Dollar Devaluation To Fix The Great Recession

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krogoth's picture
krogoth
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Dollar Devaluation To Fix The Great Recession

This should kill off the remaining savers

http://www.forbes.com/finance/2008/12/09/dollar-devaluation-gold-pf-ii-in_fb_1209soapbox_inl.html

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DrKrbyLuv
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Re: Dollar Devaluation To Fix The Great Recession

The are trying to take every penny they can - according to the Money Masters: "wealth is not destroyed in times of great economic upheaval...it is transferred."

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Re: Dollar Devaluation To Fix The Great Recession

During Depression I, I would say it was Frank Roosevelt's 40 percent
devaluation of the dollar against gold which finally stopped the
deflation. After Wild Ben 'Maggot Brain' Bernanke has cut his policy
rate to zero, dollar devaluation is the only policy option left to ease
our collective pain.

Not that he isn't doing it already.
Increasing the Fed's balance sheet by a factor of 2.5 times is like
diluting stockholders by the same amount. It's just that monetary
policy acts with a lag. Only in last week's statistical releases has
short-term M1 growth finally launched up to 36 percent, on its way to a
probable 50, 70 or even 100-plus percent.

Dr. Domingo Cavallo,
the former Finance Minister of Argentina, said in response to a post I
put on his forum, that he thinks the Fed will eventually shed the
mountain of assets it has accumulated. With all due respect, I
completely disagree.

What many experts miss is that the U.S. economy is a Ponzi scheme. The only game in town
is to keep it expanding. Any attempt to remove the stimulus -- as, for
example, when the Fed hiked the discount rate in 1937 -- will instantly
slit the economy's throat and bring the deflation monster slithering
out of its cave, breathing fire and knocking over skyscrapers. Too, too
horrible.

The U.S. economy can no longer make an honest living by making stuff -- 'Honey, I shrunk the factories.' Fact
is, we have a debt monkey on our back. The only way to keep feeding the
monkey is -- to use Bernie Madoff's delightful expression -- to pay it with
'money that doesn't exist.' Printed money, in other words. The more you
print, the more your currency devalues against real stuff like oil,
wheat, and meat.

Go, GO ... go, Benny, go ... GO, Benny print good ... Cool

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Re: Dollar Devaluation To Fix The Great Recession
machinehead wrote:

During Depression I, I would say it was Frank Roosevelt's 40 percent devaluation of the dollar against gold which finally stopped the deflation. After Wild Ben 'Maggot Brain' Bernanke has cut his policy rate to zero, dollar devaluation is the only policy option left to ease our collective pain.

Not that he isn't doing it already. Increasing the Fed's balance sheet by a factor of 2.5 times is like diluting stockholders by the same amount. It's just that monetary policy acts with a lag. Only in last week's statistical releases has short-term M1 growth finally launched up to 36 percent, on its way to a probable 50, 70 or even 100-plus percent.

Dr. Domingo Cavallo, the former Finance Minister of Argentina, said in response to a post I put on his forum, that he thinks the Fed will eventually shed the mountain of assets it has accumulated. With all due respect, I completely disagree.

What many experts miss is that the U.S. economy is a Ponzi scheme. The only game in town is to keep it expanding. Any attempt to remove the stimulus -- as, for example, when the Fed hiked the discount rate in 1937 -- will instantly slit the economy's throat and bring the deflation monster slithering out of its cave, breathing fire and knocking over skyscrapers. Too, too horrible.

The U.S. economy can no longer make an honest living by making stuff -- 'Honey, I shrunk the factories.' Fact is, we have a debt monkey on our back. The only way to keep feeding the monkey is -- to use Bernie Madoff's delightful expression -- to pay it with 'money that doesn't exist.' Printed money, in other words. The more you print, the more your currency devalues against real stuff like oil, wheat, and meat.

Go, GO ... go, Benny, go ... GO, Benny print good ... Cool

Well see, that's why you haven't been offered the Finance Minister post in Argentina.  You might try Zimbabwe.  Smile

FDR had the relative luxury of being able to do a direct devaluation as we were still on the remnants of a specie backed system.  No one has that luxury today.  Unless of course you physically print it as Weimar Germany and Zimbabwe both clearly show the devaluing effects of such action.  The Fed does not legally have that ability - not saying they couldn't illegally do it, but its unlikely at this point.

