From Dan Denning in St. Kilda:

--"Happy families are all alike," wrote Leo Tolstoy in Anna Karenina, "every unhappy family is unhappy in its own way." Today's Daily Reckoning looks at the unhappy family of nations in Europe and their coming family feud. Each is definitely unhappy in its way.

--Yet there is a common thread to the current state of economic melancholy. It's money. Most failed marriages, we've heard, end up breaking up over money. Why would Europe or America or Australia be any different?

--But before we get into family counselling, let's have a look at markets. Over in America the Dow Jones Industrials Index has closed at its highest level since October of 2008. The Dow sits at 10, 979 and has risen eight days in a row. Woop woop.

--The volume figures on the Dow, however, show a disturbing lack of faith, or conviction if you prefer. The chart below shows the Dow since the March 9th low of 2009. It's been a pretty steady rise since then. But you can see that average daily volumes are less than half of what they were when the low was made a year ago. What does it mean?

--"It's bearish. That's what it means," said Murray when we ambled over to his desk to show him the chart above. "It means there's a general lack of conviction by buyers. You'd want to look out below."

--Where are all the buyers? Is the market just drifting higher based on programmed money flows by institutions? Granted this is an index of just thirty U.S. stocks. But it shows you that once you go below the surface of the index levels, the waters in the market are eerily calm and not frothy at all.

--The other point about this is that in market-cap weighted index, a few key constituents can account for big day-to-day moves. For example, the table below from Standard and Poor's shows the top ten weightings in the ASX/200. The financials and the miners dominate, with property, telecom, and consumer staples all making cameos.

--In other words an up or down move in BHP or Commonwealth Bank has a bigger effect on the direction of the index based on the size of their respective market capitalisations. That sounds like gobbeldy gook. But the takeaway is you should beware light volumes and indexes whose higher movements are driven by just a few stocks. It shows a lack of breadth which can turn quickly and result in big sell off.

--Now, you probably don't want to talk about this. But we need to talk about Greece. Its on-again, off-again bailout flirtation with the European Union is driving the market nuts. Its reality sovereign debt finance theatre at its most dramatic. But what, really, is at stake?

--The European monetary family is in crisis. It meets on March 25th and 26th to discuss whether to kick Greece off the island (survivor style) or to intervene and save the prodigal son. The problem, from a German perspective, is that Europe is full of prodigal children. To save Greece means to save the rest of the economies troubled by rising public debt-to-GDP ratios. Where will it stop? With the trashing of the euro.

--But is doing nothing an option? The Greeks have already said they will meet with the IMF on April 2nd if Europe resolves nothing by the end of March. And in the meantime, bond yields on Greek debt are left twisting in the wind. Rising bond yields wipe out the benefits of austerity measures and deficit reduction.

--According to Bloomberg, "The yield on Greece's 10-year government bond rose 12 basis points to 6.21 percent. The euro fell for a second day against the dollar, slipping as much as 0.7 percent to $1.3648. Credit-default swaps on Greek sovereign debt rose 7 basis points to 295, the highest in a week, according to CMA DataVision prices."

--It's hard to imagine the Northern European powers hanging Greece out to dry. Families are supposed to look out for each other. You do more for your family when the chips are down than you do for most people in the world. But maybe Greece will spare Germany the hand-wringing and default on its own....just throw up its hands and shrug.

--The willing default on sovereign debt is what Societe Generale analyst Albert Edwards expects. In a note to clients earlier this week Edwards wrote, "Ultimately, as my colleague Dylan Grice writes, I think we head back to double-digit inflation rates as governments opt to default. I certainly again expect to see CPI inflation above 25% in the UK and indeed in most developed nations in my lifetime."

--This is the old "asset-deflation-first-then-hyperinflation-later" two-step. It's the Big Crash dance, with the Bernanke/CNBC orchestra providing mellow tunes as your promenade your way to the lifeboats. Edwards writes that, "In the near term, however, the deflationary quicksand will suck us ever lower until we suffocate. A key driver for underlying inflation remains unit labour costs. While unit labour costs decline at an unprecedented rate, they are sucking us inevitably into a Fisherian, debt-deflation spiral. Only then will we see how far policymakers are willing to go to debauch the currency. Last year saw them cross the Rubicon. Monetisation is now the policy lever of first resort."

