenues to the government because the economy blossomed, I wouldn't be happy with that because I don't want the government to grow. Because eventually it'll get out of control, and when government gets big, individuals get minimized - they have less freedom. So I don't want to make it look easy for the government to spend money.

In those years where it looked like the deficit wasn't so big, it more or less lulled us to sleep and we said "Oh yeah, we can do these things." But it is true in the '90s we weren't quite as abusive with the budget because we didn't have a major war going on and the number of entitlements weren't being passed as they have been in this past six or seven years.

Q: Has it been hard to be here in Washington and watch what's happened financially to our country?

Ron Paul: Well I don't know whether hard is the right word, but it is aggravating. I never consider myself frustrated, because I came to Washington with full knowledge of how the system works. I know the system is bad, and I vote a certain way, I try to make the points on what's wrong. Everything that is happening, I've sort of expected, but it's still pretty annoying to find out that people don't respond to common sense, but hopefully they do before we have a tragic outcome like a financial or a dollar crisis. After that, the conditions are much tougher to come back with reforms, which we need, and we also need a different attitude about the role of government. We need an attitude that's different about what we are supposed to be doing overseas, as well as how we run this welfare state. And if we don't change our attitude then we're going to have an economic crisis, which surely could lead to a political crisis.

Q: You and former Fed Chairman Alan Greenspan have famously knocked heads over the years. Can you tell me a little about that? Why it is that you seemed to be at times the only person that seemed to be keeping a very close eye on the goings-on at the Federal Reserve?

Ron Paul: Alan Greenspan from '87 up to over a year ago was the Chairman of the Federal Reserve Board, the U.S. central bank. I see the central bank and the Federal Reserve System as unconstitutional in that they have this tremendous power and a monopoly control over money and credit, which is an ominous power. Greenspan, or any chairman of the Federal Reserve, is more powerful than even our president because he has so much control over the economy. But the interesting thing about Alan Greenspan was that he was a true believer in Austrian economics and in the gold standard. So in a private conversation I had with him I told him that I followed what he taught. In the 1960s he was very clear on his position on gold, that he liked gold and rejected the fiat monetary system, because if you have fiat money it leads to deficits and to the expansion of government - all of which he opposed.

So it's rather ironic that now that Dr. Greenspan accepts the paper monetary system (which is a fiat system). He literally was the participant in these deficits, and I would bring this up to him in the committee because the Federal Reserve Board's chairman always condemn deficits; it's always Congress's fault. But my point was Congress couldn't do it if they weren't complicit: If we don't want a tax and we can't borrow and then they have to print the money in order to accommodate the big spenders. If the Federal Reserve couldn't do that, interest rates would go up and there would be restrain on spending. So he literally became one who once believed in the restraints of the gold standard to one who was converted into becoming the Federal Reserve Board Chairman - the one that ran this whole system of fiat money and central economic control. I would chastise him quite frequently about how can he be for a free market when he endorses a system of central economic planning by controlling the money? And when you think about it, the monetary unit is used in every single transaction, so if you can control one half of every single transaction you have a lot of power, and a lot of control.

Q: There is a story you are asked to tell often, about having Alan Greenspan sign a copy of a book called Gold and Economic Freedom. What happened there?

Ron Paul: In the 1960s, I was studying and reading Austrian economics and I received the Objectivist newsletter that Ayn Rand put out. Alan Greenspan had a piece in the newsletter and it was a delightful article - it said all the things I believed in. One day, we had a personal meeting with Greenspan just to get our pictures taken and chat for a few minutes, and we knew that was coming up. So I dug out my original copy, and I took that with me, so when we were getting ready to get our picture, I flipped it open to his article and said, "Do you remember this?" and he said he did. Then I asked him to autograph it, so he got out his pen and he was signing it, and I said, "Do you want to write a disclaimer on this article?" He said, "No, I wouldn't do that. I just read this recently and I fully support everything I wrote." Which is interesting because you don't know exactly what he means. If he fully supports what he wrote, why was he managing a monetary system that was exactly opposite of what he wrote in 1966?

