The papers are so full of claptrap and humbug this morning...we don’t know what to laugh at first.

There is Hillary’s proposal for a ‘Gas Tax Holiday,’ for example. The initiative is so absurd that even trained economists can see through it. Alice Rivlin, Bill Clinton’s former budget director said she was “appalled” at what “looked like pandering.” One hundred economists signed an open letter criticizing the proposal – pointing out the obvious, that it would increase driving and divert money now going to the U.S. government to the governments of Arab oil exporters.

Obama has an advantage; Paul Volcker is advising him. So, we can expect a little better. But little better is what we get. Obama proposes a cut in the payroll tax (which finances Social Security) – up to $1,000 – to help families “offset the cost not only of gas, but of food.”

As we have said many times, we never met a tax cut we didn’t like. But what troubles us is: where are the cuts on the other side of the ledger? If Social Security has less money, how will it keep up with baby boomer retirements?

The weekend press tells us that people are beginning to worry about whether they’ll be able to retire at all. The middle class counted on rising house prices. But now house prices are going down. What are they going to do?

They’re going to start saving, is the answer. “Consumers to the sidelines,” says a Wall Street Journal headline. “Americans cutting back for Mothers’ Day,” says a headline in the Los Angeles Times .

You will recall why stocks were certain to go to the moon, dear reader. It was “Dow 36,000” for sure – because the baby boomers had to put money in stocks so they could retire. When that mirage disappeared, they turned to residential real estate. People figured that they could buy an extra house at the beach. They would enjoy it on weekends and holidays...and then, when the time came to retire...they could sell the main house and live off the proceeds. That strategy too was fine – as long as prices were rising.

And now the boomers find them themselves with no easy way to finance their golden years. (They should have bought gold when we first suggested it!) What can they do? They have to resort to the old-fashioned, tried and true method – thrift and savings.

Here, we will spell it out:

You take the total amount of income, after tax. Then, you subtract the total amount you spend. If the result is a positive number, at least you are headed in the right direction. If it is a negative number, we suggest you apply for a job in government...maybe with the Council of Economic Advisors or the Congressional Budget Office. Besides, the federal retirement system is the most generous one around – outside of Wall Street.

Yes, dear faithful reader...the economy is getting a nip on the derriere. The consumers who spent what they didn’t have are now forced to save the little they do have. Result: the consumer economy is slowing down. The bubble has sprung a leak...and the feds desperately try to keep pumping it up. (More below...)

But forget the math...forget the ledgers...there’s an election to be won...and faint humbug n’er won fair voter. No, the way to win is to go all out...tell the biggest lie possible...promise the moon...and pretend to be something you are completely and emphatically not.

George W. Bush, for example – son of a CIA Chief, Vice President and then U.S. president, educated at Andover, Yale and Harvard, from one of America’s richest, most elite New England families – passed himself off as a straight-talking yahoo in a cowboy hat. Now, both Obama and Hillary are trying to pretend that they feel the working classes’ pain. Hillary appeals to the redneck instinct for toughness; she will “obliterate” Iran if it lays a hand on Israel, she says.

(Why the yahoos from Kentucky should care what goes on between Israel and Iran has never been fully clarified...but in the final days of imperial grandeur no sparrow can fall anywhere in the world without setting off sensors in the Pentagon...and eliciting a rapid response from the military/industrial/political complex!)

Obama, meanwhile, can pretend to be a man of the people too. He drinks beer, when the occasion calls for it... and shoots hoops with the locals. Of course, neither politician would probably give the blue collar workers the time of day were it not for the fact the yahoos are likely to vote tomorrow.

Yes, dear reader, tomorrow is now the big day...the showdown between the two democratic candidates. If Obama wins big...he can say goodbye to Hillary. If the Clintons win big, they could still win the nomination...and probably, the election. At least, that’s what the pundits say...

And so we see how democracy really works...by flimflam and bamboozle.

*** We have set up shop in a café near Auteuil in Paris...copy of the International Herald Tribune in hand...and someone’s wifi connection at our fingertips. It is a delightful spring morning in Paris...the chestnut trees are in flower...birds sing, the sun shines, and beautiful women amble along the sidewalk.

