Freedom Lawyers of America

Subject: SAGE ADVICE from Richard Russell: The Fantasy System


> http://goldmoney.com/en/commentary/2003-08-05.html
>
> Is there anything ethically or philosophically wrong with the central bank
> system of money as it has evolved? My answer is yes. As gold was
> systematically removed from the system, the system became a "fantasy
> system." I say fantasy because the central banks are able to create money
> at will, with no discipline to stop them. This I believe - is immoral,
even
> evil. The current system allows a central bank to create money out of
> nothing - whereas I and my fellow Americans have to work for that same
money.
>
> Is it ethical, even logical, that I have to work my whole life to make say
> a million dollars when the Federal Reserve can, in a minute, create
> billions of the same fiat dollars that I work so hard for? The system
> defies logic and defies reality. It's a scam.
>
> But because there is no limit to the fantasy-dollars that the system has
> created, the system has simultaneously created a giant edifice of debt.
> Nobody is certain how much debt has been built into the US structure, but
> the accepted figure is around $38 trillion. If you figure that the average
> interest on this debt is 5%, then you are talking about $2 trillion a year
> needed to service that debt.
>
> Thus, the system now requires inflation to handle the debt. You see,
> inflation renders debt less onerous through time.
>
> This explains why the Fed is so terrified of deflation. In deflation, debt
> becomes increasingly difficult if not impossible to handle. In deflation
> dollars become scarcer and more potent, while the debt remains constant.
> This, in a nutshell, is why the Fed is so frantic to thwart the forces of
> deflation.
>
> The forces of deflation? What forces? During the '90s people, cities,
> states, the federal government, corporations - they all borrowed heavily.
A
> huge world of "prosperity" was created. But alas, the structure toppled
> over starting in late-1999. We refer to that as the "bursting of the
bubble."
>
> Why did the structure topple over? It toppled because "no tree grows to
the
> sky." It's as simple and yet as mysterious as that.
>
> But worse, at the same time, a number of deflationary forces came to the
> fore. They were:
> * The Internet, which allowed people to find the cheapest item.
> * China and Asia, which gave manufacturers and service providers a way of
> drastically cutting their costs.
> * Wal-Mart, which now accounts for 1.3% of the GDP of the nation. WMT gave
> people an outlet for Chinese goods. * WMT is now a giant, fast-growing
> chain that cuts prices mercilessly. The global economy, which allows
every
> nation to compete for exports with every other nation. This resulted in
> what I call "the end of pricing power." Today nobody can raise their
prices
> and no manufacturer can raise its wage scale.
> * The US negative current account, which exports tens of billions of
> dollars to other nations, and which has allowed * Asians to built up their
> manufacturing facilities and thus compete with US manufacturers.
> * The relentless rise in unemployment, which is a fear factor for the US
> population - and also a force for deflation.
>
> All the above represent the forces that now threaten the current system of
> fiat money. Above all they threaten the edifice of debt that was built up
> during the '90s.
>
> What is the Fed to do in the face of these forces of deflation, and the
> death of pricing power?
>
> The Fed's answer is that "We will absolutely not allow deflation to enter
> the picture. We'll preempt deflation. Since deflation is basically 'too
> many goods confronting too little money,' why we'll defeat deflation by
> creating so much money that deflation will be swamped. We'll drown the
> forces of inflation with a veritable ocean of liquidity."
>
> Can it work? Can the Fed defeat the natural forces of correction and
> contraction that is following the collapse of the greatest financial
bubble
> in history?
>
> The Russell answer - It can work for a while, and, in truth, it has worked
> for a while. But what has also happened is that in its inflationary
frenzy,
> the Fed has injected even more debt into the system. As I see it, three
> major problems have been rendered even worse.
>
> First, a housing bubble has been built. Due to low mortgage rates,
> Americans have rushed into housing, driving home prices up to absurd
> prices. And with the housing boom, more debt has been built into the
system.
>
> Second, the stock market bubble has been brought back. Is the stock market
> a bubble? With the S&P selling at 32 times trailing earnings and providing
> a yield of 1.70%, I say that the stock market is now most definitely in a
> bubble.
>
> Third, in driving short rates down, the Fed has created a bond market
> bubble. At the recent low, 10 year T-notes were yielding 3.1%, rates not
> seen in almost five decades. The bond bubble has now suddenly and totally
> burst, sending bond rates and mortgage rates higher. This morning the rate
> on 30-year fixed-rate mortgages rose to 5.71%.
>
> So what lies ahead? What I see is a continued battle on the part of the
Fed
> to thwart the forces of deflation. The more persistent the forces of
> deflation, the greater will be the Fed's inflationary efforts. The Fed
will
> use every resource, every "trick in the books," to thwart deflation. I
call
> it a "death struggle." It's a battle the Fed has vowed not to lose.
>
> In the end, the Fed's all-out inflationary war will impact on the dollar.
> Too many dollars will be created (of course that's happened already), but
> as the dollar is systematically destroyed, bonds will become suspect, and
> the whole world of financials will come under suspicion.
>
> The flow of funds will turn from the financials that are denominated in
> "funny money" to tangibles which possess an intrinsic value of their own.
> Among the financials that will stand out, I believe, will be the precious
> metals. Gold and silver possess intrinsic value based on 5,000 years of
> human history. Gold and silver are the financial equivalents of a Picasso
> painting or a ten-carat D-color VS-1 diamond. The difference is that gold
> and silver are priced every minute of the day while the price of a Picasso
> or a diamond is ultimately determined by auction.
>
> -------------
>
> You can subscribe to Richard Russell's newsletter at:
> www.dowtheoryletters.com
>