[seahorse2]

This argument has been had in various forums over the years, but I want to see where people stand on it now that we are clearly in a deflationary environment.

Please assume, for purposes of this thread, that the US and world go into a Great Depression 2, as bad as the last Great Depression. My question is, will the dollar rise in value or collapse?

Here's why I ask. I'm not convinced we can assume the dollar will remain strong in a new depression. Why? The US gov't has massive trade and budget deficits that didn't exist in the 30s, and in the thirties, the dollar was backed by gold, all to say, there are serious differences between then and now.

Its my basic understanding that the dollar has maintained strength over the years for the simple reason foreign central banks and others buy our treasuries. They do this to support their own trade imbalances which keeps the US consumer spending.

In this depression hypothetical, the consumer obviously quits spending. Therefore, I don't see that foreign gov'ts would continue to buy our treasuries, meaning the dollar would drop in value. Further, in a world wide depression, the foreign gov'ts may not have the finances to keep buying.

So, in a new world-wide depression, will the dollar still remain strong?

[mattduke]

The dollar supply is still growing tremendously. We are in the middle of a debt deleveraging right now, and it will end at some time. The dollar will collapse, and it will be breathtaking.

Jim Rogers says the dollar is doomed.

http://www.youtube.com/v/nmrp9KQq1v0&hl=en&fs=1

[lowem]

The dollar supply is still growing tremendously. We are in the middle of a debt deleveraging right now, and it will end at some time. The dollar will collapse, and it will be breathtaking

The timeframe for the above is the $64 trillion question.
(Sorry, the "$64,000 question" has been retired due to ongoing inflation).

[ColossalContrarian]

The dollar supply is still growing tremendously. We are in the middle of a debt deleveraging right now, and it will end at some time. The dollar will collapse, and it will be breathtaking.

Jim Rogers says the dollar is doomed.

http://www.youtube.com/v/nmrp9KQq1v0&hl=en&fs=1

The amount of dollars flowing out of the system is still far greater than the amount the fed is pumping in.

I still believe there are two types of dollars, the 1's and 0's byte dollars and paper dollars. My feeling (WAG) is that paper dollars will decouple from byte dollars.

I know as a consumer that I would rather have money stuffed in my mattress rather than in a bank or the stock market! Gold won't help much to buy groceries and fill the gas tank.

[frankthetank]

Don't bet anything out. I'd like to think that the dollar will crash bad, but after this mess, anything is possible. Still have a huge agriculture system in this country and lot of high tech weapons.

[Armageddon]

In past depressions ( late 1800's and 1920's ) , the FED contracted the money supply causing money to become scarce. This time they are expanding the money supply at unprecedented amounts, but the overall fundamentals are worse now that ever in history. Very strange.

[Revi]

They can't seem to break deflation. Bernanke knows how to do it and will use anything he can to keep it from happening. It seems to be happening anyway. Here are some of his thoughts on deflation and how to combat it from 2002:

"Conclusion
Sustained deflation can be highly destructive to a modern economy and should be strongly resisted. Fortunately, for the foreseeable future, the chances of a serious deflation in the United States appear remote indeed, in large part because of our economy's underlying strengths but also because of the determination of the Federal Reserve and other U.S. policymakers to act preemptively against deflationary pressures. Moreover, as I have discussed today, a variety of policy responses are available should deflation appear to be taking hold. Because some of these alternative policy tools are relatively less familiar, they may raise practical problems of implementation and of calibration of their likely economic effects. For this reason, as I have emphasized, prevention of deflation is preferable to cure. Nevertheless, I hope to have persuaded you that the Federal Reserve and other economic policymakers would be far from helpless in the face of deflation, even should the federal funds rate hit its zero bound."

http://www.federalreserve.gov/BOARDDOCS ... efault.htm

[firestarter]

Dollar remains strong far longer than some here might imagine, although "strong" is a relative term. Keep in mind that 70% + of all debt is denominated in $$$, and with continued de-leveraging, dollars will be continue to be in high demand globally.

