Richard Russell last night…

January 7, 2010 -- I read a lot, and one of the best minds I've come across is John Hussman of the Hussman funds. John knows the Fed and the economy from head to toe, backwards and forwards, and what John Hussman writes I always find of great interest. I'm starting this site with two paragraphs from John's latest weekly report (read it in full on Hussman Funds). In brief, John believes that the build-up of government liabilities (and Lord knows we have 'em) results in outright inflation. Please read the excerpts below courtesy of John Hussman. I might add that John believes that some of the Fed's current and recent activities skirt on the edge of the law.

"As I wrote several weeks ago, the Federal Reserve has expanded the U.S. monetary base by more than 150% since the beginning of the recession. That is not a typo. The monetary base has soared from $800 billion to over $2 trillion. Much of this has been accomplished through outright purchases of mortgage-backed securities (not repurchases) and an equivalent creation of base money. Unless these securities can be sold back out into private hands for the same value that was paid to acquire them, the Fed will have effectively forced the U.S. government to make its implicit guarantee of these agency securities explicit, without the authorization of Congress. To the extent that the underlying mortgages default, the U.S. government will be forced to issue additional Treasuries to retire the mortgage backed securities now held by the Fed. Alternatively, if the U.S. does not explicitly bail out Fannie Mae and Freddie Mac to the full extent, the Fed will have created money, with no recourse, and without the equivalent backing of assets or securities on its books. In short, the Fed is now engaging in unlegislated, back-door fiscal policy."

"What is likely, in my view, is that we will observe far greater issuance of government liabilities, which will predictably create a near doubling of the consumer price index in the coming decade (though probably not for a few years due to credit concerns, which dampen monetary velocity). It is notable that the massive expansion of government liabilities beginning in the late-1960's eventually exploded into uncontrollable inflation by the late 1970's. There are lags between the creation of government liabilities and their inflationary effects. But to expand these liabilities as recklessly as the Fed and Treasury are now doing is to undermine the long-term foundations of the economy."

Russell Comment -- So what John Hussman is saying is that what the Fed is doing in its desperate, really wild, battle to battle with the deflationary bear market is so "far out" and so crazy that it's outside the law. The result of the Fed's machination is a build-up in debt that is almost beyond comprehension. I can't imagine how it will ever be paid off, and I'm certain that our creditors are wondering the same thing.

Actually, I think Fed Chief Bernanke has put his own ego on the line. He'll turn this recession around or, by God, he'll destroy the nation trying. Hitler, against the advice of all his generals, put his ego on the line when he invaded Russia. Bush and Cheney put their egos on the line when, with absolutely no debate in Congress, they ordered the invasion of Iraq. In both cases --disaster.

Gold -- What about gold? I wrote that gold below 1000 was "cheap, cheap, cheap." Below you see a P&F chart of gold. I see this chart showing a huge potential BASE for gold with previous resistance and now SUPPORT at 1000. Gold broke out above 1000 and climbed to the 1220 box. From there we saw a frightening "wipe out" correction to the 1080 box. This correction set off all the anti-gold experts warning of a coming collapse. Instead of collapsing, gold rallied to the 1140 box. It will probably require some back-and-forth action from here, but I believe gold will be going to new highs this year. Once above 1220, the upside is open-ended. Gold has climbed this far in the face of continuing anti-gold propaganda and selling by the world's central banks. Now that the banks (China, India, Russia and the Asian banks) are buying gold, it should be a different story…

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