The Fed is unique amongst CBs in that is privately owned.  Bernanke has stuck his foot in the feces bucket pretty deep and effectively made the Fed insolvent were it forced into immediate liquidation.  In my two remaining brain cells the only way out for Benny is to sell back into the market the crap (M BS, GSE and other securitzed junk) and the excess deluxe crap (treasuries).  I would guess from the maturities of the MBS purchased and the rolling of those into additional treasuries with an average maturity of something in the 6 year range that Benny plans to be back to "normal" in the next 5 years or so.  Best laid plans .........

What Ben cannot change is the psychology of all involved.  Mr. Average has switched from Consumers Gone Wild to Ebeneezer Scrooge.  Most are sitting and staring at mountains of crap and  asking why in the hell they thought they needed it in the first place - besides the overpowering need to fill those echoing rooms in their McMansions.  The thoughts of adding Golden Arches over the gate have now turned to how they look in a paper hat while inquiring if you want fries with that.

In order for the system to get off its dead ass and utilize the new money you have to have Joe and Jane wanting to borrow money to buy stuff which makes Bob the Business owner want to borrow money to make his  store bigger which gives Casey the Carpenter a job and so on.  Taht's mpt happening or are we anywhere near a point that it will happen.  Small business owners survey show no lack of ability to borrow money - but they lack any desire to do so.  Tehir number one concern is the inability to increase the top line.

Inflation is a non - issue

http://globaleconomicanalysis.blogspot.com/2010/11/measuring-success-of-...

My reads indicate that while FDR's devaluation provided a great benefit to the gold miners who had a guaranteed buyer of unlimited wuantity at a now higher fixed price but not much else.   People who point to the 1930s as a good reason to own miners fail to recognize that they alone made huge gains from the "inflation".  No such mechanism exists today. Commodities in general rose and then slumped quickly back as did employment.  They got it off the pad only to watch it crash and burn in a nearby field.  Thank gawd WWII came along to provide a diversion and sop up some of those excess humans running about.

 

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Re: Dollar Devaluation To Fix The Great Recession
yobob1 wrote:

My reads indicate that while FDR's devaluation provided a great benefit to the gold miners who had a guaranteed buyer of unlimited quantity at a now higher fixed price but not much else.  People who point to the 1930s as a good reason to own miners fail to recognize that they alone made huge gains from the "inflation".  No such mechanism exists today. Commodities in general rose and then slumped quickly back as did employment.  They got it off the pad only to watch it crash and burn in a nearby field.  Thank gawd WWII came along to provide a diversion and sop up some of those excess humans running about.

Yobob, some spammer resurrected this thread from Dec. 2008 last night. The spam post has disappeared, but I guess I should thank SpamGirl for dredging up my prediction that the Fed would not withdraw its original QE1 program, which was underway at the time.

In mid-2010, the Fed officially dropped the idea of running off its QE1 assets, but it was easy to see it coming based on Ponzi logic. The same is true of QE2 -- it's permanent, unless they want to impose a 'lights out' gravity lesson on our Wile E. Coyote cartoon economy.

You read my mind, about the miners in the 1930s. I've been researching this issue. Homestake, the dominant U.S. gold mine in the early 20th century, delivered an incredible tenfold return from the mid-1920s through 1936, accompanied by a fat 10 percent dividend yield. If you were invested in Homestake from 1929 to 1933, there was no bear market -- instead, you were getting freaking rich:

Not hard to see why -- all other industrial companies and commodity producers were facing falling sales and crashing prices. Whereas the price of Homestake's product -- gold -- was government guaranteed at $20.67 an ounce. As wages and material costs dropped, Homestake's margins actually went up. Then Frank Roosevelt hiked the gold price to $35 an ounce -- an absolute windfall for Homestake! 

Once the price of gold was freed in the 1970s, miners could no longer serve as a reliable deflation hedge. Gold itself trades like a commodity, so I would say that it has effectively replaced mining stocks as a hedge against extreme inflation or deflation. Should gold return to a monetary role, with some sort of government price floor, then possibly miners could reassume the deflation hedge role that Homestake played so superbly in the 1930s.

The negative correlation of gold to industrial stocks creates a fascinating alternative history, in which a Homestake investor could describe the Thirties as the dream decade that made his fortune. 

