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To: baystock who wrote (26416)	1/18/1999 2:40:00 PM
From: Bob Dobbs	Respond to of 116871

Ram: I agree with you concerning the possibility of a dollar devaluation and consequent upvaluation of gold. With the current negative factors arrayed against the dollar I see very little except a further deterioration in its value worldwide. On the deflation front, I forsee a severe one here as well, and soon. In this country we have a stock market that is fundamentally overvalued. Labor costs relative to world norms are high, and the gutting of distribution systems due to information technology gains will continually pare down costs and force more layoffs. Profit margins worldwide are beginning to shrink, as overcapacity exists virtually everywhere you look, especially in the hard goods and farm product arenas. Debt levels in the US are nearly astronomical, historically speaking. Consumer spending and investment is just about maxed out in the US. It is difficult, but not impossible, to forsee how production gains from information and other technologies can keep the US economic system from a sustained deflation. It's this reason I'm concerned about gold. Undoubtedly there will be further distressed gold sales worldwide should the West tumble economically, but that may be offset by new investment demand in the West. How those forces resolve themselves in the overall balance is anyone's guess. Bob

To: baystock who wrote (26416)	1/18/1999 3:42:00 PM
From: Hawkmoon	Read Replies (1) \| Respond to of 116871

Ram, We've been seeing deflation for the past two years as other economies devalue their currencies (inflationary for them), which makes their goods cheaper here in the US (deflationary for us... or at least dis-inflationary). Only due to the Fed adding liquidity through increasing money supply and lowering the Fed Funds and Discount rates has deflation been kept in check and the US economy stronger than it should be. Now it looks like the the Fed and Treasury is prepared to devalue the dollar in order to balance out the trade deficit discrepancies we're seeing evident vis a vis the Euro and Yen who are still running trade surpluses with the US (as well as most every other economy.) So devaluing the currency will permit other currencies and gold to compete for value with the Dollar creating a deliberate "inflationary" effect. This will likely hold off many deflationary effects from the soaring trade deficits, but would also put pressure on bonds (hopefully neutralized by the flight to safety of capital in the equities market). However, while devaluing the dollar will take some pressure off of debtor nations for awhile as it inflates the relative value of various commodities, especially oil and gold, it will only delay the inevitable. These countries owe huge quantities of money and if Y2K is the issue for them that I'm hearing suggested, there will be few lenders willing to extend the massive amounts of further credit they require to get their economies under steam again. They may declare payment moratoriums for debtor nations, but then again these debtors may just say "heck with you, we're going to default, and you can't do anything about it". Massive defaults would destroy huge amounts of money supply denominated in dollars, Euros, and Yen, thus making those currencies, ironically, much more valuable as the money supply contracts while demand remains constant. And the Fed and ECB can only lower rates so low to assist in maintaining the liquidity of money center banks. (they borrow from the Fed and ECB at reduced rates, and lend to us at a more costly rate, if they lend at all). And there is a slim chance that the ECB may permit the Euro to become stronger in order to find additional favor as a global reserve currency. But doing this will incur a huge political cost for member nations facing the unemployment issues as cheaper goods flow into Europe. And the highly possible alternative is that Europe will institute protectionist measures through quotas and tariffs. (and that folks is the kind of behavior that led us to WWII.) Should the ECB seek more strength in the Euro and raise protectionist barriers to please the politicians, we'll be heading for major economic difficulties. The kind that have resulted in warfare in the past. And the natural reaction of the US will be to enforce our own tariffs. This will leave smaller exporting nations few places to sell their goods and result in a general decline in global trade. Global business will continue to contract. Prices will continue to fall, and businesses will go belly-up for lack of markets or the credit to supply them. And with a stronger Euro, I opine that people will forego gold until maximum pain in commodity prices is exhibited as "beggar thy neighbor" export policies force all but the strongest companies into bankruptcy. But right now, if a potential dollar devaluation is in the cards, I completely agree that gold may be getting ready to move. But it will only move as much as the CB's are willing to permit it to move without creating an inflationary panic. This will be a very interesting year and I'll be quite interested if I'm taking into account most of the variables and factoring them in properly. As alway, I'm open for rebuttal and correction. (Btw, the pendantic nature with which I write these posts is mainly for my benefit. If I can write it down in an arguable form, then I should be able to keep it straight in my mind when people ask me questions verbally). Regards, Ron