--Some readers think we're trying to have it both ways on the inflation/deflation debate. But it is one of the issues you have to be flexible about and be willing to go both ways on in order to keep your money safe. Prepare for falling asset prices and a sovereign debt crisis. And then watch out as central banks reach out and take us to strange new monetary places and boldly go where Weimar Germany and Argentina have gone before.

--Buckle up buttercup.

And now over to Bill Bonner in Mumbai, India:

In the US, producer prices fell in February, more than expected. Core inflation was barely positive. That is not just a US trend. In Europe, price increases have fallen to the lowest level in 11 years. Japan is experiencing the biggest price drops in many years.

This sounds like a D-word to us...disinflation, almost deflation.

One report tells us that greater than 5% of Fannie Mae mortgages are 90 days in arrears - or more. Another report says it's 10%.

This too sounds like a D-word. Default.

But wait...

"Fed signals optimism over US economy," is the lead headline in today's Financial Times.

The markets responded, pushing the Dow up 47 points to a new high for this bounce...though still midway between its all-time high and its low of March 2009.

Oil rose a dollar too. So did gold. The euro edged up too...

Reading more closely, we don't see much reason for the Fed's optimism. And apparently, neither does the Fed. It is leaving its monetary stimulus program in place for an "extended period." It says inflation is likely to remain subdued "for some time."

The Great Correction (our term) destroyed nearly 8.4 million jobs (the FT's count) and wiped out $14 trillion in household wealth. And now Americans are struggling to find firm footing in an economy with fewer job openings, less credit available, and an uncertain growth outlook.

What's going on? There's a word for it. Another D-word...several of them. There's Depression. Deflation. And De-leveraging, for example.

Our old friend Porter Stansberry writes to tell us that we're wrong about household de-leveraging. The drop in credit we reported yesterday was caused by defaults...not by voluntary reductions in debt, he says.

He's right. Most of the decline in household credit, so far, comes from defaults. And maybe it is just wishful thinking on our part... hoping that Americans would willingly and eagerly improve their balance sheets. The savings rate is up...but it's not yet clear whether this marks the beginning of a major trend or not.

But whatever the cause - be it voluntary de-leveraging or involuntary de-leveraging - we think there's more of it ahead.

Here's a statistic: 21% of Iraq and Afghanistan veterans are jobless. They're mostly men. And mostly unprepared for the modern job market. After all, who wants to hire someone who knows how to drive a tank or patrol a gas station?

Ultimately, an economy gets rich by making and acquiring things people want.

Ah...we look back nostalgically at the Bubble Epoch. It was so easy to make fun of people back then. They thought they could get rich by buying things they couldn't afford with money they didn't have. Now, we're in a new era... of sorts. Now, it's the public sector that has lost its head. The feds think they can make the economy work better by buying things nobody really wants with money nobody really has.

Who really wants to guard a gas station in Baghdad? Nobody we know. Who's got the money to fund the fed's $1.8 trillion deficit? Nobody.

And think of the poor fellow who draws that sorry duty in Iraq. When he comes back to the US, what does he have on his résumé? He's good at guarding a gas station against terrorists? Not many job offers for that skill set.

So, one in five of these fellows is unemployed. And the feds try to do something about it by spending more money they don't have on more things nobody really wants.

Meanwhile...money may be getting harder to come by.... See below...

This, from Bloomberg:

China, Japan Reduced Holdings of US Treasury Debt in January

March 16 (Bloomberg) - China and Japan, the two biggest foreign holders of Treasuries, reduced their positions of US government debt in January as a measure of demand for American financial assets fell to a six- month low.

China remained the biggest owner abroad of Treasuries, even as its holdings dropped by a net $5.8 billion to $889 billion, according to Treasury Department data released yesterday in Washington. Japan cut its holdings in January by $300 million to $765.4 billion, the report showed.

China has been a net seller of Treasuries for three straight months, the longest such stretch since the end of 2007. Chinese officials have questioned the dollar's role as a reserve currency and recently sought assurances about the safety of US government debt as the budget deficit widens to a projected record $1.6 trillion this year.

"Foreign central banks stopped buying Treasuries in January," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. "If this were to continue, if China were to stop recycling its dollars into US Treasuries, it could have dire implications for Main Street America in that mortgage rates could move higher."

"More Jains taking up santhara," reports the TIMES of India.

