Baltimore, Maryland

Below, you'll find an update on our Trade of the Decade.

Has it done well? Not exactly. But the decade has just become.

And it looks more promising than ever.

The Japanese have got themselves in a jamb. A trap. A one-way ticket to Hell. There's no way out.

It's going to be bloody. It's going to be messy. There will be crying...gnashing of teeth...cursing...blaming...howling...whining...

...ah yes...

And there will be huge profits too. If not for us...for someone else!

But save the gloating...or whatever it is that Germans do when someone else spends too much money and goes broke.

Hold the satisfied smirks at Japan's self-induced misfortune. America is in the same boat. Yes, that's the point of our update. Once you take get on board with zero interest rates, runaway deficits, and printing press money you're trapped. You have to stay where you are...or you're overboard and you'll drown.

William McChesney Martin, Fed chief during the Eisenhower years, used to say that the Fed's job was to 'take away the punchbowl' when the party started to get out of hand.

Times have changed. Now, the Fed has no intention of taking away the punchbowl. It's just running out to the liquor store to buy more gin!

What's changed?

Well, a lot of things. But one of them is simple. The economy of the Eisenhower years was a healthy economy. The party could get out of hand then. Because it was a real party. There was something to celebrate. The US made things and sold them at a profit. Wages rose. With rising incomes came increasing purchasing power...which gave US industry more customers...with more money to spend.

Now, we've entered a new phase. The party's a flop. It's a fraud. A bunch of stuffed-shirt zombies are standing around with drinks in their hands. Listening to awful music. Talking a line of guff. And no one is listening.

The largest group of consumers - the boomers - was born in the Eisenhower years. Now they're retiring. They'll no longer be contributing to the nation's wealth. They'll be subtracting from it...spending their savings...and looking to the next generation to provide healthcare and Social Security payments.

And what has become of US industry? It is getting better, say the papers. But it is only a shell of its former self...only able to compete in certain narrow areas. The Chinese make more cars. The Germans make better cars. And the Indians make cheaper cars. What's left to make? Cars "Made in America."

General Motors, the world's best, biggest, and more admired corporation when Ike and Dick were still clicking, went heavily into the finance business during the Clinton administration. Then it went broke...and got nationalized.

And America's top graduates too...shifted from industry in the '50s, to marketing in the '60s...to advertising in the '70s...to tax accounting in the '80s...to investing in the '90s and financing in the '00s.

And now the biggest group of them is getting ready to knock off...to retire...to enjoy the good life...

But wait. How can they enjoy the good life? They don't have any money?

Remember those numbers we cited last week? Only one in 10 - or something like that - has enough money in his 401k to permit him to retire in the style to which he's become accustomed.

So what's he going to do?

Let us be the first to tell you: his standard of living is going to go down. And not just retirees...but working Americans too...

Why? That's what happens when you borrow too much. You have to pay it back somehow.

Most likely Americans will see their incomes and accumulated wealth fall along with the dollar. Yesterday, we reported a Wall Street Journal opinion that the dollar would fall 20% as it ceased being the world's only reserve currency.

That alone would wipe out a fifth of Americans' global purchasing power.

But it could be much more. Just wait. The trap only chaffs now. Wait until it digs into the flesh...and then the bone. The more the feds struggle against it, the tighter the trap becomes. They run budget deficits. They print money. They bailout...and lend money below the rate of consumer price inflation

Of course, it's not just Americans. The US, Britain, Ireland...and much of the rest of the world...are all in a Great Correction. Their standards of living are going to be corrected...

...lowered, that is.

*** And here's Ben Bernanke. He's telling us that he will continue to try his clumsy tricks... pretending to create real growth and real prosperity...with money he prints up...just like that.

Bloomberg has the story:

. Federal Reserve Chairman Ben S. Bernanke didn't rule out expanding the central bank's asset purchases aimed at stimulating the economy, saying he doesn't want to see the nation relapse into a recession.

Asked at a House Financial Services Committee hearing today what conditions would warrant a third round of so-called quantitative easing, Bernanke said that "what we'd like to see is a sustainable recovery. We don't want to see the economy falling back into a double dip or to a stall-out."

Bernanke's testimony today and yesterday signaled that he will keep the Fed on course to complete $600 billion of Treasury purchases through June under the second round of quantitative easing, a policy criticized by Republican lawmakers as risking an inflation surge. He's avoided saying what the central bank may do after that.

A third round of purchases "has to be a decision" of the Federal Open Market Committee, and "it depends again on our mandate" for stable prices and maximum employment, Bernanke said in response to Texas Representative Jeb Hensarling, the House panel's vice chairman and a critic of QE2.

