As people continue to digest breaking news out of Greece and around the world, the Godfather of newsletter writers, 90-year-old Richard Russell, warned that failed Western central planners are now trapped and desperate.
The Dream Of The Gambler And The Death Of Fiat Currencies
Richard Russell: "One of man’s dreams has been to get something for nothing. The alchemists were dreamers who sought to turn base metals into gold. They never succeeded. Gold is only accumulated by man’s labor. The dream of the gambler in Las Vegas is to put a coin in the slot machine and with a mere pull of the handle, hit the jackpot.
In the same way, the operators at the central banks create money out of thin air. Through acts of manipulation, they create new money. They force people to accept their new currency by fiat. Fiat currency gains its legitimacy through government threat and the muzzle of a gun. Ironically, despite government threat, no fiat currency has ever survived. In the end, reality trumps government threats. The reality is that the great trend of the economy is in a correction mode. The great leveraging and inflation since World War II hit its peak in the year 2000, and since then the forces of deleveraging and deflation have dominated.
Deflation, Deleveraging And A Desperate Fed
Deflation or deleveraging create losses and pain. The retail public does not like pain and loss, and blames politicians for the pain of the losses it takes as the economy contracts and corrects. The politicians, in fear of losing their jobs, pressure the Federal Reserve to bring back prosperity by any means. The Federal Reserve seeks to bring back prosperity. More money, thinks the Fed, will move the retail public to buy more, and thus revive the economy. But ironically, the public does the unexpected and uses the new money to save and pay down its debts. This is the great problem that faces the Fed today.
The Fed’s balance sheet is now in the trillions, while the Fed wants to return the US economy to its normal state. Among other things, this requires interest rates to return to their normal level. In its strategy of promoting prosperity, the Fed has kept short rates at zero for the last six years. The Fed is now anxious to allow interest rates to rise to normal. Rising interest rates will put pressure on the national debt. As the nation’s national debt revolves and rolls over, higher interest rates will have a compounding effect, adding hundreds of billions of dollars to it as interest rates rise.
As Richard Russell sees it, the bear market that started in 2000 should have been left to work its way to conclusion. The entities that were weak should have been allowed to go bankrupt. Years of leveraging and manipulation should have been left to the mercies of the markets. The economy should have been left to the free forces of supply and demand. As matters stand now, the politicians have decided that they can promote prosperity forever. They can do it by fiat, and stop a bear market in its tracks." I would urge all KWN readers around the world to subscribe to Richard Russell's 90 years of wisdom and remarkable writings at Dow Theory Letters by CLICKING HERE TO SUBSCRIBE.
***ALSO RELEASED: A Remarkable View Of The War In The Gold And Platinum Markets CLICK HERE.
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