LIVING THROUGH A CURRENCY DEVALUATION | SilverDoctors.com

LIVING THROUGH A CURRENCY DEVALUATION | SilverDoctors.com


With The Fed now two weeks into it’s official QE∞ policy, and with calls this week by Fed Presidents Evans and Plosser for even further easing-bringing a devaluation/hyperinflation of the dollar one step closer by the day, we thought it apropos to republish StackerX’s account and experiences recognizing, surviving, and even profiting from a fiat currency devaluation.
Those who recall the account may benefit from re-examining the lesson, and for those unfamiliar with the account of the 1976 Mexican Peso devaluation, this is an ABSOLUTE MUST READ as the US is rapidly descending into full-blown Banana Republic status.

In 1976 I was managing an American subsidiary of a successful large US Company in Mexico. It had been a financial turnaround for our team. Cash flow had accumulated in our bank in Mexico and corporate didn’t want the money repatriated to the US. Although we had already paid a 35% income tax to the Mexican government, we would have to pay an additional 30% exit tax to repatriate the money. In addition, we would have to pay high fees for the peso/dollar exchange, in order to make the transfer. The company wanted to expand our successful business and so we decided to keep the money in Mexican pesos to be used for further expansion.
One morning, as my wife and I were on a trip driving on the highway, we heard a national message from the President of Mexico, Luis Echevarria, one of the most corrupt presidents in Mexican history. “It is a lie that we are going to devalue the peso,” he said. I stopped at the nearest motel to make a collect call to the US headquarters and I asked my boss, the head of the International Division, to allow me to immediately open a new US dollar account in Mexico. I wanted to convert the pesos into dollars for deposit. My boss, laughing, asked me why I wanted to do that and I responded that the peso was going to devalue. He asked me how I knew this and I told him that the President of Mexico had gone on the radio and announced that rumors of a devaluation of the peso were false, which meant they were true. He continued to laugh but allowed me to open the account.
 I then called my CFO and directed him to go to the bank and get everything ready for me to sign leaving only the necessary funds to continue to operate. We immediately returned to Mexico City in time before the bank closed. Everything was ready for my signature, but the bank manager was rather bewildered and probably thought I might be overreacting.
 One week later the peso was devalued from 12.50 pesos to $1 USD, where it had been for decades, to 26.00 pesos to $1 USD. A few days later it improved to 24.50 pesos to $1 USD. The reason for the devaluation of the peso was simply that it had been pegged to the USD for too long and they rose and fell in unison. Because of better economic conditions in the US, the dollar continued to go up in value and the peso increased in value artificially. Mexican goods were too expensive to trade with other countries and hence the devaluation, which allowed exports to increase. For the first time in decades the peso was allowed to float and since then it has been allowed to freely rise and fall against the dollar. The decision to devalue the peso was made by the president, which made him unpopular, as well as his economic advisers, which included the Secretary of the Treasury and Chief of the Central Bank of Mexico.
Everyone in the country was in shock. People’s net worth had devalued more than 53% overnight. The value in savings accounts dropped in half and neither merchants nor consumers knew how to react because they had never been through anything like it before. Luckily for me, I had also exchanged my money and my salary had been set in US Dollars when I signed my contract with the company to work in Mexico. For me, it was like getting a 100% raise, since for a long while; my house rent remained the same as well as utilities, clothing etc. I remember that on my boss’s next trip, he bought himself a couple of nice suits at a nice discount.
Businesses were unable to immediately raise their prices. They had to raise them slowly, and through many sacrifices. The positive side was that the company had a loan in Mexican pesos for an expensive property and was able pay it off with the new dollars at practically a 50% discount. Before the devaluation, we had been leasing other properties, some of which had expired and had been on a month to month basis. Thankfully, immediately before the devaluation, I renegotiated and signed some of the leases with modest increases for a term of 5 years. After the devaluation occurred, the landlords wanted to renegotiate these leases, but because of the terms, we enjoyed low rents for that period. Later, as we leased new properties, the owners  introduced clauses tying the annual increases to the value of the US dollar, which appreciated every year until the recent fall of the dollar in the exchange rate.
Our attorney in his 50s, of German descent, who spoke English and Spanish with a German accent, didn’t take my advice on the oncoming devaluation. After the devaluation, he was so desperate that he came into my office one day, accompanied by another attorney that worked for him, carrying an old-fashioned suitcase, which he placed on my conference table. He opened the suitcase, which was completely filled with high denomination peso bills. I had never seen that much cash in my life and I was completely surprised. He pleaded with me to accept the money right then and allow him to purchase shares in our company. I told him that this was not the proper procedure, but he asked me to consult with corporate headquarters and insisted I put the money in our safe. As I expected, corporate said no and much to his distress, I returned the money to him.
People were so desperate to exchange their pesos into dollars that the supply of dollars dried up and some, who had them, sold them at a premium in the black market. (editor note: As the US dollar is currently the global reserve currency, this would likely play out in the US by gold and silver becoming immediately unavailable, and selling at massive premiums for the physical metal on the black market)
The situation was so dire that a presidential order was passed banning the banks from allowing customers to open US dollar bank accounts. A few years later, when the peso stabilized, this practice was reversed.
Of course, on my next trip to corporate headquarters, I was received like a conquering Roman hero. My boss kept asking me to tell other executives why I decided that the peso was going to be devalued. My answer was simply that I didn’t trust politicians and had decided that the president was telling a lie in his address to the nation. This, of course, was very funny to them after seeing the results.
Today, Mexico’s financial situation is very much improved and the peso has been appreciating against the USD. Mexico holds more than $120 billion in USD reserves.
As I am writing this, the USD index is at 75.71. Commodities are priced in dollars worldwide and this doesn’t fare well for other countries where there is a growing unrest amongst the population. The world governments blame this on the US government for passing laws allowing the Federal Reserve to print trillions of dollars out of thin air. This money has been used to bail out the banks and to purchase US bonds that countries like China, Japan, Russia, etc. are refusing to continue to purchase. The money received by the federal government is spent in the expanded military wars and countless pork barrel programs. The government is unable to control the budget deficits by cutting expenditures because of poor presidential leadership and irresponsible and politicized congress.
The US has agreed that something needs to be done. One of the most favored proposals at the G-20 meetings is to use a basket of currencies which would includes the USD, backed partly with gold to serve as a new world currency. This proposal would mean a further devaluation of the USD of 50% for the US to be able to participate in the program. It would be interesting how this can be done since the dollar floats freely.
As long as we don’t repay our national debt, cut government spending, increase interest rates or stop the Federal Reserve from printing more dollars out of thin air, dollar’s role of international reserve currency will soon end. China and Russia are already using their currencies to trade with each other, especially in oil purchases, bypassing the purchase of US dollars to make the payments.
Numerous countries are buying gold and silver to replace some of the dollar reserves and hedge the value of their dollar reserves. Mexico recently purchased nearly 100 tons of gold to replace some of their dollar reserves. We still don’t know how much American gold is in Fort Knox as no audits have been completed since the 1950′s. The rumors are that there are no gold reserves remaining. We know that the US mint is purchasing gold and silver blanks from Australia as domestic production is not enough simply to satisfy the demands for US Mint production! Either way, this is bad news for the US dollar and also for any of us living in the US.
My experience with the peso devaluation makes it necessary for me to move my investments away from paper into physical gold and silver. I am doing this more as a defense mechanism to ensure my net worth is not devalued. Economic think tanks are already conducting feasibility studies to predict the ramifications of the devaluation both domestically and internationally.
It is going to be a very tough time for the US and I anticipate the Mexican devaluation will pale in comparison to our dollar devaluation, not only to this country, but worldwide. What is the answer for Americans?
Read the writing on the wall, and extricate yourselves from your US dollar positions.
Physical gold and silver bullion and coins will be the ultimate protection and wealth preservation assets during the coming devaluation of the US dollar.

