--There is no shortage of productive capacity, that's for sure. But that could be problem, especially for China. All those goods with no place to call home came from factories. Many of those factories were (and still are) in China. And the Chinese working in those factories-many of whom moved off the farm and into the city-are not especially happy with the current state of affaris.

--And we are not talking a small number of people here. We are talking an entire Australia of workers who migrated to find urban factory work. Many have now returned from the Chinese New Year Holiday, only to find out they don't have a job.

--There is this from today's Asian Wall Street Journal: Chen Xiwen, who heads the Chinese Communist Party's office on rural policy, said Monday that about 20 million migrant workers -- nearly a sixth of the total -- lost their jobs in recent months. That number, the first official estimate, underscores the government's challenge in maintaining employment and avoiding unrest.

--"For those migrant workers who have lost their jobs, what are they going to do for income when they return to their village? How are they going to manage? This is a new factor affecting social stability this year," Mr. Chen said at a news conference in Beijing.

--You can say that again. The Far Eastern Economic Review calls it, "The Coming Crack Up of the China Model." More on the origins of that phrase "Crack Up" in a moment. But what is the China model? It's the model that keeps the Chinese currency artificially cheep against the U.S. dollar in order to give Chinese manufacturers-already armed with a distinct advantage in low-cost labour-a global competitive edge.

--It worked, at least in the sense that Chinese manufacturing boomed in the last ten years. But the model also failed to produce substantial real wage growth for Chinese workers. This wage growth, and the expansion of consumer credit, would allow domestic demand to generate more economic growth in China that exports alone.

--What's more, if and when China ever allowed its currency to appreciate against the U.S. dollar, it would instantly increase domestic purchasing power. It would also instantly wipe out a good deal of the value of China's massive U.S. Treasury bonds and dollar-denominated reserves. This is what's known as a "pickle."

--Take a huge contraction in global trade. Add one part corruption. And two parts growing income inequality. Mix together vigorously and what do you get? Political instability.

-- "Violent unrest rocks China as crisis hits," again reports the Times. "In the southern province of Guangdong, three jobless men detonated a bomb in a business travellers' hotel in the commercial city of Foshan to extort money from the management. On January 15 there were pitched battles at a textile factory in the nearby city of Dongguan between striking workers and security guards."

--"On January 16, about 100 auxiliary security officers, known in Chinese as Bao An, staged a street protest after they were sacked by a state-owned firm in Shenzhen, a boom town adjoining Hong Kong. About 1,000 teachers confronted police on the streets of Yangjiang on January 5, demanding their wages from the local authorities."

--"In one sample week in late December, 2,000 workers at a Singapore-owned firm in Shanghai held a wage protest and thousands of farmers staged 12 days of mass demonstrations over economic problems outside the city. All along the coast, angry workers besieged labour offices and government buildings after dozens of factories closed their doors without paying wages and their owners went back to Hong Kong, Taiwan or South Korea."

--In the West, a dysfunctional financial system with many major banks insolvent. In the East, a dysfunctional economic model whose breakdown is leading to mass unemployment and social instability. And here in Australia?

--Well, yesterday the government said the fall in revenues from the global black swan dive will lead to a $115 billion decline in government tax takings (what the government likes to call revenue). That's a pretty big hole in the budget. It suggests that we've entered an era of regular government budget deficits and, if the RBA holds to form, lower interest rates.

--These lower rates, and not just in Australia mind you, represent the coming devaluation of paper money against real goods. We wrote about this in the January issue of Diggers and Drillers. And in today's essay section, you can read about what the devaluation means for one particular tangible good, namely gold. The Swarm Trader Gabriel Andre shows you the inter-market relationship between the Aussie dollar, the U.S. dollar, and gold. Check the essay section below.

--The phrase "crack-up boom" first appears, as far as we can tell, on page 427 of Human Action, by the great Australian economist Ludwig von Mises. Mises was writing about how changing expectations for purchasing power eventually affect people's real-world economic decisions. Once people see trillions in new money coming down the pipeline, they flee for higher, firmer ground.

--"Once public opinion is convinced that the increase in the quantity of money will continue and never come to an end," he writes, "and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size."

--"For under these circumstances the regular costs incurred by holding cash are increased by the losses caused by the progressive fall in purchasing power. The advantage of holding cash must be paid for by sacrifices which are deemed unreasonably burdensome. This phenomenon was, in the great European inflations of the 'twenties, called flight into real goods (Flucht in die Sachwerte) or crack-up boom (Katastrophenhausse)."

--It may seem odd to ring the alarm about an inflationary crack-up boom at just the time when policy makers are publicly fretting about deflation. But deflation as such is not the bogeyman. You can have deflation when you have a constant money supply coupled with increases in productivity. Prices fall.

--The deflation in asset markets, on the other hand, is what policy makers are worried about. But as Doug Noland points out in a must read update at PrudentBear.com, the "deflation" in financial assets is itself a result of a system of Wall Street Finance that is now in tatters and failed to produce anything of real economic value.

--"The financial sector is a black hole right now," Doug writes. "With myriad assets Bubbles having burst, there is an enormous amount of debt today insufficiently backed by asset values. At the same time, there is a tremendous amount of debt backed by households, businesses, municipalities and our federal government. In terminology I have used in the past, the Credit Bubble has left both the Financial Sphere and the Economic Sphere grossly inflated. Total system debt has been severely impaired."