We had a café crème and a croissant...and then, we were enjoying the view so much, we ordered another. The waiter brought a check – the damage was just $15, very reasonable, under the circumstances.

The relevant circumstance is that the price of food is soaring everywhere. The grains are selling near record prices...and so is oil. This is no laughing matter. Food is a relatively minor part of our own family budget; the rising prices are only a nuisance. But a news report from Reuters tells us that 20% of Asians live on less than a dollar a day. Many are farmers with their own local supplies of cheap food. But more and more of them live in cities and pay global prices for their daily bread.

Rising food prices are producing famine-like conditions for many of these poor people. For others, they are wiping out years of financial progress, creating what Reuters calls a “Poverty Time Bomb.”

But who should we thank for these remarkable events – a price induced famine...a poverty ‘time bomb’? How could these things be happening in the 21st century – nearly two decades after the fall of the Berlin Wall...more than a century after the invention of the mechanical reaper...and 95 years after the creation of America’s central bank? Ah...there’s the funny part.

Prices are twice as high as they were two years ago. Is the weather twice as bad? Are people suddenly eating twice as much? No? Then what happened? What has happened is that the central bank has created bubble-like conditions in the commodity markets.

An update from Kevin Kerr:

“Many are saying that the commodities bubble is bursting and that all will be well. I don’t think so, but all of this selling will certainly give us at Resource Trader Alert a better chance to buy back in at cheaper levels, especially in the metals, although not yet.

“We are seeing crude oil pull back, and it seems that sugar is along for the ride. I expect sugar to pull back even further, but then turn around after summer – maybe even before.

“As far as the grains go, it’s a completely different story. The weather in the Midwest has been awful, and farmers are getting itchy. Rain – even snow – and very cold ground temperatures continue to hinder farmers. This market remains very, very choppy, so be prepared for some wild swings. However, come harvest time, I think both our beans and corn will leave our RTA portfolio smiling.”

*** “Fed moves to loosen tight credit,” begins a story in the New York Times this morning.

A related article – in the LA Times – tells us that the crunch in subprime is now grinding down on cash-out refinancing, investment property and vacation homes.

But the Fed makes haste to the rescue. Two days after cutting rates down to 2%, the Bank of Ben Bernanke announced – without much fanfare, hoping it would be ignored – that it would accept credit card debt, student loans and even car loans as collateral. Student loans are now being traded on private markets at discounts of about 25%. But the Fed takes them at full value...and charges only 2% for the loan, about half the rate of consumer price inflation.

What kind of way is that to run a bank, you might ask? Don’t bother...

The bubble has sprung a lead...the Fed is doing all it can to keep it pumped up.

*** Meanwhile, Warren Buffett has gone into the business of insuring municipal bonds. His competitors don’t deserve their triple A rating, he observed last week. AMBAC, for example, watched its stock price tumble from $96 to $4 in the space of a year. Its credit is so bad it has to pay 14% to borrow money. Buffett says he’s never before seen such a company rated AAA.

*** And the art market is preparing for a big test. So far, the very peak of the socio-economic pyramid has been relatively immune from pain. The rich are still getting richer, as near as we can tell. Occasionally, the papers speak of problems among the “rich.” But the people they are talking about are not really rich. Often, they have two large incomes...two large houses...and two large mortgages – along with all the expenses of living high on the hog, circa 2008 – including private schools, club memberships, ski vacations, and so forth. At the end of the day, they don’t really have much capital to protect them from rising prices or adverse economic trends. But the truly rich are truly different. They don’t have mortgages. They don’t depend on their incomes. And they often have sources of wealth beyond the dollar.

The rich can afford to hold gold, for example, even though the yellow metal provides no yield. They don’t need to rely on it to pay for their retirement...so they can take a longer view. They can invest differently because they don’t need current income. And they are often more concerned with protecting or enjoying wealth than with making more. But they are human, just like the rest of us...and just like the rest of us; they are gullible, credulous, and moronic. The last time we looked, Manhattan apartments were selling at record prices. Luxury airplanes and yachts are still selling well, too. And so are works of ‘art.’

Here we add a little detail that we think may be important. Recent sales at Sotheby’s and Christie’s have set records for Chinese and Russian art. You won’t have to think long or hard to figure out why. The Chinese and Russians have a lot more money than they used to.

