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Friday, November 13, 2009

The Great Depression Currency Games, Revisited

During the Great Depression, there was a global race to devalue currency. All countries competed to make their currency weaker. This only intensified issues between countries fostering more political instability.

Today, the race is back, as the US tries to devalue, rather successfully, its currency lower than everyone else's. What the US needs is strong leadership, fiscal responsibility, and enforcement of law. True leadership. But that's hard to do. So instead, it's currency debasement to "fool" the public that the economy is doing fine......even though weekly over 300,000 jobs are lost.

Case in point, back in the year 2000, the US stock market hit all-time highs. When the stock market is adjusted against gold prices, it is a high still stands to this day, even though in US dollar terms the market went much higher in 2007.

OK, so you don't like gold as a metric, I can understand that, its just a shiny rock, no different than a piece of steel, or a brick, a piece of material.

If you like the US dollar as a "unit of value" instead, then the US dollar's value should be compared to other currencies. For this metric, we will use "US Dollar Spot price". I found this on TheChartStore.com.

In 2000, the US stock market, S&P 500 hit about 1550 for most of that year. The US dollar spot price was about 120.

Today, the S&P 500 is about 1,100, and the US dollar spot price is about 75.

Lets have fun with math shall we? Lets convert the US stock market index to "international dollars" ,the value of US dollar to the world currencies.

Year 2000 US dollars 120 x 1,100 = 132,000
March 2009 US Dollars 90 x 1,100 = 99,000
Today US dollars 75 x 1,100 = 82,500

So, in effect, the US government has placed a hidden "tax" by devaluing the USD by 37.5% since 2000. Since March 2009 devalued by about 17%. And that doesn't include inflationary living costs.

But this game has a finite end, somewhere between 65 and 25, the USD devaluation would cause a panic and the dollar could collapse.

It doesn't comes as surprise that the world doesn't like the US winning the currency devaluation game, as some countries announce they will buy US dollars to try to prop it up.

This game is a dangerous one, the US is in effect blackmailing the world into buying IOU's (treasuries) to try to keep the dollar up. If the world can turn the US dollar around and raise its value, the US stock market is about to fall.

If the world cant hold the dollar up, or decides to give up on the US dollar, then a collapse would force the US government to raise interest rates to try to defend the dollar. That would cripple the economy.

For now, the dollar can decline, the market can rise, until the wall is hit.


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