Inflate or Die!

It’s really just Economics 101.  Normally if there is a huge bumper crop of oranges next year in Florida, or if the weather is great and it’s a record year for corn growers in the farm belt, you know that prices of oranges or corn will go down.  

Since interest rates are the cost of borrowing money, how exactly does the Federal Reserve make the price of money go down?  They have to make more of it.  Whether by old fashioned printing, by digital methods, or by some other means, they have to somehow increase the supply of money and credit.  A bumper crop of printed dollars.  Economics 101.

So that is what the Fed committed to doing last week in contriving lower interest rates.  It is inflating (expanding) the supply of money and credit.  That’s where we get the term “inflation.”

Now some of the reasons for inflating are publicly discussed by officials.  When a slowdown looms, they want to “stimulate” the economy.  But stocks and residential real estate are at record highs.  Why a rate cut at all, much less a big one?  You would not be wrong to notice that we are less than two month from the election.  We are on record repeatedly advising that the Fed would cut rates to benefit Democrats.  Anyone who thinks the Fed wouldn’t act in a partisan way simply doesn’t know much about the historical record.

But there is another reason the Fed has chosen to inflate, and that it will continue to do so that they don’t talk about:  Washington has to inflate or it is game over.  Richard Russell, the late market analyst and Dow Theory Letters author, famously boiled Washington’s options down to this phrase: “Inflate or die!”

What does that mean?  

Today the US debt is so huge – $35.4 trillion! – that paying the interest alone costs Uncle Sam $3 billion per day!  Driving interest rates lower help keep a lid for now on the compounding debt.  After all, imagine if the underlying interest rate on that debt doubled.  The interest cost would double!  But lowering the rate marginally is a band aid fix that won’t last longer that a summer housefly.  The underlying debt keeps growing anyway.  This fiscal year the debt will increase by more than $2 trillion!  (Sorry for all the exclamation marks and the italics, be want to make clear that these numbers are in the gargantuan order!)

In plain language the US national debt is metastasizing.  High rates are part of the problem.  So Russell is right:  There is just no way for Washington to pay its bills honestly.   It can declare bankruptcy.  But that’s game over; that is the die part.  Or it can inflate, drag things out by trying to keep their interest expense down with lower rates, and try to keep the interest paid with cheaper inflated dollars.  Ergo, inflate or die.

That’s just a brief description.  It is why you need to protect yourself from the dollar.

Under the circumstances, Russell also said something else very important:  “It’s always a good time to buy gold!”