It's a set-up, dear reader

Bill Bonner
Provided as a courtesy of Agora Publishing
& The Daily Reckoning
Dec 10, 2010

Yes, we're back at home, after flying around the world. It was a good trip. No problems. No hassles. Everything went well.

What was the point?

"You know, my friends and relatives in the states still believe that the US is the greatest place in the world," explained an American in Melbourne, Australia. "They think the rest of the world is full of poor people who can't wait to emigrate to the US. They need to get out more."

So we get out. We open our eyes. We look around.

And what do we see?

We see a whole world full of people who are hustling and bustling... schlepping and bussing... each trying to gain an advantage, each looking for a way to get richer, faster.

The motivations all over the world are about the same. People generally want wealth, power and status. And they want to get it in the easiest possible way. But it can mean different things to different people, and they go about it differently too. In the mature economies, they look for subsidies and angles. Tax breaks. Bailouts. Boondoggles. Sinecures.

"We have plenty of corruption here in India, too," a colleague noted. "But most people know they can't get much from the government. They have no choice. They have to start a business or get a job."

Nothing stands still. A few years ago, the Russkies, the Indians and the Chinese were all very helpfully sitting on the sidelines. With their goofy theories and their counterproductive policies, they posed no competition. Americans found it easy to feel superior. Half the world had tied its hands behind its back.

But in the '70s and '80s, things began to change. "To get rich is glorious," said Deng Xiaoping. "Perestroika," said Gorbachev. And now they're all at it. Indians, Brazilians, Turks, Indonesians - they all have faster growth rates and much less debt than the developed countries. China and Turkey are both growing about 5 times faster than the US. India, Brazil and a dozen other countries aren't far behind.

The latest test scores show Chinese math students in Shanghai far ahead of Americans. And the latest reports tell us Chinese trains are setting records - at 300 mph.

Nothing is off limits. No industry is safe. Nobody can expect a free lunch forever.

In India, we rode in a Nano, the car Tata Motors is selling for $2,500. It was a little loud, but surprisingly spacious and comfortable. For getting around town, it seems perfectly adequate. And soon it will be available in the US. How will Detroit compete with these guys on the low end? And on the high end, there's plenty of competition too - from Japan and Germany.

"But wait... Germany is a mature economy too."

Well, yes, and no. Germany's factories and infrastructure were flattened in WWII. It had to rebuild from the bottom up. Its post-war government was completely new. Its currency just came out less than 10 years ago.

Besides that, a large piece of present-day Germany lived under the heel of the Soviets for 45 years. They had a close-hand look at what central planning can do to an economy.

America's government, meanwhile, has been in business since 1776. Its economy has been the biggest in the world for the last 110 years. It was the only major combatant in WWII to come out the other end with its wartime plant and equipment intact. It has had the world's richest people and the most gold for many years.

"Nothing fails like success," is one of our Daily Reckoning dicta. Will it fail now, or later? We don't know. But readers are urged to get out more, and draw their own conclusions.

And more thoughts...

The news yesterday was all about the tax deal. Did President Obama drop the ball completely? He was against extending the tax cuts. How come he caved in? Will he alienate his voter base?

Or did he just pull a fast one on the Republicans? The tax cuts/unemployment benefit extension deal is a kind of "stealth stimulus," say some commentators. It will stimulate the economy, with no need for another vote on Capitol Hill. The Tea Party people were dead set against any further stimulus. But there it is.

"Obama tax move lifts hopes for growth," says The Financial Times. It will even eliminate the need for more QE, said one hopeful commentator. The dollar will be stronger as a result.

Stocks went up 13 points on the Dow yesterday - nothing at all, in other words. But gold fell $25.

But so far, bonds are telling us a different story. Yields on the 10- year T-note are over 3% - at 6-month highs. The feds have pledged to buy more than $800 billion worth of government bonds. And still prices go down. Go figure.

What we figure is that investors are wary. At least a fair number of them must be thinking what we're thinking - that the authorities don't know what they're doing, that they are going to lose control of inflation, and/or that the economy is going to collapse despite all their stimuli and money printing.

The effect of the tax deal (assuming it is passed) will be to increase government spending and lower government revenues. That will produce a federal budget deficit, according to official sources, of more than 8%. Meanwhile, the states are looking at huge deficits of their own. With muni bonds falling, they will have a hard time raising more money and may be pushed into bankruptcy - roughly the same drama that is on the European stage.

While bonds fall, commodities soar.

"Investors pile into commodities," says The Wall Street Journal.

Hmmm... They must be worried about inflation, or maybe they're just speculating. It looks to us as though the feds are creating yet another bubble.

It's a set-up, dear reader. Watch out for commodities and stocks. And oh yes, watch out for bonds too.

*** Except for the very old, Americans have generally lived pretty easy, comfortable, safe, and prosperous lives.

"That's why this downturn will be worse than the Great Depression," says a particularly gloomy friend. "Americans are not prepared for adversity. During the Great Depression, most people still lived on farms. They heated their houses with wood they cut themselves. They grew their own vegetables. They canned their own fruit. They raised their own hogs. They knew how to survive.

"That's not true today. We don't know what would happen in a major crisis. But people are not ready for it. They depend on the system, the cash machines and grocery stores, and the unemployment compensation and food stamps. I don't think they could stand it if theses things break down."

Regards,

###

source: http://www.dailyreckoning.com.au/worlds-apart-a-firsthand-look-at-emerging-market-growth/2010/12/10/

Bill Bonner
email: DR@dailyreckoning.com
website: The Daily Reckoning

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