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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Elroy Jetson who wrote (53878)	2/15/2006 4:36:23 PM
From: shades	Read Replies (2) \| Respond to of 110194

It wasn't the U.S. returning to the Gold Standard after WW-I, it was Great Britain. The UK over-priced their Pound relative to gold. Right, heinz is wrong on this - I have posted this guys blog before - he gives some more history on top of yours Elroy. bankdersysrisk.blogspot.com So in order to redeem their place as the center of the financial world, England came up with a plan that called for the British pound to return to its pre-WW1 value with gold. They then made payments to other European countries with British pound sterling. Foreign banks could then redeem their British pound sterling for gold inducing a control mechanism to slow gold from leaving England and making the British pound sterling the world’s reserve currency, much like the US dollar today. As the value of the British pound sterling was still overvalued to the comparable money supply of other countries in its relationship to gold, this forced a negative trade balance with the other countries of the world. English currency entered the other countries like locus in a biblical curse. During the 1920’s England refused to deal with their negative trade balance and provided money for their welfare state as unemployment skyrocketed. English sovereign debt and money supply went into to steep rise. Overextended as the English were, they continued to inflate their currency, but still kept their currency overvalued per agreements they had made with other central banks. This situation finally collapsed upon itself when England went off of the gold standard right before they had exhausted their supply of gold. This caused massive inflation in England. So, as history dictates, countries will gladly sacrifice the value of their currencies buying power in order to pay for the social programs and government expenditures. Even though the banks are very very powerful, they cannot compete with the voting populist. This is because politicians are elected and not by banks, but by people. And politicians generally get elected by promising the what ever it takes to win an election. As to our current situation with housing in the US, and the world for that matter you can expect some initial deflation in terms of the asset prices, but then the banking system will become unstable as banks become insolvent. If the banks cannot clear money transactions then the economic system get paralyzed as this induces first general insolvency and quickly, very quickly leads to bankruptcy. With enough bankruptcies, which make it harder to people to earn an honest living, social breakdown always occurs. To combat this and keep in power the government must bail out the banking system. In bailing out the banking system will certainly deflate the buying power of the dollar. However the corollary to this is that prices rise very quickly. Since the US dollar is the world’s reserve currency, exchange rates may not change that much between countries because this would induce similar situations all over the world. Therefore Deflation, if you define it as the buying power of the dollar increasing can only happen as a lasting outcome with the total destruction of the banking system. The US would never allow this situation to happen, due to the fact that politicians are always trying to get re-elected and they need the political system in tact to do it, but the buying power of the dollar is an acceptable causality. Who is chromatic dispersion? hehe