Escape and Fantasy -- Economic Commentary by: Richard Russell

safehaven.com ^ | July 29, 2003 | Richard Russell

[arete]

I spent a lot of time over the weekend hitting the malls, watching the crowds, and noting the prevailing sentiment. The feeling I got was "escape and fantasy," a subtle but overwhelming sense of unreality.

These days the kids are heavily into sex, sexy clothes, near-nudity, cartoons, funny-paper movies, pseudo-violence. Look at your local newspaper and observe the new movies that are coming out. Nine out of 10 appear to be aimed at teenagers, and most have little to do with anything resembling reality. It's all escape, escape, escape.

I've been on this earth for quite a while, and I've been a pretty good observer of the so-called "human condition." I was in high school during the '40s along with Jack Kerouac who was one class above me. So I was there when the "beats" shocked America with their protests against this nation's old, up-tight ways. But the beats were protesting in their own way, and Kerouac's "On the Road" became the cry for a new freedom.

I was there in World War II, which brought on a seminal change in America's thinking. Suddenly, we went international. And we went triumphant. We were king of the world, and everybody knew it.

I was there in the '60s, lived in a commune for a while, and was writing against the Vietnam War in the face of protests from many of my own subscribers. The kids at Berkeley started the revolt against the Vietnam War, and the revolt quickly spread across the nation. Those were the hippie days, but the hippies were protesters -- protesting first against the War and then against up-tight America and its love of violence and its sexual repression. Drugs became the order of the day.

In the late-80s, the lust for money and success began to take over, and by the late-'90s everything was money, more money -- and profits above all, even if you had to lie about your profits.

What I see now is ESCAPE. Nobody's protesting -- Americans are just escaping. People somehow sense that "something is wrong," but they don't want to deal with it. So today it's all about celebrities, parties, big cars, second homes and lots and lots of sex. Sex is the greatest escape mechanism that God ever invented. Like cholesterol, there's good sex and bad sex.

And there's a third division, it's called LOTS of sex. You want to see lots of sex, turn on TV, go to any movie or better still -- watch MTV. I'm not saying that what hundreds of millions of kids are seeing on MTV is good or bad, I'm just observing that MTV has turned into an over-the-top "girlie show." Talk about escapism, this is it.

So what are people escaping from? I believe that consciously or unconsciously, they're escaping from our future. And what is our future? I'll say it once more -- our future is "INFLATE OR DIE."

What - you don't understand what that means? Then I'll rephrase it. Our future is "INFLATE OR REPUDIATE."

You see, the 1990s under Fed Chief Alan Greenspan was a decade of over-spending and debt creation. Half of all our Federal debt was created during the 1990s. During the 1990s our government ran up $2.87 trillion of new debt. This was more than all the debt the US government had built up since the United States were first formed.

But that's just part of the story. Coming up is roughly $44 trillion of unfunded liabilities, which includes Social Security, Medicare, normal government expenses and interest on the national debt.

We have a $10 trillion economy. How on earth is a $10 trillion economy going to service what's coming up in the way of $38 trillion in debt?

There are two choices. Repudiate a good chunk of this debt or at least cut it back drastically. Or finance the debt via the printing presses. Which one do you think the US government is going to choose? Look, if we're running the printing presses full speed now, and the BIG expenses haven't even hit yet, what do you think our leaders are going to do when the "debt hits the fan?" You guessed it, they're going to inflate at a level that has never been seen before.

Right now we're seeing just the tip of the mess. Our federal budget deficit is now half a trillion dollars, and our current account deficit is another half trillion. This is bad enough, but it's financial peanuts compared with what lies ahead.

And the irony is this -- here's the US, the world's biggest debtor nation, playing policeman to the world, running up bills of $3.9 billion a month in Iraq alone and placing our military all over the world. It's obvious that our government leaders are totally refusing to face the situation, and in fact, they're rapidly making it worse.

So changes will have to happen. One change is that free spending by Americans will have to stop -- and the new trend, forced upon Americans, will be savings.

A second change will be parsimony -- American consumers will have to scrimp, to cut back, to economize in order to pay their bills.

A third change will be employment. Jobs will be increasingly difficult to find. Unemployment will remain high as America's manufacturing and service bases are exported to low-wage nations overseas.

A fourth change will be recognition. Slowly but surely Americans will be forced to face the truth -- this nation is spent-up, it's over-spent -- we've spent our future and more.

