Richard Russell (Dow Theory Letters) senses dollar collapse accelerating

King World News likes to report on the commentary of the famous octogenarian financial news letter author, Richard Russell, who has been writing his insightful financial newsletter since 1958.  If you believe that there is nothing new under the sun when it comes to finances (only remakes of past scams), Russell is the guy to listen to because he has been there, done that, seen it all.  In a recent review of Russell's newsletter, King World News reports that Russell continues to be a dollar bear and even fears that the collapse of the dollar may be accelerating.

Russell knows that someone has to pay for all the excesses of the past 30 years in addition to continual overspending at the federal government level.  He also knows that we have one of 3 basic ways to accomplish a drastic reduction in the reliance on borrowing:

1. cut federal spending dramatically
2. increase taxes dramatically
3. inflate the currency

Item number 1 is not going to happen without a revolution of some sort (not necessarily violent but not discounting this possibility either).  There are several reasons why I believe this.  First and foremost is that the federal government is now big enough that it has taken on the qualities of a living, sentient being.  It wants to live, grow, reproduce and consume.  Most importantly, like any living thing it will defend itself if attacked.  Simply starving it of needed revenues will be considered an attack, an assault on its security.  Not letting it grow and reproduce will be considered an attack.  In fact, stopping it from doing anything it wants will be considered an attack and even treasonous.   Politicians have been talking about cutting federal spending every year but it only goes up each year exponentially.  You really have to be pretty weak minded at this point to believe it is actually interested in cutting spending.  Budget theater is all we will get until the federal government is forced, somehow, to stop deficit spending.  There will be no significant voluntary reductions at this point.  They are now talking about cutting $4 trillion over 10 years.  Sounds like a big number but that is only $400 billion per year and our annual deficit is $1.3 trillion.  So that's an increase in debt of roughly $1 trillion per year if they can actually agree to this cut (which they won't).  Besides all that, the federal spend is a huge part of our fake GDP.  Cutting federal spending will lead to a massive reduction in GDP.  If they let that happen then the world will see that the emporer has no clothes.

Item number 2 is going to be very difficult to implement because it has been shown that overt taxation reaches a point of diminishing returns.  If you suck all the capital out of the economy via taxes then investment and growth crashes and jobs collapse.  If it gets too bad then it generally leads to civil unrest or worse.  They will talk about higher taxes but nothing significant will actually happen.

Item number 3 is the easy way out for the con men.  With inflation they don't actually have to tell people they are raising their taxes and suffer the back lash.  Inflation is the silent tax that most people don't even understand is a tax.  I estimate that only 10-20% of the people in this country understand that inflation is nothing but a tax.  People actually blame "the greedy Arabs" for higher oil prices and "the greedy farmers" for higher food prices.  They just don't get it that when Bernanke prints more money from thin air that it waters down the buying power of the money you already hold as well as that of your monthly salary.  Inflation is sneaky taxation. 

In addition, government actually cares about two kinds of people: those who vote and those who are economically productive.   They care about those who vote for obvious reasons and they care about those who are economically productive because without them who would there be to steal from in order to buy the votes from those who vote?  When things get really bad (read "foreigners stop loaning us money") then the protected class must always be those who are productive and taxable.  When you inflate the money supply, inflation eventually results in wage increases right along with food and energy prices.  That means that workers take some pain but over time their salary will make up for some of it if the inflation stops long enough for a new equilibrium to form. 

On the other hand, retirees living off of fixed income and entitlements are not producing anything for politicans and statists to steal and so they are a prime target for government to attack.  We have a lot of savings in this country and when people get old they become too weak to fight.  Thus, inflation steals their money by reducing the purchasing power of their savings and the government really doesn't feel the heat because of it.  As Sheen might say, "#Winning!".  The final reason why inflation is going to be the mechanism of choice for paying for ridiculous government spending is that it destroys the value of everyone's dollars globally, not just the dollars held by US citizens.  Thus, inflation spreads the tax pain to non US citizens who don't get any of the trickle down benefit of the government spending.

Today Monex is selling silver Austrian Philharmnic 1 Troy oz. silver coins for $41.59 each (when bought in quantities of 100).  1 Troy oz gold Phils just broke $1500 each (when bought in quantities of 10) for the first time ever. 

Smart man, that Richard Russell.