Dollar Devaulation?
I am posting this not because I have the answers, but exactly the opposite. I think that I have the right question. Find the answer to that question (or at least know the likely possible answers) and you will be half the way to success.
There is the ongoing debate regarding inflation versus deflation. Last year, deflation was in force, while this year we have seen a return of inflation, in a sense at least. (We haven't really seen a great expansion in credit and/or money, so the verdict is still out on that one.) But how is it ultimately going to end? Because it is not over. Not by a long way. The final denouement could come in nine months or nine years. It could be a deflationary collapse followed by a reflationary recovery. Or it could be a blow-off, bubble type top, followed by a huge collapse, leading to an era of higher inflation in a post-reserve US Dollar, floating exchange rate world with or without regional currency pegs or with shifting currency pegs as each nation attempts to jockey for competitive advantage without doing the hard work of restructuring while trying to work off the hangover of the last few decades' party. I tend to believe that it is not the latter, but that is not the point here. The point is that somehow, someway, the USA will have to get itself out from under the weight of its oppressive debt. It can default and throw the US Dollar to the wolves and cause a dramatic and traumatic adjustment of domestic priorities as revenues and spending must quickly be brought back into balance. Or it can devalue the US Dollar and effectively revalue its debt obligations to a level which can be managed.
First, a couple of premises. The overall debt levels during the Great Depression of the 1930's started that period just below 200% of GDP and peaked just under 300%. Currently total debt levels in the US are just below 400% and rising. This implies that the current situation is of a larger scope than the crisis of the 1930's. Bob Prechter of the Elliot Wave Theorist is convinced that this market top is of a larger degree than the 1929 peak. (And lest you are inclined to dismiss Mr. Prechter as a "perma-bear", he made this call in the 90's well before the scale of the current peak was clearly known.) That does not mean that his deflationary call is correct, but at least that it should be seriously considered. In 1933, FDR devalued the US Dollar (against gold) by 40%, by confiscating privately held gold at the price of $20 and then fixing the new international exchange rate of gold at $35. Of course, at the time, the country was on a gold standard, a somewhat flawed and flexible one, but a gold standard nonetheless. How would such a feat be pulled off today, since we are no longer on a gold standard? More on that later. The other way that the US Dollar could be devalued is against the other major currencies of the world. That would include the Euro, Yen, Chinese Yuan, British Pound, Swiss Franc, Canadian and Australian Dollars. What would the response from these seven countries (maintaining the fiction that the Euro Zone functions as a supra-national entity) be? In the 1930's, the world was much less interconnected and the four major powers (Britain, the US, France and Germany) collectively controlled a much larger share of world GDP and therefore could more easily agree to the terms and conditions of international trade. ( Those powers combined share of GDP has fallen from about 2/3 of world GDP to a little over 1/3 from 1913 to present.) Getting all of these competitors to agree would be a monumental challenge. Just keeping the EU in line is proving to be a major exercise, which by no means is guaranteed of success and could quite possibly break up, sooner rather than later. Witness Greece, Ireland, Spain and Portugal (the PIGS). If this is the model that is attempted it would seem more likely that their would be an Asian currency regime (either a single currency replacing the Yen, Yuan, HKD, Singapore Dollar, etc or fixed exchange rates among its members or some combination), the Euro Zone and then the Anglo group. It would not seem to be the most stable of situations, since a lot of this sort of fiat paper, floating rates monetary schemes have brought us to where we are today, but never put anything past the money interests and their servants in governments everywhere.
The rule of alternation would seem to imply that a return to some sort of hard money standard, gold, silver, bimetallism, etc would be demanded by a world spectacularly let down by paper money. It would also provide the cleanest and least painful path ( at least in terms of dispersion of the pain) among participants. Even if just the US and Euro Zone went back to the gold standard, a 50% devaluation would possibly bring debt levels back down to the 100-150% range where it would be feasible for these economies to grow out of the debt in 20-30 years.
Both devaluations would seem to suggest that purchasing gold as a "store of value" or an alternate currency would be the wisest path (and to some extent that will surely be true). But as the possible scenarios of a US Dollar devaluation against other paper currencies versus a return to the gold standard, could involve drastically different paths including gold confiscation, the answer is not yet knowable. But being prepared with right questions and the possible resolutions to that question could make the difference in a volatile and dynamic situation.