Got a time machine I could borrow? Wink

agitating prop's picture
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Re: Dollar Devaluation To Fix The Great Recession

If you do a meta analysis of capitalism, you can see how it closely resembles a ponzi, or multi level marketing scheme. As long as there are significant numbers continuing to enter the bottom tiers, and a certain amount of progression up the pyramid is taking place, it works. But once the real economy ceases to actually grow, financialization replaces factories, financial fidgeting replaces widgeting.   Money games and the illusion of prosperity, feeds the false promise of progression up the pyramid.  In reality, nothing is really going on except cannibalization of real tax dollars to feed the institutions and bond holders that have provided the illlusion.

Karl Marx was right about end stage capitalism, and what is happening today is Marx on steroids as we have reached the limits, not only of the endurance of  this system, but the endurance of the resource base that supported that system. Hey, thanks Comrade Machinehead! I knew eventually, a woman from Saskatchewan could talk a little Socialist sense into you! Wink

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Re: Dollar Devaluation To Fix The Great Recession

Exactly. As supply side solutions centered on monetary policy are the really the only actionable tools left in the tool kit, no one wants to focus on the demand side calculus which requires some rather disconcerting conclusions.

And why would one look to demand side critiques? Fiscal policy solutions are dead in the water thanks to a fully captured corporatist government and boatloads of mass media propaganda foisted onto the American public to discourage any sort of meaningful cause and effect discussion. With a certain amount of irony, our culture can only attempt to correct a ideologically and monetarily bankrupt society with ineffective tools provided by the Fed, and only because it (the Fed) is substantially free of oversight by fiscal policy makers.

And the machine grinds on. Sarah Palin’s new reality TV show premieres tomorrow, essentially an eight segment campaign ad cloaked within glacier climbing episodes featuring the quintessential “grizzly mama” bounding through the Alaska wilderness, accompanied by her cubs with heightened sense of smell, trained to sniff out socialists at 100 paces.

And abroad, Obama pitches the stillborn globalization and failed free trade policies to people who really did get the memo, and tries futilely to reenact the good old days of crisis capitalism.

Alas, supply side theory, resource collapse, and other various and sundry deaths by a thousand paper cuts still miss the point, capitalism in general and corporations in particular have committed the cardinal sin of business- their unchecked greed and unbridled wealth redistributions have finally succeeded in consuming their own customers.

No measure of financial corrective action, no Fed policy, no QE I, II, III can fix a system when the middle class has been not only eaten alive by it’s own protagonists, but chewed up and spit out with anger.

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Re: Dollar Devaluation To Fix The Great Recession

Particularly upsetting is the realization that most of the governing principles of how and why this is happening was asked and answered nearly 200 years ago by Marx, Ricardo, et. al.

On the subject of free trade and the modern “globalized” adaptation of same, Ricardo is generally considered the main theorist of comparative advantage, that touchstone of Neoliberal enabling and gateway drug to the world of shantytowns next door to your favorite McMansion.

In 1817, he wrote the seminal treatise (in other words a real snoozer) defining “On the Principles of Political Economy and Taxation” which laid out the first principles of comparative advantage.

“Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by regarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically.”

 

But alas, this was only the window dressing, the part that gets programmed into the Heritage Foundations propaganda machine. Further digging nets the admission that its not all wine and roses, indeed the operating principles have a very different motive:

 

It has been my endeavour to shew (sic) throughout this work, that the rate of profits can never be increased but by a fall in wages, and that there can be no permanent fall of wages but in consequence of a fall of the necessaries on which wages are expended. If, therefore, by the extension of foreign trade, or by improvements in machinery, the food and necessaries of the labourer can be brought to market at a reduced price, profits will rise. If, instead of growing our own corn, or manufacturing the clothing and other necessaries of the labourer, we discover a new market from which we can supply ourselves with these commodities at a cheaper price, wages will fall and profits rise………..

(Ricardo 1817)

Bottom line, Ricardo, and his contemporaries, knew full well that free trade based upon capital chasing lower cost of goods across borders via reduced wages had one and only one use – to increase profits and to redistribute wealth.

We knew this and other similar operating principles nearly 200 years ago, and yet here we are……

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Re: Dollar Devaluation To Fix The Great Recession

'the rate of profits can never be increased but by a fall in wages' -- David Ricardo

For all of Ricardo's considerable insight, he seems to be making an unduly static assumption here. By far the main contributor to rising profits since his time has been the advance in productivity. And at least from Ricardo's era until 1973, the rise in productivity was accompanied by rising real wages.