"We're looking very closely at inflation both in terms of too low and too high," Bernanke said during the second day of semiannual testimony on monetary policy. "I want to be sure that you understand that I am very attentive to inflation and potential risks for inflation. That will certainly be a major consideration as we look to determine how to manage this policy."

****

Update on our 'Trade of the Decade'

A nation can stay insolvent longer than you can stay rational

Lord Keynes may not have had the Japanese bond market in mind. But almost an entire generation of JGB investors is living proof that "the market can stay irrational longer than you can stay solvent." For nearly 20 years, they thought rising supplies of Japanese bonds must lead to falling prices. As the quantity increased the quality had to decline. It was irrational to think anything else. And yet, Mr. Market not only remained irrational, he seemed to enjoy it. He was like a drunk with a half-finished bottle in his hand. Everyone knew he would have to sober up some day. But as long as there was still liquor left, why bother? Japan borrowed more and more...and speculators went broke waiting for bonds to go down.

Here on the back page we yield to no man in our appreciation of the irrational. It is practically boundless, as near as we can tell. Nevertheless, sooner or later the booze runs out.

What makes this interesting to readers everywhere is that Japan is a trendsetter. The Japanese stock market headed down 10 years before the Nasdaq cracked in the US in January of 2000. Japan's economy was ahead of the pack too; it went into a long correction 17 years before America's sub-prime lending crisis. Its central bankers and finance ministers have a long lead too. Every rabbit, currently being pulled out of Ben Bernanke's hat, was hopping around in Tokyo many years ago.

For example, the Japanese have been 'zero bound' for 15 years. In an effort to restart the economy, the Bank of Japan went to ZIRP (a zero interest rate policy) in 1995. They've been within 50 basis points of zero ever since. So too did Japan's huge central government deficits begin a decade ahead of those in the US. But the rope that was thrown out as a lifeline has become a noose. Japan can't go back to normal policies; it can't afford it.

Among all the world's nations none now has more debt per GDP than Japan. For every dollar of output, Japan has $2 of central government debt. The figures are much more striking, and meaningful, when you compare debt to the cash-flow that services it. The central government owes about 1,000 trillion yen. It collects less than 50 trillion in revenues each year. In other words, every dollar of tax receipts must support about $20 in debt. If it had to carry its debt at just 5% interest it would take up 100% of government revenues. And its debt is still increasing; the Bank for International Settlement says it will grow to grow to 3 times GDP over the next 10 years.

Pondering these numbers, JGB speculators must have thought they had found a gold mine. Japanese bonds HAD to go down, they said to themselves. What they discovered was that a government can stay insolvent longer than they could stay rational. And now, practically every financial official, householder and investor on the home island is foaming at the mouth. Having avoided sanity for so long, they think they can do so forever.

The descent into insolvency was directed by the Bank of Japan and enabled by bond buyers themselves. It did not bother them that Japan was the most broke nation in the world. Or that the Japanese were dying out, with negative population growth and more people retiring than entering the workforce. Or that the primary sources of funding for Japanese deficits were drying up. Corporate profits are pinched between the forefinger of a strong yen and the thumb of higher energy prices. The savings rate for people over 60 has fallen to zero. And as a percentage of GDP, national savings, net of both public and private borrowing, has fallen from plus 11% in 1991 to minus 5% today.

Lenders must be as stupid or as mad as borrowers. Even today, they give their money to the government for 10 years, at a yield of only 1.2%. But so far, they have been right. The inflation rate in Japan is negative by about 2%, giving them a real yield of 3.5%. And compared to other investors in Japan, bond-buyers they're geniuses. Japanese stocks are down 75% since 1990. Real estate is down about 70%.

On Tuesday, Ben Bernanke told Congress not to worry:

Once we see the economy is in a self-sustaining recovery and employment is starting to improve... and meanwhile that inflation is stable, approaching roughly 2% or so, at that point we'll need to begin withdrawing.

He should get out more. Take a trip to Japan. He would see where $1.5 trillion deficits, ZIRP, and QE lead - to more deficits, more ZIRP, and QE squared. He would see the madness in investors' eyes...and palsied hands of his central banker cronies. They couldn't stop. Neither can he. Not without higher unemployment and falling prices - the very things he fears more than the fires of Hell. Once an economy drinks deeply, it cannot stop until the bottle is empty.

Our 'Trade of the Decade' called for selling Japanese bonds and buying Japanese stocks. The bonds go down when the liquor runs out...and then, when Japan can no longer close its budget gaps by borrowing, it will print money. First, the bonds will crash. Then, the stocks will soar.