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

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

By: Larry_Edelson

Currencies

Best Financial Markets Analysis ArticleNo 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-warning” systems in place so each country, each economic system — understands where in the cycle it currently is.

If we do that, then we can also gain a better understanding of the entire picture, the entire globe.

By doing so, in conjunction with a more modern monetary system, mind you, we still won’t be able to eliminate booms and busts, but we should be able to catch them earlier, and moderate their swings.

Believe it or not, Ben Bernanke recognizes this too. He knows full well that we can never hope to eliminate boom and bust cycles.

He also knows a gold standard is no good. And, he also knows — and I agree with him that …

Third, in the not-too-distant future, we do need a new monetary system.

Don’t kid yourself for one minute. Bernanke knows that as he pushes the value of the dollar lower to stoke up inflation … to avoid deflation … that he will face resistance from just about every side. Not just in Washington, but from every major country of the world.

They will want to prevent their currencies from getting too strong against the dollar, because that’s the flip side of inflation for them: It means their countries will start importing deflation.

So naturally, you’re already seeing countries all over the world take measures to either prevent their currencies from rising too much, or taking specific measures to devalue their own currencies.

Bernanke knows this. He knows what he’s up against. But he has more power than all the other central bankers of the world, combined.

And more importantly, he knows where all this is headed: Toward a total rewriting of the “rules of the game” — central bank speak for changing the monetary system.

What is needed is a new monetary system. A system that allows each country to use its own currency for internal, domestic trade, — and an international currency for all international transactions.

The international currency should be tied to a floating basket of commodity prices.

Each country’s currency can still float against the international unit of account and exchange, but because the international currency is tied to a basket of commodity prices, one country’s boom or bust is muted within the totality of the system.

In other words, an international currency essentially puts a firewall in place, helping to prevent boom or bust contagions from leaping the globe.

I am absolutely sure this is Bernanke’s end game. In the meantime, he has no other choice but to devalue the U.S. dollar to …

arrow black The Biggest Bet Of All Time ...  Help inflate away the country’s debts

arrow black The Biggest Bet Of All Time ...  Help spark the flames of inflation

arrow black The Biggest Bet Of All Time ...  Help boost U.S. exports

And as I just noted, to eventually bring the rest of the world to the table to rewrite the monetary system.

So, do I agree with Bernanke’s strategies? Yes, as I said earlier, I would be taking the exact same measures and overall strategy he is taking.

But whether you agree with me or not, one thing is for sure: Bernanke has pulled back the curtains so you can see what he’s doing.

So my suggestions are …

1. Do not fight the Fed. If you do, you’re going to lose big money.

2. Stay with your gold positions. Yes, a big correction is overdue. But until we have a new monetary system in place, which is years from now, gold’s longer-term trend is in place for much higher prices.

3. In the not-too-distant future, Bernanke’s strategy will also reinflate the broad stock markets, just like I’ve been warning you all along.

Indeed, this past week the Dow Jones Industrials came within a mere three points of my all-out buy signal at 11,158.

If the Dow can close above that level, especially on a Friday — it will be a very significant sign that it’s headed much higher long term.

Like gold, however, that does not rule out sharp downdrafts.

Bottom line: Stay closely tuned in to my forecasts, and my Real Wealth Report, where if you’re not a member, you can join now by clicking here. The U.S. is now in the midst of its biggest gamble ever.

Best wishes, as always …

Larry

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