Not coincidentally, 1973 was the year we entered the 'full floating fiat' currency system. Real wages slammed into a brick wall, and have been stagnant ever since. Meanwhile, the zero-sum, economically unproductive game of fiat currency trading became the largest-volume market on the planet. Since large capital and inside information confer an advantage in currency trading, income and wealth inequalities were given a heady boost by the newly financialized economy, as the Sage of Saskatoon mentioned above.

Seems that the bad old gold standard, loathed by progressives and populists, wasn't as cruel to labor as they made it out to be.

Ricardo's classical example of the benefits of trade was the exchange of English cloth for Portuguese wine. Try some English wine (if there is such a thing), and you'll quickly see his point. Smile

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Re: Dollar Devaluation To Fix The Great Recession

In the early 1970's America's oil production also peaked. It was during this time that the term "petrodollar" was coined.

Until 1971 America had been the leading crude oil producer in the world. The allies war machine in WWII ran largely on Texas crude. But after 1971 the world's oil production shifted from Texas to the Persian Gulf.

Fortunately for America, OPEC nations all sold their oil in dollars, and pegged their currencies to the dollar. Meaning that if Japan wanted to buy oil from Saudi Arabia they needed American dollars to make that purchase.

This created an external, artificial demand for our pretty, green pieces of paper. The world's economy runs on oil, and as long as all the oil producing nations demanded dollars for their crude then American dollars were in reality backed by oil. In other words, it was Bretton Woods II.

...

In Bretton Woods II, there is no limit to the amount of dollars America can print, hence the massive amount of price inflation (aka currency devaluation) we've seen since 1971.

The Last Days of the PetroDollar

So is it really gold or cheap energy that gives money its intrinsic value. I would say money is nothing without the energy to back it up.

And as Heinberg noted:

Increasing efficiency means doing more with less. In the U.S., the number of inflation-adjusted dollars generated in the economy for every unit of energy consumed has increased steadily over recent decades (the amount of energy, in British Thermal Units, required to produce a dollar of GDP dropped from close to 20,000 BTU per dollar in 1949 to 8,500 BTU in 2008). Part of this increasing efficiency has come about as a result of the outsourcing of manufacturing to other nations—which burn the coal, oil, or natural gas to make our goods (if we were making our own running shoes and LCD TVs, we’d be burning that energy domestically). Economists also point to another, related form of efficiency that has less to do with energy (in a direct way, at least): the process of identifying the cheapest sources of materials, and the places where workers will be most productive and work for the lowest wages. As we increase efficiency, we use less—of energy, resources, labor, or money—to do more. That enables more growth....

And efficiency follows a law of diminishing returns: the first gains in efficiency are usually cheap, but every further incremental gain tends to cost more, until further gains become prohibitively expensive.

In the end, we can’t outsource more than 100 percent of manufacturing, we can’t transport goods with zero energy, and we can’t enlist the efforts of workers and count on their buying our products while paying them nothing.

These efficiency gains were not shared with workers but hoarded by corporations & CEOs:

The productivity gains, which never found their way into worker salaries, have been pocketed by the American corporate elite: in 1978, the average CEO salary was thirty-five times greater than the average worker salary; in 2007, the average CEO salary had mushroomed to 344 times greater than the average worker salary.  [Executive ExcessReports].

So the question is: What Happened in 1980?

One good place to start to answer that question is with the UC Berkeley David E. Feller Memorial Labor Law Lecture given by Damon Silvers, Associate General Counsel for the AFL-CIO, back in April 2008. Silvers offers this summation:

For thirty years, America’s economic elites and their political allies have pursued a combination of economic and social policies designed to produce a low wage economy. These policies—our labor laws and our broader system of labor market regulation, our tax policies and our approach to globalization, have yielded decades of stagnant wages and rising economic inequality.

(emphasis added)

http://www.dailykos.com/story/2010/7/29/21645/8803

Of course everything falls apart when you destroy your tax base.

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darbikrash
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Re: Dollar Devaluation To Fix The Great Recession
machinehead wrote:

'the rate of profits can never be increased but by a fall in wages' -- David Ricardo

For all of Ricardo's considerable insight, he seems to be making an unduly static assumption here. By far the main contributor to rising profits since his time has been the advance in productivity. And at least from Ricardo's era until 1973, the rise in productivity was accompanied by rising real wages.

