The Only Way Out Is to Devalue
The following is an excerpt from Richard Russell's Dow Theory Letters
"Political power grows out of the barrel of a gun." Mao Tse-Tung
The US national debt is now over $16 trillion — and growing at the rate of more than $1.2 trillion a year. This is clearly unsustainable. But how to cut the debt? One way is to cut entitlements, which are growing exponentially. Will they cut Medicare? Cut food stamps? Cut any entitlements at all? No politician would dare make extensive cuts in entitlements.
OK, then raise taxes sky high for everyone, and I mean for everyone. Are you kidding? If we raised everyone's taxes to the hilt, that still wouldn't solve the US's deficit problem. Furthermore, no politician would dare vote to raise taxes sky high!
Really, then how are we going to solve the debt and deficit problems?
It is not going to be solved. The temporary "solution" will be put off for as long as our pols can put it off. But how will they put it off? It will be put off in only one way — by devaluing the currency. And surprise, that's what they're doing now.
Let me give you an example. I took out a $10,000 GI insurance policy in 1945. The payments were $20 a month. That $20 a month was a great hardship for me in 1945. In the time since, the Fed has driven up inflation at the rate of 2% a year. 75 years have elapsed since I took out that policy. Today, paying that $20 a month would be a piece of cake for me. I could pay it easily.
And that shows how they're going to "handle" the debt. They'll do it by devaluing the dollar. Twenty years from now, there'll be so many dollars floating around that our national debt will look a lot easier to handle. By printing dollars by the billions or probably trillions, the US will render the national debt much easier to deal with.
But what about the dollar? What will happen to the dollar if the Fed continues its 2% inflation program each and every year?
Answer — The purchasing power of the dollar will slowly erode. And all other fiat currencies will decline with the dollar as they compete for exports against the dollar.
Ultimately, the whole strategy will collapse the purchasing power of the dollar. And the various fiat currencies will have lost all their purchasing power.
When will that happen?
It's happening now — but slowly. "QE to infinity" was a big step towards it happening.
In the end, it will take more and more of any given fiat currency to buy anything — a quart of milk, a shirt, a loaf of bread, a car, a house — anything. The rising debt and the government's efforts to "handle" the debt will destroy the entire monetary system. Only one form of wealth will remain — gold.
Gold? Why gold?
Gold does not need the backing of any sovereign power, gold has no counter-party — gold in itself represents pure, eternal wealth. The total world quantity of gold is limited, nobody can manufacture it — although for centuries alchemists have tried, nobody can increase it by the flick of a computer. In the end, gold will be the only true wealth. Fiat paper, the products of the central banks, will represent a symbol of man's egotism, greed and thirst for power. The only existing wealth will be the currency that men (bankers) cannot control or manufacture — gold.
Question — Who are these people who you say thirst for power?
Answer — They are the secretive bankers who created the Federal Reserve. The Fed was created by bankers and for bankers. As recently announced by Ben Bernanke, the Fed will buy $40 billion a month of mortgage-backed securities from the banks. In this way, the Fed will take these junk mortgage-backed securities from the banks and in return give the banks dollars. Thus, they will reliquify the banks with acceptable money, while taking these junk mortgage-backed securities off the hands of the banks.
Question — Where will the Fed get the money to buy all these mortgage-backed securities?
Answer — The Fed will conjure up the money out of thin air.
Question — If all that you say is true, then why not advise your subscribers to put all their assets into physical gold?
Answer — Because that would be inconvenient, perhaps inconvenient for a long time. The scenario I'm talking about could take place in a matter of years. In the meantime, you and I are forced to do all our transactions with fiat dollars (which are the only legal tender). If I tried to pay my restaurant bill with a small gold coin, I would be turned down, and the police would be called in.
Besides, if the current monetary system collapsed, the government in its desperation could pass a law making it a felony to transact any business transactions with gold. In that way, the government could force people to deal with Fed-created junk dollars. Which is why some analysts suggest holding your gold in a foreign country. In that case, our government could imitate France where it is against the law to take any gold out of the country. Yes, the government (or the Fed) will do whatever it takes to force us to use the Fed's unbacked junk paper.
Unintended consequences — Bernanke in his mad efforts to drive the Dow up, is doing Americans no favor. Instead of preparing for hard times as they should be doing, Americans look at the climbing Dow and say to themselves, "Things are fine and getting better. The Dow's going up, and if anything 'bad' does happen, the Fed will step in and make everything good again."
Question — Russell, you keep talking about hard times. Why do you keep repeating that fantasy?
Answer — I repeat it because it's starting to happen. From Friday's WSJ — "DP Warns Over Slowing Global Economy." "Trade Slows Around the World" from last week's WSJ and "Making the Best of a World Slowdown" from the Ivey Journal. Europe is in recession. China is slowing down. The smaller Asian nations are hurting. The entire global economy is deflating and deleveraging. The Fed and the government can manipulate the news and the data — but they can't manipulate the world economy. The primary trend of the world is bearish and the news is getting out.
The world is in a slow-growing economic slump and the US is part of the world. But the Fed is masking the picture with its furious money printing. As I said, the Fed is doing Americans no favor with its monetary manipulations.
From the front page of the October 2 NY Times — "Leaders At Work On Plans to Avert Mandatory Cuts Facing Jan. 1 Deadline. Efforts Take Shape In the Senate to Avoid the Fiscal Cliff."
The Fiscal Cliff is a symptom and a result of the massive US deficits. But instead of addressing the deficit problem directly, Washington's politicians will try to AVOID the symptoms, which we call the fiscal cliff.
The Times writes, "But lawmakers and aides say that a bipartisan group of senators is coalescing around an ambitious three-step process to avert a series of automatic tax increases and deep spending cuts. The process is supposed to save $4 trillion over a ten year period. Russell comment — note that the politicians' cuts and tax increases would occur over a ten year period, which is a handy way of kicking the can out a full decade.
To read the rest of Richard Russell’s Dow Theory Letters, click here to subscribe.
About Richard Russell
Richard Russell Archive
|07/07/2015||China Is the Real Potential Black Swan||story|
|12/29/2014||Richard Russell: Buy Stocks As We Enter Market's Final Boom Phase||story|
|08/13/2014||Market Trends Still Bullish||story|
|07/31/2014||The Four Biggest Threats to this Bull Market||story|
|11/15/2013||Get Ready for the Mania Phase||story|
|10/30/2013||Financial Doom: Is This Time Different?||story|
|09/26/2013||Is Something Ominous in the Cards?||story|
|09/05/2013||Market’s Main Trend Remains Bullish||story|
|08/07/2013||Glass More Than Half-Full||story|
|07/10/2013||Is Gold Undervalued?||story|