Inflate, Devalue or Perish

by Pancho Mendez | May 24, 2010

The world is awash in burgeoning debt. It is stifling economic growth and raising the specter of excruciatingly high unemployment. Moreover, global stock markets are tumbling across the horizon with no respite in sight.

Not a few experts and market analysts suggest we must inflate our way out of the crushing debt. Among these is the internationally known economist, Nouriel Roubini. Raging bear Roubini asserts, "America Faces Inflation Or Default." " Nouriel Roubini's latest US warning addresses our debt, and what he sees as two possible solutions:INFLATION OR DEFAULT."

Roubini's complete comments may be seen here:

http://gulfnews.com/business/opinion/us-faces-inflation-or-default-1.622397

Other well recognized international economic and monetary experts believe there are actually three ways to alleviate the overwhelming debt burden of a country:

INFLATE
DEVALUATE
TAX

Whereas the first two ways can be achieved without too much backlash from the investment public, everyone hates increased taxes, which would be the death knell for the party in power that tries to impose it. Consequently, only Inflation and/or Devaluation are the least onerous of the three 'medicines,' swallowable by the public at large.

Exacerbating the severity of the stifling US debt is the UNEMPLOYMENT RATE, which is currently at a 26-year high. Understandably, debt levels increase in proportion to mounting UNEMPLOYMENT…one feeds upon the other.

The above scenario leads me to believe INFLATION TEMPERED WITH GRADAUL DEVALUATION will ultimately be the 'elixir' that cures the ailments plaguing the US today…ie UNACCEPTABLY HIGH UNEMPLOYMENT & CRUSHING DEBT (fostering an avalanche of foreclosures across the land). I am convinced that INFLATION TEMPERED WITH GRADUAL DEVALUATION is the solution - based upon two historic precedents:

The Jimmy Carter Presidency (1977-1980), and
The Argentine Case (2001)

The Jimmy Carter Presidency (1977-1980)

The biggest problem facing the Jimmy Carter Presidency was precisely UNACCEPTABLY HIGH UNEMPLOYMENT. When Carter became President, he inherited the highest unemployment rate since World War II (ie since 1947).

During Carter's Administration the dollar's value was methodically lowered (via devaluation) as inflation was slowly generated. Here are the statistics:

During Carter's tenure the US Dollar Index fell 20% from 105 to 85.

Effectively, President Carter's policy of massaging inflation upward as the greenback was prudently lowered produced a material 25% reduction in the UNEMPLOYMENT RATE. Admirable!

Carter's Wave of inflation Caused Everything To Rise In Value.

During Canter's Presidency precious metal prices soared with rising inflation and fuelled by a falling dollar. Here's what happened from 1976 to 1980:

Gold rose............................................................+467%
Silver soared......................................................+922%
Platinum soared.................................................+700%
Palladium soared...............................................+600%
Copper rose.......................................................+170%
US Housing prices rose on average.................+50%

However, during the same period T-Bonds plunged -35%, while the Dow Index flat-lined, hugging the 800 level for four long years.

The Argentine Case (2001)

In the first year of the millennium Argentina was suffering seriously grim problems, caused by a too dear currency. For years the Argentine peso was pegged to the US dollar. Slowly but surely Argentina was priced out of ALL export markets, because its products were too expensive. This resulted in factories closing throughout the country, causing massive unemployment, and forcing the Gaucho Republic to default on its gargantuan foreign debt.

During the tumultuous 2000 and 2001 years, Argentina had three presidents who could not cope with the mounting severe socio-economic problems. Finally, the 4th President in 2001 was convinced by Argentina's Central Bank to de-peg the peso, allowing the Argentine currrency to devaluate vs the US dollar. Subsequently, the peso plunged 70% vs the US dollar.

The draconian action produced near instantaneous positive results. Argentina regained its export markets, factories reopened hiring laid-off workers. The economic recovery was awe inspiring. Capital that fled Argentina during the turbulent times, returned au masse. In fact foreign capital poured into the country. Furthermore, the impact in Buenos Aires Stock Exchange was electrifying - as the MERVAL Stock Index soared.

In late-2001 the Central Bank of Argentina executed a massive devaluation to cure its severe economic and deficit and default problems, resulting in the peso price of gold rocketing more than 300% in just 5 months. See graph:

http://tinyurl.com/2aukwpp

An extraordinary quick economic recovery started only one quarter after the devaluation - as the Argentine GDP again began to grow vigorously.