Q: David Walker says in his talks that he thinks we've lost our way, that the idea of what America was a long time ago and what it could be is somehow getting away from us. Is this something that rings true to you?

Ron Paul: Oh yeah, we've lost our way because the majority of people - certainly in Washington - really don't care about the Constitution. The Constitution restrains government power and enhances personal liberty. We've lost our way because we've given up on our faith and our conviction and our understanding how freedom works. We don't believe free markets will take care of people. Everybody has to have a safety net. Big businesses have a safety net, small businesses have a safety net, and poor people have safety nets. Medical care can't be delivered by the marketplace and housing has to be delivered by government, and they never look at the problems: whether there's going to be a housing bubble and whether medical care is not only getting too costly but it's not improving, and whether the military industrial complex takes over the system.

Now we've lost our way; we don't believe in what made America great, and that was individual liberty. We've become too dependent on government, and yet, in spite of all those negative things I've just said and how bad Washington is and how bad the financial system is, in my travels around the country I'm really encouraged. Because so many young people today understand this and they're getting information off the Internet and different sources.

So I think the undercurrent is very, very favorable and I think the next generation is not as tolerant for this acceptance of big government, and there's probably two reasons for that. I think they're attracted to the ideas and the principles of liberty, but also I think they sense that we have problems and they don't know how they're going to pay these huge debts and these entitlement burdens that are coming. They're sick and tired of the foreign policy, so in some way the problems are arousing a lot of people. As long as we do our job in spreading the ideas of freedom and emphasizing the rule of law and the restraint of government, there's reason to be hopeful.

Q: How would you characterize a generation of people who live beyond their means and pass that debt along to their children?

Ron Paul: I don't think people do it thinking, "Let's see, how many benefits can we get from government and stick it to the kid's tab?" But in a way, financially, it looks like that. But they can rationalize and say, "Well, I paid into these systems, I've been paying taxes, I just want to get some of my money back," not admitting the truth to themselves that all their money's been spent. I think it all came out of bad economic teaching of the Depression. In the early '30s when we had our Depression it was taught that capitalism and the gold standard caused all the problems, and therefore, you had to have government bailout programs and safety nets and they ushered in the whole age of welfarism, Social Security, and the government had to take care of us. At the same time, they had been taught ever since World War I that it is our obligation and responsibility morally to spread our values around the world. We have to have a war to spread democracy throughout. This whole generation accepted this but it was fallacious. It's based not on principles of liberty and self-reliance. It's based on the fact that, "well, we do need government to take care of us," and they never ask the question, you know, "Who's going to pay for it?"

We have dropped this moral constitutional approach to what we do, and yet a whole generation if not two or three have accepted this idea because we've been so wealthy and we're still doing pretty well on the surface. People seem to be doing pretty well. The tragedy is, it is all on borrowed money now. The finances are in such disastrous shape because we can't survive without borrowing $ 2.5 billion every day from overseas because of the current account deficit, and a country can't continue to do that. They can't continue to borrow from overseas and print money. They will come up short, and they can't just print the money - it just won't work. Eventually that ends up in big economic problems.

Q: Back in the mid-to late '90s, you were one of the only people who was blowing the whistle and speaking up against Dr. Greenspan and the Fed. What does it feel like personally to be out there on your own? Do you ever feel that you wish you weren't sometimes the only person in Washington to vote against the bill of "Let's save"?

Ron Paul: It is a lonely position, but I came with full knowledge that I expected to be in that situation, and I guess I looked always to the positive if I'm lonely here in Washington. When I leave Washington, I'm not quite so lonely. When I'm back in my district or talking around the country, all of a sudden there's a lot of support. There's a lot of grassroots support for my position about getting rid of the income tax and privatizing Social Security and letting the young people get out of it. There's a lot of support by a lot of people that understand the danger of a central bank, and they understand it when I say, "Let's just get rid of the central bank. We didn't have it before 1913, we don't have to have one." I make up for it by looking for allies outside of Washington, but I also have a nucleus of people here in the Congress who would, behind the scenes, agree with me, and a lot of times they'll say, "Well, I would vote with you more often, except I'd have more trouble explaining it back home." They are afraid that the conventional wisdom at home is such that it might hinder their reelection. But I have found that it's a political benefit to try to talk about these difficult issues.

