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.

[Beck_isright]

"Call me prescient. ;^)"

Call you profitable come October.

[Tauzero]

"A third change will be employment. Jobs will be increasingly difficult to find."

On the bright side, customer service ought to improve...

[hopespringseternal]

Rather tangential, but I have a problem with someone who rails against the war on the basis that it is too expensive, yet largely ignores entitlements.

Yes, we got into this mess partly because we try to be the world cop, but most of the blame still goes on Islamic radicals who want to dictate foreign policy and everything else for the rest of the world. This war is not something we can simply shrug off. The biggest problem for serious politicians is how to wage it with such fickle political support and the nonserious politicians constantly sniping at them.

Entitlements, on the other hand, are an entirely different problem. Everyone has simply surrendered on entitlement spending, and it is a far bigger threat than war. These things are destined for a day in the near future where it is simply no longer possible to fund them.

And as far as "everyone" making insane financial and cultural decisions, that just isn't true. It is true that too many are, but a lot of people still know how to balance a checkbook and raise halfway decent kids. We too often focus on the one teen dressed like a streetwalker and miss the ten who are not.

[arete]

Wow, that was good. Both the currency and society in general is being debased. Got to remember to pick up those tickets to the circus at the local coliseum. I'm betting on Brutus.

Richard W.

[Soren]

I heard a guesstimate that worldwide, since 1990, something like $10,000 in currency has been created for every single ounce of gold in the world.

These numbers are off the top of my head. I believe they are ballpark correct. 130,000 tons of gold in existence (above ground) = roughly 4B oz. Global money supply 30T US$ (may be off on this number). Implies 30T/4B = 7500 dollars / ounce of gold.

[Soren]

Is Russell the one that says POG and the DOW are gonna cross at 3,000?

Yes. Based on market valuations, money supply, and an analysis of the Dow/Gold ratio over time (a return to 1.00).

[djf]

I'm inclined to think that long before gold or the dow get near 3,000 WWIII would break out, if for no other reason, than to mask the utter failure of the financial sectors.

[Beck_isright]

"I'm inclined to think that long before gold or the dow get near 3,000 WWIII would break out, if for no other reason, than to mask the utter failure of the financial sectors."

WWIII has broken out. The media is just masking it with more important stories like Kobe Bryant, Baylor University, and of course, Oprah's waistline. We are in a world war. Just ask all of our troops deployed in the 100 plus countries they are in. And look at how open to attack we really are. Too bad the lemmings won't wake up until an event 10 times worse than 9-11 occurs. If then.

[Soren]

defaltion/inflation:

The Fed can lower interest rates, but it can't force people to borrow. However, isn't the ultimate monetary stimulus mechanism having the Federal Govt run huge deficits and have the Fed monetize the debt? (ie. the govt runs a deficit, issues debt, the Fed buys it using newly printed money, and the money enters the economy as the govt spends it) Can't inflation be forced this way?

[Tauzero]

"I think that any deflationary scenario would be a disaster. I think the only exit lies through inflation, as painful as that may be."

Inflation might -- might -- prevent the specific evil widespread of loan defaults. But inflation is a tax on the holders of all dollar-denominated assets, and really isn't any better than deflation, in the long run.

Inflation won't necessarily prevent defaults. It doesn't matter that principal and payments are declining in real terms if you are unemployed, or must devote more and more of your dollars for things like food. Those prices rise *before* the average person's nominal income rises.

And even supposing you are able to stay solvent, *inflating* your debt away is almost as big of a hit to your *bank* as an outright default.

Whether both the debtor and his creditor can survive a large inflation is an open question, IMO.

[djf]

In a way, you're talking about a sort of addiction to new money. It's as if the only way to cure the problem is to print more money and feed the problem. When the dust settles, things might be almost unrecognizable compared to what we see today.

[Fraulein]

Also, the next depression -- unlike the last one -- is going to hit upon a nation filled with citizens who have amassed massive debt.

[Soren]

For the record, I am not advocating that approach. Just seems that the govt can force inflation and that it is more likely they would try that than deal with deflation.

[djf]

I wasn't saying you advocate it, just pointing it out. Seems to me that the problem is not with "deflation" per se, but if even a hint of it shows up, there will be all these loans and items that are called in, a cascading collapse of financial instruments that have little if any relation to their face value. It would be the biggest collapse in history.

[Orangedog]

Amen! The marxists learned many years ago that the judicial branch is the weak link of the republic's chain. When the left could not get the legislatures or voters to support their socialist agenda, they did an end-run around them and found judges to make up laws from the bench. What most people are not recognizing are their efforts to get as much "public policy" issues that would previously require legislative action into civil courts. They do this because many civil courts are don't bother inconvenient issues like due-process and equal protection. Half of the kids in this country don't live with their fathers mostly because the left has turned divorce courts (civil courts) into a jobs program that only continues to exist and grow if more and more fathers are evicted from their homes and the lives of their children. Men are only tollerated as long as they pay up the arbitrary amount of money each month that the industry ordered them to pay...an amount of money, by the way, that is directly tied to the amount of federal subsidies that the states receive from Washington DC to administer the collection system, currently over $4 billion a year. The more they order people to pay, the more they get from DC, on top of the percentage they also charge the subjects of those orders. Can you say "conflict of interest?"

And that's just ONE racket the state, local and federal governments use to beat as many people as possible into apathetic surfs.

Look at how they use our own transportation infrastructure against us. All levels of government tax us to death to build and maintain roads that need replaced every 10 to 15 years. They pass laws that allow the police to fleece drivers out of cash for big, bad offenses like having window tint that's too dark (don't get me started on that one!). The insurance industry takes money that drivers are required to pay to them and buy radar and laser speed guns for the police, who use them to right tickets that go on a driver's record, which allows the insurance company to raise the driver's insurance premiums that the state compels them to pay if they want to keep driving.

I could go on and on and on. Of course people are trying to escape, even if it's only into something as utterly vapid as reality TV or professional sports, or the athlete of the month court trial.

[Orangedog]

50% of the people don't know what "50%" means.

Tell me about it. I never will forget an incident from about 15 years ago where I woman I knew asked me to take her to the bank so she could (I'm not making this up) get two 25's for a $50 bill she had. And yes, I did let her go to the cashier and ask for that. This girl was straight-through-the-skull blonde.

[Orangedog]

Given the high debt levels in this country, as well as the large amount of money that most people have invested in their real estate, I think that any deflationary scenario would be a disaster. I think the only exit lies through inflation, as painful as that may be.

This is how I also see things turning out. Why? because it's like all government action...it will punish the people who worked hard and saved their entire lives while giving a pass to the idiots who run $50,000 on their credit cards.

[djf]

I don't see how it can work. You can't with one hand go on inflating real estate four, five, six hundred thousand, then with the other hand, send two million jobs to India. It's untenable.

[Orangedog]

Too bad the lemmings won't wake up until an event 10 times worse than 9-11 occurs. If then.

I'm not as optimistic as you are. The next 9/11 style event will send this country into a total frenzy. The main reason why there were no riots at the grocery stores and banks was because nothing like it had ever been seen before. Think about it. If you told someone ten years ago that a well organized, terrorist group could pull off hijacking four commercial airliners (or more...God knows how many didn't get off the ground when the FAA closed all air traffic), turn them into guided missiles and use them to completely level the World Trade Center and over 20% of the Pentagon...people would look at you like you just peed on their flower bed.

No, people have had two years to contemplate how bad the next attack will be.

[Orangedog]

I didn't say it would work. Just that it is the easiest way for the fed to get around the massive entitlement and debt situation. It's either that or stop sending out the social security checks, and that would be political suicide.