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The New Depression

Richard Russell snippet
Dow Theory Letters
Posted Apr 10, 2012

April 9, 2012

"The single most exciting thing you will encounter in government is competence." Sen. Daniel Moynihan.


I just received a new book by my old friend, Richard Duncan. Veteran subscribers may remember that I raved about Richard's first book published (by Wiley) in 2003. That book was entitled, The Dollar Crisis.

Richard's new book is entitled, The New Depression: The Breakdown of the Paper Money Economy, and it is an absolute MUST read.

The gist of Duncan's new book is that the Greenspan-Bernanke Fed created the greatest credit boom in recorded history. So what's next?

Answer: "A credit expansion boom must unavoidably lead to a process which everyday speech calls the depression." -- Ludwig von Mises

What is Fed chief Bernanke's attitude towards the credit expansion? Read on --

"I would like to say to Milton Friedman and Anna Schwatz regarding the Great Depression. You're right. We, the Fed, did it. We're very sorry. But thanks to you, we won't do it again." Fed governor Bernanke.

Above, Bernanke apologizes for two items: (1) the Fed's having increased interest rates in late-1928 (to stem inflation), (2) The Fed did not print money to bail out the banks when the credit that the banks had extended could not be repaid.

In other words, the Fed did not issue more fiat money in 1928. when, according to Bernanke, it "should have." But Bernanke will definitely not let that happen again. Bernanke is a firm believer in the thesis that the Fed can ward off collapse during a crashing credit boom. We can therefore be certain that when the US economy turns down, Bernanke will fight any slowdown with a new massive infusion of Fed-created fiat money.

Following are a few quotes from Richard Duncan's new book:

"When the US removed the gold backing from the dollar in 1968, the nature of money changed. The result was a proliferation of credit that not only transformed the size and structure of the US economy but also brought about a transformation of the economic system itself."

And more Duncan -- "The US economy has been built on $52 trillion of credit that the private sector is now incapable of repaying." Russell Comment -- In other words, the towering credit boom is now bursting like a balloon meeting a pin.

"For the year 2012-- Expect QE3." Duncan expects that the Fed will continue to fight the current listless economy with additional massive infusions of fiat money. Because of this, Duncan predicts either: (1) a coming period of hyperinflation -- or (2) a coming period of deflation and depression. Duncan thinks number 1 is the more likely, and it may take another one to two years before we actually get there.

Duncan's remedy for today's mess is for the US government to keep spending -- to spend trillions more on worthwhile projects -- anything that will generate business and profits in America.

But Duncan warns against creating more trillions of credit for the purpose of merely lifting the stock market and increasing consumer consumption.

"There is extreme disequilibrium in the global economy. Too much credit has caused too much industrial capacity and has driven asset prices far above the level of the income that can be supported by the general population."

Russell comment -- There are two mighty forces now leading towards deflation. (1) The massive 44-year credit expansion is now bursting. (2) The wholesale entrance of Asia into international markets, the world is now producing more goods and merchandise than it can digest resulting in pressure on prices. The result of the two = global deflation.

The final question -- Will the Bernanke Fed and other central banks enter an all-out fight against deflation? Answer -- probably! This will lead to temporary inflation or even hyperinflation -- followed by deflation.

The New Depression is a short book of 166 pages with many useful charts. I urge all my subscribers to read this fascinating, chart-filled volume. By the way, I suspect that a lot of the smartest investors in the world are thinking the same way that Duncan is thinking, which goes a long way towards explaining the stock market's weird and confused action.

The government must change the way it spends. Rather than spending trillions of dollars each year in a manner that only boosts consumption, the government must begin to invest in large-scale projects that actually generate a return.

Russell bets --

(1) Before the year is out, we will get some form of QE3 from the Bernanke Fed.
(2) The new QE3 money will simply go into the banking system and be squandered through consumer consumption.
(3) The US will end up with some form of either (a) extreme inflation -- or (b) deflation and a deep recession (otherwise known as a depression).

In his "Where are we now?" chapter, Richard Duncan writes, "Fourteen million Americans are unemployed, and a further 9 million cannot find the full-time employment they seek. The unemployment rate is 9.1 percent and the under-employment rate is 16.5 percent. Even more damaging to society than the number of people out of work, is the duration of that joblessness, which, at 40 weeks, is twice as long as that during any other economic downturn since the late 1940s when the records began."

Russell comment -- based on the fact that the credit boom is now in the process of collapsing, I predict that the unemployment statistics will be negative and unsatisfactory by presidential election time. This will make Barack Obama a one term president and will give us President Mitt Romney. In other words, we will get Romney by default.

Question -- In view of all the above, how do we invest or at least protect ourselves? I'll be taking up that question on future sites.


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

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