The rich in the West have more money too. But so far, the art market has been doing a good job of separating them from it.

The test of prices on Western art is coming in three weeks, when the big auction houses have $1.8 billion on sale. In recent years prices have swollen to bubble levels. Many works have little or no real merit – they are merely gaudy, sensational, or pure gimmicks. Still, investors felt clever paying extraordinary sums for these things...and then, even cleverer when they went up in price.

The works of Richard Prince, for example, were put together just a few years ago. Kenny Schachter, an art-critic friend of Marc Faber’s, described his oeuvre as “consisting of large silkscreens on canvas, of purloined covers of pulp fiction novels involving a series of books with nurses in the titles...” such as “Wayward Nurse,” or “Surfing Nurse,” and so forth. In 2003, you could have bought one for $75,000 to $150,000. Two years later, prices topped $1 million. A year later, one was sold at auction for $2.5 million. And in 2007, one of the nurses hit $6 million.

“What is the inherent value of these works?” asks Mr. Schachter.

About as much as a dot.com without a product or a business plan, is our guess. But what will addled buyers pay? We don’t know...it depends on how eager they are to get rid of their money.

*** A note from Addison on the Maryland Film Festival:

“When Dick Cheney told Paul O’Neill deficits don’t matter,” we found ourselves explaining to the audience after Saturday night’s screening of I.O.U.S.A. at the Maryland Film Festival “he didn’t mean that they don’t matter economically. Of course, deficits matter in economics. What he meant is politically, politicians don’t get punished by voters for running deficits.”

In the movie, former Treasury Secretary Paul O’Neill tells the story about the day Cheney said, “deficits don’t matter” to him in a cabinet meeting. He also talks about the day he was fired from the Bush Administration for “a difference of opinion.”

“Well,” said a gentleman in the second row “let me explain things from the policy makers point of view...”

“Uh ho,” Patrick, the director of the film said. He was standing next to me at the front of the theatre. “Are we in trouble?”

The gentleman went on at some length about the “political coalescence” that had take shape in the 1990s, whereby both parties agreed, that despite their differences, keeping the nation’s finances sound should be a priority for everyone.

But that all flew out the window in 2002 when you had the third of the three consecutive tax cuts go into effect at the exact same time that self-imposed “pay as you go” spending laws expired. The nation’s revenues dried up. But spending exploded. For the first time this year, we’ve seen a $3 trillion dollar budget proposal. The deficit is expected to reach beyond $500 billion.

The gentleman, it turned out, was Paul Sarbanes, the former Senator from Maryland whose name gives the willies to corporate legal and accounting firms across the civilized world. Sarbanes co-authored the much-rued Sarbanes-Oxley corporate transparency law. And, now retired, had some extra time on his hands to come and instruct us on the subject of our own movie.

Patrick, a Chicago born, recovering Union supporter was impressed and took the time to raise the issue of disparity of wealth in the country. We were a little more subdued. This is exactly the crux of the problem with I.O.U.S.A. – the film, the project and the nation. Once you get down to brass tacks and start talking about specific solutions you run into two sides of an economic argument that are equally entrenched.

On the one hand you have the Arthur Laffer, supply-side zealots, of which the current president is one. On the other you have the died-in the wool New New Dealers who see government programs – most notably social security and medicare – as the bedrock of their parties’ existence. Their current arguments sound like this:

Neo Lafferites: “Let’s keep the tax cuts permanent”
New New Dealers: “The nation needs universal health care.”

Neither the twain shall meet. If we’re successful in getting I.O.U.S.A. into theatres this August and as part of the “national conversation” in time for the political conventions...this is the crux of the problem. With these two sides entrenched, Washington and the political system is broken. And you are the victim. “If we do nothing,” David Walker likes to point out “the national debt alone rises by $3-$4 trillion a year. That’s if we do nothing.”

Which is exactly what we’re doing now. Nothing.

Unfortunately, it won’t be the Paul Sarbanes or the Arthur Laffers of the world who have to pay the price. It will be you and your family.

*** Tomorrow...more on the coming revolution (yes...you heard that right)...

Until then,

Bill Bonner