In Jim Cook's Archive


The newsletter writer, Richard Russell, tells us that U.S. government debt has soared to an unbelievable $8 trillion dollars. He states, “The following are increases in the national debt that have been mandated by Congress. In 2002 the increase in the national debt was $450 billion. In 2003 the increase rose to $984 billion. In 2004 the increase was $800 billion. This year, in 2005, the House passed an increase of another $781 billion, although the Senate has not yet acted on this. In other words, in the last four years the increases have totaled $3 trillion, which amounts to an increase of 50 percent in the total national debt.”

He continues, “The U.S. is now the world’s largest debtor. This nation is swimming in debt. The buying of U.S. consumers comprises 70 percent of the Gross Domestic Product of the U.S., and the U.S. consumer is now spending more than he’s earning. The savings rate of the U.S. consumer has now gone negative – minus 0.60 percent.”

The newsletter writer, Lance Lewis, sums up the current economic situation nicely. “High gasoline, heating oil, and natural gas prices due to Katrina are putting even more pressure on the economy, and the Fed is going to be forced to continue to tighten (or the long end may do it for them if they don’t) due to the inflationary risks that high energy prices post until the economy softens enough to contract demand and bring prices down. If that’s not the perfect trap to trigger a recession, I don’t know what is.”

The recession he warns about is described by Chris Temple in his “National Investor” newsletter. “Once the point of over-investment, over-consumption and the willingness to accept ‘low risk premiums’ has been reached where the rubber band simply can be stretched no further, a vicious cycle of debt liquidations and defaults will take over. Those who can, will unwind their irresponsibilities of recent years, selling all manner of assets in order to jettison debt that becomes unserviceable, or is deemed too risky to carry any further. Ultimately, a mad dash for the exits will ensue, which could devastate asset prices. All of this will have been a consequence of far too much credit having artificially inflated prices beyond all reason or economic justification in the first place.”

That kind of deflation is just what our Federal Reserve and administration fears the most. Richard Russell explains the probable response. “With the Fed’s ability to flood the system with liquidity, you have to wonder what will happen when the U.S. economy finally turns down (think housing and retail decline). My thinking is that the Fed will do what it always does, and that is move to offset weakness with more monetary inflation. I know that many leading economists and analysts feel that deflation is in our future. However, you can be sure that the Fed will do everything in its power to thwart the forces of deflation – in fact, the Fed is still being accommodative now as you read this.”

I have a friend who just sold a second home in Naples and put over a million dollars in the bank. If we have deflation, he will be in good shape because money will be scarce. However, if things continue as they have, then holding dollars will be a poor choice. Inflation and a falling dollar are intertwined forces that decimate the value of money in the bank.

Richard Russell sums up the dilemma we all face. “It’s sad when you have to worry about your own country’s currency. It’s hard enough to pick stocks or investments that you think are going to work, but when your nation’s currency itself is under suspicion, then nothing is safe, nothing is easy, nothing is a sure thing long-term ‘investment.’”

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