How Washington's Inflation Deception Might Affect You

Publisher's Note: Mr. James Dines is a legend whose insight has been proven time and time again.

Today we bring you an excerpt of The Dines Letter discussing the Washington economic establishment and why it wants to push interest rates and inflation to the point of recession.

To your wealth,

Nick HodgePublisher, Outsider Club

It's about as long as Parsifal, and not as funny.- Noel Coward, The Wit of Noel Coward

This is not a political newsletter, so please don't look for subtle inferences. However, it is very definitely a financial publication, and when anyone's politics include what might affect your finances, The Dines Letter is definitely interested.

For example, when the WEE (Washington Economic Establishment) makes a decision on interest rates, we would certainly consider sharing our views in TDL. The government - nearly all world governments - bases its decisions on Keynesian economics, which we predict will be looked back on as deeply flawed. These days Americans disagree on crucial issues. The WEE openly acknowledges that it has no idea why there is "no inflation despite near-full employment." Some of Washington's economists are wonderful people, as long as they stay away from things they don't understand - such as working for a living!

The WEE's puzzlement is that the current overprinting of paper money should result in inflation, because it maintains that the word "inflation" means "higher prices." The WEE's belief exposes a fundamental weakness in its economic theory that calls for suppression of prices. Instead we perceive that an increase in the money supply eventually results in lower prices - its own cycle - and prices might take quite some time to react after the money supply grows.

In our definition, inflation is really an increase in the money supply that results in higher prices. Why? Because more paper chasing the same goods and services drives the competition, pushing prices higher, by the ironclad law of supply and demand.

This is no mere semantic quibble. The worst consequence is that the WEE seeks to punish labor by blaming full employment for inflation, since workers are able to temporarily demand higher wages. The WEE wants higher interest rates to bring on a recession, which would beat wages down when there are layoffs and more unemployment. We have openly declared that such an approach is either a crackpot theory, or a delusion. Punishing growth is not right and blaming labor for this fallacy dismays us, with the middle class already struggling to survive as higher prices squeeze them, an injustice that we forcefully oppose. One result of suppressing labor is sky-high debts to pay for college.

Many politicians are thrilled however to overprint enough money to fund their reelections. It's Easy Street to pay for their children's orthodontistry, and to finance college presidents' multimillion-dollar salaries. No wonder America's middle class has been shrinking.

Now that America has nearly full employment, the Fed "therefore" continued its regular interest rate raises in December 2018, to start a recession to undermine workers. We have often reported on this in TDL.

Since December 17, 2015, the Fed has had eight quarterly 0.25 percent increases in the Fed Funds Rate, which is what banks use when lending to other banks, cash which all banks are legally required to keep on hand. Banks use the rate as a key determinant for setting other important rates, such as the Prime Rate, and rates on credit cards, bank loans, and adjustable-rate mortgages. This Fed Funds Rate was dropped effectively to zero amidst the 2008 Crash, and then suppressed there for seven years, despite our protests, until December 2015. It has recently risen to 2.5%.

So how high might interest rates go? Far above where they are now, the exact amount might depend on American trade deficits and the budget. As it stands now, America is in debt for around $22 trillion, rising at over $1 trillion a year. It is essentially unpayable. Trump's budget will add at least $1 trillion more, but he is probably betting renegotiated trade deals would reduce deficits, and that prosperity derived from his price cuts would allow the U.S. to pay down its debts. That appears to be his theory, and we hope that it works.

TDL's solution has always been to link gold to paper, to limit debt that is paid for by printing paper money, as laid out in our Goldbug! book.

When Fedhead Powell recently sought to raise interest rates, pushing the 10-year bond recently above 3%, President Trump growled that it didn't make sense to suppress the economy in good times. He's clearly right on that. While we discern no sign that Trump comprehends our theory that linking the dollar to gold would stop excess printing of paper money, as a businessperson he surely knows from blunt experience that higher interest rates depress the economy - especially real estate, his area of expertise.

Trump declared that the government should not be starting a recession by deliberately raising interest rates to avoid non-existing inflation. Incidentally, Trump also does not even appear to be clear on the true definition of the word "inflation." Seemingly everybody trusts the Feds' mistaken definition as "higher prices," and who are we to question nearly all economists.

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Going further, we add our own unique and mind-blowing theory that what we call "real inflation" has its own cycle, and eventually degenerates into its own deflation. In other words, overprinting causes rising prices, but that rolls over to a deflation naturally even as the government continues to overprint paper money. That deflation can't be cancelled by simply overprinting more paper money. It is happening these days - and the WEE mistakenly identifies it as "no inflation." It is in fact a natural deflation, regardless of government overprinting. Its continuation risks a hyperinflation, and worse. A topic for another time. Furthermore, as part of our revolutionary economic theories, the end of an inflation is automatically a period of a deflation that seems "invisible" because it is not easily recognized.

Prices on a roller coaster stop rising despite the amount of money printed, like the windless eye of a hurricane, and at that point rolls over into a deflation that is extremely difficult to reverse, as in 1929. We believe the world is somewhere near the top of the roller coaster, and while the WEE calls it a "mystifying absence of inflation," as noted, it is in fact a deflation that soon enough will become visible as splashy bankruptcies and lower retail prices soon begin to appear in the mass media. In fact, our book The Invisible Crash, written decades ago, predicted that a great deflation would begin - and we even dared to specify a date in the paperback version (on page 18) - it was 2008! A spectacular call. Primarily those investors who are prepared will survive financially.

We've done what we could throughout our career as "The Original Goldbug" to stop "The Coming Great Deflation," but the furthest we got was engaging Congressman Jack Kemp and Senator William Roth, to whom your editor spent a full day in June 1979 explaining gold, but they couldn't get anything through Congress. Having done all we could, we are now in the High State of Detachment from Result. Somebody else will have to take it from here.

The higher interest rates we expect should send bond prices slowly but seriously lower. Our recommendation to professionals is to roll them over, as noted in past IWBs. We still believe the bond market is headed for a slow-motion crash, led by junk bonds. See the HYG chart below, when we advised, "We beg you to sell bonds."

As the developing economic situation breaks down, and other aspects of Keynesian economics are not working as the WEE expected, we predict that at least one brave soul within the WEE would actually challenge the majority, and eventually spread it into a wide-ranging debate. When that happens, gold and silver will finally explode to untold heights in our long-predicted "Third Wave," as in Goldbug!

Hopefully the WEE's inevitably rising consciousness might have already begun, as a December 17, 2018 New York Times article stated that, "President Trump renewed his attacks on the Fed that continues to raise interest rates. A growing number of experts think the president has a point." Imagine, "has a point," what a concession from the economists at the WEE!

James Dines is legendary for having made correct forecasts that were in complete contradiction to the rest of the financial community. He is the author of five highly regarded books, including "Goldbug!," in addition to his popular newsletter, The Dines Letter, and videotaped educational series. Dines' highly successful investment strategies have been praised by Barron's, Financial Times, Forbes, Moneyline, and The New York Times, among others.