"Be not deceived, God is not mocked. Whatever a man sows, he shall also reap."

Dear Options Traders,

China's not buying Treasuries -- they're buying gold... Australia "well positioned" to exit the crisis... United Kingdom getting ahead of the pack... United States -- the bubble gum corollary... Eurozone: a crisis of credibility... and more!

Welcome to this week's edition of the wrap-up, where you get the economic news in perspective, and measures to profit and protect yourself. Our boat is ready to sail, the wind is up, so let's lift anchor and start cutting through the swells.

We’ll begin with one of my favorite analogies. Actually, it's not mine; St. Paul wrote it first.

"Be not deceived, God is not mocked. Whatever a man sows, he shall also reap."

It's as plain as day to those who will see it. As spring has sprung in our little corner of the world, it is time to put in the garden. I got it turned under yesterday, and the soil was soft and warm. I'm very partial to fresh tomatoes, green beans, squash and peppers. But this year, I also put in some asparagus. But it doesn't matter what I plant -- the harvest has a certain number of laws that are always true.

First, what I plant is what I am going to harvest.

I cannot plant green beans and watch for peas to come up. I can't plant lima beans and expect tomatoes. Whatever I plant, that's what I'm gonna get. So I better make sure I'm planting what I want.

The second law of the harvest states that whatever I plant, I'm going to harvest in multiple. I don’t expect to plant one bean and get one bean in return. I expect to plant a bean, then get a bush, then harvest 50-60 bean pods from that bush. Inside each pod may be five individual beans. In essence, I should expect a large return on my planting.

St. Paul says this is true of all of life. And it is especially true in economics and fiscal policy. We will harvest what we sow. And we'll get a lot more of it than what we started with. Just keep that in mind for now, and I'll draw it all together by the time we're finished.

From the Orient last week, we had some interesting news and a sea change. The Chinese, upon whom we have long cast our hopes of producing cheap, little things that we could not afford to buy, are changing their game plan. Up until now, we would buy their doodads, and in return they would buy our Treasuries. Now it seems something a little more glittery, and a lot more stable, has caught their eye.

While we have been ooohhhing and aaahhhing at their widgets, they have been buying a little bit of gold. Six hundred tonnes, actually. They have increased their gold reserves roughly 75% in the last six years -- or 100 tonnes per year. In amassing their hoard, they have quietly moved into fifth place among the gold-holding nations of the world.

As of the end of last year, the United States was still leading the gold holders with 8,133.5 tonnes. So all in all, the Chinese are not even close our holdings -- but they are "movin' on up"! By the way, Germany, the International Monetary Fund and France fill in positions 2, 3 and 4.

At the same time, China is reportedly also about to release its second round of stimulus, which will be centered on the country’s infrastructure. So it is time to really start watching the countries that will bring the necessary raw materials to China’s markets.

Of course, the first country that pops into my mind on that front is Australia. And the Australians seem to realize it, too. Officials there stated this week that they are "well positioned" to emerge from the present crises. They are, of course, among the higher yielders presently, and their commodity position will help ensure their strength going forward. More on that in a bit.

As we head closer to home, we have just more bad news pouring out of the United Kingdom, the United States and the Eurozone.

Britain’s Chancellor of the Exchequer, Alistair Darling, announced last week the biggest budget deficit in the United Kingdom since World War II. Now, when a person or a family has a deficit — that is, more bills to pay than they have money — the solution is fairly straightforward. They have to get a job, get a better job, get a second job, get their wife a job or hire out their kids. In other words, you have to generate more income. As a rule, you generate more income by more work.

The problem that the United Kingdom now faces is that many of its people are out of work. There are 2.1 million unemployed, the highest rate in 12 years.

Without workers working, how do you pay off a debt or fund a deficit? If it were you or me, we might have a yard sale. Or we might decide to give up that extra car -- reduce the associated expense and get a capital return on the sale. At any rate, we would try to sell something that would generate money to pay our shortfall. Or we could borrow and hope for better days ahead.