Not coincidentally, 1973 was the year we entered the 'full floating fiat' currency system. Real wages slammed into a brick wall, and have been stagnant ever since. Meanwhile, the zero-sum, economically unproductive game of fiat currency trading became the largest-volume market on the planet. Since large capital and inside information confer an advantage in currency trading, income and wealth inequalities were given a heady boost by the newly financialized economy, as the Sage of Saskatoon mentioned above.

Seems that the bad old gold standard, loathed by progressives and populists, wasn't as cruel to labor as they made it out to be.

Ricardo's classical example of the benefits of trade was the exchange of English cloth for Portuguese wine. Try some English wine (if there is such a thing), and you'll quickly see his point. Smile

Indeed, 50 years later Marx would make a similar error, with much greater magnitude by miscasting his Labour Theory of Value – very nearly undoing his enormous contributions to the workings of capitalism in his zeal to prove that capitalism must necessarily plunge into a socialist state.

We know now what they did not know in the pre-industrial revolution times, that machines and productivity gains could in fact add not only value to goods, but profitability as well.

This however, does not take away from the central points mentioned, one of which is that free trade policies and the globalisation strategies were known to contribute significantly (and some lesser enlightened might say entirely) to a massive inequality of wealth distribution, and that such a set of concerted initiatives using comparative advantage as intellectual cover of legitimacy, might indeed be a Trojan Horse of epic proportions.

Additionally, a rather overused point can be made that the Fed’s supply side manipulations are merely a case of the condition when “the only tool you have is a hammer, everything looks like a nail”.

As a point of curiosity, what would an overlay of trade deficits as an indicator of early stage labor off shoring look like in 1973 onward, as a possible contributor to stagnating wages? The early 1970’s also marked the ascendancy of international trade, and specifically, offshoring.

Currency trading schemes do not normally show up as real wages in income distribution studies, they show up as capital gains income, which is sorted out from real wages and median household income. So it’s possible to segregate the effect of the financial sector “coming of age” from the real income wages of the middle class.

In support of your comments of the financial markets’ impact on W2 income two effects are apparent, both resulting in increased wealth and income inequality:

1.)  From the data (Piketty and Saez wealth distribution dataset 2008) average household income in the 0-90% fractile for wages only was $32,780 in 1973, and stagnant or declining to 2008 where it logged an anemic $30,987. (all numbers adjusted for inflation) There were three exceptions, in 1999, 2000, and 2001, wage income rose slightly (about 3%) and then resumed it’s drop to today’s numbers. This demonstrates declining or stagnant wage incomes in the middle class, particularly when we recognize that additional wage earners (female employment) were being added in rather large numbers during the same period- yet the average income goes down?

2.)  The data for the same period with capital gains added shows a different picture. The average (0-90% fractile) for 1973 was now $89,933 (wages and realized capital gains) and has risen nearly linearly from 1973 to the last recorded value in 2008 of $109,062. So yes, the financial world has had an impact on these income sets. However much of these reported gains were associated with property value gains and are directly attributable to the massive rise in real estate values during this same period. I’m not sure how to separate out the real estate contributions for the overall data, but statistics that show percentages of stock ownership in this fractile seem to indicate relative low holdings overall. (401K holdings are normally not reported as realized capital gains in these studies, so any gains here would be transparent to the data)

On top of these observations it is well known that looking at the decile above the 90% value shows massive – and accelerating – wealth and income inequalities so I wont bore anyone repeating these data, but these factors are so severe and debilitating that I contend they cannot be corrected (or really even affected)  by supply side monetary policy adjustments.

While these comments and data apply to individuals, the real story is not in individual incomes, it is in corporate profitability. These declines in wage income corresponds to increased corporate profitability, also a zero sum game seen from this perspective. At some point, increasing profitability (and simultaneously lobbying for – and receiving - tax breaks) negatively impacts the middle class by externalizing costs to the infrastructure with an ever declining tax base due to offshoring, pocketing tax revenue as profits, and ultimately cannibalizing the very market they wish to sell into.

Good thing Henry Ford didn’t read Ricardo. Smile

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agitating prop
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Re: Dollar Devaluation To Fix The Great Recession

Great interview, Fitts discusses dollar devaluation, among other things:

 

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