How American Dollar Devaluation Will Affect You

June 2, 2010

By Jim Deeds

History books will tell us, when a nation (large or small) goes deeper and deeper into debt, and increases its printing of debt-backed paper currency and the debt-backed creation of trillions of dollars in credit, nothing good will come of it.

Greece, then Spain, Italy, Portugal and finally Great Britain and France will soon give us a model by which we can accurately judge what will soon happen in the future of America. The only problem, since the USA is already the greatest debtor nation ever in world history, the above normal sequence of bankruptcy and default on sovereign debt could be shortened at any moment. Since their whole “money fiasco” is a CON game in the creation of confetti currency, an overnight collapse in the CON (public confidence) could change our lives overnight. Are we ready?

Bill Bonner, a true financial professional (www.dailyreckening.com) recently summed up both the American “problem” and the world problem as clearly as I’ve seen:

“In France, and much of the rest of Europe, government led the consumption boom. While households continued saving at relatively high levels, Mitterand raised the cost of the welfare state. Minimum wages went up 10% immediately. Then, he cut the workweek and added so many benefits for the workingman that the system barely worked at all. French government debt rose from 20% of GDP in 1980 to 80% now; in a couple of years, the government will have spent an entire year’s output that France had not yet put out.

“In Britain and America, government spending rose too. But household spending went up even faster. The resulting boom was almost magical; the effects were diabolical. Britain went from a debt/GP ratio of 43% in 1980, to over 65% today. Its deficits rose up too and now are projected to be the highest in the European Union – as much as 13% of GDP. But the big expansion in both Britain and America was in private household debt. Combined with government borrowing, it pushed total debt from about 150% of GDP in the mid-‘80s to as high as 400% today.

“Japan – the other major ‘western’ economy – has total government debt of nearly 200% of GDP. Its deficit is now so large that it must borrow an amount equal to the total it collects in income taxes. It is s aid, of course, that Japan has much debt but also much savings. The trouble is, the savings and the debt are largely the same money. Households saved. Government borrowed the money. The savings that are supposed to offset the debt have already been spent.

“All together, Europe, America and Japan have total government debt of about $32 trillion, compared to total output of $34 trillion. Add $50 trillion or so of private debt, and you begin to see the bottom of the hole. In other words, the developed economies have borrowed nearly 3 years’ worth of future output. At 5% interest, (investors recently wanted Greece to pay 16%) this means the western world must give up all the output from January 1st to the end of February just to stay in the same place.”

When uncontrolled debt extravagance explodes and then collapses (and it always does), one of two things usually happens:

      1.   CURRENCY DEVALUATION: A country defaults on its sovereign debt (in our case Treasuries and municipal bonds), then devalues the currency (our dollar) giving savers one new “dollarite” for every ten old American dollars. Quickly, the new currency buys about 1/10 of what the old currency bought at the store (instant poverty for most previously prudent people).

      2.   ACCELERATING INFLATION: The Gov snoozes and prints and prints and even drops new dollar bills from helicopters over major American cities (the end-game “Bernanke plan”), and hyperinflation ensues. Once started, hyperinflation arrives by surprise and prices at the grocery store double every week, then every day! Again, prudent savers of “old” dollar denominated debt are wiped out, penniless, overnight.

Welcome to "Obamaworld"!

Pancho Mendez (on www.gold-eagle.com) wrote an extremely thoughtful article on Argentina’s devaluation of their currency in 2001 and the Jimmy Carter era in the US in the late ’70s, compared to what he predicts can happen next in USA.

His conclusion, if we just use what happened back in America during President Carter’s flirtation with dollar devaluation and planned inflation, the following price targets for “something real” as compared to tomorrow’s shrinking dollar value will be quickly realized in a couple of years.

      Gold might rise to . . . . . . . . . . . . $4,600

      Silver might rise to. . . . . . . . . . . . $110

      Platinum might rise to . . . . . . . . . $8,400

      Copper might rise to. . . . . . . . . . . $445

This is based upon what actually happened to these metal prices percentagewise as inflation rose to over 17% annually in America in the late 1970s.

Should we all have our personal plan for “the death of the dollar”?