U.S. Dollar Devaluation, The Greatest Bet of All Time

Currencies / US Dollar Oct 18, 2010 - 10:34 AM

By: Larry_Edelson

No doubt you watched the U.S. dollar plunge almost out of control last week.

And no doubt you heard about the massive currency wars that are bearing down on the world, as each major country tries to put itself on sale, to boost exports, to inflate debts, and to compete in a world where both consumers and investors are running for cover.

You also saw the most powerful man in the world — yes, even more powerful than the President of the United States — start to tinker with his various levers — like the Grand Wizard of OZ.

But Fed Chief Ben Bernanke is not hiding behind any curtains anymore. He’s now pulled back the curtains, for all to see, and he’s making the biggest bet of all time.

He’s got one heck of a set of b#%ls. That’s for sure. His wager: He can turn around the sinking $14 trillion U.S. economy … avoid a worsening recession, avoid a depression — and instead, stoke up a real economic recovery. His main target is of course the U.S.

But in reality, his bet extends far wider — to the entire world, as his actions will affect every country on the planet.

I forewarned of Big Ben’s moves in December 2008, and earlier, in many issues of my Real Wealth Report.

I knew he would eventually take this gamble: Devaluing the U.S. dollar deeply and quickly so he could overcome the massively ill U.S. economy, which has become nothing more than a giant credit card … a giant ATM based on prior housing appreciation … a save nothing, spend-till-you-die mentality.

Bernanke is doing the right thing. In fact, devaluing the dollar to try and ease the burden of this country’s massive debts and IOUs is the only thing he can do.

It means he must keep interest rates low for as far as the eye can see, by printing money to buy and put constant upward pressure on bond prices — thereby allowing Washington to refinance its debts at lower prices … keep foreign creditors from bailing on us … keep mortgage rates low … and more.

It also means he must print new fiat dollars to liquefy the economy … to raise general price levels and inflation … by making each and every dollar worth less. There is no, I mean ZERO, limit on how much money he can print.

As we also learned this past week, and as I warned just a few weeks ago in my September 13 column, Fed Chief Ben Bernanke can even print money to buy common stocks … buy foreclosed real estate … buy commercial real estate … buy stock index futures, you name it. He can do anything he damn well pleases to achieve his goals.

Will his gamble payoff? It’s too early to say. But here are my insights about it that I want to share with you today …

First, many will disagree with me on this. But if I were in Ben Bernanke’s shoes, I would be taking the exact same steps as he is.

You see, a deflationary depression is about the worst thing a country can experience. There is no shelter from it. There is nowhere to hide from plunging asset values.

Everything you own … everything you’re invested in … everything, goes down in value.

Worse, deflationary depressions almost always lead to international conflict. Yes, international, worldwide type wars. No one in their right mind would want to set the stage for such a thing.

Second, we no longer have a gold standard, which is a GOOD thing. The gold standard of years past — and authorities’ stubborn belief that they had to adhere to it at all costs — was largely to blame for the Great Depression.

The supply of money, credit, and liquidity to the financial system could not be increased unless there was a massive new increase in the supply of gold. Period.

So while it’s true that the gold standard helped keep politicians and central bankers in check, preventing them from spending too much, it also prevented them from taking any meaningful steps whatsoever to alleviate the depression.

I repeat: The fact that we no longer have a gold standard is GOOD. It means the supply of money and credit can be somewhat better regulated, increased as the economy grows, increased with the natural birth rate of a population’s demographics, with waves of innovation, etc. … and tightened when need be.

You see, the problem is not with fiat money. We have to have fiat money. There is no commodity that has either enough supplies … enough liquidity … or fungibility (capable of mutual substitution) that can act as the basis of a monetary system.

That’s not to say there can’t be improvements made. There can be, and I’ll get to them in a moment.

The big problem is that everyone — politicians, regulators, central bankers, and investors — need to recognize that no matter how hard we try, we will never be able to eliminate the giant swings that occur in human nature, from greed … to fear … back to greed, and on and on.

They are part and parcel of human nature, and they will always be.

Instead, we need to accept this single fact of life, and then aim to learn from our mistakes, seek a better, deeper understanding of human nature, and even have “early-warningâ€