Scary Specter Of '30s-Style Economic Depression

Jay Taylor, who publishes Gold, Energy & Technology Stocks and hosts his "Turning Hard Times into Good Times" radio program each week, is hoping and praying for deflation to help the U.S. heal its wounds and find its way back to prosperity. He has reasons to think the dollar might bounce back, too. Nevertheless, Jay reminds The Gold Report readers about frightening parallels to the 1930s and doesn't dismiss the possibility of a hyperinflation that renders the U.S. dollar about as valuable as toilet paper. Although bulls have been charging around Wall Street the past few months, he expects fearsome bears to reemerge soon and feast on equities almost like they did last year. If he's right, he also foresees a "grand buying opportunity" and the potential for "huge upside gains" for savvy investors in some gold mining stocks.

The Gold Report: The last time we spoke, in July, you expected a market downturn this fall. Is that correction yet to come?

JT: I think we're on the verge of that correction, but I'm not so sure it's so much a correction as a resumption of the secular bear market that started with the Lehman Brothers collapse last fall. We saw the first leg down in the market, a bottoming out in equities, in March; then a very strong rally with the Dow going back up past 10,000. And now we're most likely to see a major decline in equity prices. We can only hope and pray that the March lows hold because if they don't, we could be looking at something very, very frightening on the downside.

JT: I don't believe we're out of the recession at all. Not if you use numbers that I think are more valid—and those would be numbers from the likes of the independent economist, John Williams, who's been on my radio show. According to his ShadowStats, inflation is grossly understated and hence our GDP is overstated, that, in fact, we've never come out of recession. If you just look around and see what's going on in the U.S. economy—except for Wall Street, which is really more of a gaming industry than anything else—it's hard to make the case that we're back on a growth track.

A few things to keep in mind are first, that what a countries currency does outside that country, and what it does inside that country, can be two very different things.

When living overseas, if you are being paid in dollars, this becomes obvious. Say in this mythical 1st world country, their currency is the “flatus”. You note that if you live like a local person does in that country, 1 flatus will buy there about what 1 dollar will buy in the US. This, more than anything else, is a *psychological* convenience to local trade. It can be this because currency value is based on faith, not gold and silver.

However, between the US and the land of Flatulence, the *international* currency exchange rate is $1 = 3F. This means that if you are paid in dollars, and willing to “live on the economy”, and buy local goods like the Flatulanders do, you effectively triple your pay, once you convert your dollars to Flatus.

But, if you still want to enjoy imported American products, even though you pay in Flatus, you will have to pay more. Inflation will come to imported products, which then will slowly raise the price of locally produced beans and brocolli, the typical fare of the Flatulanders.

So how does this impact Americans in America? At first, it doesn’t, because long ago we set up a system by which our #1 imported product, crude oil, is traded in dollars. This protects us somewhat from wild vacillations in currency exchange affecting oil prices.

But recently, the oil producers have realized that they are getting shafted in the deal, because of the total irresponsibility of the US government. So they want to move away from dollars. If they do this, then they can significantly increase oil prices, and the US will have to pay for oil in other ways.

If they get too greedy, the US public will demand that the US produce its own oil, even if we have to squeeze it out of freshly picked environmentalists.

But other than that, the US is in much the same boat as any other country. Since US debt is held by other nations, if the *international* value of dollars starts to vacillate, at first it will have little impact on US domestic prices.

In fact, it may be a good thing if the price of imported goods jumps, because that will encourage companies to produce more in the US instead of overseas.

But the biggest effect will have to be that the US federal government stops spending money like it was nothing, and promising to spend vastly greater amounts in the future. Though it knows right now that those promises cannot be kept, it cannot help itself but to promise trillions of dollars it will never have to things that cannot continue to exist.

Things like Social Security, which even 20 years ago people figured out was a goner. And Medicare, and Medicaid. Completely gone. And the Defense budget will have to be halved. No way around it.

But will all of this cause massive inflation or deflation?

Not if we cancel all these promises and debts. Other countries have renounced their national debts, some several times, and gotten away with it. And right now these nations that invested in the US won’t be totally devastated, because they invested their *profits* in the US, not money that was core, and essential to their own economies.

So, they sold the US stuff, made a ton of money, that they then loaned back to the US. The US ends up getting all the stuff it bought for free.

However this means no more credit for the US for 20 or 30 years. And if they try to use the WTO or the IMF or whoever to lean on us, we just leave those organizations. The UN would be more at home in Harare, Zimbabwe, anyway.

Oddly enough, the US would still have some imports and exports. But we would pay for the imports with something other than dollars, and we would export mostly food because we are basically good guys, even though we have just ripped the rest of the world off.

Back in the US, sure there is some inflation, maybe some deflation, and maybe at the same time, because though they sound like antonyms, they aren’t, really. But as long as the US federal government backs off, we will do well as a country. Individual States will take over much of the role the federals have right now, and more than half of the federal government will be looking for work.

The hard part will be getting to that point. Because you know that they are not going to stop with their wild excess unless they are forced to, and would likely prefer to try and internationalize and one world government, and nonsense like that instead of returning to reality and sanity.

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