Dollar Devaluation

I see, so really, the gov't trying to make a smooth landing......

 

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US default deflationary? i have read a lot of case studies and it seems with a currency default most anything than can be exported is adjusted to the world rate and the underlying currency devalues dramatically because it has lost all backing.

Yes, in scenarios you describe Cloud it would not be a default, just additinoal taxes that would slow the economy and maybe lead to deflation, but do you think a full default would be deflationary? Even in your scenario I think exportable goods would rise, like we are seeing right now, (trying to sort out price changes from the commodity bubble).

Chris

 

It's interesting that I come to the exact opposite conclusion. Defaults tend to be deflationary. If mortgage loans are unobtainable, house prices will fall to the level where all cash transactions can occur to clear the market. The inability to roll over debt will cause a huge increase in demand for dollars to settle the outstanding debt, and drive the value of the dollar higher. Stock market prices will crash as institutions and individuals rush to raise cash. Prices on imported items will fall because of the drop in demand -- other nations are dependent on the US to purchase their goods to stay in business.

 

We woudl still have US Dollars, they might just be worth a quarter of a Euro or less. Most people do not get it, when politicians spend this money, it is not fake money they are spending, WE have to pay it back either through higher taxes or the government/market will TAKE it from us by devaluing our currency. Its real money either way. We are taxe every year over $400 Billion just to pay INTEREST on past borrowing, not even current deficits. If the US public really understood all of this, that this deficit WILL result in a lower standard of living and having assets seized from them, maybe they would do something about it. Unfortunately almost half of all Americans do not pay Federal taxes anymore, or get more money back than they put in, so they are happy to steal from the rest of us.

 

Absolutely. Crashing markets are always deflationary.

Edit: Think about it. Bonds down, real estate down, stocks down. Money is debt and debt is money. After a bond crash, there will be a huge decline in the amount of money in circulation, and a mad scramble to liquidate assets to get a share of what remains. Demand for imports will just about cease, and prices of imports will plunge.

Edit2: All of this presumes no other action will be taken. It is possible and perhaps likely that the Treasury will mail everone a check for $100k or so to try to stem the deflation. That's what makes things so unpredictable.

 

We sound like two economists, agree on fact and disagree on conclusions. I guess I think of Russian or Asian defaults and what happened to their currencies and cost of living in 1998. The Thai baht went from 7 to the dollar to 40. It was survivable for Thais who only bought Thai goods, but anything that could be exported their price went up the same percentage the baht went down. Overall the standard of living went down for most people. This is the scenario I believe PM enthusiasts think about, all of the gold and silver here would hold its "real" value, and anyone holding them would benefit. Yes, like you said, anything innately tied to the US, (like housing), would simply decline in value, but a lot of what we have and produce would have to rise to the new world price.

 

Yes, crashing markets. Not a single crashing currency. Completely different scenarios. If all currencies crashed similarly, then it would be a traditional crashing market and all prices would simply adjust. If only one country crashes, then the people suffer the sins of the politicians.

 

That was a currency problem, not a debt problem. Russia and the others were borrowing in foreign currencies and could not service the debt without printing money domestically. This is NOT the situation that the US is in -- the potential inability to service debt denominated in US dollars, so the outcome will probably be different. And as I must repeatedly say, everything always and everywhere depends on policy reactions. The government can always create inflation by printing unlimited quantities of currency and issuing them as noninterest bearing replacements for the debt.

But the defaults themselves are deflationary.

 

Always disagree. Russia yes was borrowing under other currencies, but Asian countries weren't. Debt/currency problems are effectively the same. All countries can simply print more money if their debt is denominated in that currency, which is what they do on a technical default. Effectively they steal from lenders and their citizens by creating 10 times more money, devaluing all of it by 10 so its easy to pay back. I do not think anyone would suggest teh government would keep a strong dollar policy and simply try to have 70% tax rates on all citizens, so US default will have to be a dollar devaluation. I cannot see another way.

Debt problems, if denominated by dollars, is the same as dollar currency problems. US Treasuries are treated around the world as currency with a bonus interest payment. Most bankers, when referring to "dollars" are referring to US Treasuries, not currency. Its not our currency printing presses that are devaluing the dollar, its our US Treasury debt printing presses.

 

South Korea, Thailand, and Indonesia were borrowing foreign currencies in an attempt to keep their currencies pegged to the US dollar in an attempt to attract foreign capital. Eventually, this failed, and their currencies fell. This has no bearing on the debt default scenario for the US Treasury market where we do not borrow in foreign currencies, and allow the dollar to float. Different conditions lead to different outcomes. People can guess what the policy reaction will be. I think they will choose inflation, but it could easily go the other way. Nobody knows. But the debt default itself will be deflationary. I don't see any way around that.

 

and as we speak ... silver is up to $30.90 an ounce

 

Perhaps I am off track here, but these are my thoughts on the economic system we have today.

1. Printing money to save the economy will only eventually collapse the economy. Doing nothing either would also lead to the collapse of the economy.

2. Gold and Silver will not save you. When everything goes to pot, only the person who has the most supplies with no fear of running out of anything will take bullion for supplies. I don't think they will be giving change either. No one is going to give you a case of beans for a pile of metal when they have no more beans left to give after their case is gone.

3. History shows how economies can go bad even when Gold and Silver are the main currency of the day. Instead of printing more money like they do now-a-days, those guys just reduced the silver/gold content of the coins and tried to pass them off as if they were the full amount.

4. I am just as clueless of how things can be solved.

 

Your observations are correct -- if we suffer from a total economic collapse. Nothing can really protect people from that. Personally, I think the survivalist mentality is a waste of time. Collapse is a low probability event. It makes a lot more sense to me to prepare for what is likely to occur and what has occurred in the past -- either inflation or deflation with their corresponding effects on money and investments. We aren't going back to the stone age.

 

Happy New Year Cloud!

I was watching CSPAN this morning and someone from the Cato Institute was talking about a population shift that's been going on over the past decade or so of folks wanting government benefits moving to welfare states such as California, Illinois, and New York...and folks fed up with the high taxes moving out.

I can imagine an increase in battles over States' Rights...along with the failure of some individual states...such as California. It'll be interesting if the Federal government will bail out a welfare state at the expense of other states which are more fiscally conservative.

 

Things are far from perfect here is California, mainly as pointed out, in the economic sense. Aside from that it would still rank as the premier state IMHO. If the fed would get off their duffs and enact a fair immigration law that could be enforced, it would possibly alleviate some problems as the Feds get social security income from illegal ( or undocumented if you like) workers, but leave most of their support up to the state, and estimates are that 7% of California population is illegal.

But that aside, California's economy ( GDP) is #1 among states, and if a country would be approx. 7th. ( some say 6th, others 7 or 8th). Greater than the 2 countries on each border, Canada at #10, and Mexico at #15. California also had a surplus balance of 20 years ( ending in 2008) of 3.65 Billion per year to the Federal Government over what it received in Federal services.

So would the federal government willing to choke the previous Golden goose ( which will return to prosperity ) and one of their own constituencies? I don't think so myself, but I am biased. I even believe that the US would help out Canada ( even though not a state) if they needed it, as such a neighboring country is worth the political support to the Federal Government.
All in my opinion

 

California's main problem isn't welfare, or illegals, or anything else. It's Proposition 13.

A lesser problem is the ridiculous way the legislature draws up budgets.

 

no, it's pretty much all of that combined...well that, and poor mangt at the state level..and the cost of living...etc etc

 

Silver broke over $39 today and has more than doubled in the past year -- wow -- what a run!