The Pressing Weight of Compounding Debt
The following is an excerpt from Richard Russell's Dow Theory newsletter
The world's major central banks launched a joint action to provide chief emergency US dollar loans to banks in Europe and elsewhere.
In a desperate effort to raise stocks the central banks of the world coordinated by forcing more money into the world system. The obvious result was a surge in stock prices with the Dow rising almost 500 points. This is exciting for now but it will result in inflation within 6 months to a year. Along with rising inflation will be its cousin, higher interest rates. This will impact everything from commodity prices to the rising cost of financing the federal debt. Right now the federal debt is being rolled over at extremely low interest rates, but as rates climb, compounding will occur and the cost of rolling over the federal debt will become a critical problem.
Remember, 40 % of the federal debt matures in less than one year and the average rate of the entire federal debt is 4.3%. This is when compounding of the federal debt becomes poisonous. The problem of borrowing to finance the federal debt becomes prohibitive. For now the act by the federal bank of flooding the market again with cash acts as a stimulant, but the same stimulant becomes, in a matter of years, inflation poison. The first bubble to be crushed will be the ridiculous federal debt. The second crushed will be the US dollar. The compounding federal debt will act as a steam roller, rolling everything in its path. The island of safety will be pure wealth, better known as gold. Patient subscribers will be rewarded for their patience. The great enemy will be the act of compounding pressing its weight of the US debt. Just as compounding turned rising money supply into fortunes, compounding the rising interest rates will turn fortunes into shoestrings.
About Richard Russell
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