Governments take the latter two choices and meld them together to create bonds. The bond represents a debt, but the government can sell them like an asset. In the United Kingdom, they are called gilts. Gotta sell 'em. Gotta raise more money. The question is, what happens if people or institutions lose faith in the bonds? What will that mean for the sterling? And when they cannot sell enough to meet the shortfall, what then?

While we're on that question, let's ask the same thing about the U.S. dollar. Yes, the United States has more than twice the gold reserves of our second nearest competitor, and 8 times the reserves of China. But when the United States is selling bonds like there is no tomorrow to finance our debt, the amount of gold becomes only a secondary consideration.

As has been warned for some time now, the Treasury is inflating a new bubble. And this is as simple to understand as a girl chewing bubblegum. All her bubbles inflate nicely. All the kids around her laugh as she blows each one bigger than the next. But when the big one explodes, and the little girl gets it caught in her hair, suddenly it's not so fun anymore.

The only thing more unsightly is to see a bearded man who blows a bubble and has it pop all over his facial hair. First of all, a grown man ought to know better, so nobody has any real pity on him. Second of all, he should probably take up a more manly habit, like chewing tobacco or something. At any rate, no matter how you measure the manliness of Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner, they both should know better.

Here comes my mantra: Read a history book. Then read a math book. Even a little, bubblegum-blowing girl in pigtails knows you can't spend your way into making money.

This week the Treasury is auctioning off an additional $100 billion in T-bills: $40 billion of the two-year, $35 billion of the five-year and $26 billion of the seven-year. Here's the $100 billion question: Will the Treasury have to raise the rates on these in order to sell them? Will they be scarfed up as in days gone by? Or will potential buyers see the shine begin to fade from U.S. debt? This is where the rubber meets the road, folks. Is it the beginning of the end? Only time will tell.

However, in the short term, which seems to be the only horizon of modern investors, the swine flu may have pulled the Treasury's bacon out of the fire, if you will pardon the pun. As uncertainty rises around the word "pandemic,” money has flocked back to the dollar. I have a conspiracy theorist friend who enjoys the program "24.” His theory is that the current deadly flu bug has been bio-engineered to be released in concurrence with the latest Treasury sale. May not be true, but I think it has the makings of a great book... or maybe even a "24" episode!

Speaking of revolutionary tactics, Tuesday was National Petition Delivery Day for the National Taxpayers Union and The Campaign for Liberty (C4L), Ron Paul's organization. They are delivering hundreds of thousands of petitions to Capitol Hill to push for HR 1207, Dr. Pauls' legislation to audit the Federal Reserve. Go, Ron, go! They were aiming for 100 co-sponsors of the bill. As of yesterday they had 91. Somebody is getting a whiff of the political change in the winds...

As we talk of all this Treasury selling, it is worthwhile to see where we stand in terms of our debt count. France’s is predicted to rise to 8% of GDP this year. The United Kingdom will see a rise to 10%. The United States, a rise to 13%. However, if we take a look at all publicly held debt in the United States, we stand at 40.8% of our GDP. If you think of it this way, it's kind of helpful. If your income is $50,000 a year, and all your debt is $20,000 (including mortgage, cars, school loans and credit cards), you'd probably say that's not too bad. But what if your interest was rising and your income was falling?

Essentially, that's exactly what is happening to the United States. On top of which, they are spending way more than $50,000 per year. So now your accountant comes to you and says there is no end in sight to this cycle. Your interest is adding to your debt. Your income is falling and you are borrowing more every year. If he said that your total debt would rise to 82.5% of your income over the next 10 years, would you be worried?

If you are like many Americans, probably not.

If you are like the majority of home-owning Americans under 50 years of age -- definitely not!

