Escape and Fantasy -- Economic Commentary by: Richard Russell

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.

Under your second point, does the East Asia hyperinflation occur because they devalue their currencies to maintain their exports?

Under your third point, I agree with the first sentence. My question is this. Could the Fed create inflation if it was hell-bent on doing so in a misguided attempt to prevent deflation? I'm not saying they would re-invigorate the economy, in fact, I'm guessing they would likely destroy the dollar.

Yes, that's correct. As inflation rises in the U.S., the dollar would depreciate and consumer demand would decrease. This would maneuver Japan into an untenable situation where they must devalue the yen in order to maintain their export sector. This would compel U.S. corporations to decrease prices in order to compete with East Asian imports, which would induce U.S. domestic deflation. The ECB can only hold the line on the euro for so long; they would also have to attempt devaluation in such a scenario.

I don't see how the Fed can hyperinflate with abandon because people have to be willing and able to actually spend the dollars. The problem with hyperinflation scenarios in this case is that American consumers cannot sustain the credit expansion required to funnel this liquidity into the economy. Moreover, lending institutions would simply refuse to extend credit to overburdened consumers with intolerable debt loads. That's why I alluded to a personal credit crunch in post #81 above; the Fed must have a conduit for monetary expansion.

In other words, a personal credit crunch would deprive the Fed of its means of injecting further liquidity into the economy before the point of hyperinflation could get reached. If and when the economy slides into deflation, then the entire equation shifts and none of the economic precepts we're all accustomed to will matter anymore. There's no meaningful precedent for deflation within the modern fiat system; Japan's experience doesn't qualify because such a great part of its economy is actually here in the U.S.

"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.'"

So you are of the faction that believes the U.S. government actually planned and carried out the 9/11 attacks in order to blame the Arabs?

--Boris

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