In Jim Cook's Archive


You may have heard the recent remarks about the economy by Stephen Roach, chief economist of investment banking giant, Morgan Stanley. According to the Boston Herald, he told a small group of mutual fund managers that America has no better than a 10% chance of avoiding economic “Armageddon.” That’s a mighty strong statement since Armageddon means a cataclysmic battle and the end of the world. We assume that an economic Armageddon would be a monumental financial crisis and the termination of America’s great era of debt-financed prosperity.

Not that anybody’s paying attention, but lately we’re beginning to hear more of these gloomy forecasts. Congressman Robert Matsui of California says that a crisis is looming. “Unless we act immediately, we’ll face a collapse of the housing market and consumer purchases as interest rates shoot up. We’re already seeing signs of the crisis.” What action he would take beyond letting inflation rise and the dollar fall, we’d like to know.

Off and on we’ve been making these kinds of worrisome predictions for thirty years. We believe our opinions have been based on sound economics. However, our forecasts haven’t come to pass. That’s because of the many unsound economic policies that have been employed to forestall a crisis. Rather than allow recessions to run their course and wipe out the excesses that occur in a credit-driven economic boom, the Fed invariably resorted to artificially low interest rates to sponsor even greater periods of money and credit excess.

Can they do it again? That’s the important question the ensuing months will answer. If they can’t, fasten your seatbelts because we will then be in the biggest financial trouble of all time. Despite this potential economic peril, great optimism reigns about the U.S. economy and the stock market. Over the years we have been one small voice in the wilderness issuing warnings, but seemingly crying wolf. Yet, someday the wolf will come. That will likely be a moment of great optimism with many people blindsided. It could be a time like now. You, the reader, may smile at our dire comments, but I urge you to take the time to study the economic facts as they are today. Perhaps you will undergo your own personal epiphany and come to understand the dimensions of our predicament. In that way, and that way only, will you be able to adequately protect yourself and weather the approaching storm.

Is today’s optimism justified? My friend, Dr. Kurt Richebacher, argues that the economy today is far weaker and more vulnerable than in the years prior to the 2001 recession. Monetary stimulation and tax cuts have spent themselves. He believes another recession is in the offing and it will cause enough shock and disappointment to banish the optimism of Wall Street. He concludes, “The monstrous credit and debt bubble in the United States, through years of over-accommodation by the Federal Reserve, has created an economy with an array of horrible and massive dislocations and imbalances that make a sustained recovery impossible.”

Between a Rock and a Boulder

Lately the dollar has been falling like a leaf. Government intervention in currency markets can and will eventually slow this process. However, a falling dollar effectively raises prices and lowers wages. It contributes to price inflation and the kind of currency debasement that absolves debtors, the largest of these being the government. The dollar is purposely being devalued. It’s a policy more often utilized in banana republics. Great nations with sound economies don’t suffer currency devaluations. It’s a sign of monetary laxness and spending excess.

Here’s the rub. If the dollar falls too far, it may require higher interest rates to stabilize it. That’s where the doomsdayers see a great crisis unfolding. A sharp rise in rates would burst the housing bubble. It would place added financial pressure on flexible mortgage holders. It would add to the cost of debt service on credit cards and consumer loans. It would curb consumer spending, massively slow the economy and sharply increase unemployment.

Higher rates threaten a bond market collapse. If too many sellers head for the exit at the same time, enough buyers won’t be there. With 180 trillion in derivatives and 20 to 1 leverage commonplace in the carry trade, the bursting of this bubble would in the words of Dr. Richebacher, “spell financial apocalypse for America. It would trigger a fire sale of unimaginable proportions in the bond market with bond prices crashing and yields soaring.” He warns that “liquidity will disappear overnight” and “It could devastate the whole financial system.” He claims we should “be prepared for double digit long-term rates.”

Nobody in this company is rooting for such an outcome. We do, however, worry about our nation’s well being. For now, we see continued credit excess, inflation and currency debasement. Consequently, we try to convince as many people as possible to put a small percentage (10%) of their net worth into the actual physical possession of precious metals. They have a historical record of protecting against currency debasement. What they would do in a depression is less clear. Certainly in a panic or financial crisis, it’s reasonable to expect they would be heavily acquired.

Start typing and press Enter to search