The U.S. Economy & U.S. Markets

November 6, 2001

IAN GORDON'S "SPOT ON" DEFLATION FORECAST

"For the First Time Since Ike, a Whiff of U.S. Deflation." That was a headline that appeared in yesterday's "New York Times." The article reported that for the first time since 1954, CONSUMER prices have actually DECLINED. To the extent the government numbers are to be believed, prices for items paid for by consumers fell by 0.4% during the third quarter of this year. Now there is no doubt in my mind that economic numbers from our Federal government have become increasingly suspect in recent years. It is no secret government economists apply changing assumptions and timing methods to get the numbers they seek for their own propaganda purposes. But over the longer term, policy makers cannot fool Mother Nature because longer- term trends cannot be hidden forever. There can be no doubt that deflation is very much a growing fact of life at this time. Moreover, if Ian Gordon is correct - and I believe he is - in his predictions of a business contraction akin to or worse than that of the 1930's, the "whiff" of deflation that the N.Y. Times spoke of represents only the first indication of an economic stench that is likely to get much worse in the coming months and years.

So, while deflation may come as a shock to reporters at the "New York Times," readers of "J Taylor's Gold & Technology Stocks" will not have been surprised by this deflation news of last week. Indeed ever since our 1998 interview with Ian, our readers have been warned on an ongoing basis about the dangers of an impending deflation that threatens to bring down our financial system.

Why Deflation is Inevitable

The notion that our richest and brightest minds may not be able to orchestrate policy to avoid a replay of the pains of the 1930's or worse is of course unthinkable to the Godless humanist at the New York Times and other major establishment media in general. These members of the ruling elite, who have succeeded in fooling themselves into believing that mankind has the power to control his own destiny and to circumvent the natural laws of the universe, unfortunately do not have the spiritual constitution to face the fact that the laws of nature, or God's laws if you will, cannot in the end be circumvented.

So, they trot out Keynesian and Monetarist propagandists to spout conventional wisdom on the major TV networks. That wisdom maintains that if the U.S. simply prints enough money, the global economy will turn around and stock prices will once again regain their upward trajectory, propelling an ever growing number of this world's citizens to a fancy address on "Easy Street" or Heaven on Earth if you will.

The notion that a country can print its way out of trouble or, create wealth is a well established lie. Still our policy makers persist in believing and proclaiming it to be true in no small part because it provides an immediate benefit to the bankers and politicians who espouse that policy.

Ian Gordon & Richard Russell "Spot on" on Deflation Call

Aside from Ian Gordon, the only other analyst worth his salt that I read who has been talking about deflation for any period of time is RICHARD RUSSELL. I have a deep respect for this man's work. First of all, he is in his 70's so he brings with him a wealth of experience that even people my ripe old age of 54 don't have. But equally important is that Richard's sharp mind allows him to think outside of the box within which the establishment is desperately endeavoring to contain, enslave and impoverish Americans. I find Richard's ideas to be so valuable that last week I took out a $250 annual subscription to his "Dow Theory Letter" and his daily letter known as "Richard's Remarks." I encourage investors to visit www.dowtheoryletters.com and to consider subscribing to this valuable service.

Yesterday, Richard provided one major reason why current efforts to turn our downward spiraling economy around by running our printing presses overtime, are doomed to failure. Richard quite correctly pointed out that during the late 1990's, the Fed not only created a financial bubble but then denied having done so. He noted that this huge amount of money creation at the hands of the Fed resulted in false signals to the economy that led to excess capacity and consequently too much of all kinds of goods and services that are being chased by too few dollars. A major consequence is deflation.

I agree that excessive supplies of goods and services have resulted from a promiscuous monetary policy during the Clinton years and that these excesses or economic dislocations if you will, are now putting extreme downward pressure on prices. In fact, the "N.Y. Times" article referred to above, suggested that corporations have less pricing power now than any time since 1949! (We think it is interesting and revealing that as pointed out by Ian Gordon, 1949 marked the end of the last Kondratieff winter when the forces of deflation were last unleashed in the U.S.) But there are at least two additional factors that Richard did not site that convince me we are in the early stages of an inevitable economic decline and deflationary episode of major dimensions no matter what policies are carried out from here on. In other words, there is no turning back. Those two factors are following:

1. MAL INVESTMENT - Not only did excessive amounts of money creation lead to oversupply problems, but the kind of capital expenditures made were down right loony at best. From an historical perspective the business models sold to investors made no sense at all. The dot com companies as well as the telecom industry are perhaps the best example of mal investment. THE IMPORTANT THING TO KEEP IN MIND IS THAT MAL INVESTMENT, WHICH (Richard is ALSO TALKING ABOUT) RESULTS IN DECLINING NATIONAL INCOME.

