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Preparing for Hyperinflation
By Gold Economist: Jay Taylor
Goldinvestor.com
Friday - March 19, 2010
Category: Investment, Gold, Mining
(Investorideas.com Mining stocks newswire) Richard Russell, who is the most experienced, well-known Dow Theory newsletter writer in the world, confirms the non confirmation that McHugh spoke of. On March 11, this is what Russell said.
"Back to the stock market. Day after day goes by and the Dow makes little progress. Not so, the Transportation Average, which rose to a new high for the move yesterday and today. That was a classic non-confirmation. To confirm, the Dow would have to close above 10725, its January 19 high. Will it or won't it? That's the trillion dollar question. And no one that I know of has the answer."
You can see what McHugh and Russell are talking about with a glance at the DJIA chart above, which has thus far not made a new high for this move, and the DJ Transportation average chart. As you can see, the transports have in fact made a new high for this move. If the Dow can do the same while the transports remain at new highs, Dow Theory holds that the rally can continue. But if this is, as Richard Russell says, a "classic non confirmation" then it's a sign that the (B) wave up may be nearing an end and we could be on to the horrible cataclysmic (C) wave down that Dr. Robert McHugh has been warning us of for months.
Russell on Bonds and Hyperinflation
"I find that the least understood area of investing has to do with the bond market. The sheer size of the bond market (including munis) is huge, worth many times more than the entire stock market. Bond rates (coupons) are fixed. So if a bond rises, its current interest rate declines. If a bond falls, since it's holding the same coupon, its yield rises. The Fed can control short rates (T-bills), but it cannot control long rates, such as the 30-year T-bond. Most amateurs don't understand the singular power of the bond market.
"Question -- There is much talk about the US ultimately going into hyper-inflation. What about that?
"Answer -- The US cannot, as Germany did in the early 1920s, go into high inflation or hyper-inflation. The reason is that the bond market would sense high inflation coming and the bond market's reaction would be to decline, even collapse. If the bond market collapsed, interest rates would surge, and rising interest rates alone would kill inflation. Sharply rising interest rates are deflationary and harmful to business. This is what the proponents of hyper-inflation don't understand. The bond market would not stand for rising inflation.
"Even now, as I explained on yesterday's site, the 30-year Treasury bond (in a head-and-shoulders pattern) is on the edge of breaking support. The stock market is watching this carefully, and it's a big reason why the stock market is now so cautious and making no progress.
"Big money, sophisticated money is watching the bond market carefully. And because of the precarious position of bonds, big money has been reluctant to come into this market. As I've said repeatedly, the Fed can follow its low interest, quantitative easing strategy until the bond market says it can't.
"Question -- How can the bond market say STOP to the Fed?
"Answer -- The bond market says "stop" when it heads down in earnest. When that happens, interest rates rise, and that's the last thing the Fed wants to see. The Fed will raise rates when the Fed wants to raise rates. But the Fed does not want the bond market to decide when rates move higher.
"Question -- Russell, I keep hearing announcements that the recession is history, that it's over. If so, why is the stock market acting so spooky?
"Answer -- The stock market knows that the recession is not over. The stock market knows that the Fed's low interest and quantitative easing (money-printing) activities plus the government's stimulus policies have been largely responsible for the US economy holding together (avoiding a depression). The stock market also knows that these actions by the Fed and the administration are NOT SUSTAINABLE. The more the Fed prints and the more stimulus packages the government comes up with, the greater the national debt.
"Question -- Russell, years ago you introduced the expression, "INFLATE or DIE." You said that this was the choice that the US would ultimately face. But now you say that the bond market would not stand for a policy of perpetual inflation. What's next, if the Fed is forced to halt its inflation strategy?
"Answer -- If the Fed is forced to halt quantitative easing (money printing), I'm not saying that the US will "die." But I believe the US will be dealing with the worst recession in history (Jay Taylor's emphasis). Greece is now being forced to cut back spending in every area from local government spending to bonuses and salaries for government officials to schools and education. This, I believe, will be the coming fate of the US.