The Argentine Solution (2001) fuelled stocks up 550% in next 2 years…

The devaluation of the Argentine peso in late-2001 was the factor that propelled their MERVAL STOCK INDEX UP 550% in the subsequent two years!!!!!!!!!!!!

http://stockcharts.com/h-sc/ui?s=$MERV&p=D&st=2000-01-01&en=2005-12-31&id=p86097230240

In this period the MERVAL STOCK INDEX was the highest performing stock index in the entire world. Indeed, the Argentine Solution blew all Stock Exchanges out of the water (2001-2005)

The massive peso devaluation propelled its MERVAL STOCK INDEX up +627% in the 4 years subsequent to the peso devaluation, while major world stock exchange indices (DOW, FTSE & NIKKEI) groveled virtually dead in the water.

Argentina's Miracle Medicine...DEVALUATION

In 2001 Argentina was suffering the same problems the USA is bearing today:

Unsustainable national debt
Ravaging high unemployment
A crashing stock market
Plunging real estate values
Massive Business failures
Export trade deficits
Political instability
Civil unrest caused by all the above

Consequently, the Presidente de Argentina decided to massively devalue its currency...the peso.

Almost immediately Argentina was on the road to recovery.

Testament to the success of the peso devaluation is the sky high performance of its stock market as measured by the MERVAL Stock Index. Here is its total return since 2001 as compared to the feeble performances of the US Dow, UK's FTSE and the Japanese NIKKEI:

MERVAL soars..........................................+811 percent
US Dow ekes out............................................+9 percent
UK FTSE loses................................................-2 percent
Japanese NIKKEI dwindles............................-8 percent

! Viva Argentina y VIVA LA DEVALUACIÓN!

THE USA Needs Higher Inflation and Moderate Devaluation

CLEARLY, President Obama needs to implement a policy of higher inflation, tempered by moderate dollar devaluation, if he is to be a two-term President. Assuming the President and the Fed begin to implement the above, we might see the following projections during the next few years.

Projections based upon Carter's results of 1977-1980 fuelled by inflation.

Gold might rise to............................................$4600
Silver might rise to.............................................$110
Platinum might rise to.....................................$8400
Palladium might rise to...................................$1400
Copper might rise to.........................................$445

Furthermore, US Housing might rise on average +50% within the next 3-4 years, thus bringing badly needed relief to the real estate and banking industries…as foreclosures evaporate in addition to disappearing 'under water' mortgages.

SUMMARY

The entire world is drowning in debt, causing mountains of foreclosures, accelerating bank failures and unacceptably high UNEMPLOYMENT…actually at a 26-year high in the US.

Historically, the only sure and time effective solution to these severe economic problems has been TO INFLATE AND DEVALUATE.

The Euro Union is rapidly realizing a de facto devaluation of its currency. During the past 6 months the euro has plummeted nearly 18% -- an average decline of 2% per month.

http://stockcharts.com/h-sc/ui?s=$XEU&p=D&st=2009-12-01&en=(today)&id=p46324781369

It is reasonable to think China will soon follow with a devaluation of the Renminbi in a defensive move in order to maintain its export competitive edge with its largest trading partner...the Euro Union. Consequently, the USA will in turn feel insurmountable pressure to devalue the greenback with a view to achieving the following objectives:

Reduce the horrifically high yearly trade deficits
Reduce the politically 26-year high unemployment rate of nearly 10%
Reduce the avalanche of foreclosures as real estate values rise
Inflate away the burden of crushing private and public debt
Promote nationwide economic growth
Shore up bank solvency

Hopefully, the Fed will soon implement measures to achieve its goal of inflating the US economy and devaluating the US dollar to achieve the aforementioned desirable objectives. Nevertheless, inflationary policies will substantially increase the value of all commodities, especially precious metals.

To be sure, the rising wave of inflation will provide long awaited relief to the real estate market and banking system, which teeters on collapse due to burgeonous toxic assets exposure.

The final solution to the grave problems plaguing world economies is NOT UNIQUE. It is a solution practiced historically in Latin America in decades past. And more recently the same solution was implemented by President Carter (1977-1980).

Indeed, INFLATION & DEVALUATION were in the past effective, and will again be so. To be sure it's déjà vu all over again in 2010.

INFLATE AND DEVALUATE OR PERISH.