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Inflate or Die

Richard Russell snippet
Dow Theory Letters
Posted Jul 12, 2012

July 11, 2012 -- Years ago I coined a phrase that described the US's predicament. The phrase was "inflate or die." As far as I'm concerned, inflate or die is even more to the point today. Here's why. The US possesses 8,133 tons of gold, or more than three times the amount of gold held by any other nation (Germany is second with 3,396 tons of gold).

Have you ever wondered why the US hangs on to its gold like grim death? And at the same time the US talks down gold? Have you wondered why the US appears (like China) to be encouraging its citizens to buy, hold, and accumulate gold? Why is the US government distributing gold coins to Americans? Why did the US government come out with a new Buffalo solid gold coin and advertise that coin widely?

Why did Nixon slam shut the gold window when France wanted the debts that the US owed France to be paid in gold rather than dollars? Why did Nixon and company refuse to give up any more US gold?

The reason is that the top US leaders knew that gold was our only true tangible money. A few of our most knowledgeable leaders distrusted the Federal Reserve notes that we, the US, were printing and buying goods from the rest of the world with. They knew that with the growing US debts, we'd never be able to pay them off. And they knew that eventually, through spending and compounding, the growing debts and deficits would wreck the US economy and maybe even destroy our democracy.

Now with a national debt of over $15 trillion, the choice has really come down to "inflate or die." There's a primary bear market in process now. This is the "die" part of the choice -- "inflate or die." If matters continue as they have been going, the US, as we know it, will indeed -- die. Bernanke is no fool. He can see that quantitative easing is not working. With QE1 and QE2 and "twist" already baked into the US economic system, business is still lousy, unemployment is still at 8.2%, and no amount of Fed stimulation seems to be able to turn the economy brighter.

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. Furthermore, enormous inflation would almost surely wreck the country (remember German inflation after World War I, and the rise of Hitler?) So inflate or die would have serious (more likely disastrous) consequences.

The world is now deflating. And the Fed appears helpless to halt the deflation, no matter what they try. The antidote for deflation is a devaluation of the currency. The Fed has failed in its desperate attempts to halt deflation -- which is becoming worse as the weeks go by. Americans (voters) are increasingly discouraged and disappointed with both the Fed and Congress.

INFLATE OR DIE. Wait, there is one more thing that can be done. We have this vast store of gold, the biggest hoard of gold the world has ever seen -- 8,133 tons of gold.

We can raise the price of gold overnight by unilateral edict (as Roosevelt did in 1933 when he raised the price of gold overnight from $20.67 to $35 in an effort to re-inflate the economy). By raising the price of gold by a large amount, we would be devaluing the dollar by a huge magnitude. Suddenly, with a vastly devalued dollar, all our debts would appear manageable -- they could be paid off -- that is, if we had to, or wanted to, pay them off.

This would have an immediate impact on all fiat, central-bank-produced currency. In a matter of days, all fiat currency would be devalued to compete with the new "cheap" dollar. All debts could be paid off. It would be like the ancient Hebrew year of Jubilee, when every 49 years or so, all the world's debts were declared null and void. Dollar devaluation would give us a new start!

What would happen next? Naturally a new world monetary system would have to be drawn up. And I imagine the US might temporarily outlaw all trading in gold. The new monetary system would have to include gold and perhaps some other tangibles to back the new currency. So in the end, gold might save the nation. No wonder the US, despite its ridiculous anti-gold stance, has refused to give up any of its gold.

Notes -- I think all the above ideas and concepts have occurred to the leaders of China, and they are acting on it. Why is China now the world's leading miner of gold? Why is China literally begging its people to buy and hoard gold? Why has China opened new gold-trading facilities? Why is China installing dispensing machines in public places so that people can insert their paper money and buy small quantities of gold? Why is it forbidden to ship or carry out gold from China? (France also has this law -- you cannot take an ounce of gold out of France.) Why is China continuing to build up its gold reserves?

In the last five months alone, China has imported more gold from Hong Kong than all of Britain's gold holdings.

"China's central bank could soon take advantage of the price correction in the gold market to increase its gold reserves." According to a statement by a senior representative of the People's Bank of China (PBC), the bank will continue to diversify away from the US dollar.

PBC analyst Zhang Jianhua stated that the PBC should take advantage of the current price correction in gold to add to its reserves. This was a necessary move in order to diversify its $3.2 trillion foreign currency holdings. The PBC currently holds 33.9 million troy ounces of gold. In recent months, markets have been speculating as to when the PBC would start buying gold again. China's central bank has not made any market purchases since April 2009, a decision that experts believe was based on the strong price rally in the yellow metal over the last three years. China has instead been adding to its reserves by relying on gold production from mines in China." (from Roman Baudzus, www.goldmoney.com)


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

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