Great Depression Online Archive Issue:

The Spectacular Depression

Great Depression Online
Long Beach, CA
October 09, 2009

Inside This Issue You Will Discover…

*** Everything’s Going Up
*** The Mother of All Bubbles
*** The Spectacular Depression
*** And More

Everything’s Going Up

Everything’s going up, so it appears.  Oil, gold, and even stocks keep pushing higher.

Crude oil for November delivery gained 83 cents, to $70.40 a barrel on Wednesday.  And gold’s now at record highs…over $1,050 an ounce. 

So it’s true…everything’s going up.  Everything, that is, but the dollar.  For the dollar is not going up; it’s going down.  This year, the dollar’s lost 6.5 percent, as measured by the dollar index.  And it now costs $1.47 just to by a euro.

Yet, according to multimillionaire speculator Jim Rogers, gold may top $2,000 an ounce in the next decade.

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Still, it’s not that oil, gold, or stocks are great investments.  Last we heard, western economies were sputtering.  Demand for oil was limited to expectations that just maybe, perhaps, it could increase.  And gold had yet to pay a dividend.

But they all appear to be going up for one simple reason: The dollar is going down.  

The Mother of all Bubbles

Sometime back, when the Federal Reserve cut the federal funds rate to practically zero and the Obama administration quadrupled the deficit to $1.4 trillion, we contemplated where the money would go.

Where would the next bubble be?

The government wanted the money to flow into job creation, capital investment, and economic productivity.  But, for a central banker or a fiscal policy maker, creating money and controlling where it goes are two entirely different things.  The former requires adding zeros to the debit – and in turn the credit – side of a ledger sheet.  The latter requires an act of God himself, to intervene in the freewill of man as he goes about his daily business.

For a time we were rather perplexed.  The government opened the fiscal and monetary flood gates, yet the money flowed out like cold molasses in January.  After the credit crisis and stock market crash, safety was what everyone was after. 

Banks were able to borrow money from the Fed at essentially zero percent, and then buy government debt yielding 3.5 percent.  Where the Fed got the money to lend out for free is a topic for another day.

The government, of course, thought this was marvelous.  For it kept rates down and helped them finance their record deficits.

That’s when we realized just where the next bubble would be.  In fact, we realized it was already here.  We wrote about it in these pages.  We even called it the Mother of all Bubbles.

The Spectacular Depression

But now a huge disconnect is taking place.  The Ten Year Treasury Note’s yielding just 3.18 percent while the dollar’s sinking into the abyss.  Gold’s setting new records and oil and stocks seem to be defying gravity.

This situation cannot continue indefinitely.  However, it can go on much longer than we can imagine.  But eventually, we suppose, something will have to give.

In other words, the Mother of all Bubbles will pop. 

When oil dropped back to $40 a barrel and gold to $800, and the stock market crashed…Treasuries yielding 3.5 percent at least made a little bit of sense.  As asset prices collapsed, the flight to safety was to government debt.

We believe the stock market is due for another fall.  Quite frankly, we believe it could be cut in half – or more.

Yet, when this happens, contrary to the stock markets colossal collapse at the beginning of the year, the money may not flow back into Treasuries.  Rather it could flow into gold and oil and all non-dollar denominated assets.

The consequences of this could be rather spectacular…

Spectacular not in the sense that it’ll be magnificent in any way.  But, more accurately, it’ll be stunning.  And it’ll take your breath away.  

Sincerely,

M.N. Gordon
Great Depression Online

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