In Jim Cook's Archive


By James R. Cook

Everybody has their theories on the economy and often they are at loggerheads. The big argument today is whether we’ll have inflation or deflation. My guess is that any kind of tumble in stock prices or slowing of the economy will cause the Fed to push out more money and credit. Some argue that this can’t be done. But look at the new, low variable mortgage rate of 3.6% and the sudden up tick in refi activity. We either inflate or we have a depression. With the fantastic degree of leveraging and debt throughout America, every effort will be made to forestall the kind of slowdown that can cause public and private bankruptcy.

Today’s boom in asset prices reflects easy-money and loose credit conditions. Stocks, bonds and real estate are all super-leveraged. There’s only one way to keep all this pumped up and that’s to create more money and credit than existed a year ago. Three trillion more will keep all the bubbles inflated for this year. That’s around $300 billion more than the prior year. The Fed’s on a treadmill of inflation and they must run faster to stay in place. This ongoing currency debasement coupled with factors like Chinese demand has spurred a commodity price boom. Historically, oil prices have always risen to offset U.S. money growth (M-3). Fifty-dollar a barrel oil will be here before you know it.

It should be apparent to everyone by now that you can’t trust the governments numbers on the economy. The consumer price index looks more like disinformation than a trustworthy bellwether. If the inflation rate is a lie, then the GDP figures are also bogus, since 1% of unreported inflation adds that same percentage to the GDP numbers. With hedonic pricing and government spending, GDP numbers are fishy to begin with. Despite the all-time greatest money and credit excesses in history, the economy remains stagnant as reflected by job creation and capital spending numbers.

Newsletter writer Lance Lewis talks about the impact on the stock market. “We’re in a bear market because the biggest bubble in history busted in 2000. Sure, the Fed delayed the consequences with low interest rates, but it didn’t solve the problems. The Fed has only made things worse in the long run, and now that stocks appear to have exhausted to the upside and are trending down once again, they’re going to drag on the economy again. And this time the Fed’s interest rate gun is nearly empty. So, we’re looking at a very dicey situation as the year progresses.”

My friend and mentor, Kurt Richebacher, called me early in the week to warn me of the seriousness of the U.S. economic situation. He doesn’t believe the Fed has the ability to pump out enough new money and credit to restore economic vigor. He thinks falling stocks signal a crucial turning point. He expects contraction, defaults and deflation.

Here’s Kurt’s view, “Surveying the U.S. economy’s performance over the last three to four years, we see ever-mounting structural imbalances: the worst job performance in the world, a rock-bottom national savings rate, a record current account and trade gap; a huge and soaring budget deficit; record levels of personal indebtedness; the most unbridled credit expansion in history; and a plunging currency.”

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