Sunday, April 17, 2011

The New Raw Deal

History doesn't repeat, but it rhymes and these days it sings in harmony as well. In 1933 the
great depression was in full swing, the banking system had completely imploded, the stock market was ensconced in the greatest bear market in it's history, a tidal waves of foreclosures was sweeping the country, as massive unemployment and consumer confidence remained stubbornly unresponsive to abysmally low interest rates. Finally President Roosevelt declared a bank holiday and when the holiday was over another massive wealth transfer the the many have-nots to the few have-it-alls was completed. Its a tried and true formula, when all else fails devalue the dollar. All else has failed, history is tuning up to rhyme.

The economy like a train wreck waiting to happen, with mad men at the controls has long since passed it's Minsky moment and is riding the rails at light speed into the wall of oblivion. Prior quantitative efforts exchanged short term stimulus for permanent future debt. Further quantitative easing programs can only do more of the same, but with diminishing returns on the former and exponential increases in the latter. You cannot put out the fire with gasoline.

Which is why the well informed with skin in the game who know history, are in bed with the bankers and onto the their dirty tricks were already whispering the D-word at a meeting with Treasury Secretary.
"It is not going to happen in this country." Geithner said of dollar devaluation to Silicon Valley business leaders here.
Geithner of course lied. In fact that denial is noteworthy precisely because it almost ensures that an overnight devaluation has already been planned. It is exactly what the business leaders want, they just don't want you to know it. Devaluation is like a seesaw, the lower the value of your dollars, the more attractive their products and services become, thus increasing the stock price and padding their bonuses.

Roosevelt attempted to stimulate the economy via the devaluation rout. The effects were predictable. There was a short term increase in the values of stocks, property and gold, but even then only in nominal terms. The value of savings was cut by 40% in real terms overnight and a 40% tax on everyones future earnings had just been stealthily levied. The devaluation was really a wealth transfer from the saver class to the investment class. To the economy it had no effect at all in real terms. There was a depression before the devaluation and there was one after it. The great depression in fact continued on it's merry way right into WWII and beyond. It was only post war when America was the last man standing that the economy boomed and the depression ended. In the end the war did end the Great Depression because it eliminated the competition.

Fed Chairman Ben Bernanke, a known student of the Depression era, delivered a speech titled "Deflation: Making Sure 'It' Doesn't Happen Here."
"it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation."
That moronic speech earned him the nick name helicopter Ben. Then as now deflation is simply a symptom of a sick economy, the toxic run off from years of Fed induced inflation in the previous decade. Instead of forcing inflation down our throats the Fed should let free the market force capitulation in the housing, stock and credit markets. The resulting mark to market destruction of capital and credit would be massively deflationary, but is the only way by which to put a foundation in place upon which we can build an economic recovery. Yet the Keynesians predictably continue to treat the symptom instead of the cause and just as predictably will continue to fail to fix either. Yet that is just what Geithner was signaling to the business leaders in Silicon Valley that he intended to do.

Devaluation is the single greatest threat to anyone holding dollars and will be until it happens or the end of Obama's first term whichever occurs first. Those heavy in cash will be robbed, those deep in debt will be wiped out. But as stated above as the dollar goes down in value the things they buy goes up. So, oddly by holding house during the devaluation you can preserve your wealth. To protect yourself from your remaining cash sell it, by buying other real assets, property, equipment or precious metals.

Obama certainly will channel Roosevelt and call for a banking holiday, if he gets the chance. But the market may take the opportunity from him. A look at the chart of the US dollar index DXY shows it in a 45 degree nose dive, and seriously threatening to break strong support at 75. There is only air to support it under 70, free fall will certainly occur below that.

It is just the way markets work, the more some participants don't want something, the more the other participants don't want it either, the selling accelerates all the way to the bottom. The point is that the US dollar index is not approaching 70 it is racing to oblivion.

Take action before Obama does it for you, before the free market does it for him.


Anonymous said...

Please back up your claims with data, comparison to the great depression is not a valid set of data, it almost feels we are reading a product of your fantasy, if you want your readers to read your posts at least tell them up front that you won't be presenting any data to support your claims.

StockMarket -Implode said...

comparison to the great depression is extremely valid because the Fed caused the bubble then as now. once it is blown the bubble has to burst. its just a matter of when and how bad.

The data will be when Obama announces the $ devaluation or when it crashes, I don't know which will happen first. either way (crash or devaluation) being in $s is being trapped. even if there is no crash or devaluation just look at what gold and silver have done. they are far safer than $s anyway.

your point is well taken that no one can predict the future, but everyone can be prepared for it. but unless you expect a sudden revaluation of the $ then get out of it. and if you do expect a revaluation of the $, then please take another look at the chart of the DXY.

remember the Fed prints the money outta thin air and maximizes it's profits via the boom and bust cycles, with wars sprinkled. the value of money like any other commodity depends on supply and demand. demand for the $ is decreasing even as the fed prepares for QE3. i.e an increase of the money supply. How do I know QE3 will happen, because the Fed denied it will.

Anonymous said...

"How do I know QE3 will happen, because the Fed denied it will."

Good set of data?

StockMarket -Implode said...

Denials such as that have been of excellent predictive value. I.e. there is no housing bubble, there is no credit bubble, we will not monetize the debt.

But they have no choice. the debt is rolling over and more debt (QE3)to repay the old is the only solution they have. No one can tell the future, but this on is easy. Bet on it.(QE3)

We needn't debate just wait and see. By the Fall they will already be talking about doing it.

StockMarket -Implode said...

well as I said QE3 will happen, but it looks like i was 3 months late.

"Federal Reserve Chairman Ben S. Bernanke may keep reinvesting maturing debt into Treasuries to maintain record stimulus even after making good on a pledge to complete $600 billion in bond purchases by the end of June."