As an aside, I quit listening to Schiff, Puplava, Jansen, et al late last winter. Their hyper-inflationista, crashing dollar screeds grew unbearable, especially in light of the clear evidence they were wrong. I came to this forum and expressed my deflationist views and was roundly insulted by prominent posters here who don't post as much anymore given the massive deflation right under our noses.

I'm open minded enough to change my views as the data dictates but for my money, at least in the foreseeable future, FRN's are king.

[RdSnt]

The strength of the USD has nothing to do with positive actions, it is primarily companies selling assets to bring cash back to the US to cope with their own debts and collapsing businesses.

[truecougarblue]

I agree that this is the golden question.

I don't think the two are mutually exclusive. I think we will see a strengthening dollar, almost like another bubble, but it like the rest will collapse.

The trigger? My favorite theory is an asian multi-national currency ala euro, with Japan, Singapore, Taiwan, Korea, and maybe even Australia and China participating. In the event of such an establishment you can kiss uncle Buck goodnight.

[Revi]

I think we'll get to inflation, and maybe even hyper-inflation, but I don't think it will start happening for a year or two.

This deflation is going to take the economy down, and then inflation will deal the real punch.

In the depression it started with 3 years of deflation, followed by inflation and then a new little recession in 1937.

I think it will be like that for the foreseeable future. The economy comes up a little, inflation.

Whenever you think you know what it's doing, it's ready to slap you down hard.

[mefistofeles]

I say both are true. Since the internet bubble we seem to have bubbles forming in various markets which become overheated.

At first it was real estate, then it was commodities and now I believe its the US dollar.

Also you have to remember the things that make the dollar strong can make it weaker later. Yes demand is strong now for Treasuries, judging by the rates they are paying, but will it continue to remain that strong in the future? I would answer no.

There's a great book called Confidence Games where the author postulates that assets have no true value per see but are all valued relative to each other. He considers the modern financial system to be an extension of post modern philosophy, where nothing has an absolute.

In the end the dollar will be determined by how much faith people have in it.

[heroineworshipper]

Inflation can't happen because the entire planet is deflating simultaneously. If everyone but US started recovering, there would be a selloff of dollars 2 B sure.

[Revi]

Confidence games seems like a good name for the global financial system. It's a con game that has held up for this long. Most countries had a silver backed monetary system until the 60's. Now nobody does. We have been inflating a bubble of fiat currency since then. When it all falls in there's nothing to drop back to now. It's been the greatest con game ever created, and it may be over soon. It was fun while it lasted.

[mefistofeles]

Now nobody does. We have been inflating a bubble of fiat currency since then. When it all falls in there's nothing to drop back to now. It's been the greatest con game ever created, and it may be over soon. It was fun while it lasted.

I would have to agree its a massive ponzi scheme or a potential crisis of faith. I imagine that one day everyone will know that the emperor has no clothes. I think everyone knows this to be true on some level.

However in biological terms I think our current financial system is much more like a cancer. Cancer cells lack the normal kill/death mechanisms that regulate most cells. In a sense that's what our financial system has been about,freakish and uncontrolled growth without any sense of limit or regulation.

To be honest a deflationary depression is really the best thing that could happen to the world's economy. Unfortunately I doubt our leaders will see it that way. They want the dangerous out of control growth that has been the defining feature of the global financial system for the last two decades.

I think what we have seen is only a precursor to the chaos and calamity that awaits us at the end of all this. Which will probably be far more severe and drastic than anything we have seen so far to date.

Inflation/deflation/hyperinflation/boom/bust I think we're going experience all of it.

[threadbear]

As an aside, I quit listening to Schiff, Puplava, Jansen, et al late last winter. Their hyper-inflationista, crashing dollar screeds grew unbearable, especially in light of the clear evidence they were wrong.

Hope I wasn't one of the pro inflation zealots, FS, though I did figure we were in for a devaluation of the dollar, and inflation. I remember I DID argue against hyper inflation, if defined as costs rising at an annual rate of 400%.

