Mish, what do you think about inflation in UK in 1931 because of currency devaluation there? The commodity prices declined 23% in gold/USD prices, but in 1931 pound it was 7% higher!!! Do you think such a scenario can happen in the US now? i.e currency depreciates faster than goods price. Note that pound fell about 30% ONLY against gold!! And this caused inflation in late 1931 and UK govt had to slow spending significantly...
Ofcourse, my belief is that, this inflation will eventually die after say 4-5 years of bust if govt spends less, inerest rates go up etc. etc. But those are unknown variables...
Below is the excerpt from my previous mail.....
Mish, Britain, in the midst of depression had inflation!!!!!
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10% inflation in 1931 with wheat, steel, house, jobs ALL falling!!!! I think US today is like Britain in 1929!!! The history will repeat!!! It WILL be monetary deflation and CPI inflation around 4-5% because of lack of USD support - And I believe FED understands this and hence interest rates will go up - irrespective of JOBS falling, house falling, Chinese selling their stuff at even lowered price (lower in yuan BUT higher in USD!!!). It is exactly same as today. China, Japan holding US bonds etc......Below are the excerpts!!!!
Expectations were that the pound would lose a substantial proportion of its purchasing power in foreign markets. With foreign raw materials and goods costing more in terms of pounds, a significant price rise within England would exist for a couple of months side by side with the great unemployment caused by the Great Depression.
This is an occurrence that John Maynard Keynes and his followers have always since conveniently ignored. By the end of the year, the British price index would be up almost 10% - it would still be up more than 4% a year after the devaluation.
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If the devaluation had not been accompanied by harsh austerity measures - if it had been "accommodated" by monetary expansion - the inflation of prices could have continued indefinitely, even with Great Depression unemployment. This is the mechanism of inflationary depression - the worst form of economic collapse - and stagflation - its much milder form experienced in the 1970s in the United States.
If the pound declined by 1/3, it would cost the U.S. and France about $650 million each. In both France and the U.S., there was about $2 billion in English securities held by governments, financial institutions and private citizens. About 60% of the world's business was done in pounds. Holland, Sweden, Switzerland, which were pound creditor nations, would be hurt. Germany, Austria, Hungary, Italy, which were pound debtor nations, would be helped, by the decline in the pound sterling. But all would be hurt by the loss of purchasing power throughout the British Empire and for all who held assets denominated in pounds. |
