C Hudson, thanks for letting me take a shot at it. Oldman's deflationary scenario is very plausible actually.
It goes like this: it's 1929 all over again. The worlds excessive debt levels and malinvestment have to be cleared through default (think Russia). That means lots of dollars that people thought were there disappear, raising the value of those dollars against all else, including gold.
Gold, no longer recognized by the govt as money, must be sold along with stocks, real estate and collectibles to cover debt. Think of huge debt levels as massive shorting of the dollar that must now be unwound. Voila--$195 gold.
C, here's why I don't believe today is 1929:
1. The U.S. govt balance sheet is a disaster compared with 1929. A 1929 deflation would result in severe decrease in tax revenues and and likely the Feds inability to pay even the interest on the U.S. debt (which notice at 5% interest rate is growing much faster than our "boom" economy) . That means default or (much more liklely) an inflationary monetization of debt. Therefore, unlike 1929, U.S. bonds and cash will not remain a safe haven for long.
2. The U.S. is the world's reserve currency, but unlike 1929, has been cut loose from any gold backing, even for foreigners. The foreigners hold billions of U.S. dollars and trillions of U.S. debt which they are sure to dump if greener pastures present themselves. And greener pastures will present themselevs as the U.S. attempts to bailout everyone from credit card bankrupts to Latin American speculators.
3. Ever read Warren Buffets works? He states his view very categorically: given a choice between deflation and inflation, the politicains will choose the latter.
4. Shorter term, the dollar is set to slide, as it did in 1994 during the last LatAmerican currency crisis.
|
