Lost In The Deflationary Jungle.

Since August, the dollar has rallied against most major currencies, and has appreciated about 17% against the euro. This isn't for good reasons. Deflation, or the destruction of debt, destroys dollars, and as you destroy the supply of dollars, the value goes up. A strong currency is the hallmark of deflation; a weak one is due to inflation (all other things being equal).

Deflation can actually be viewed as relatively good for savers, and Japan has one of the highest savings rates in the world. It wasn't hard to figure this one out. During the same period, the yen has appreciated versus the dollar by 13%.

Nor was it difficult to figure out the impending nature of the "financial crisis," as it's been labeled by the U.S. government and the media. In Hank Paulson's op-ed in the New York Times, he shamelessly uses the word "unpredicitable" several times to describe the "crisis". Even the word "crisis" connotes suddenness and unpredictability.

The current deflation was very predictable, and it wasn't sudden: It is the culmination of a long process in which the Federal Reserve allowed the US financial system (and other central banks allowed those of other countries) to become extremely super-levered. That's inflation. The system become so levered it couldn't take any more. There wasn't enough (and there isn't enough) income generation to support this level of debt.

If you follow a guide into a jungle, and he gets you lost, are you going to keep following him? Or at some point, does logic tell you to just look up at the sun and figure out which way is west and just keep going in that direction?

The guides are now telling US citizens how to get out of the jungle they got them lost in. They're telling citizens to spend money, not to save it; they're telling them to borrow more and not pay it back; they're telling them to create deficits at the expense of their children's standard of living.

Please keep one thing in mind as the U.S. politicians come up with their "solutions": The government cannot create wealth; they can only transfer it. So when the government "injects capital" or "lends money" to a company, they are transferring that money from somewhere. They get it from people who can never complain because they can't vote as yet: The American children.

And here's the lesson of today: We're all a part of the system. We will all be worse off over the next few years than before. Get used to it.

But you can protect your family better than the rest by just staying the course. Don't try to pick the bottom of the stock markets with your last few free dollars; instead, pay down your debts.

In essence, go in the opposite direction from where our "guides" are telling us to go.

Risk is very high.