[sjn]

Everybody seems to have made their mind up about what's happening right now. But really, what is happening right now?

Are we undergoing deflation? (A monetary phenomon)

Or are we experiencing the first stage of global economic collapse? (Due to Peak Oil)

Can we tell the difference?

[patience]

I am far from an economic guru, so I try to read those who are and make some sense of it. The best guess I have been able to put together follows.

Just now we are seeing deleveraging of the massive debt bubble, creating big demand for dollars to settle the debts denominated in dollars, so the relative value of the dollar rose from 71 on the Index, to 87, compared to a basket of other currencies. This will continue for a while, since the bad mortgages and the bad bets made on them are far from all being resolved. Probably another year of deleraging to come, at least, possibly more.

As the US economy suffers from this unwinding of debt, other countries have less incentive to buy US treasury debt, and are hampered by the low prices of commodities, notably oil. With less foreign money out there, and the US looking like a poor credit risk from a tanking economy and massive national debt/consumer debt/looming 2009 deficit, there will be less demand for US treasuries. This could cause the US to be unable to sell enough T's to finance their 2009 budget. IF SO, IT COULD LEAD TO US DEFAULT. GEAB thinks this will happen.

The US has declared it will fight deflationary collapse to the end. There are few means left to do so, without "printing", or issuing unbacked currency (paper or virtual), since T's are getting harder to sell, along with bonds from Germany, and other countriess who have cancelled bond auctions, where some auctions have failed to find enough buyers. GEAB's guess is this could happen as soon as next summer. (Of course, GEAB is saying to buy Euro's to hedge that, while Europe is also in trouble.)

With that scenario, the US would see deflation in assets and commodities, and that trickling into retail goods. Falling prices would continue until something changes, probably the US monetizing unsaleable debt--printing money, if you will, or some form of devaluation of the US dollar. If so, then we would see immediately rising prices at the retail level. Both deflation and an ensuing inflation would kill a lot of businesses, and making credit even harder to get, feeding the downturn. At that point, I expect shortages of consumer goods, with higher dollar prices on them, further hurting retail, in a vicious cycle, leading to more business failures, and to more deflation which I think will continue for the foreseeable future, because the debt bubble is too big to stop by the old ways. Governments will be overwhelmed by it.

Somewhere in this mess, I expect a second round of devaluations in several countries, repeating the whipsaw effect of ups and downs in currency values.

Note that as this progresses, any predictions become futile, with too many variables. My synopsis may be off at the first or second step and negate all I said. All I am sure of is that it will be one heckuva ride, and I won't like it at ALL.

[CrudeAwakening]

Whether inflation or deflation, we can be sure that there will be a continued wealth transfer of gargantuan proportions. Naturally, we agonise over which side of the wealth transfer we are going to be on, and the decisions we make seem to be angst-inducingly critical - bet one way and it goes the other - you may be ruined. Bet correctly and you might emerge with some semblance of security, at least such as it is likely to be in the world we are inheriting.

I think the saving grace for the US dollar at the moment is that all fiat currencies are seemingly f...kd. It's just a matter of degree. If a rival currency were to ride in on a trusty steed of global faith, I'd see a more imminent denouement for the dollar. But since all currencies are ultimately backed by faith in the strength of their respective economies, and I can't see any economy rising from the ashes of the current maelstrom to become the global standard bearer in the way that the US did post WW2, it's a game of "which turd floats to the top first".

[MrBean]

Asset deflation means that the participants in citizen's capitalism will loose their savings, pensions, houses etc. together with their jobs and salaries. Their purchasing power drops like stone. In many cases to stone-age.

All the while the food prices keep going up - inflation staying strong in the most vital area. And oil crisis coming next decade, according to even IEA.

Consequense: people can't afford to eat, even if there is food for sale.

Congress owned by banks will tell them only: Let them eat cake! And they will rebel. They looted the supermarkets in Argentina, they will do that again.