Whoever controls the gold market positions himself first in the gold shares

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From The Daily Reckoning
DailyReckoning.com
Thursday, February 17, 2005

The force of a correction is directly proportional to the deception
that preceded it.

We repeat our dictum for no apparent reason. We just like the sound
of it. You may quote it any time you like, dear reader.

As a practical formula, it does little to help us. We still do not
know when or how the correction will come. And, to borrow a phrase
from Lord Keynes, the deception can last a lot longer than you can
remain solvent betting against it. And yet, it is even more
dangerous to bet on it.

The source of the proximate deception is the U.S. Federal Reserve,
America's own, dear central bank. Setting its key-lending rate below
the current "inflation" rate, the Fed misled almost everyone.

Yesterday, the Great Deceiver himself, Alan Greenspan, appeared
before the U.S. Senate and dissembled.

"The economy seems to have entered 2005 expanding at a reasonably
good pace, with inflation and inflation expectations well anchored,"
he told the nodding heads on the Senate Banking Committee. "The
evidence broadly supports the view that economic fundamentals have
steadied."

As to the mystery of why long-dated bond yields have failed to
increase, the free world's leading financial expert said he had no
idea: "For the moment, the broadly unanticipated behavior of world
bond markets remains a conundrum."

The dollar fell on the news, the euro rising above $1.30.

We are not going to criticize the maestro this morning. You must be
getting as tired of it as we, dear reader. But we are connoisseurs
of absurdity here at The Daily Reckoning and we can't help but
appreciate a good vintage. And Mr. Alan Greenspan must be the 1986
Petrus of economists - the most absurd of all. For on the very same
news, Mr. Greenspan had only to read the headlines to see that
inflation was far from "anchored." Instead, inflation and inflation
expectations - notably in the housing market - were under full sail
in hurricane-force winds.

"January housing starts at 21-year high," said one headline.

"8-figure homes sales soar," added CNN.

"No Stopping Housing Boom," concluded TheStreet.com.

The cost of housing, in many areas of the country, is not just
inflating -- it is puffing up like a front-seat air bag. As reported
here yesterday, in Alan Greenspan's hometown, prices are rising six
times faster than GDP growth. Buyers are not looking for a place to
live; they are speculating -- betting that their neighbor, the Fed
chairman, will continue giving away enough money to make them rich.

There was little movement in major markets yesterday. The Dow, gold,
bonds, and the dollar -- all ended the day not far from where they
began it. So, we stop, draw breath, and wonder.

As Alan Greenspan raises short rates, the gap between short rates
and long ones narrows. The financial industry -- which is the
leading source of profits and economic expansion in America today --
is squeezed. It typically makes money by borrowing at low short
rates and lending at higher ones long-term. If long rates sink and
short ones rise, the trade is out of business. This is normally when
a recession begins. Mr. Greenspan knows that just as well as we do.
But Greenspan needn't keep the deception going forever, just until
next January, when he steps down from the Fed.

Whatever happens after is someone else's fault.

What kind of correction will it be? We have guessed that it will be
long, slow, and soft, like a lazy snake. But what do we know?

And yet the deception is so large, we wonder how it could ever be
fully corrected. We speak not merely of Mr. Greenspan's perjury
before Congress but of the larger deception, in which Mr. Greenspan
plays a leading role, but not the only one.

The promise of American capitalism is that it makes people richer,
freer and more independent. But since the introduction of the Fed,
the currency in which Americans keep score has so addled the
figures, we scarcely know if we are winning or losing. The dollar we
knew as a child -- in the 1950s -- is only worth a tenth as much
today. The average household today has far more of them than we did.
But it also has far more debts on the other side of the ledger.

Their house is worth more dollars, for example, but it owes more
dollars on it. Mortgage debt has doubled since 1996.

Real wages, on the other hand, have barely budged. People also tend
to owe a lot of money on their cars. And today, online, we were
asked if we wanted to mortgage our house to pay for college tuition.
How many people do that? Statistically, quite a few.

While there are many people who have accumulated a pile of real
money, savings, and wealth, there are many more people who have
nothing at all. They have been gradually, and silently, ruined. They
have more gadgets and better cars, but they own only a few rooms of
their houses ... and their bank accounts are empty. Every week is a
race to keep up with credit card bills, mortgage and auto payments,
taxes, tuition and health care expenses.

Socrates despised democracy. Most people are fools, he said. So
anything approved by the majority was bound to be foolish. Is it any
wonder America's majority insists on more health care benefits ...
more Social Security benefits...more this and more that? The poor
stiffs live hand to mouth; they've shackled themselves with chains
of debt. Now they're dependent on handouts from the government and
low lending rates from the central bank.

And so, the absurdity darkens. The Fed provides the credit --
misleading them further into debt and dependence. And the feds
provide the bread and pubic circuses, which cost more money. In
addition to their private debts, Americans are now on the hook, one
way or another, for their share of America's vast public debt.

The present value of federal-level unfunded liabilities is said to
be about $55 trillion. That's about half a million dollars per
household.

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