A fifth change will be the recognition that the US can no longer be the undisputed world's hyper-power. Sure we'll have the world's biggest and baddest military, but that's actually going to be a problem. The problem is expenses. It's just too darn expensive to be military master of the world. It will be too expensive when you're building debts of a trillion dollars a year.

A lot of our success is due to one extraordinary phenomenon. That phenomenon is the acceptance of the dollar as the world's reserve currency. Up to now we've been able to print our debts away. Up to now the world has been willing to accept dollars for their goods and merchandise. But as the mountain of dollars builds up, the world will begin to choke on dollars. The world may even begin to question whether the dollars are a valid holding. When that happens, everything changes. And I mean everything.

Bond holders are beginning to bail out. They're jumping the ship. As I write, the 30-year Treasury is down over a point to new lows. This means mortgage rates are heading up. This means debt will be more expensive to carry. This means people and pension funds and mutual funds which are holding the long bonds are already down better than 15% since mid-June.

The Fed has forced savers either to take big losses in bonds or to earn literally nothing in T-bills or CDs. The Fed's low-interest policy has forced oldsters to spend their savings or lose their shirt in bonds.

Subscribers, listen to me. The future is being carved out as I write. The future is going to be the US government printing massive amounts of Federal Reserve Notes (we call them "dollars") in order to pay off debts and unfunded liabilities coming due.

The future is going to be dollar-deterioration and a move out of financials and into tangibles. The future is going to be a flow of funds out of paper and into real wealth -- gold and silver.

I don't know how many of my subscribers have moved into gold and silver and gold and silver shares. In my opinion, the precious metals are still on the bargain table. Compared to the amount of paper that has been printed, the precious metals are ridiculously cheap. Gold was $850 back in 1980. Gold today is less than half its 1980 peak price. Before this bull market in the metals is over, I expect 1980's peak price to be far surpassed.

This isn't just a case of making profits. This isn't just a case of "beating the market." Buying the metals and the metal stocks here has to do with financial survival. It has to do with arming yourself against a mighty tide, and I don't know how I can make the case any stronger.

It's time for all my subscribers to get into a new and unfamiliar mindset. The mindset is based on a Federal Reserve which has allowed this nation to move toward a position which I can only describe as "technical bankruptcy." We've got a $10 trillion economy but we're going to deal with unfunded liabilities of over $40 trillion plus our "normal" ridiculous budget and current account deficits.

Think about it -- or join the "escape generation." The choice is yours.

Richard Russell

Dow Theory Letters Inc.

[arete]

I think Russell pretty much nails it.

Richard W.

[arete]

FYI

Comments and opinions welcome.

Richard W.

[anniegetyourgun]

The goldbugs were/are right.

[grania]

What I see now is ESCAPE. Nobody's protesting -- Americans are just escaping.

The author really goes through the topics, but I like the way he connects the dots.

The beginning of this article brought to mind something that has been bothering me lately. It's those "reality shows". Well, they aren't reality at all. They involve rigged, contrived situations that people must live with. That's what surviving in today's society is about...even reality isn't real.

Again, inflation comes up. Suggestion...hold on to cash, pay off debts (especially those that have interest rates that can increase), evaluate what your real necessities are and where money can be saved. Then, when interest rates go up, put the money somewhere safe, hopefully at 6-7 % interest rates.

[arete]

Then, when interest rates go up, put the money somewhere safe, hopefully at 6-7 % interest rates.

That's a start but if we get the kind of inflation that Russell is talking about, rates will eventually be much higher than that.

Richard W.

[headsonpikes]

When the SHTF, I only hope that folks turn their anger on their own stupid belief in socialism and free lunches.

Pretty thin hopes, I know. My fall-back plan is for young people to repudiate all this socialist nonsense at one fell swoop.

Technically, that might qualify as a revolution.

[AntiGuv]

I'm telling you, it won't be hyperinflation for the United States, it'll be deflation. All roads to hyperinflation lead through deflation...period. You can't get from here to a hyperinflation or even a genuine stagflation scenario without plunging into a deflationary contraction. And, once such a development occurs, the economic dislocations will be so comprehensive as to render the very basis of these hyperinflation forecasts meaningless.

[arete]

I'm telling you, it won't be hyperinflation for the United States, it'll be deflation.

Russell obvously believes that the FED will be able to avoid asset deflation. I'm in the stagflation camp right now although that could change.

Richard W.

[Axenolith]

I only hope that folks turn their anger on their own stupid belief in socialism and free lunches.

