Tuesday, December 16, 2008
A Disturbance in The Force
I promised to tell you about a shock that I believe is coming to America. Well, this is it: I expect currency devaluation sometime in the next two years. In currency devaluation a country makes its currency less valuable in relation to a fixed standard or in relation to other currencies. This may well happen as part of a series of competitive devaluations by the U.S. and other G-7 (or G-20) countries.
Why do I believe this will happen?
1. It has happened before. In 1933, F.D.R. devalued the dollar from $20.67 per ounce to $35.00 per ounce of gold.
2. Americans are drowning in a sea of debt from a credit expansion that has gone on for more than fifty years. The collapse of the debt bubble is pushing us toward deflation that can best be stopped by creating an inflationary shock through devaluation.
3. Inflation may be the only hope (did I say “Hope”?) of helping people to pay off the mountains of debt they have accumulated. An inflationary shock of 20%, for example, would tend to cause wages (except perhaps for those of overpaid auto workers) to jump by ten to twenty percent allowing debtors to pay off their debts more easily.
4. Home prices have fallen dramatically and are likely to continue falling without a shock to the system to make them bottom quickly.
5. Prices for numerous assets are falling because of forced liquidation. Falling prices have wiped out over $2 Trillion of net worth. A bump in inflation may begin to bring some of that back, at least in nominal dollars.
6. In the 1930’s at least eighteen countries devalued their currency and most emerged from the depression fairly quickly when they did so.
7. The biggest debtor of all is the U.S. Government and the only prayer it has, (not that the government actually prays) short of taxing everyone to their eyeballs, is to inflate the currency enough to pretend to have paid off its debts.
8. Currency devaluation robs creditors to the benefit of debtors. Government bailouts so far have mainly benefited creditors. A backlash is brewing and devaluation may be the java that we all get to drink as a result.
Devaluation is a way to kick-start inflation, which I believe is coming with or without devaluation. Now, I could be dead wrong and no devaluation will ever happen, but inflation is baked into the cake. In this environment, commodities and precious metals will be the best performing assets beginning at some point and continuing for a long time thereafter. Because the U.S. Dollar is the world’s primary reserve currency, dollar devaluation will definitely qualify as a disturbance in The Force.
And now for the good news! It is a good time to assess the value of the “stuff” in your life. Chances are that if its value can be measured in dollars, it is not really all that important. Life, health, family, friends, freedom; these are gifts from God that can not be valued in dollars.
Why do I believe this will happen?
1. It has happened before. In 1933, F.D.R. devalued the dollar from $20.67 per ounce to $35.00 per ounce of gold.
2. Americans are drowning in a sea of debt from a credit expansion that has gone on for more than fifty years. The collapse of the debt bubble is pushing us toward deflation that can best be stopped by creating an inflationary shock through devaluation.
3. Inflation may be the only hope (did I say “Hope”?) of helping people to pay off the mountains of debt they have accumulated. An inflationary shock of 20%, for example, would tend to cause wages (except perhaps for those of overpaid auto workers) to jump by ten to twenty percent allowing debtors to pay off their debts more easily.
4. Home prices have fallen dramatically and are likely to continue falling without a shock to the system to make them bottom quickly.
5. Prices for numerous assets are falling because of forced liquidation. Falling prices have wiped out over $2 Trillion of net worth. A bump in inflation may begin to bring some of that back, at least in nominal dollars.
6. In the 1930’s at least eighteen countries devalued their currency and most emerged from the depression fairly quickly when they did so.
7. The biggest debtor of all is the U.S. Government and the only prayer it has, (not that the government actually prays) short of taxing everyone to their eyeballs, is to inflate the currency enough to pretend to have paid off its debts.
8. Currency devaluation robs creditors to the benefit of debtors. Government bailouts so far have mainly benefited creditors. A backlash is brewing and devaluation may be the java that we all get to drink as a result.
Devaluation is a way to kick-start inflation, which I believe is coming with or without devaluation. Now, I could be dead wrong and no devaluation will ever happen, but inflation is baked into the cake. In this environment, commodities and precious metals will be the best performing assets beginning at some point and continuing for a long time thereafter. Because the U.S. Dollar is the world’s primary reserve currency, dollar devaluation will definitely qualify as a disturbance in The Force.
And now for the good news! It is a good time to assess the value of the “stuff” in your life. Chances are that if its value can be measured in dollars, it is not really all that important. Life, health, family, friends, freedom; these are gifts from God that can not be valued in dollars.
Labels: currency, debt, devaluation
¶ 12:58 PM
