The Depression has Begun !

September 10, 2001

Wall Street is befuddled. It can't figure out what is going on because economists are operating with an economic model that is about as out of touch with reality as if a physician tried to examine a pain in your big toe by listening to your heart beat. Economists today are operating under Keynesian or Monetarist ideologies. Neither can provide a clue as to what is going on at the present time. Specifically they don't have a answer as to why interest rate cuts (aka printing money) is not resulting in an economic turn around or a stock market rebound.

What they fail to see is that we are commencing the last and most unpleasant phase of the Kondratieff cycle, namely the Kondratieff winter. This period is characterized by painful debt repudiation, high levels of unemployment, massive bankruptcies, and plunging incomes. It is a period when CASH IS KING.

What the policy makers also fail to see or even consider is that the very policies they were patting themselves on the back for - the ones they thought demonstrated a new paradigm and an ability to rid ourselves of the business cycle - are exactly the cause of the impending business decline. At the heart of our problems, as Ian Gordon and a host of Austrian economic thinkers know, is DEBT. And because there have been no constraints on the creation of fiat money out of thin air (which is created by the issuance of debt), the bubble that we are in the early stages of deflating, has been by far the most extravagant in the history of mankind! Thus, it is not unreasonable to expect the correction to be even worse than that which experienced by "the greatest generation" of Americans, namely folks the age of my parents who are in their late 70's.

Given the ignorance of the masses and even more significantly, the ignorance media and the establishment in general, President Bush is likely to be blamed for our decline. Because the philosophies of government held by Mr. Bush are much closer to my own than those held by President Clinton and the interventionist minded Democrat party as a whole, I think that is a shame. But who ever said life was fair? Like Hoover who inherited the problems caused by excesses of the Coolidge years including an overly expansive Federal Reserve monetary policy during the 1920's, Bush has inherited the next Great Depression, compliments of President Clinton and a Greenspan Fed that couldn't do enough to grease the palms of President Clinton by: 1) Exploding the money supply and 2) concocting the productivity myth that seemed to justify such rapid money growth.

In truth a series of governments are responsible for the catastrophic future we now face. Most notable and most to blame however in my view have been two Presidents, namely Nixon and Clinton. Both men have been the subject of Impeachment for relatively petty crimes compared to the monetary crimes they actually committed. Like the drug dealer who entices the young school lad to try some crack cocaine, Nixon introduced the big lie to America, namely that you don't need gold to back your currency in order to remain strong. Certainly that theory appeared correct for a long time, but it's fallacy is now being dispelled by endless amount of money that has been printed since his Presidency which has in fact led to the bubble and the next Great Depression that we are apparently now entering into.

Expanding on the drug analogy, while Nixon introduced the big lie, Clinton became the multinational drug pusher. He expanded the lie to the breaking point, and I also believe it is true with all my heart (based on facts established by GATA) that Clinton, with the help of people like Bob Rubin and Lawrence Summers, distorted the gold markets to ensure that Nixon's lie would continue to be accepted as truth by U.S. and international markets.

What was the Strong Dollar Policy & How Was it Implemented?

From about 1995 onward, the Clinton Administration talked a great deal about a "strong dollar policy." But they never really said what it was or how it was implemented. The so called strong dollar is especially puzzling in light of: 1) One of the most rapid periods of money growth in the U.S. and 2) The productivity story, which based on plunging corporate profits was far more myth than reality. Now, in order to try to keep confidence alive in the dollar, Treasury Secretary O'Neil is still talking about a strong dollar policy without telling us what it is.

We have maintained now for several years that the strong dollar policy is nothing more than a policy to trash gold. And now, the paper written by Professor Lawrence Summers on "Gibson's Paradox" and discussed in our September 7th newsletter tends to support our thesis. The strong dollar was in fact a fraud. While you may be able to make the case that the dollar is the "least worst currency", the premise of its strength was built upon a foundation of sand rather than a rock.

Based on historical data, the academic work of former Treasury Secretary Lawrence Summers himself demonstrated the necessity for the Clinton Administration to rig the gold markets, if the great U.S. dollar lie - namely that you can keep printing endless amounts of dollars and pushing real interest rates down without the value of the dollar declining. This allowed the expansion of the bubble beyond all reason to develop in the second Clinton Administration. But now it is time to pay the Piper. If gold had been free to find its true free market price, the excess of the second half of the 1990's would not have occurred.

