The latest from Richard Russell posted this afternoon:
By Daniel at 10 July, 2009, 11:09 pm
(Always worth reading)
“Which one is it going to be — deflation, inflation or hyper-inflation? You can find claimants to each one of these possibilities. No wonder they call economics “the dismal science.” Nobody’s got the answer. And it occurs to me that maybe the answer is “all three of these, each one arriving at an inconvenient time.”
A few years ago I stated that huge levels of debt constituted a “synthetic short against the dollar” In other words, as debt becomes a problem (and it certainly is a problem today) an increasing number of dollars will be needed to service the debt. Today the whole world is deep in debt. Consumers are in debt, corporations are in debt, states and cities are in debt, and nations are in debt. A good portion of this debt is denominated in dollars. Therefore, there is a tremendous need for dollars. Which is why the dollar is strengthening.
People are selling anything and everything to raise dollars. Homes are being sold, stocks are being sold, bonds are being sold, even life insurance policies are being sold — and all for urgently needed dollars. The Obama administration is spending trillions of dollars in an effort to carry god knows how many enterprises. What the administration is doing will either work or it won’t work. If it works, eventually the system will be stabilized. When that happens all those trillions of dollars will be floating around in the system. There will be too many unneeded dollars on the planet. This crush of dollars will very likely drive up prices and first foment inflation and rising asset prices (which is what the administration wants) and later perhaps hyper-inflation.
But what if all the administration’s efforts to halt the current deflation fail? In that case, we will be dealing with deepening deflation and very possibly crashing equity prices and a depression.
Deflation occurs when an insufficient amount of money is dealing with too much product, too much merchandise, too many cars, too many homes. The Bernanke theory is that if you create enough money you can defeat deflation. In fact, if you produce literally an ocean of money you can change deflation into inflation. At any rate, that’s what the Obama-Bernanke crowd is thinking and is trying. So far, in spite of trillions of dollars being literally tossed at the economy, deflation remains “in the saddle.”
The stock market is truly puzzled. Will the US government be able to turn deflation into inflation or won’t they?
Both sides are presenting their arguments. The optimists have their “green shoots” and hopes, the pessimists point to rising unemployment and consumers cutting back plus fading corporate earnings. The stock market is searching for a clear trend, any trend if it can find one. Traders and hedge-fund managers are pulling their hair out looking for any kind of profit. Institutions are hoping for a bull trend so they can make up for some of their horrendous losses.
The American public is frightened — they know a few things for certain — they know they can’t get mortgage loans and they know they can’t find a job. And if they are lucky enough to find a job, the pay isn’t what they received on their last job. As a result, they’re blaming the whole scary situation on “those d*** thieves and bankers on Wall Street.”
I see it this way — this is not a good time to be stubborn. We know that “the market can do anything,” and today, apparently “the economy can do anything.” The whole situation has the poor consumer confused, terrified and backed against the wall.
The worst thing you can possess today is a lot of debt, more debt than you can handle.
The best thing you can have today is a job that pays you a living. Or a business that is making a profit.
For a lot of American individuals or families this is “survival” time. I guess I’m used to it. I went through survival time during the 1930s. And I went through it again during World War II. Sometimes I think my whole life has boiled down to 85 years of surviving. As a matter of fact, that’s probably what first got me interested in the markets and in the economy.
I’ll tell you the truth — I still haven’t made any sense out of the whole mix. If I’ve come to any conclusion it is this — 85% of mankind is clueless and living on a hand-to-mouth basis. 5% of mankind is smart and pretty much knows what they are doing. Ten percent are intelligent enough to follow the 5%.
I believe the hope of mankind is education and therapy. Neurosis rules the world. The hope of mankind is that in some century it will become sane. We are far from that now. And that goes double for our leaders. The drive for power is a deadly urge.
The best course in college that I ever took was “The Philosophy of Democracy” by the great philosopher, Sydney Hook. Hook told us that best form of government would be a dictatorship. The only catch, he added, “is that Jesus would have to be the dictator.” How can you argue with that?
My feeling about government is that left to its own devices, it will always do the wrong thing. That’s because, above all, politicians want to stay in power, and they’ll do whatever they have to — to insure that they remain in power. General George Washington was actually given the opportunity to be the king of the new nation. He turned it down. Washington was a great and unusual man.
Sometimes I just feel like writing what I’m thinking. When I’m confused, I know it, and I admit it. And I’m inclined to write about it. This is one of those times. Funny, my thoughts always return to gold. I like gold because no man or government can destroy it. It’s outside all the man-made systems, gold is intrinsic wealth on its own. I like gold — the worse and the stupider man’s world, the more I like gold.
Through all the idiocy and mistakes men have made through the centuries, gold remains wealth. Nothing else has.
And that’s about all I have to write about on this confusing Friday.”
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