Your mortgage is probably twice the size of your income now, and it seems manageable. But it isn't manageable if you become unemployed, or under-employed, or if you have to take a salary reduction. This is what's happening in major currency countries all around the globe. Income (as measured by GDP) is falling. Interest is growing, and nations are borrowing to keep up with exploding social costs.

Also of note last week here in the United States was the reversal in durable goods orders. They were down -0.8%. Pretty bad, huh? Not if you're Wall Street. The expectation was for a negative figure twice that amount. So... the people rejoiced! Stocks re-inflated, and that has carried over this week to consumer confidence. It came in yesterday morning at 39.2, versus the March figure of 26.9. And the people rejoiced... again!

A very similar phenomenon just occurred in Germany from the Eurozone. After six weeks of stocks climbing in a rebound, investor sentiment rose dramatically. It was up to 13 from a -3.5 reading in March. A turnaround of over 16 points! So if the world is going to hell in a hand basket... what gives?

In reality, most sentiment indexes are worthless now. Markets still place a great amount of weight on them, but they belong to an old paradigm that is passing. The fundamental analysis of sentiment and confidence indexes was that the better people felt about the economy, the more they would spend. The better they felt about the market, the more they would invest. But it's different now. People are all spent out. Their credit cards are maxed. Their incomes are dropping. Their home equity lines of credit are being cancelled and reduced. They have no savings to spend.

So it doesn't matter if consumer confidence and business sentiment were to shoot to 1 million. It doesn't matter if everybody feels great. If there's no money to be spent, then all the hoopla over sentiment and confidence is wasted. There is no one to drive demand. So while the markets still rejoice when such indexes are up, before long we will come to see that such figures have very little meaning.

It's rather like what the European Central Bank says. The Eurozone is beginning to suffer from a real credibility crises.

They were the last to recognize the great deflation. Their poor economic foresight had them raising rates in July 2007, when the rest of the world was falling. Few, if any, pieces of poor economic forecasting have ever been worse than that.

The United States had been dropping rates for a year, and the ECB still refused to see what was going on. They failed to accurately predict their own exposure to U.S.-related credit problems. The last 12 months have seen them go from paragons of stalwart anti-inflationism to the verge of 1% rates and the consideration of qualitative easing.

It is thus important to watch what they do and not what they say. But as of now, the political tensions and divisions are hampering any collective ability to address the crisis. Which is one reason why I look for more euro weakness ahead. And in a last admission of failure, they have begun talks on "non-standard monetary policy.” More info to come in May. But it doesn't look good…

So how is all this involved with planting and harvesting?

The bottom line is this: What is true of an individual is true multiplied times over for a nation. What we sow, we shall reap, and a lot more of it than what we started with.

While nations race to devalue their currencies, they are planting the seeds of a future harvest. And we will reap what we sow -- a more devalued currency. Only in multiplied form. How does a nation like Zimbabwe, the bread basket of Africa, with nominal inflation rates equal to those in developed countries, end up with an inflation rate that is beyond comprehension? They're reaping what they sowed.

How will the United States, United Kingdom and Eurozone go from deflation to devaluation? By reaping what we sow. The fix is in. The game is afoot. The clock is ticking, and the bomb is being loaded with more explosives.

What to do...

Actually, it isn't that hard to figure out. Value will always go where it is well treated. When currency is devalued, the value flows into something else. It flows into what is being purchased. And as our friend Alan Knuckman of Resource Trader Alert says, it all comes back to commodities. People will still need to buy oil. They will still want gold and silver. They will still want food. Even a man with a devalued currency has to eat. So does his family. Look for prices to rise in these goods and the countries that produce them efficiently. This is why we will remain long the Aussie, and oscillate on the others as they show some profit opportunity. While our long-range forecast for the dollar, sterling, euro and yen are down... they will still offer opportunities on both sides of the trade in the meantime. But longer term, we wait to see who breaks first, and where the great run will begin. We know it will. For what a nation sows, it will reap.