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Naturally, Krugman disagrees with us completely. Which puts our mind at ease.
Beijing, ChinaWe just stepped off the plane... We'll have to catch our breath and open our eyes before we have anything to say about China...In the meantime, let's look back at what is happening in Europe and America. FREE investment emailSign up to receive The Daily Reckoning here... And we will begin by thanking Paul Krugman, economiste ordinaire at the New York Times.Sometimes, in the dark of night, we are haunted by demons of doubt and worry. Especially when we're alone. And far from home.Maybe we're wrong. Maybe we're leading thousands of loyal Dear Readers astray. Maybe the Great Correction isn't what we think it is. Maybe deficits are good. And maybe the US will never run itself into the Greek-style yoghurt.What a relief it was to find Krugman in yesterday's International Herald Tribune! Naturally, Krugman disagrees with us completely. Which puts our mind at ease. If Krugman agreed with us, we'd have to re-think out position."America is not Greece," he says. So far, so good. His geography is correct.It is all downhill from there.Krugman won a Nobel Prize for his early work. Which makes us wonder about the Nobel committee.The US is running about the same size deficit as Greece; but don't focus on that, says Krugman. The two places are not the same, he insists. Because the US has a "much lower debt level".He's wrong about that. If you add to the US national debt the debts of Fannie Mae, GM and all the other financial holes which the government will ultimately have to fill, the crater is about 120% of GDP "“ the same as Greece's debt."Even more important," he writes, "is that we have a clear path to economic recovery."Oh. Where's that? As near as we can tell, the path is twisty, poorly lighted and full of lethal obstacles.The number of people relying on the US government for food is now equal to the entire population of Spain. There are about as many people unemployed as the entire population of the Netherlands. And there are as many people who have gotten negligible income gains as... well... the entire population of America.Without more income, how can Americans increase spending? Without more spending, how can the economy really grow?The government can do the spending! Well, good luck with that. Already, the return on additional borrowing in the private sector is so marginal that banks are generally unwilling to lend.And the return on government debt? It looks like a positive return, at first. People spend transfer payments just like any other money. Economists like Krugman can't tell the difference. But government spending generally produces negative real growth.Nevertheless, Krugman explains that IF the economy improves... and IF the administration cuts deficits... and IF the new health care programme doesn't cost more than the Obama team says it will"¦ heck... everything will work out just fine! With a few tax increases, of course.Then, he tells us that, yes, over the long run we're going to hell in a handcart. But that can problem can be solved by a "combination of health care reform and other measures".Finally, he's right about something. Enough "?other measures' and you've got the problem licked.What other measures? Well, the deficit is now at about 10% of GDP. So, all you've got to do is to cut spending by 11% of GDP and you've got a surplus. Let's see, where are we going to cut $1.4 trillion dollars? That's cutting out 100% of the defense budget. And 100% of Social Security too.And if you don't do that... you get more deficits. And if you get more deficits, you end up with more debt. And if you keep adding debt faster than real GDP growth, you eventually get to the point where the markets cannot or will not finance it. And then you're Greece.What is likely to happen is that yields will stay low enough for long enough to make people think Krugman knows what he is talking about. They'll think that the US can borrow as much as it wants for as long as it wants... FREE investment emailSign up to receive The Daily Reckoning here... In the Washington Post, economist James Galbraith is already a believer. He argues that the chance of getting into a Greek-style jamb is "zero". He says deficits don't lead to trouble. The US has been running deficits since the "?70s, he points out.And look at the Japanese, he adds. They've been running huge deficits (fiscal stimulus) since their economy slipped up in 1989. And they're still able to borrow at practically zero interest.Makes you wonder how Greece got into trouble. It ran plenty of stimulating deficits. Then again, everything was all right in Greece until it wasn't.A man jumped off the 65 th floor of a skyscraper. As he went by the 11 th floor, the secretaries heard him remark:"All right so far."The US is all right so far. So is Japan.More news...*** A dirty secret that makes the sub-prime collapse look like a tea party...You may have missed this the other day. But actually, that's OK. Today is even better.That's because today we can join the dots even better for you. We're tying in the idea with a deeper report that will allow you to profit from this unfolding story again and again in the months ahead"¦What we're talking about here is a coming debt disaster that's BIGGER than the sub-prime meltdown of 2007-2009 "“ and a way that DR readers (and anyone else you manages to pick up on this) can cash in"¦ on plunging bank stock prices.What's better is that you can get in on this before it hits the mainstream.Here's what you may have missed. It's a recap from last Wednesday's DR"¦US banks are on the brink over another meltdown, says the increasingly bearish Riccardo Marzi, the brains behind our London team's "trade anything that moves (up or down)" service, Events Trader.That means Riccardo is getting his profit-hungry readers ready for an outright short-selling frenzy. Call it a feast for bear raiders. All we know is that Riccardo's licking his lips.In his latest note to readers, Riccardo wrote"¦"The stock market has rallied hard for 12 months. And with most economies emerging from recession, the toxic debt problems that sent the global banking system into meltdown seem a distant nightmare."It won't stay that way for long. There is a major black cloud hanging over British and American banks. In the easy credit years before the meltdown, banks did huge business lending to dodgy property tycoons and financing new office blocks, warehouses and shopping malls."And those properties have been sitting empty for a long time now. In the US, commercial property values are still down about 40% since the 2007 peak. And about 18% of all office space is now sitting