civil unrest and that is now happening in both places.”I asked the Smartest Man why the markets of India and China had suffered along with those of Europeand the United States when the economies of those countries continued to do well. He said,“Equity investors in the developing world don’t think their markets can perform if stockmarkets in the West are having trouble. Now, however, stocks everywhere could movehigher. There is plenty of cash around to invest in risk assets. The financial problems thatthe United States had in 2008 and Europe had this year have been solved temporarily,world growth is continuing and earnings are strong, so you see I am not bearish in theshort term. It is the long term I am worried about.“In the future we might have to create a new international reserve currency. It would be abasket with dollars representing 40%, the renminbi 20%–25%, gold 25% and the euro andthe yen the rest. It would require a new Bretton Woods conference to accomplish this andit will probably never happen because of political considerations, but if it did, we wouldfinally have a reserve currency in the world that would be stable because it is partiallybacked up by gold. The goal has to be to restore confidence in the world financial systemand this would do it. The pain would have to be pretty severe to get the relevant countriesto agree to it, however. In any case gold is going higher. Its time has come. I could see itrising to $1500.“We’ll probably know whether my assessment of the current situation is accurate in twoyears. You will know we are in for trouble when interest rates start to rise dramatically.Before that, however, the stock market will go higher, inflation will get to 5%–6% and the10-year U.S. Treasury yield will get to 7%. Earnings are nominal and they will beimpressive, so investors will be happy about that. Even though the Treasury yields willmore than double from present levels, real yields will remain low, so investors won’t gettoo bothered about that. It’s when real yields start rising that the problems will begin.“You may run into some difficulties earlier because of a tear in the fabric of society. If thestock market is moving higher and those working in Wall Street and other areas of financeare doing well, that could cause some unrest. Unemployment is likely to remain high andthe general public will say that the financial service regulatory reform legislation didn’t doenough to bring Wall Street into line. The breach between the rich and the poor will bewidening and the government must do more for the less advantaged. The Tea Party willargue that spending must be restrained, but populism will win out over the conservatives.I don’t see a double dip happening with the U.S. going back into recession.“Regarding the Gulf of Mexico we must realize that man is a Frankenstein to nature. Wemust accept accidents, even serious ones, as normal. A year from now the oil spill won’tbe forgotten, but it won’t be a headline item. British Petroleum won’t go bankrupt. Theywill meet their liabilities. The evolution of man makes us susceptible to greater accidents.When the first 747 went down people said that airplanes shouldn’t be that large. Now wehave the Airbus A380 and the Boeing Dreamliner.“Looking around the world, there are opportunities. The election in Brazil is key. If theLula look-a-like gets in, the economy will probably continue to do well. I am not investingin Japan. They have a huge debt problem and an aging population. It won’t be a disaster,but it is not interesting to me. I see potential profits in places few people would look at. Iam investing in real estate in Africa and, yes, in Baghdad and elsewhere in the MiddleEast.“We are at the point of no return. The developed world created problems for everyonefrom 1945 to 2007 and now we have to solve them. The United States cannot afford astrong military force, health care for all, an adequate retirement program and fullemployment. You don’t have the resources to maintain that. There will be a modestdecline in the standard of living, but life will go on. There is no limit to the humanimagination. There is always something to do. Apple has doubled this year. Solar energyis coming. The future will be led by the emerging markets. It is not the end of the world.