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Richard Russell snippet
Dow Theory Letters
Feb 2, 2011

February 1, 2011 -- Is the US's financial position hopeless? I've studied the US finances backwards and forwards, and as I see it the US's financial position most definitely is hopeless.

The actual posted national debt of the US is $14.1 trillion. However, the US reports its finances on a cash basis while omitting its unfunded obligations in such items as Social Security, Medicare and Medicaid and various other entitlements. If the entitlements are included, the total national debt including unfunded obligations would be over $100 trillion.

Wait, it gets worse. Entitlements, defense and interest on the national debt takes up 80% of the entire budget of the US. That leaves just 20% that can be sliced away if the US wants to actually cut into its deficits. So what's left to cut? Actually, nothing that's politically feasible.

To make the picture even more grotesque, the first group of baby boomers is now reaching the retirement age of 65. As they leave the nation's work force, the problem of financing Social Security becomes more difficult if not impossible.

So what in God's name is the answer to all this? How will the US's finances be handled? There are only two ways that I can come up with:

The first is -- to default, just declare that the nation is dead broke and it can't meet its obligations. That would be tantamount to admitting that the US is less than a third-rate power, a dying banana republic. Unthinkable.

The second way would be to devalue the currency to the point where obligatory dollar debts would be financed or paid off with dollars equal to pennies or nickels.

It's now really a question of timing. With the national debt compounding at rising rates, the problem of financing the debt becomes ever-more pressing. For this reason, I believe the process of devaluing the dollar will have to be speeded up.

From the government's standpoint, the deliberate devaluation strategy must be kept secret from the public. They must not be allowed to know that the currency they've worked so hard for, that the currency their savings are in, is to be crushed into a shadow of its former self. Ultimately, the awful truth must come out.

At some point the government may be forced to be honest. The phrase will be three words that I coined many years ago: "Inflate or die." And, the government's answer will be, "You wouldn't want this nation to die, would you? We have no choice, but to pay off, or carry, the debts, with a currency that must be devalued down to ten cents on the dollar.

You don't have to be a genius to read the chart below. This is the 1yr Dollar Index chart.

First we see the long decline from June to November. Then a short rally, that was interrupted by a consolidation. Most recently, the Dollar Index dropped through the bottom of the consolidation "box." This chart is one day behind. Today the cash Dollar Index plunged again (OMG) to 76.99!

At this point, the Dollar Index is oversold and probably overdue for some kind of a rally.

Well, maybe.

USD 1yr chart


Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters

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