vacant."More than $1.4 trillion of loans secured by commercial properties will need to be refinanced between 2011 and 2014. And there are over £300bn outstanding in Britain. If you compare it with subprime mortgages, which totalled something in the region of $300bn, you begin to recognise the scale of the problem."Without a major recovery in the commercial property market soon, a lot of US banks will end up with a huge burden of failed debt on their balance sheets. Many will go bust."Riccardo believes hundreds of banks are about to hit the wall. Most of these dodgy commercial loans are, as he puts it, "rotting on the balance sheets of small and medium sized US banks. These are the ones who were not sophisticated enough to have investment banking divisions to trade their way out of trouble"¦"This story could play out for months "“ years even "“ starting any day soon. Riccardo is setting his readers up to pick off these banks one by one, or perhaps in batches, as the bad loans blow up and the banks share prices plunge.And starting today, Daily Reckoning readers can position themselves to play this too.Riccardo will reveal the first "target" to readers of Events Trader soon.Access Riccardo's new in-depth report on the incredible opportunity in "CP Debt" now. You can find out more about Events Trader today and get in line for his bank "short-selling frenzy", by visiting his website "“ the link you need is right here:"What happens if £517bn of dirty "?CP debt' forces our banks to collapse overnight?"WARNING: If you're against making money from other people's misery, this isn't for you. Riccardo is actively seeking out opportunities to profit from FALLING share prices. So while shareholders are losing money, you could be making it.If you're OK with that, check out Events Trader. You'll gain access to the specifics of all Riccardo's current trades. I guarantee you won't have seen a service like it.Click here: Events TraderEvents Trader is a regulated product issued by MoneyWeek ltd. Forecasts are not a reliable indicator of future results. Commissions, fees and other charges can reduce returns from investments. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek advice if necessary. 0207 633 3780.*** What drives a man to sack all his financial advisors and go it alone?We've been getting to know more about Simon Caufield. It's easy to see what made him angry about the fund management business. (To be honest, it should be nothing new to DR readers"¦ what might be new to you is how he deals with it.)"All told I lost £300,000 in the "tech wreck," Caufield explains about his experience of the dotcom crash of 2001.His money was being looked after by brokers who kept telling him to own hot tech stocks"¦ and never told him that the market might be overheating.When a large chunk of his capital was wiped out in the bust, his trust in his money managers was destroyed.In May 2007, Simon took drastic action"¦He realized that at the wrong side of 40, he just didn't have time to leave his money to be managed by a bunch of idiots who really had no interest in his future. He needed to protect his future "“ and start making money."I sold my stake in a very successful financial consulting business"¦ sacked my fund managers, my investment advisors"¦ and took my entire pension pot into my own hands."Now he manages his own money "“ with remarkable success. He's made over £300,000 using his own, unique "?pension plan', in three years. That's 15% a year.If your retirement fund is lagging, check out Simon's 15% Pension Fund "“ more details soon"¦And more thoughts...*** Deep Do-Do Horizon"¦"Following the Gulf disaster... it will be a long time before any new permits are issued for drilling for oil in the Gulf..." said Rick Rule, at the Family Office get-together this weekend.[Editor's note: Meanwhile, there's an oil frenzy in the South Atlantic. When one oil exploration company struck oil there two weeks ago, its shares shot up more than five times.But there's another company that one of our oil specialists believes could make DR readers more that 17,000% gains. That's 18,000 times your investment. Sounds ridiculous, we know. But these projections have legs "“ and the analysis is compelling. Take a look for yourself:STRIKE! Falkland discovery sparks 60bn barrel OIL SCRAMBLE!!The Bulford Files is a regulated product issued by MoneyWeek ltd. Forecasts are not a reliable indicator of future results. Commissions, fees and other charges can reduce returns from investments. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek advice if necessary. 0207 633 3780.And this from Bloomberg:"Senators from California, Oregon and Washington introduced legislation to ban oil drilling off the West Coast amid mounting concern about the spill in the Gulf of Mexico.""?We believe that offshore oil drilling is simply not worth the risk,' Senator Dianne Feinstein, a Democrat of California, told reporters today in Washington."The measure would amend the Outer Continental Shelf Lands Act to impose a permanent ban on drilling off the three states."Offshore drilling was banned for decades after a 1969 spill about five miles off the Santa Barbara coast soaked California beaches in a 35-mile long oil slick. In July 2008, then-President George W Bush lifted the presidential moratorium. Congress allowed its own drilling ban to expire three months later.""This oil spill could destroy the future of offshore drilling," adds our Family Office researcher, Charles Delvalle."More states will be allowed to decide whether they want drilling offshore or not. And senators are trying to allow neighbouring states to have a "?veto' over any one state's offshore drilling decision."So let's say Florida wanted to put some offshore rigs up close to Georgia. If Georgia doesn't want that rig up, it can "?veto' Florida's decision."Daily Reckoning readers can see where this is going. Even if the oil were available beneath the sea, the oil industry is going to have more and more trouble bringing it to market.Rick notes that even on dry land, the oil industry is facing disasters. A number of major exporters "“ Mexico, Iran, Venezuela and Peru "“ could take themselves out of the export business in the next few years, he says, thanks to their habit of using oil revenues for social/political purposes and failing to invest in additional capacity.This is occurring as the number of cars "“ and the demand for energy "“ is exploding.Implication: a higher oil price."There's plenty of $200 oil," said Rick.Trouble is, there isn't that much $70 oil.Until tomorrow,Bill BonnerFor The Daily Reckoning FREE investment emailSign up to receive The Daily Reckoning here...
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