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20 Questions with Robert Prechter: Devaluation Won't Work

Economics / Deflation Jul 06, 2010 - 03:37 PM GMT

By: EWI

Economics

Best Financial Markets Analysis ArticleThe following article is an excerpt from Elliott Wave International’s free report, 20 Questions With Deflationist Robert Prechter. It has been adapted from Prechter’s June 19 appearance on Jim Puplava’s Financial Sense Newshour.


Jim Puplava: In 1933 at the bottom of the crisis, the Roosevelt administration comes in. In its first week they declare a bank holiday, they reopen the banks with the FDIC, they sever gold, they come in with massive fiscal stimulus and they devalue the dollar substantially. The result was from 1933 to1937 we have positive CPI, economic growth, a robust stock market. If fiscal and monetary measures fail to revive the economy and the market, could the government try devaluation to change the deflationary outcome the way they did 1933?

RP: Well, you have to have a benchmark in order to devalue a currency. Our currency isn't pegged to anything, so I don't understand even what the term devaluation would mean. What would they do to do create a devaluation?

Editor’s Note: The article you are reading is just one small excerpt from Elliott Wave International’s FREE report, 20 Questions With Deflationist Robert Prechter. The full 20-page report includes even more of Prechter’s insightful analysis on fiat currency, gold, the Fed, the Great Depression, financial bubbles, and government intervention. You’ll learn how to protect your money -- and even profit -- in today's environment. Read ALL of Prechter's candid answers for FREE now. Access the free 20-page report here.

JP: Maybe they come out with a formal saying: the dollar is now worth a half a euro, X amount of yen or it’s a formal statement. They just declare it formally.

RP: Yeah, but everybody already knows what it's worth, because it's floating freely against these other currencies. And they certainly couldn't fix it to a lesser currency like the euro. And then the managers of this other currency would simply make another decree and negate it. That’s not going to work.

Let's take your example, because it's very important. The whole idea of the government being ahead of the curve is bogus. You know the collapse was from September 1929 down to July 1932, right? The government did not act until it was over. They waited for the bottom of the collapse—of course—and then they finally decided they're going to do something about it. So, months after the low in 1932, they finally shut the banks and pass laws such as Glass-Steagall, which created the FDIC, and the Securities and Exchange Act, and that sort of thing, to bring confidence back into the banking system. I think the same thing is going to happen here. They're going to try the same old stuff, more and more lending, more and more borrowing—which is the problem, not the solution—until everything collapses, and then they'll go, “Oh maybe we should try something else,” and by that time we'll already be at the deflationary nadir, and it'll be time to look for an inflationary outcome.

My whole thesis is exactly along those lines. We want to stay prepared for a deflationary crash, and when it’s over, we're going to convert whatever money we have to stocks, and raw land, and gold, and whatever else we want to buy. That's when—if the government makes a political decision to inflate through currency printing—it would make the decision. They're not going to make it before the bottom. The government has never acted before the bottom, never acted in a new way. Right now these bailouts and other schemes are simply pressing the accelerator harder on what we've been doing since 1913. 

Editor’s Note: The article you are reading is just one small excerpt from Elliott Wave International’s FREE report, 20 Questions With Deflationist Robert Prechter. The full 20-page report includes even more of Prechter’s insightful analysis on fiat currency, gold, the Fed, the Great Depression, financial bubbles, and government intervention. You’ll learn how to protect your money -- and even profit -- in today's environment. Read ALL of Prechter's candid answers for FREE now. Access the free 20-page report here.

This article, 20 Questions with Robert Prechter: Devaluation Won't Work,was syndicated by Elliott Wave International. EWI is the world's largest market forecasting firm. Its staff of full-time analysts lead by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world's largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private around the world.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Shelby Moore (author of "End Game, Gold Investors Destroyed")
06 Jul 10, 20:59
NO DEFLATION!

Prechter wrote:

"They're going to try the same old stuff, more and more lending, more and more borrowing—which is the problem, not the solution—until everything collapses, and then they'll go, “Oh maybe we should try something else,” and by that time we'll already be at the deflationary nadir, and it'll be time to look for an inflationary outcome."

And what does more debt in a fiat system mean? It means more inflation of prices. Yes there is deflation in prices of assets that were overly inflated by debt (e.g. houses), but all of this debt creation to stop that from imploding, is feeding through to massive price inflation, especially in India and China where strikes are being reported now every day. Thus the prices of most things must and are rising, as the working class (third world) is demanding higher wages. I have watch wages increase here in Asia by 30+% in the past year or so, and potatos and other vegetables are 30 - 50% higher than they were at peak in 2008, and nearly 100% higher than their low price in 2009.

Anyone who is measuring their net worth relative to houses is going to get a nasty surprise when the world rebalances to a gold back currency(ies), because the I can build that same $200,000 house (say in Arizona) for $10,000 here in Asia (cost of materials, labor nearly free, no permits needed, land very cheap in rural areas). And the prices of those raw materials are rising 30+% per year.

Those who follow the deflationalists, will end up buying gold at $10,000, when it is already too late.


Nadeem_Walayat
07 Jul 10, 03:49
US Inflation
10 years of deflation looks like this ?

Bottom line, inflation is far too profitable for governments (stealth tax), deflation is very expensive for governments. EASY - NO DEFLATION
Shelby Moore
07 Jul 10, 12:25
Food deflation?

See my prior comment on this page.

Yesterday, in the downtown wharf area, I stumbled upon 13 kg sacks of white onions imported from China for P360 (US$7.83). This is about 40% of the price I was paying in the grocery store. But this just appears to be the fact of living in the islands, where locally produced vegetables are very expensive due to low economies of scale and high fuel and middle men costs.

I live within 2 blocks of where the fishing boats land, so recently was able to buy (still alive!) small fish for about $1 per kg, versus the dead frozen on ice $2 to $3 in the grocery store.

I think this illustrates the level of deflation that is possible if free trade is allowed and the govt gets out of the way. The ASEAN region is experiencing a boom in trade as tariffs are dropped. We are seeing pockets of deflation due to this.

Nevertheless raw materials, fuel, and wages continue to rise in price.

Also remember that relative to gold, we do have deflation. In that sense, Pretcher is correct, that the debt model is imploding.

Also the correct (non-liar) US inflation chart is here:

http://www.shadowstats.com/alternate_data/inflation-charts

Thank you.


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