"Americans are already far ahead of their clueless government. Americans of every money class are cutting back on spending and pushing up their savings rate, all the while trying to get rid of debt. As I see it, this trend is just beginning. There's nothing like losing one's job to concentrate the mind; it's almost as scary when your neighbor or your brother-in-law loses their job. Americans see the picture, even if Washington is only just beginning to see the picture.
"The Russell formula for a (hopefully) pleasant survival -- cash, gold, and no debt. Advice -- Don't buy or own anything you can't carry in hard times."
EDITOR'S COMMENT: If I had Robert Kirby with me as I have had on my radio show, he would no doubt suggest to Russell that the Fed will ultimately pay no attention to the U.S. bond market and buy up ALL the U.S. Treasuries. That argument, which I am not sure I agree with, would definitely help complete the ongoing march toward economic fascism that has been a part of American policy under both Republican and Democrat administrations alike. Of course, as G. Edward Griffin and others in this letter and on my radio show have made clear, the purpose of these policies is anything but democratic. It is to ensure that insanely high profits stolen from the public by bankers, through laws forced on the public by a highly armed government, are privatized. The flip side of that is to ensure that, when the system breaks down, banks do not suffer the losses that would inevitably come from a lack of free market shut down by fascist government policies in the first place!
So let's think about Rob Kirby's view. If the bankers create dollars out of thin air why would they as creditors want to see a hyperinflationary outcome such that the repayment of those dollars is worthless? Why would the bankers and the Washington lawmaking whores they are in bed with not usher in the second coming of Paul Volcker and a high interest rate policy that would force even more bankruptcies and even more control of government and bankers over all the wealth left in America?
The inflation proponents would argue the answer to that question is that the federal government and the banks, being armed to the teeth, can continue to inflate and then create a new currency that will result in the same rape and pillage of the American public. In the meantime, the wealth continues to flow to the financial sector as more and more claims against what wealth is left in the private sector are taken away by Washington and Wall Street printers of money.
I honestly don't know which of these two arguments is correct. I believe very strongly that, as things remain at this time, with the rich getting bailed out at the expense of the masses who spend 100% of their income on basic needs to stay alive, hyperinflation is not in the cards. If they, as Dr. McHugh suggests they should do—roll back taxes for the last three years in the form of gigantic checks to all taxpayers during those years—I think we could see economic demand rising dramatically and with that, depending on how much money is put into the hands of the public, we could get to hyperinflation. But short of that I don't see any real danger of a rampant, runaway hyperinflation.
QUESTION: What about a collapsing dollar? Wouldn't that lead to a hyperinflation?
ANSWER: In theory it would. And this is the best argument hyperinflationists make, except that you have to ask, what is the dollar going to collapse against? If it is against other currencies, I would agree hyperinflation could be possible. But which major currency can replace the dollar, which is by the way enforced as much as anything by the U.S. military. But in fact, I do believe the U.S. military could actually go broke along with the rest of America. In that case, I could see the dollar collapse against other currencies, and with that, I think we could see a collapsing dollar that could usher in hyperinflation.
Regarding the potential for the U.S. military to go broke, this is one question I asked my guest, Dmitry Orlov, on Turning Hard Times into Good Times. I believe that is a real possibility in the near future. Listen to Program with Orlov Interview
Jay Taylor
Mr. Taylor is editor of J Taylor's Gold, Energy & Techn Stocks newsletter. A native of Ohio, he has resided in New York since 1973 when he began working there for Barlcay's Bank International. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares.
In 1981 he began publishing North American Gold Mining Stocks, which preceded his current newsletter. His continuing interest in gold mining prompted him to study geology at Hunter College in New York City, supplementing his MBA in Finance & Investments. Throughout his career Mr. Taylor worked as a commercial, then as an investment banker. Most recently, he worked in the mining and metals group of ING Barings in New York. Prior to that he was involved in the first gold loan made in modern times in the U.S. to Amax Minerals, a 250,000 oz. loan facility led by Citicorp.
In 1997 he resigned from ING Barings to devote himself full time to researching mining & technology stocks, writing his newsletter and assisting companies in raising venture capital.
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