The younger crowd will probably not remember the legendary newsletters nor interviews of Richard Russell and his Dow Theory Newsletter. In one of those letters back in 2002, he coined a phrase which stuck in my mind and over twenty years later rings truer than ever.
This excerpt via Gold-Eagle from Richard Russell on the Markets summed up where we were as a nation then and sadly, why it is more pertinent now:
The Fed’s dilemma can be described in three words. The three words are —
INFLATE OR DIE.
It’s obvious that the Fed has chosen to act on the first word — yes, the word is inflate. Part of the Fed’s battle against deflation is via what I would call “open-mouth.” Almost every day some Fed official tells the press of a convention or a financial gathering that there is no way the Fed will allow deflation to take over in the US. In fact, in a recent speech Fed Chairman Greenspan stated that deflation was literally impossible in the US — and that if need be the Fed could buy up bonds endless and thereby continue to monetize the debt, which, of course is highly inflationary.
That article was published on November 26, 2002 and yeah, it took this author a minute or two and find it in my archives.
The very consequential actions of the US Government in concert with the Alan Greenspan Federal Reserve was to encourage and enable the largest housing bubble in US history from 2002 until the real estate crash start accelerating in 2008.
There was a further follow up to Mr. Russell’s work during the Great Financial Crisis of 2007-2009 by James Turk, an author and commentator who deserves all of the respect in the world, where he stated this:
The problem with debt is that it brings uncertainty into the economy. What’s worse, it also brings uncertainty into the monetary system because instead of being based on gold, the dollar today is based on debt. The uncertainty arises of course because not all debts are repaid. Banks take losses because some loans go bad and never get repaid.
As long as those losses are small, there is little reason to worry. But monetary history clearly shows that unfortunately, bankers make mistakes.
They inevitably extend too much credit. That newly created debt increases the quantity of dollars in circulation. The pace of economic activity quickens, but because money is easy to come by from the banks, it gets readily borrowed, with much of it going into bad investments.
Inflate or Die, March 3, 2008, FGMR
The last sentence is extremely important and thus why I emphasized it for my readers. The data which is coming from the US Government is extremely dire and with the prospects of global conflict or political disarray increasing every day, the prospects of being able to “grow” the US economy out of any debt crisis situation recedes on an hourly, if not minute by minute basis.
What do I mean by this?
The chart below from BOA via The Kobeissi Letter’s X posting last week highlight’s the problem.
This is a basic math problem people, the chart above does not do it justice.
The most terrifying aspect of the data and chart presented above?
This information is assuming it is a linear increase in rate of spending. The US Government in concert with the Federal Reserves easy financial conditions is making this an exponential problem and it varies so much weekly, it’s difficult to determine if it is changing by factors of 1.2 or even as high a 2 or more.
Let that sink in. The United States Treasury publishes data which supports the idea of just how unsustainable this is without even realizing it.
From the Federal Spending page at FiscalDataTreasury.gov:
85% of all government spending in fiscal year 2024 is from areas which can not be cut, have built in elevators to boost spending, and worse, net interest payments are only scheduled to become a larger proportion of all fiscal spending in less than a year.
This brings America and the economy into the reality of inflate or die.
I. INFLATE
The CPI inflation report was issued by the BLS this week and the news was dire for lack of any better words. Unfortunately, the pace of inflation is insufficient to provide enough monetary magic to cover the amount of debt issued not just by the US government, but by private American corporations. In fact, debt for all parties, including the consumer, is at all time record highs.
The only way to pay this size of debt off, as argued above and by many others, is to print money and expand, not contract, fiscal spending to a point where the global reserve currency must be diluted like the Venezuelan Bolivar to “pay” its debtors back for the excessive borrowing by all parties. Of course this means that the middle and lower class in America will suffer the penalty of being “poor” relative to their ability to service their own debt, much less pay it off and defaults will increase at an alarming rate.
Thankfully for the governing class, the last, most inflationary cure for the debt crisis is always on the table:
War.
II. DEFLATE OR DIE
This is the most unlikely outcome.
On July 13, 2012, Richard Russell restated his argument in another article on Inflate or Die via LewRockwell.com:
There are still only two choices – inflate or die. The die part of it would be to allow the bear market to play itself out to the end – to the bitter bearish end. But this would be Great Depression number 2, and the country would surely not stand for it. It might even foment a revolution. But how about the inflation part? This would require truly a massive amount of Fed money creation. The printing presses would have to go wild.
And so the presses went wild.
The problem with deflation, as witnessed throughout US history is that it stimulates political anger towards the Federal government and would eviscerate the system of centrally managed capitalism as it exists now.
The Panic of 1837, Panic of 1907, Great Depression, Great Financial Crisis, etc. all created a hostile political situation where the citizenry wanted a pound of flesh from both the capitalist elites and the government. Since 1932, however, it was discovered that instead of letting the ills of the system be cured via capitalism, like the 1920 depression, bribing the sheep to shut up and deal with it was far cheaper than allowing the necessary paring of systemic excess.
Thus the fear the Mr. Russell had professed almost twenty-three years ago has come true. Speculative fervor in real estate, meme stocks, insane cryptocurrencies, along with creative credit speculation and derivatives is now the supporting structure for the economy according to the masses. The financial elites might profess to the media and sleeping citizenry that the derivatives mess can never happen again, even though literally trillions of dollars are gambled daily to maintain the status quo, along with prayers that nothing breaks.
That is why no matter what the Federal Reserve and Jay Powell proclaim, in the end a combination of easier money from the Fed via the backdoor of Section 13 and fiscal irresponsibility, inflation shall continue, accelerate, and become more insane no matter what fake inflation data is promoted by government bureaucrats.
TINA gang, There Is No Alternative
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