Santhara (also called sallekhana) is the Jain practice of voluntary and systematic fasting to death. Jain texts say it is the ultimate route to attaining Moksha and breaking free from the whirlpool of life and death...

Nearly 500 people took the road to Moksha in 2008, the paper reports. The article goes on to tell us that more women than men starve themselves to death, because they are "more strong-willed" than men.

In the past, when people took the holy vow of santhara they used to advertise it in the local papers. This would allow friends and relatives time to come over and say goodbye. Now, the government is said to be cracking down on the practice; apparently, you are no longer permitted to advertise. Now you have to die alone.

"Eunuchs want rape laws to be gender-neutral," is another headline from the Indian press. We couldn't make out the cause of the eunuchs' complaint. Rape laws are already being rewritten in a more politically correct way; the word 'rape' is to be replaced with 'sexual assault.' But the eunuchs feel they are still not getting the attention they crave. They are often "the targets of some of the worst sex crimes in India," said a spokesperson.

"Economy expected to grow four-fold by 2020." Think the headline refers to the US? Britain? France? Think again. It's the subcontinent the article talks about.

Edelweiss Capital predicts a nominal growth rate of 13% per year for India...leading to a GDP over $4 trillion in 10 years. Per capital income is expected to rise too - from $1,017 per year now to $3,213.

Imagine what these mean to business and investors. Even if you have a mediocre business you can expect your sales to triple...or quadruple...over the next 10 years.

Regards,

Bill Bonner
for The Daily Reckoning Australia

[Editor's Note: Bill Bonner & Lila Rajiva's new book, Mobs, Messiahs and Markets, is now available in Australia from The Educated Investor. Order

The paper we use today is a medium of exchange - it got that way because governments made it illegal not to accept it - but it's not a good store of value. And it's rapidly and radically becoming less of a store of value. What we use as money today is actually not money; it's currency. Technically, that's simply a word that indicates a government substitute for money.

What does make for good money? Again, Aristotle gives us the answer. It's something that has five characteristics: it's durable and divisible, consistent and convenient, and has value in itself. And for these reasons, gold is almost certainly the best thing to use for money. Not because I say so, nor because Aristotle said so, but because, over time, people have found it to be the most durable, divisible, consistent, convenient, and inherently valuable thing to use. Silver is also good, but it's less durable because it corrodes. And less convenient, in that it takes about 60 times more of it - at the moment - to offer the same value as gold. Copper is the next traditional step down the ladder.

Louis: That, plus one reason that's pertinent today but was not a problem in Aristotle's world: gold can't just be printed up on the arbitrary whims of those in power.

Doug: That's the big one. Using metals as money takes the whole matter out of the hands of the government and its bureaucrats.

Louis: But we don't use gold today...

Doug: No, it's as though a bunch of friends without any real money started exchanging IOUs for money, and then after a while forgot that the IOUs were supposed to represent, and be redeemed in, real money.

The problem with this is that, in the case of the IOUs between friends, paper is based solely on hope and trust. One can move away, or die, or turn dishonest, or become insolvent - many other things could happen. A guy stuck with a dead man's IOU has nothing.

With government IOUs, or currencies, it's worse, because they can increase the number of IOUs in circulation without telling anyone - that's what inflation is. Since the government creates the IOUs, it gets the benefit of spending them before the inflation they create raises prices, which is basically stealing from the people. And, of course, sometimes governments do "die," leaving the holders stuck with nothing, just as with the IOUs between friends. In fact, it's arguably far more likely that such problems will arise from trusting a government to print IOUs than from trusting a friend.

Louis: Most people feel that they should do right by their friends - government's don't have friends, and most see their citizens as being property, like cattle. Therefore, inflating the currency isn't a crime in their view, just a tool for controlling the dumb masses. But it's really taxation without representation.

Doug: Sadly so. And since the institution of government is based on force, on compulsion, they feel they have every right to do what they want. They sanitize all types of criminality by saying it's in "the national interest" or some such poppycock.

Louis: Okay... but these currencies have worked for a very long time. Why are you right about this and the rest of the world wrong? Why is it inevitable that government currencies will fail?

Doug: [Chuckles] Because governments are not living persons who care and can be motivated to do the right thing. They are collections of individuals - politicians and bureaucrats, not exactly the most desirable types - who pursue their own interests. Regardless of the rhetoric, their interests coincide with the public good only on occasion, like a broken clock being right twice a day. Even in the most enlightened times - even in the best of times - governments have huge incentives to spend more than they take in. These are not the best of times; the population has been trained for generations to expect subsidies and freebies as their due, without regard to who pays or how they will be paid.

