Dirty Word: Debt

Richard Russell snippet
Dow Theory Letters
Sep 9, 2011

September 6, 2011 -- As I see it, the fundamental problem that the US and the developed nations are dealing with is the CONTRACTION of decades of over-spending and borrowing and debt-building that has occurred in the decades since the end of World War II.

I remember during the days prior to WW II that debt was literally a dirty word. People used to give "mortgage parties" when some member of the crowd finally paid off his or her mortgage. All the neighbors and friends would bring cakes and cookies and the party was always a big happy one. That was when that hated mortgage saddle was off one's back, and that monthly bill no longer came in the mail at the end of every month.

The operative phrase in those days was "No credit, Buddy, cash on the line." Everybody thought in terms of cash, and if you didn't have the cash to buy what you wanted, you went without.

I lived with my family on the upper East Side 89th Street and Lexington Avenue. Prior to that we live in an apartment house at 24 West 69th Street.

I remember one day I was standing in front of the building when an Italian gang of about ten kids walked by. The leader sneered and said, "Look at the little rich boy. Look at those fancy clothes." He came over and rained about ten punches on me in rapid fire. I fell to the sidewalk, not hurt but terribly embarrassed. That was the way if was if you lived in a decent neighborhood during the Great Depression.

Those who had some money slinked around the neighborhood. Those who have no money lay awake thinking of ways of obtaining money, even if they had to steal it.

I believe we're entering the "GREAT CONTRACTION" now. It's finally payup time. And it may not be pretty. La Jolla is now lined with stores or apartments and condos for sale. Little groups of vagrants (women among them) hang out behind the supermarkets, hoping for a handout (which are illegal). The markets are not allowed to dole out unsold food to waiting vagrants (sanitation rules). At every freeway entrance or exit men and women are seen, carrying signs such as "Veteran, will work for food" or in the case of women "Single mother, help me buy food for my baby".

I just perused the latest issue of Barron's. For a change, Barron's drops its incessantly bullish headline and instead asks "Where Do We Go From Here?"

But as usual, Barron's answers its own question right on the cover. Answers Barron's, "Why the market could rise 10% by the year's end, led by tech, industrials and health care."

Subscribers might ask why I concentrate so much on Barron's. The reason is that Barron's is read by almost every serious investor and analyst on Wall Street and the rest of the nation.

Barron's is an opinion-maker. Barron's carries the statistics and the opinions that everyone is interested in.

Among all the analysts and national columnists, veteran Alan Abelson remains highly sceptical of where the nation is heading.

Towards the end of this issue of Barron's there's a most interesting review of the new book, "Exorbitant Privilege: The Rise and Fall and the Future of the International Monetary System" by Barry Eichengreen. The last paragraph of the review runs as follows:

"The history lesson eventually brings us to the current state of the dollar and its future path. Since the benefits of being the world's primary reserve currency are vast but also nearly invisible to the noneconomic, the analysis of these benefits, and their potential to be lost, relates the discussion back to the everyday decisions of businesses, households and governments. When the dollar is eventually forced to take a lesser role in world affairs, international demand for the dollar will decline, pushing up interest rates and reducing American living standards, particularly America's ability to consume beyond its means."

Please read this paragraph over carefully. The economic strength of the US lies largely in the fact that the US owns the world's reserve currency. Because of this, the US should be a nation with a spotless record of spending within its means. Alas, nothing could be further from the truth.

The fact is that nations are moving away from the Federal Reserve Notes (dollars) and looking ever-more seriously at gold as the preserver of their sovereign wealth.

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