Will the government’s massive deficit spending and increasing debt actually eat up wealth?
*Dow Theory Letters, Richard Russell, March 23, 2007
“”The US’s defense against rising debt is inflation. Debt is denominated in dollars. But the problem with debt is that it sucks up wealth. And it tends to compound. But if inflation accelerates faster than the build-up of debt, then debt can be “handled.” The problem is that as debt and inflation both accelerate, the purchasing power of the dollar declines.
As the debt of the US grows ever-larger. the inflation process also speeds up. This concept is not lost on real money or gold. Last year the dollar price of gold increased by 28%. During the same year the dollar price of silver increased 69%. Real money, which was in a bear market slump from 1980 to 1999, is now back in a bull market.
At its 2000 high, the Dow was at 11722. Yesterday, the Dow was at 12461. That’s a gain of 739 points or 6.3% in seven years or about 2% per year. With inflation rising at probably 6% a year, that’s hardly exciting progress. In other words, stocks aren’t really keeping up with inflation. Stocks today are overpriced, and my guess is that the growth in stocks from here on will fall further and further behind inflation.”
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