Q: If we don't right this course that we're on, reel in the deficits, and address this ever-expanding spending, what do you fear could happen?

Ron Paul: Well, the worst thing is that the dollar's value is being eroded systematically every day, and that is since 1913. Since we've had the Federal Reserve, we have lost about 96 percent of the value of the dollar. If we don't course-correct, we're going to have a crash in the remaining value of the dollar, and you could lose it quickly. When a currency gets up to end stages, it goes quickly. A lot of people remember what happened in Germany when the German mark lost all its value. When that happens, there's runaway inflation, no controls, and economic breakdown. This usually invites a dictator - that's what helped usher Hitler into power. So many countries have bitten the dust through inflation, even in ancient times. They didn't have printing presses, but they would dilute the metal or clip the coins and deceive and steal from the people - things the government shouldn't be doing.

This is a very serious problem and the biggest reality that we have to come to grips with is that we can't afford to pay all these bills, and if we just pay for these bills by printing money, then we'll destroy the currency. And that will be a much, much more painful reaction than us just tightening our belts and living within our means.

Q: Would you say that monetary policy is largely a disincentive to save?

Ron Paul: This system discourages people from saving, because if the money loses value they can't keep up. So it's better they spend the money and get something of value, and borrow the money, and this is what has happened. Too many people depend on borrowing instead of savings. But if you didn't have a Federal Reserve System, it wouldn't work that way because somebody has to produce the credit and the funds in order for people to borrow, and for businesses to borrow - and they create that out of thin air.

But a negative savings rate is very, very detrimental. True capital comes from savings. You should have what you can earn over and above what you have to use to run your business or live on. This should be savings and that should be used to be loaned out to create more jobs and more wealth. But today, because the dollar loses its value, and then it if earns a little interest then we go ahead and tax people for the interest they've earned. So if in order to regenerate savings, you should have sound money, get rid of the devaluation of the currency and get rid of all taxes on savings, and then people would go back to savings again. At the same time, we should prohibit the Fed from creating money out of thin air.

Q: Do you see the housing bubble as somehow being tied to the lack of savings today?

Ron Paul: Alan Greenspan and I got into a little debate when I was complaining about no savings rate, and he says, "Yeah, but housing prices are going up, and therefore people have savings." I told him that he was getting savings confused with inflation, because as a consequence of inflation the nominal price of houses was going up, but that really isn't savings because as something like that can go up in price, it can also go down. And that's exactly what has happened. In the old days, when I bought my first house, I went to a savings and loan, and somebody put money in that bank and I borrowed it and I had to pay it back. That's basically the way a market should work: Somebody should put money in the bank and you should borrow it out.

Today, because we don't have any savings, we depend on the Fed, and the Fed creates too much money, lowers interest rates too much and then they create a bubble. How long has it been that many, many good economists have been predicting that the consequence that we're facing is the collapse of the housing bubble. When the markets finally realize how damaging this is and how pervasive it is and how it's going to affect all of our other markets, we're going to have a lot more unwinding to do and it's going to affect our whole economy, because housing is a significant part. I'm probably impressed that it hasn't stirred the markets up that much yet but I think in time this is going to be much more of an issue in the economy and on the financial markets than it is today.

Editor's Note: The above was taken from the companion book to the critically-acclaimed documentary I.O.U.S.A. Included in the book you'll find interviews from some of the most revered voices in the nation, including Warren Buffett; former Treasury Secretaries Paul O'Neill and Robert Rubin; Pete Peterson, CEO of The Blackstone Group; Congressman Ron Paul (R-Texas); and bestselling Empire of Debt author Bill Bonner. Defiantly non-partisan, the empowering solutions outlined in these pages are a must-read for any American who wants to help change "business-as-usual" in Washington as a new administration heads towards the Oval Office.

To get your copy, along with the I.O.U.S.A. DVD and a special "Emergency 'Personal Bailout' Bundle" click here.

-- Posted Tuesday, 4 November 2008 | Digg This Article