$700 Billion added to debt = Oil back at $130, Welcome back to $900 Gold

It would be nice if things were simpler like that again, wouldn't it?

1. Given a finite supply of bread, price of bread stays flat according to stable demand.

• : loaf of bread = 1 kg of ham
• : loaf of bread = 1 jug of milk

2. Now all of a sudden an effective fertilizer is used and 30% additional amount of grain was produced the next year - resulting in an oversupply of bread.
3. What would happen?
4. Here's what usually happens...

Oversupply meant people preferred having hams and milk to bread. Because of all the extra bread leftover, stores are discounting the price to sell more so they can clear the inventory.

Sound familiar? (don't worry Mining101 isn't going to become a farming analogy blog anytime soon...)

Let's take a look at today's headlines.

WASHINGTON -- Unveiling its plan to rescue the nation's financial system from near-paralysis, the Bush administration is asking Congress for the authority to spend $700 billion and for powers to intervene in the economy so sweeping that they have virtually no precedent in U.S. history.

The proposal, set out in a spare 2 1/2 -page document sent to congressional leaders Saturday, would in effect allow the Treasury secretary to set up a government investment bank to buy up the billions of dollars of the mortgage-backed securities now clogging the arteries of the global financial system.

The dollar figure alone is remarkable, amounting to 5% of the nation's gross domestic product. But the most distinctive -- and potentially most controversial -- element of the plan is the extent to which it would allow Treasury to act unilaterally: Its decisions could not be reviewed by any court or administrative body and, once the emergency legislation was approved, the administration could raise the $700 billion through government borrowing and would not be subject to Congress' traditional power of the purse.

"Nothing quite of this scale has happened since the early years of the country when Alexander Hamilton wrote the Treasury act to give him the power to borrow and intervene in markets," said New York University financial historian Richard Sylla. And in Hamilton's case, Congress quickly clipped his wings, and no successor -- not even under President Franklin D. Roosevelt at the height of the Depression -- exercised quite such unfettered power again.

Simiply substitute US $Dollars for bread and voila... instant dollar deflating news. Which also means *drum rolls* commodities are up accordingly. Don't you wish everyday can be this simple?

Oil spikes $25 a barrel on anxiety over US bailout
Monday September 22, 2:24 pm ET Oil prices shoot up over $25 a barrel as anxiety over US bailout weighs on dollar NEW YORK (AP) -- Oil prices are spiking more than $25 a barrel as rising anxiety over the U.S. government's proposed bailout of the financial system batters the dollar and sends investors scrambling for safe-haven assets.

Investors worried Monday that the mammoth $700 billion rescue proposal will dramatically ramp up U.S. borrowing, an inflationary move that sent the dollar sharply lower versus its rivals.

Light, sweet crude for October delivery was up $25.45 to $130.00 on the New York Mercantile Exchange.

That's not all, our favorite commodities which guard against inflation, gold is up nicely. We would like to welcome the royal commodity back to the lofty $900/ounce levels.

Since our last few posts, our favorite Mining Juniors have all be reacting positively despite the overall grim economic pictures.

Minera Ande's (MAI.to) is now trading at $1.10-20 range - averaging 10%-20% for those who bought into it. Now that 43-101 is out for Los Azules would be interesting to see scoping study and prefeasibility (engineering) study to estimate cost of getting that 11 billion lbs copper from the ground! Another reminder this is a company that makes money - $9 MILLION last quarter, and now they just added a copper reserve. Jump on it if you can. Now for the related company on that Copper reserve and many more...

TNR Gold Corp (TNR.v) one of the best deal for 17 huge properties at $0.24 with large volume likely from institutional holders liquidating on any market strengths. Longterm fundamentals look positive with ongoing developments.

San Gold Corporation (SGR.v) a great deal at $1.34- small production in Quebec Canada. Very little press but loyal retail following, solid company with little shares outstanding and aggressive developments. J. Taylor pick several times in 2007-2008, he has since them dropped the company as he recommended it at $1.75+. Much better deal, same company but more difficult credit market. For a near term producer this is a good deal, not as good as MAI/TNR for potential gains though!

As Doug Casey has been around for awhile, I think it's worthwhile to visit some of his thoughts of all this debacle.

I spent six years as a business turnaround consultant. I've seen the good that comes from letting private companies deal with their own problems - either face up to mistakes or suffer as they get worse. After bankruptcy, if that's what happens, comes a fresh start. But government rescue efforts sabotage that painful but healthy process. The longer the government delays the unwinding of the current financial bubble, the greater will be the cost and uncertainty for our country, its economy and its taxpayers.

Keep in mind that the government isn't run by wizards, geniuses or even people with ordinary, practical experience. It was our government that sponsored the disastrous housing bubble by forcing interest rates to artificially low levels (negative real rates), by deregulating financial institutions while continuing to guarantee their liabilities and, finally, by encouraging the FHLB, Fannie Mae & Freddy Mac to loosen credit standards and make it easy for a homebuyer to get in over his head.

Without knowing what it was doing, the federal government offered irresistible incentives for crafty financiers to use dare-devil leverage to pile up huge profits for as long as the government could keep the system going.

The game and bubble show is ending fast for the US. The intelligent and prudent investors are piling onto Gold, commodities, quality junior miners, big major producers, whatever tangible they can hold onto.

As evident by the sub 1% Treasury Note rates - there is no faith in the US anymore.

Take a look at the 30-days treasury note rates. If that's not an indication that people would rather lose money on inflation but at least have the US Government's guarantee that their money will at least keep its face value, I don't know what is.

The trouble is not just at home here in US and North America, either.

Even the touted cash-rich nation of double digit record GDP, China, has seen its Shanghai Index drop nearly 40%+ since last year. So has Russia's markets.

The risk now is that sagging stockmarkets (inevitable after the failure to bailout Lehman) and a weakening dollar (equally inevitable) will affect the capital adequacy ratios of even the healthy commercial banks in the US. This will force them to reduce lending, worsening the credit squeeze, and condemning the US economy to further pain.

Effects on emerging markets will also be severe. Russia's stockmarket has lost 50% of its value since its May peak, at least partly due to foreign investors having moved their capital to safer havens. About $1 billion has left Russian private equities since July, according to the FT. Sharp reductions in the price of gold and oil over the past few days also suggests a serious flagging in global demand which blow-ups in the financial system will aggravate.

What would you rather have, a tangible asset in bullions and combination of high potential juniors, or a increasingly worthless dollar bill? This is the question you should be asking yourself today.