In the final analysis, the real cause for our economic woes and a general decline in the global economy can be explained by three words, DEBT and MALINVESTMENT. The expansion of debt at an ever-increasing pace was made possible by the big lie, promoted by Nixon as well as all Presidents since him. This lie proclaims it not necessary to have gold or some other asset money as the basis of a sound monetary system. The big lie also proclaims not only that it is unnecessary to restrict monetary growth to stimulate economic growth, but that a gold standard actually retards economic growth. So our political establishment would have us believe that wealth can be created by the printing press.

Out of weakness, Americans and people around the globe have bought into this line of reasoning. It's a little like premarital sex or adultery. How could printing money be so bad if it feels so good? But because we have succumbed to this temptation to get rich the easy way, we have had an exponential growth in money, which is the same as saying we have had a massive increase in debt, since debt is required in a fiat monetary system to increase the money supply. The problem is, printing money is not wealth. It is a liability. The creation of paper money has not created wealth, but only an illusion of wealth. Regrettably money (debt) has grown at an ever increasing rate of speed. But since wealth cannot be so easily created, incomes cannot keep up with rapidly rising debt service requirements (payments of Principal plus interest). So, SOMETHING HAS TO GIVE and that something is debt. Default on a massive scale at some point is inevitable as a result of buying into the big lie sold to us by the Keynesians, bankers and politicians. IT IS THIS INABILTIY FOR INCOMES TO KEEP UP WITH DEBT SERVICE REQUIREMENTS THAT IS NOW BEGINNING TO PINCH US REAL HARD ON A MACRO-ECONOMIC AND GLOBAL SCALE. IT NOW APPEARS AS THOUGH THE DAY OF RECKONNING IS QUICKLY APPROACHING.

The lies about the values of technology stocks are being exposed very rapidly. We can only hope and pray that our policy makers will take an honest look in he mirror for the answer as to why we are having these problems. Otherwise, we can expect nothing less than dictatorial solutions (in other words no real solutions) to the problems we now find ourselves in.

Because I believe we are now nearing crunch time in the economy I am taking a hard look at our technology stocks in the 3rd segment of this hotline message. We will maintain our overall portfolio allocation at the same levels, but we are placing several of our tech stocks as "holds" from their current status of "buy." In other words, some changes are being made now that are not published on page 16 of our September newsletter which went to press yesterday.

Overall, our strategy is working well. Our Model Portfolio is up 10.91% so far this year, compared to the S&P 500 which is down 17.76%.

The U.S. Economy is an Unmitigated Disaster

A newsletter named "The Wall Street Underground," flatly stated to its subscribers this past week, "The Depression Has Started." This is very much in line with Ian Gordon's views that we are in the very early stages of the Kondratieff Winter.

The letter states, "This is one of the fastest business slow-downs in U.S. history. Second quarter earnings reports hit in July and August - and it was an unmitigated disaster. The losses the big U.S. companies are taking simply stagger the imagination. We're talking about hundreds of billions in losses…losses the likes of which have not been seen since the Great Depression of the 1930's.

The letter pointed out that JDS Uniphase reported a $50 billion loss in the past year, the biggest corporate loss in history! But that was only one company. Company after company has reported staggering losses.

So now, it is not unreasonable to expect the second shoe to drop, namely for the consumer to begin pulling in his horns. Banks continue to urge people to borrow on their credit cards. The lies and spin have worked in keeping a gullible public spending. But now as enormous numbers of jobs - not hamburger flipper jobs - but high priced professional jobs are cut by the tens of thousands - as these companies continue to report staggering losses, is there any doubt that the consumer - which is 70% of the U.S. economy will begin saving rather than spending?

With consumers now having lost tremendous amounts of wealth in the stock market, Greenspan is hoping Americans will continue to spend on the basis of real estate values. This too is a losing proposition because housing prices are also greatly overvalued. This will become plain too as levels of unemployment continue to rise with companies continuing to lay off tens of thousands of workers. So the news yesterday that unemployment rose to 4.9% really shook the markets.

Can there be any doubt that unemployment will get a lot worse? We are now near some very key support levels in the stock market. When the positive psychology that has been spun by the establishment is finally broken, look for a stampede out of stocks which could take place any day now. We could be in for one of the biggest one day declines in equity valuations since the 1987 crash as some very key support levels in the market are violated.

Of course as noted above, the underlying economic cause of our pain is DEBT and MAL INVESTMENT. Buying into the big lie first told by Nixon in 1971 and pushed in earnest by Clinton during the 1990's is the real cause of our current predicament. I'm afraid it is going to be a long and very hard Kondratieff winter.

A one-ounce gold nugget is rarer than a five-carat diamond.

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