2. EXCESSIVE DEBT - What the Keynesians and Monetarists lose sight of is that in a fiat currency like ours, which they espouse as ideal, money is created out of thin air as bookkeeping entries are made in the creation of loans. So, in creating trillions of dollars, trillions of dollars of debt is also created. And trillions of dollars of debt siphons huge amounts of purchasing power out of the economy on an annual basis just to repay principal and interest on loans.

So in this situation, what are we faced with? I think the answer is fairly straight forward. We have a declining national income and a rising debt service requirement. Taken together, at some point a national economy reaches a "threshold of lethality" that effectively starves an economy of the sustenance and nutrients required to retain life. And when the point is reached whereby income is no longer sufficient to repay interest and principal, the economy not only fails to grow but given its enormous leverage, it begins to shrivel up to a mere fraction of its once inflated state. That my friends is what I believe we have to look forward to in the U.S. economy.

Did Clinton Prescribe the final lethal dose?

When the Clinton boys - chief among whom were Alan Greenspan, Bob Rubin and Lawrence Summers, set out to create trillions of dollars of debt (to bail out the world and their crony capitalist friends in the banking industry), given our fiat currency system, they inevitably created huge amounts of debt in the process. Had debt, the raw material from which fiat money is created, resulted in rising incomes from which to pay principal and interest, the global economy would not be in the deep dodo it is now in. The fact is that when so much money suddenly appears out of nowhere as it did in the 1990's, as the Austrian economists have long known, mal investment is a forgone conclusion. Now, with trillions of dollars having now disappeared into "money heaven" from the American and global economy, the beginning sounds of a "giant sucking sound" that Ross Perot spoke about is beginning to pull our economy toward the depths of despair.

In effect, the economic predicament we find ourselves in is not unlike that of a family that faces bankruptcy because a gambling husband and/or an alcoholic wife, borrow to sustain their habits. Even if they are fortunate enough to keep their jobs, (which is doubtful given their pathological behavior) principle and interest payments snuff out income that would otherwise be used to purchase life's essentials.

The Keynesians object to this argument. They say that you cannot compare the budget of a family with that of a national government because a national government is sovereign and can thus rely on the full faith and credit of its printing presses. But their argument ignores the dynamics noted above, namely that indiscriminate money creation, such as that engaged in by the Greenspan Fed will ultimately result in declining incomes in relation to mountainous levels of debt required in the fiat money printing process.

In effect, the Keynesians and Monetarists, who provide cover for what are in truth, criminal acts of thievery at the hands of our bankers and politicians. But their ideas are totally bankrupt and proof of that is the inability of Greenspan to stimulate economic growth in either the economy or stock market despite an unprecedented money growth and some suspect stock market manipulation, not to mention gold market manipulation as exposed by GATA.

DEBT STRANGULATION NOT LIMITED TO AMERICA

Because the whole world has gone off the gold standard, the problem of excessive debt and money creation is a global problem. On Tuesday November 1st, the Financial Times (FT) ran a story under the Caption "Asian banks threatened by $2,000 bn in bad debts." If my arithmetic is correct, $2,000 billion equates to $2 TRILLION. The article pointed out that bad loans throughout Asia now total $2 trillion. In the case of Indonesia where the world's largest Muslim population resides, an astounding 60% of all bank loans are in default.

Nor are the problems confined to Asia. They are also massive in our own hemisphere evidenced by increasing talks of default from Argentina who made the mistake of pegging their currency to the dollar which has been manipulated to levels advantageous to bankers but lethal for manufacturers, farmers and miners.

So our global financial condition, post 1971 has become increasingly a hopeless case. And with our global economy now more interrelated than ever before and with derivative markets in the hundreds of trillions of dollars, we are indeed sitting on the edge of a bottomless abyss. It is a frightening situation, unless you are fortunate enough to have faith in salvation through the grace of a loving God, who sits outside of time and space - the God who some 14 billion to 17 billion years ago or so set in motion the "big bang" or creation of the universe that is simply too great and magnificent for us mere mortal to comprehend. For readers who may be interested in exploring this God from a scientific perspective, I would strongly urge you to visit the web site of an organization named Reasons to Believe, headed by Hugh Ross, Ph.D. and astrophysicist. That web site iswww.reasons.org

Seventy-five percent of all gold in circulation has been extracted since 1910

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