by Martin Weiss (edited by Alex Wong)
Many people believe the 1930s Depression was caused by the failure of the federal government to fight the decline. This time, they say, the government is doing precisely the opposite.
In reality, America's First Great Depression wasn't caused by what the government failed to do to stop it. Rather, it was largely caused by all the wild things the government did do to create the superboom in the Roaring '20s that preceded it. They dished out money to banks like candy. They let banks loan money to brokers without restraint. And they encouraged brokers to hand it off to stock market speculators with 10% margin.
But if you want to see what happens when a government intervenes aggressively after a bust, just look at Japan since 1990. Japan lowered interest rates to zero, just like the Fed is doing today. Japan bailed out banks, brokerage firms and insurance companies, much like the Fed is doing here. Japan embarked on massive public works projects, much like President-elect Obama is proposing now. But it did not end the deflation.
So what's a person to do?
If you don't need something, seriously consider selling it. Real estate. Stocks. Corporate bonds. Even collectibles if you consider them an investment. You don't have to sell everything all at once at any price. Every time the government inspires a rally in the stock market, use that as a selling opportunity. Every time the government stimulates some activity in real estate or in the economy, grab that chance as well. You can afford to wait for a temporary stabilization or recovery. Markets never go straight down. And even in some of the worst markets, there are ways to sell most assets.
As long as your cash is in a safe place, the deeper the deflation, the more your money is worth. My last word: Just make sure you keep it safe!
There is just one thing that always goes up with deflation: The U.S. dollar! By DEFINITION, when the price of investments or goods and services goes down , the value of each dollar goes UP . That's the essence of deflation. And here's the key: When the value of the dollar goes up in the United States, it inevitably goes up abroad as well.
Virtually everything that matters in the global economy — trade, commodities, GDP, debts — is measured in U.S. dollars. The dollar is the world's reserve currency. So just as we see domestically, when your dollar buys more, its value also rises internationally.
A country's currency is never valued based on how well or how poorly that particular economy is doing in isolation. It's always measured against another country's currency. So it is always valued based on how a particular economy is doing relative to another economy.
The question is, “How is the U.S. economy doing compared to the European economy, the U.K. or Australia?” In this environment, it's not a beauty contest. It's a contest of which economy is the least ugly … which leads me to the second reason the dollar is rising: The U.S. is winning the least ugly contest hands down.
The U.S. economy, despite all its troubles, is still the dominant world economy. Militarily, it's the only remaining superpower. Financially, it's still the world's capital. So it's natural that when investors are running from risk, they rush back to the dollar, bidding up its value.
There's one notable exception: The Japanese yen. Japan is the world's second largest economy and also one of the world's largest sources of capital. So when the other currencies go down, a lot of that money goes back to Japan, boosting the yen.
So in the midst of all these bear markets, if you're looking for a big bull market …
You've found it! It's the U.S. dollar. I think the U.S. dollar is in the early stages of a powerful bull market that could last for years. It's the single cleanest way to make windfall profits from the deflation.
The advantage of the currency market is that it's divorced from the stock market. The stock market could be crashing, and it would not interfere with your ability to make large steady profits in the currency market. The U.S. economy could be sinking into a depression, and it would still not interfere with your ability to make nice large steady profits in the currency market. No matter what happens in the global economy or the world's financial markets, there is always at least some major currency that's going up in value.
Currencies are measured against each other. When one is going up, the other is going down, like a seesaw. Therefore, there's always at least one currency going up. There's always a bull market in currencies. I don't recommend them for all of your money. But at a time when nearly all other investments are going down, it's a great place to get away from the disasters and find a whole separate world of investment opportunity.
I also think that it's THE ideal vehicle for average investors to profit from deflation and a rising dollar.
