bubble trouble ???

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    "Pilgrim, Prepare Thyself

    The Daily Reckoning

    Ouzilly, France

    Monday, 18 August 2003


    *** The bubbles continue - big one forming in China!

    *** Money supply up big time... Dow steady... bonds

    *** Vacations... and more... including - Mogambo on Monday!


    "Unsustainable," say economists.

    "Bubble," say the sourpusses.

    "Buy," say the lumpeninvestoriat.

    The average investor cannot bear an opportunity to lose
    money. He looks at a bubble like a starving cannibal at a
    fat tourist. The rest of us look on, too, not knowing
    whether to be appalled or amused.

    "Housing prices hit a record in July," reports the LA

    "House sales hit record in July," comes the news from
    Toronto's Globe & Mail.

    "Shanghai property prices soar," says a source from China.
    Apartments rose 18% during the first 7 months of the year,
    with their sharpest increase in July, our source continues.
    In the best neighborhoods, the annual rate of increase is
    running at 172%.

    Bu... bu... bu... bubble!?

    The Dollar Standard has had its effect all over the world.
    The flood of dollars first blew up the bubble in Japan in
    the 1980s... and then bubbles in Thailand... and Malaysia in
    the early '90s... and then in the U.S. stock market in the
    late '90s... and now in real estate... and especially,
    Chinese real estate.

    These events seemed almost unrelated at first. But now, the
    pattern is becoming more obvious. The Dollar Standard
    allows Americans to spend more than they can afford.
    Foreign nations, seeing their opportunity, hustle to get a
    piece of the action. Before long, they are selling more to
    the U.S. than they buy from her. They are left with dollars
    in their pockets. What can they do with them? Build more
    factories! Buy more stocks! Lend, borrow, spend!

    The resulting boom attracts more and more capital from
    overseas and gathers momentum until it has turned into a
    bulging bubble... which, sooner or later, blows up.

    Why don't the bubbles stop? Because the source of them is
    still gushing up more and more dollars. And now the world
    economy depends on them. China, for example, has gotten in
    the habit of selling to Americans... who pay in
    dollars... which it then uses to build more factories, pay
    more workers... and buy more U.S. Treasury bonds. And when
    this peculiar economic arrangement comes to an end, most of
    the world will go into a gloomy secular
    recession/depression - much like what Japan has been
    through over the last 13 years. No politician or central
    banker wants that to happen... so they fight it with
    everything they've got. And all they really have is - guess
    what? - more dollars. To a world suffering from too many
    dollars and too much credit, they come with more!

    In the week of August 4th, the U.S. money supply, as
    measured by M3, went up by $50 billion dollars. We had to
    rub our eyes when we saw the figure - we could scarcely
    believe it. But there it was... more evidence that if the
    world economy does sink into deflation, it won't be for
    lack of effort on the Fed's part.

    Which is not to say that the Fed will avoid deflation.

    Inflation begets deflation, we remind you. By inflating the
    world economy with dollars, the Fed has created huge debt
    and huge capacity. Sooner or later, prices fall... for there
    is just so much stuff people can afford to buy.

    The Fed, aided and abetted by the credit industry, tries to
    keep people buying with lower interest rates... and ever- looser credit policies (we read in the paper that interest- only mortgages are becoming common... and that the average
    automobile is financed for more than 4 years) but this too
    begets its own perverse reward. The debt bubble must
    deflate, just like all the rest of the Fed's bubbles. When
    interest rates rise - as they have begun to do - the burden
    of debt becomes heavier and consumers must cut back their
    spending and pay down their debt. Many people will not be
    able to pay their debts; they will default, causing further
    default and bankruptcies up and down the credit chain.

    As we said, this pattern is now becoming unmistakable -
    even to economists. But inside this Devil's Brew is the
    wild and mysterious dollar itself. How long will people
    accept these pieces of paper as though they were real
    money? How far down will it go? What will happen to the
    world financial system when its reserve currency collapses? "
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