Dollar Devaluation is Inevitable…just like in 1934

April 2, 2009

It is evident to all the US economic environment is an unmitigated disaster. In fact we seem to be hell bent for leather falling into another Great Depression (the recent Bear Market Rally in Wall Street notwithstanding). This begs the question: What can President Obama do to avert the excruciatingly sad events of the 1930s?

Here are the economic problems causing havoc today in the USA:

- The banking system is collapsing

- Tidal waves of foreclosures sweep the country

- Tumbling housing prices

- A bear market ravages Wall Street stocks

- Massive unemployment throughout the nation

- Overall we are in a deflationary spiral

- Interest rates are abysmally low

- Consumer confidence is bottomless

And what were the economic maladies causing economic havoc in 1933?

- The banking system was collapsing

- Tidal waves of foreclosures swept the country

- Tumbling housing prices

- A bear market ravaged Wall Street stocks

- Massive unemployment throughout the nation

- Overall we were in a deflationary spiral

- Interest rates were abysmally low

- Consumer confidence was bottomless

As Yogi Berra might have expressed it:
"It's déjà vu all over again!"

Any differences some ill-informed might mention are irrelevant and immaterial to the overall burdens weighing upon the USA today.

What Can the US Government Do To Avert Another Great Depression?

President Obama's Stimulus Plan is to spend our way out of the economic quagmire…i.e. unprecedented massive spending for the next 11 years. The chart below clearly demonstrates that our nation will incur on-balance Trillion Dollar Budget Annual Deficits until 2011.

Source: http://blog.heritage.org/2009/03/24/bush-deficit-vs-obama-deficit-in-pictures

Never in the history of our country have we suffered such a Herculean financial burden. To be sure, 11 years of humongous yearly deficits will have its 'hidden cost' - The Devaluation of the Currency.

Dollar Devaluation To Fix (ANOTHER) Great Depression

History is testament currency devaluation proved effective in ending the Great Depression. In 1930, Australia was the first to leave the gold standard, immediately devaluing the Aussie by more than 40%, and the economy quickly recovered. New Zealand and Japan followed suit in 1931, each with the same result. By 1933, at least nine major economies had enacted a devaluation of their currency by removing it from the gold standard, all of whom emerged from depression.

In 1933, through a series of gold-related acts, culminating in the Gold Reserve Act of 1934, America realized a dollar devaluation of 41% when the price of gold was adjusted from $20.67 per ounce of gold to $35 per ounce. America, like the others before, had its economy bottom and recover as a result. Of the larger economies, only the French and Italians continued to adhere to the gold standard, and their economies remained depressed until finally, in 1936, they allowed their currencies to devalue, and their economies then recovered.

I see no reason to believe we would have any different result today. Only debt would remain the same. All other assets would immediately be worth more (in nominal terms), whether it be a home, a stock, an ounce of gold or a used car...all would rise in price. Furthermore, Bank balance sheets would immediately improve, as many loans would be moved from non-performing to performing status. Banks would be paid with devalued dollars.

In my considered opinion the current use of government's multi-trillion dollar stimulus program through the creation of dollars will certainly lead to a similar or even greater devaluation, so this is likely a net gain for the banks too.

DOLLAR DEVALUATION IS A WIN-WIN SITUATION
FOR THE ENTIRE NATION

History teaches that inflation cures deflation. And one sure way to create INFLATION (ie to generate inflation) is via a sharp devaluation of the currency.

What Happened After Franklin Delano Roosevelt Devalued the Dollar in 1934?

In early 1934 F.D.R. devalued the US greenback via increasing the price of gold by 69% ($20.67 to $35/oz). Within a few weeks nearly all of the nation's economic indicators began to materially improve, indicating the beginning of the end of the Great Depression. See charts below:

Price Levels (Inflation) - Vertical line is when FDR takes office

Investment

Commodity Prices

Stock Market Prices

Source of above charts: www.safehaven.com

Some erroneously believe it was World War II that pulled us out of the Great Depression. Unfortunately, that is a popular myth! It was the draconian measures and efforts of F.R.D. that turned the US economy upward --- starting in early 1934 as may be seen in the above charts. Nonetheless, it was indeed World War II that fueled the US to full production capacity and economic stability.

US debt monetization = Dollar devaluation = Higher gold prices

The implementation of President Obama's 11 years of Trillion Dollar Budget Deficits will oblige the Federal Reserve to monetize a goodly portion of the multi-trillion dollar issuance of US Treasury debt paper. Markets understand this, even if the Council of Economic Advisors does not.

Source: http://blog.heritage.org/wp-content/uploads/2009/03/wapoobamabudget1.jpg

To be sure Obama's 11-year Budget Deficit Plan will fuel gold and silver to over $2,500 & $30 in the years ahead.

********

And What is President Obama Thinking about these days?
Verbatim of President Obama in his 60-Minute TV interview on March 22, 2009:

"Rest assured we have learned our lessons from the Great Depression of the 1930s."

And who has the expertise to advise President Obama in the implementation of a Dollar Devaluation? No one is better qualified than the Chairman of the Federal Reserve Board, Dr Ben Bernanke, whose doctoral thesis was precisely: An Analysis of the 1930s Great Depression.

May God illuminate President Obama's path to steer us away from another Great Depression.


April 2, 2009

--
I. M. Vronsky
Editor & Partner - Gold-Eagle

www.gold-eagle.com

Founder of Gold-Eagle in January 1997.  Vronsky has over 42 years’ experience in the international investment world, having cut his financial teeth in Wall Street as a financial analyst with White Weld. Vronsky speaks three languages with indifference: English, Spanish and Brazilian Portuguese.  His education includes a degree in Petroleum Engineering from the University of Oklahoma, a Liberal Arts degree from Hartnell College and a MBA in International Business Administration from UCLA – qualifying as Phi Beta Kappa and Tau Beta Pi for high scholastic achievements.  Vronsky believes gold and silver will soon be recognized as legal tender in all 50 US states…and many countries worldwide.  You may reach I. M Vronsky at: vronsky@gold-eagle.com and/or vronsky@bellsouth.net

China has only 2% of its Total Foreign Reserves in gold.