Welcome to 21st Century Hell…

Stocks caught a break yesterday. The Dow rose 429 points. Gold rose $29.

Interestingly…or even suspiciously…the stock market still seemed to be in sell mode after the Fed announced it would keep rates low into 2013. Then, it rose.

It reminded us of the “plunge protection team,” a group supposedly set up by the Clinton Administration to counter big drops in the stop market. Whether there ever was such a group or not, we don’t know. But there is no doubt the feds were greatly relieved to see stocks going back up yesterday.

There was also no doubt that stocks were ready for a bounce. ‘Even a dead cat bounces,’ as they say on the street. And we noticed many financial services urging readers to buy. They said it was a great opportunity to get shares at “bargain” prices. “Just like 2008!”

But it doesn’t look like 2008 to us. And stocks don’t look like bargains.

With the Dow over 11,000 we need about 2 more weeks of 500-point daily drops – about 5,000 points further down — to get prices down to real bargain levels. And if we had a free market, we might have had them already. Instead, the feds are always stepping in…meddling…intervening…promising bailouts, lower rates, QEs, and other stimulus measures. As a result, investors have been programmed by half a century of experience that it doesn’t pay to “fight the Fed” or to “bet against America.”

But history has not come to a stop. And central planning doesn’t work any better for the US than it did for the Soviet Union. All the feds have really done, over the last half a century, was to aggravate the problem. Every time the growth of credit slowed…the feds made it easier to borrow. Now we have so much debt that households can’t spend…corporations are hoarding cash…and the governments’ own credit rating has been marked down.

Where does this lead? We’ve already told you. It leads to 21st century Hell…

Now, debt levels are so high in the US – gross, official government debt passed 100% of GDP last week – that it now weighs heavily on growth. Instead of growing at 3% annually, the US is barely growing at all.

So, the feds can’t get out the easy way. That is, they can’t cool spending for a while and let the economy ‘grow its way out of debt.’ Too much debt already.

And the economy can’t stomach the kind of austerity that would be required to get debt down to acceptable levels. We see what is happening in England. Riots in the streets. It would probably be worse in America. First, because the private sector is already in a deep correction; additional austerity from the government would push it into a depression. Second, because the US is running an empire…and empires are expensive. A week or so ago, we underestimated the cost of the imperial agenda. We said it was $1.2 trillion per year. It’s actually more like $1.8 trillion. It’s more than half total US spending, says our new Daily Reckoning correspondent in China, Dee Woo. The defense budget may be only $700 billion or so. But add in the military parts of other budgets – including homeland security, veterans’ benefits, foreign aid, active overseas wars, and the interest on the portion of the debt attributable to the military – and you get 54% of spending.

It may be significant that Dee Woo, or “Woody” as we call him, would point this out to us. He is writing not for US readers…but for Chinese readers. He is showing the Middle Kingdom both how much the US spends on it empire…and how fat and dysfunctional it has become.

Each empire is replaced by its major creditor. We don’t know if that’s true. But we like the sound of it. The US was Great Britain’s major creditor. Now, China holds more US paper dollars and debt than anyone.

Russia is in the news, calling the US a “parasite” for hogging the world’s credit and resources. China calls on the US to act responsibly, in order to protect China’s cache of dollars.

The Soviets had to give up their challenge to the US because they couldn’t match America’s military spending. China won’t even try. Instead, China will challenge the US empire in another way. It will use America’s spending against it… by introducing low-cost, high tech alternatives, and letting the US choke on its own excess debt. More on that…below…

Meanwhile, back in the USA itself… the gap between rich and everybody else grows wider. Shopping data from July showed a healthy 5% increase. But looked at more carefully, the numbers reveal “two Americas.” Sales at Saks, for example, shot up more than 15%. Bloomingdales’ and other upper-end marketers seem to be doing fine. But the bottom 75% of shoppers are living their own version of 21st Century Hell. They cannot spend more money. Prices are rising while incomes are not. This leaves most shoppers spending about the same amount, but getting less for it.

Gasoline, for example, costs the nation about $10.9 billion more this year than it did the last. That money has to come from somewhere. And since a rich person drives about the same number of miles as a poor person, it costs the many a lot more than it does the few.

And more thoughts…

All that talk about the debt ceiling may have left you with the impression that the feds are finally getting serious about cutting spending. They’ve set up a Super Congress, that will come to terms with the budget – or else!

Or else – supposedly – automatic axes will fall on the military. Yes, dear reader, the system is set up so that if the pols can’t get their act together America’s national defense will be put in jeopardy.

And if you believe that…we have a gold mine we’d like to offer you!

The first thing to understand about the debt deal is that it didn’t cut any debt. It’s supposed to hack off nearly a trillion in debt over the next decade. But that is unlikely.

As Congressman Ron Paul points out, the “Super Congress” is just a way for the real congress to shirk its responsibility. It is also a convenient way for lobbyists to focus their efforts…and for members of the super-committee to bring in more campaign contributions.

What is it unlikely to do is either cut real debt itself…or allow any sort of automatic system to cut it. Instead, it will move the “baseline” around, so that it can appear to cut debt without actually cutting anything.

*** And don’t worry about the Pentagon. It has more lobbyists than anyone. There is no way they are going to roll over. Already, their team is at work…making the public think its safety is risk.

…the Dreaded “Doomsday Mechanism”

Defense Budget Hysteria and Business as Usual – or Reform?By Winslow T. Wheeler

The rhetoric of people rushing to rescue Pentagon spending from “completely unacceptable” cuts is quite hysterical. Leading the chorus has been Secretary of Defense Leon Panetta. He termed the possible defense budget cuts (about $850 billion over 10 years according to most) a “doomsday mechanism,” if the automatic sequestration trigger of Obama’s debt deal with the Republicans in Congress is pulled. Some think tank types, opining in the Washington Post and the New York Times, have deemed these reductions “indiscriminately hacking away” at the Pentagon’s budget and something that could “imperil America’s national security.” Their defense spending allies, including multiple generals and admirals sitting atop various Pentagon bureaucracies, confirm it all with descriptions like “very high risk” and “draconian.”

Some factual perspective puts the brown paper bag around this hot air. As analyst Harrison also informs us, the “doomsday mechanism” would reduce the Pentagon’s “base” (non-war) budget to about $472 billion, the approximate level of the base DOD budget in 2007. I do not recall anyone declaring our national security being “imperiled” at that spending level in 2007. In fact, that level of spending for the “base” (non-war) Pentagon budget was a sixteen year high – calculated using “constant” Defense Department dollars intended to compensate for inflation. Not exactly the result of “hacking away.”

If returned to the $472 billion 2007 level, the base DOD budget would be $73 billion higher than it was in 2000, the year before our various interventions started to occur. If spending were to be continued at the $472 billion level for the next 10 years, base Defense Department spending would be three quarters of a trillion dollars above the levels extant in 2000. And, not a penny of the additional monies to be spent on the wars would be eliminated.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.