Goin Down the Road Feelin Bad

This week I am using this column to reprint an article by Richard Russell, who has predicted every "Bear Market" for the past 30 years. Recently Russell has repeatedly expressed confusion about the world economy. However, this article articulates basic economic realities that we all might do well to understand.

"Take the pain." That's what American population and pols have been unwilling to do. To undo 60 years of inflation, they refuse to take the pain. We've refused to take the pain ever since WWII. A great group of bubbles has been created since WWII. But they are starting to pop one by one. The biggest bubble of all, the debt of the US. That debt must be addressed. To address that debt and all of the debt that has enveloped the US we must absolutely take the pain. Which is why I label this site, "Take the pain."

That's what nobody wants to do, and the politicians serve the people by keeping money flowing to avoid the pain. Question: Why is it that you never see compounding and debt mentioned in the same sentence? Answer: Because it is a poisonous combination due to the new trillions that have been pumped into the US economy. Based on the massive amount of money pumped into the US economy inflation should start to appear in 1-2 years. With inflation comes higher interest rates. Rates are synthetically low today but by 2013 they will be rising along with inflation. This is when the compounding of the debt starts. 

The US National debt is at 16 trillion, 40 percent of the debt matures in one year or less. The average maturity of all US debt is 4.3 years. All this debt has been rolled over at historically low interest rates. This is going to change. As inflation accelerates, rates move higher. The entire tax-take of the US is now 2 trillion. This is a tiny amount compared to the cost of interest on the national debt. In other words, the US will have to borrow huge amounts of money in order to stay solvent. The national deficit is increasing annually by more than 1.5 trillion per year. Thus the tax-take doesn't begin to cover the interest on the debt. Within a few years a massive amount of money that is pumped into the economy by the Feds will set off inflation. With inflation, interest rates will rise. 

Remember the entire federal debt must be rolled over every few years. It will roll over and compound with rising interest rates, a death knell for the US economy and the dollar. As the process continues, the exploding and compounding national debt will crush everything in its path. The dollar will collapse, and the US will no longer be able to borrow the money needed to cover its interest and expenses. The stock market is not going to wait for these events to materialize. It will start discounting the trouble way before it happens. I see any rallies (as the one we're seeing today) as oversold bounces and they should be sold into. 

The preferred position is no stocks, gold, and 10 ounce silver bars with some cash for practical purposes. We are headed for uncharted waters and in time all central bank created currencies will be crushed. Gold is the only currency that is not someone else's liability, and it should be accumulated. 

In the end, the problem is neither the US population nor its politicians are willing to take the pain. There are no free lunches, and there are no corrections with out pain. The pain is set in stone. It's appearing now in unemployment and loss of purchasing power and spreading poverty.

Richard Russell