I'd be willing to bet that the exact opposite will occur.

[expatpat]

You're right, AntiGuv -- the first 3 changes that Russel comes up with (saving vs spending, parsimony, and unemployment) are all deflationary as hell.

[Beck_isright]

"There are two choices. Repudiate a good chunk of this debt or at least cut it back drastically. Or finance the debt via the printing presses. Which one do you think the US government is going to choose? Look, if we're running the printing presses full speed now, and the BIG expenses haven't even hit yet, what do you think our leaders are going to do when the "debt hits the fan?" You guessed it, they're going to inflate at a level that has never been seen before."

And just what happens when we have a .25% Fed Funds rate, but the 30 year is still at 7.5-8% yields. This sounds like a trap of an unseen historical magnitude. We can print money, but it will be too expensive to borrow it. Imagine that scenario for a moment.

[boris]

Part of the problem is that everything changed on 9/11. We will be at war with Islam for the rest of my life--and that means more debt and more deficits into the foreseeable future.

We are at war, and nobody thinks about debt in wartime.

This is one reason I favor quick, nasty, terminal 'solutions' to the problem of militant Islam. Make it fast; get it over with, so we can get back to the job of saving Western Civilization--which may be unsaveable anyway.

--Boris

[Beck_isright]

"I'm telling you, it won't be hyperinflation for the United States, it'll be deflation. All roads to hyperinflation lead through deflation...period. You can't get from here to a hyperinflation or even a genuine stagflation scenario without plunging into a deflationary contraction. And, once such a development occurs, the economic dislocations will be so comprehensive as to render the very basis of these hyperinflation forecasts meaningless."

I agree. Even though money will be "cheap" on the short term securities and Fed Funds, the long term loans which drive real estate and economic expansion will become expensive. So we will have cash, but no one able to afford to take out the loans. Then prices will collapse across the board. I vote the short term inflation, long term deflation scenario. Especially since the earning and spending power of the consumer has not changed in real dollars (adjusted for inflation) since the mid 1980s.

[Beck_isright]

" We are at war, and nobody thinks about debt in wartime."

Which is why I am in the deflation camp. The next attack will cripple the US economy for 10 years. That is the only reason we are getting any cooperation from the EU crowd, and no cooperation from the Latin Americans. They want us to crash so they can default on all the loans. The EU can not let that happen. Someone has started a fire in Rome, but no one has the common sense to call the fire department. What will Nero Greenfickle do next, to pour gasoline on the fire, is the real question.

[arete]

We are at war, and nobody thinks about debt in wartime.

Well, I'm much more cynical about the war. If we didn't have a bad economy first, we wouldn't be liberating anyone. The war is a distraction from the real problems which are the economy. War provides the perfect cover for politicians -- "The economy is a wreak and we have to spend all the money because we're at war, dontcha know."

Richard W.

[Orangedog]

Russel is spot-on. Regarding gold and silver, in inflation adjusted dollars, the 1980 high for gold at $850/oz would be a little over $1800.00 and about $109.00 for silver. Let the polly-annas go ahead and scoff at us. Sure, I "might" miss a 20% upside in stocks (until reality takes over), but I won't have my ass handed to me like a lot of other people will.

[Orangedog]

Unfortunately, when debtor nations collapse, their government usually turns dictatorial. Governments will do anything and everything they can to survive. This won't be like the last depression.

[Orangedog]

IMHO, Greenspan is ready to do anything to avoid deflation, that includes running the "printing press" at high speed, 24/7. It is my belief that his efforts to prevent deflation will cause hyperinflation. In any event, gold and silver are going to be the safe haven of choice. I would expect the next administration in the White House to bring back gold and silver confiscation once the dollar quickly loses more than half it's value within a few weeks (or days) time.

[razorback-bert]

The future is going to be a flow of funds out of paper and into real wealth -- gold and silver.

I agreed with this statement once, but now don't. Too many talking pointy heads have beat the notion of owning gold as a wealth hedge down, saying it's so old fashioned, out dated, and simple minded.

Owning gold, paying cash, avoiding debt and putting money in the mattress for a rainy day are all passe in our modern society.

[Orangedog]

Owning gold, paying cash, avoiding debt and putting money in the mattress for a rainy day are all passe in our modern society.

Which is a large part of why we are in this mess. Let the pointy heads scoff. Gold and silver have been real money since the memory of man runneth not to the contrary. This is just more tulip-mania.