--"There is very real risk at this point that policymaking is about to set course for bankrupting the country," Doug continues. "The pundits are out there suggesting trillion dollar economic stimulus; trillions for the banks; hundreds of billions to support the securitization markets; and hundreds of billions more for households, businesses, and municipalities. There is a current need for 'Trillions' and future needs for 'Trillions' more. Once the Trillions start to flow there will be no easy way to end them."

--We have on our hands a financial system that has used cheap credit and leverage to erect a systemically destabilising class of financial assets backed by debt. Our policy makers are trying to safe that system through a policy of deliberate inflation. And in the meantime, they are blaming "extreme capitalism," when the real culprit is perverted capitalism with its theory of unsound fiat money.


--But we won't get into that again today. How about some reader mail? We only have time for one, because it is so long. But as soon as we read it last night, we knew we had to reprint it.

--I need to say to you the following about your ideas as expressed in today's article re Rudd's opinions about the capitalist system.

Your ideological opinions are not superior or inferior to any other ideologue. They are simply different.

The world needs different opinions and ideas to become a better place. The capitalist ideas have prevailed over a very long time and the result is many minor failures as well as catastrophic failures the likes of those in the 1929/30 and the one we are experiencing today. As well as many positive other outcomes.

If one considers the economy to be a an airplane in flight that fails every about 60 years or so one would attempt to address such failures and to prevent them at any cost. What Rudd is telling us is exactly that. We need to refine the capitalist system to prevent catastrophic consequences. This will be at some cost and the balance between gains and losses is our challenge. There is no sense in having responsibility without accountability. Accountability is about risk prevention.

The dog eat dog mentality of extreme capitalism is more dangerous and immoral than any Marxist ideal that any one can present. It is a fact that extremism is anti progressive and antihumanistic. Extreme capitalism is no better in any way than extreme socialism, but, a blend of both worlds is the best for humanity.

The gaff you have presented in your article are extreme ideological here say garbage without any relevance to logic or wisdom.

How can an audience take you seriously when such a blatant disregard for sound judgement is presented by you.

So get your act together stay with commentary on financial issues that are moral and within the law. You are not qualified to make commentary on ideological connections that are too far removed from human principles of fairness, social responsibility, the greatest good for the greatest number and meaningful support for diversity of ideas.

I have read the book suggested "Mobs messiahs and the market". The book presents ideas of a distorted mind which has no basis on the scientific rationality and no sense of balance between human contributions and human failures. One should read about the fundamental mind set of a paranoid person first before reading this book in order to calibrate its worthiness in a world that is moving away from extremism. Extreme capitalism and extreme communism is evil. The world has known this for a long time hence the reason why The US has retained socialist policies to balance extreme capitalist ideals, hence why it is exercising socialist approaches to save capitalism.

Tell a self retiree that Capitalism should not be recalibrated after loosing 30% of their capital due to the behaviour of the bankers and other CEOs. Justify if you can why these financial gurus should not be brought to account for their cavalier style financial activities. If any one created a product that failed catastrophically they would be crucified by the legal system, yet capitalists are immune from accountability for financial disasters that were based on dishonesty.

Greed should never be allowed to dictate terms to humanity.

You may want to take stock of what Aristotle said about the extreme capitalist, I quote; These are the people who are slaves of greed and left unchecked to themselves they will injure themselves and everyone around them. After 2000 years we are witnessing this prediction many times over yet you advocate no need for recalibration of the system. What level of social intelligence is in play her I ask. Only individuals who are at the bottom of the Maslow hierarchy would think in such primitive ways that are far removed from the domain of wisdom.

A discussing article with out any basis in fact and wisdom.

Leo.

--Discussing?

--Discuss!

--The above letter could go in a textbook for how to put the most logical fallacies in the shortest space possible. It really is remarkable, and in its own way, delightful. Appeal to authority...ad hominen attacks...false equivalence...it is a cornucopia of rhetorical devices. Really, our former rhetoric teacher would have been in raptures over what a "teaching moment," this is. All we can say is that if you really believe most of what you've written, you should probably unsubscribe to the DR immediately.

--And by the way, we never said people shouldn't be punished if they've broken the law. Feel free to dispute what we've written. But at least read what we've said and criticize it accurately before ascending to the heights of "logic and wisdom." We're not saying we're automatically right. But of course our ideas are different. And we'd humbly argue they're better! That's what brains are for, to make judgements with.

--How about one more letter?

Hi,

I know this is not a "write-back show" but i must get a little off my chest. it is hard to sit through your political bias and then be expected to hand over money to such one eyed, money hungry columnists with little fact behind the ranting and raving ( i would rather listen to sam kekovich get paid to talk about lamb). Don't get me wrong, i would normally consider myself on the right side of middle

I myself are a very tired of the Obama bandwagon but let's remember his predecessor on the other side of the political fence had little grasp of directing a nation and too in my opinion Mr Rudd's predecessor comes into this category as a back seat leader with no forsight. If only Mr Costello were the captain of Oz. For you to say that its bad for the ruling government to want to control what our influential young populus watch on TV or to question the merit of owning a car capable of doing 320km/hr, then you should be signing up as a student and reading some university texts on the definition of irresponsible.

Luke M.

--For the record, we are biased against all politicians as a matter of principle. Markets work better than governments. But markets are just one institution that makes up a peaceful civil society. But by all means, let us know what university texts you think we ough to be reading.