I'll give you an example. When I was on the Phil Donahue Show, the day before the national elections in 1980, I was making the same philosophical points I am now. I explained how they, the taxpayers, would pay for all the goodies - like Social Security and unemployment compensation - that they wanted. A middle-aged guy in the audience asked: "Well, why can't the government pay for these things?" And the rest of the audience roared approval.

It was then that I first realized that resistance was futile and the situation was basically hopeless. And that someone who can seem perfectly sensible when he's discussing sports, or the weather, or the state of the roads, was likely to be a moron when it came to economics. And that when he became part of a crowd, it was even worse: he might transform into an imbecile or even an idiot.

Anyway, the dollar has existed for many years, even though it's degraded over time - first with the creation of the Federal Reserve in 1913, then with the repudiation of domestic gold redeemability in 1933, then with the repudiation of international redeemability in 1971. Even though the government has created trillions of new ones, the dollar is still thought of as some kind of a cosmic standard. In point of fact, it's no better than the Argentine peso and will have the same fate.

These IOUs have a quite ephemeral reality and are far too easy to create - there's literally no limit at this point. We don't even have to actually print them anymore, they're created by computer strokes - so it's unrealistic to expect fiscal restraint on the part of any government over time. It's just too tempting to spend money to make people feel richer than they really are, buying votes.

Louis: Looking at the deficits and national debt, it certainly seems so.

Doug: The national debt - when was the last time you heard any average person worry about the national debt? Americans have become so used to carrying huge loads of debt around - right out of college with student loans - that it doesn't even occur to them that there could be any reason for concern over the national debt. It's an abstraction, like the number of light years to the Andromeda Galaxy.

People used to at least pay attention, though most would say, "It's not a problem, we owe it to ourselves." But that was always a delusion. Some people, organized in a club called the government, borrowed it from some other people. But now it's even more dangerous, because the US government owes it mostly to foreigners: the Chinese, the Japanese, the Taiwanese, and so forth. Americans, who at least theoretically have some interest in keeping the US government straight, are tapped out. So they've gone to borrow from other societies.

Louis: As dire as the scenario you paint may be, is it enough to cause currencies to stop functioning as means of exchange?

Doug: They probably won't stop functioning as means of exchange. At least not right away.

Even during Germany's infamous hyperinflation of the 1920s, or Zimbabwe's more recent one, in which there were so many zeros after the ones on the bills you couldn't even count them - people still used the governments' paper currencies. They still used them! When I was last in Zim, three years ago, we already had to pay for gas with backpacks full of notes; most inconvenient. In the case of Germany, there were still ten- and twenty-mark gold coins available, if not exactly in circulation. People forget that the mark, the franc, the lire, the dollar all used to be names for a certain amount of gold. [Like the pound, all were measures of weight. - ed.]

When World War I started, Germany went off the gold standard - it used to be about five marks equaled a dollar. By 1923 there were trillions to the dollar. Only the Germans who either kept those gold coins under a mattress or had foreign bank accounts still had liquid capital by 1923; everybody else was wiped out. So people didn't spend their gold if they could avoid it.

That's what Gresham's Law is all about. If there is a "legal tender" money - a paper money - floating around, you try to pay your obligations in it. You try to get rid of the hot potato. But you try to get paid in the good stuff and hold on to it. The Weimar inflation of Germany was an utter disaster for that country; it led to all kinds of nastiness.

Louis: So many people think of Weimar Germany and Zimbabwe as aberrations from far lands, if they think about them at all. Interesting that Germany is at the heart of the euro now, facing Gresham's Law again.

Doug: It's been true since at least the days of Rome. But I wonder if it won't be much more serious this time. All the world's major currencies are issued by governments of countries that are much more urbanized, with economies that rely mostly on services. In the US, the UK, the eurozone, and Japan - all of their currencies are in big trouble for various reasons, and there's relatively little production of what you might call the basics.

Back in the 1920s, or even a few years ago in Zimbabwe, half of the people still lived on farms, and a lot of people didn't even have bank accounts, let alone credit cards and pension funds. The demise of the dollar and other paper currencies has got to be much, much more serious than these episodes in the past.

To be continued...

Doug Casey and Louis James