There is the ongoing debate regarding inflation versus deflation. Last year, deflation was in force, while this year we have seen a return of inflation, in a sense at least. (We haven't really seen a great expansion in credit and/or money, so the verdict is still out on that one.) But how is it ultimately going to end? Because it is not over. Not by a long way. The final denouement could come in nine months or nine years. It could be a deflationary collapse followed by a reflationary recovery. Or it could be a blow-off, bubble type top, followed by a huge collapse, leading to an era of higher inflation in a post-reserve US Dollar, floating exchange rate world with or without regional currency pegs or with shifting currency pegs as each nation attempts to jockey for competitive advantage without doing the hard work of restructuring while trying to work off the hangover of the last few decades' party. I tend to believe that it is not the latter, but that is not the point here. The point is that somehow, someway, the USA will have to get itself out from under the weight of its oppressive debt. It can default and throw the US Dollar to the wolves and cause a dramatic and traumatic adjustment of domestic priorities as revenues and spending must quickly be brought back into balance. Or it can devalue the US Dollar and effectively revalue its debt obligations to a level which can be managed.
First, a couple of premises. The overall debt levels during the Great Depression of the 1930's started that period just below 200% of GDP and peaked just under 300%. Currently total debt levels in the US are just below 400% and rising. This implies that the current situation is of a larger scope than the crisis of the 1930's. Bob Prechter of the Elliot Wave Theorist is convinced that this market top is of a larger degree than the 1929 peak. (And lest you are inclined to dismiss Mr. Prechter as a "perma-bear", he made this call in the 90's well before the scale of the current peak was clearly known.) That does not mean that his deflationary call is correct, but at least that it should be seriously considered. In 1933, FDR devalued the US Dollar (against gold) by 40%, by confiscating privately held gold at the price of $20 and then fixing the new international exchange rate of gold at $35. Of course, at the time, the country was on a gold standard, a somewhat flawed and flexible one, but a gold standard nonetheless. How would such a feat be pulled off today, since we are no longer on a gold standard? More on that later. The other way that the US Dollar could be devalued is against the other major currencies of the world. That would include the Euro, Yen, Chinese Yuan, British Pound, Swiss Franc, Canadian and Australian Dollars. What would the response from these seven countries (maintaining the fiction that the Euro Zone functions as a supra-national entity) be? In the 1930's, the world was much less interconnected and the four major powers (Britain, the US, France and Germany) collectively controlled a much larger share of world GDP and therefore could more easily agree to the terms and conditions of international trade. ( Those powers combined share of GDP has fallen from about 2/3 of world GDP to a little over 1/3 from 1913 to present.) Getting all of these competitors to agree would be a monumental challenge. Just keeping the EU in line is proving to be a major exercise, which by no means is guaranteed of success and could quite possibly break up, sooner rather than later. Witness Greece, Ireland, Spain and Portugal (the PIGS). If this is the model that is attempted it would seem more likely that their would be an Asian currency regime (either a single currency replacing the Yen, Yuan, HKD, Singapore Dollar, etc or fixed exchange rates among its members or some combination), the Euro Zone and then the Anglo group. It would not seem to be the most stable of situations, since a lot of this sort of fiat paper, floating rates monetary schemes have brought us to where we are today, but never put anything past the money interests and their servants in governments everywhere.
The rule of alternation would seem to imply that a return to some sort of hard money standard, gold, silver, bimetallism, etc would be demanded by a world spectacularly let down by paper money. It would also provide the cleanest and least painful path ( at least in terms of dispersion of the pain) among participants. Even if just the US and Euro Zone went back to the gold standard, a 50% devaluation would possibly bring debt levels back down to the 100-150% range where it would be feasible for these economies to grow out of the debt in 20-30 years.
Both devaluations would seem to suggest that purchasing gold as a "store of value" or an alternate currency would be the wisest path (and to some extent that will surely be true). But as the possible scenarios of a US Dollar devaluation against other paper currencies versus a return to the gold standard, could involve drastically different paths including gold confiscation, the answer is not yet knowable. But being prepared with right questions and the possible resolutions to that question could make the difference in a volatile and dynamic situation.
posted by Matt Butler at 6:47 PM
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