After the Storm by Jeff Thomas

After the Storm by Jeff Thomas With all the study and thought that are required to make sense out of how the Great Unraveling will play out, we seldom take time to think of what it will be like on the other side. Those of us who are, by nature, long-term thinkers and/or optimistic, have a vague picture in mind of a rebirth of libertarian thinking, and a vibrant economy. However, we tend not to think too much more about these hopes than that, because we are caught up in the Great Unraveling itself - a very time-consuming topic. The other day, an associate whom I like to think of as having a decent, if not holistic, view of the present depression, commented to me, "I wish we could just have the crash tomorrow and everything that goes with it, so that, next year, we can get back to normal." Oops ... maybe his expectations are a bit more simplified than I thought. And, if others share his view, possibly the topic needs a bit of fleshing-out. While it may not be ready to be a prime topic of the ongoing conversation, possibly an outline of what may happen after all the fireworks have gone off would be in order. Ten Years Down and Ten Years Up Economic wizard (and favourite 'Uncle') Harry Schultz stated back in the early 2000's that what he anticipated was "ten years down and ten years up." At the time, many thought that his projection was extremely prolonged. I didn't think so. People do commonly seem to take the view that, once the various crashes have taken place, we simply walk out into the sun, brush the dirt off the knees of our trousers, and, with a spring in our step, walk into the bright new day. However, a depression is not at all like that. It is more like a town after a hurricane has hit. The storm may have been swift, but the recovery is not. Power lines are down. Roads are blocked. Homes and stores have been destroyed. Having personally been highly involved in the reconstruction of a small country after the devastation wrought by a category five hurricane, I can attest that, even if the population is hardworking and motivated (which they were), the task of rebuilding is monumental, and the time period required to achieve it is prolonged. I see the period after the various crashes very differently from those who anticipate immediate recovery symptoms. This is not because I imagine myself a visionary; my view is based on history. If we look at the economic collapses of the past, (inclusive of their possible knock-on effects, such as hyperinflation and destruction of the currency), from the fall of the Roman Empire to Weimar Germany, to Argentina and Zimbabwe - take your pick - the pattern is extremely similar. So, let's have a look at that pattern and ask ourselves if the present situation might not play out much the same (except far worse and more prolonged, as the conditions that led to this particular depression have been more extreme). The various stages are likely to be a given, but the various factors within each stage are a bit more uncertain. In every major economic collapse, some combination of these factors takes place. Also, consider that the stages themselves are like dominoes - they almost always fall in order. The reason? Details change in history, but human nature remains the same. The same knee-jerk reactions by people will repeat themselves over and over. (As an example, we are now experiencing a decline in exports from the First World. I believe that a repeat of the disastrous Smoot-Hawley Tariff of the 1930's will be passed in America, which undoubtedly would trigger increased hardship for Americans.) Stages of The Crash The stages are laid out below. The first three have already occurred. 1 INITIAL CRASHES Crash of the residential property market Crash of the commercial property market Crash of the stock market 2 INITIAL KNOCK-ON EFFECTS OF CRASHES Loss of homes Loss of jobs Inflation 3 IMMEDIATE ACTIONS BY GOVERNMENT Bailouts for select groups Dramatic increase of debt Politicians going in the opposite direction of a real solution The first knee-jerk reaction began immediately, with the Government attempting to "make the problem go away" as quickly as possible. Almost invariably, at this stage, the corrective strategy is hastily prepared and shortsighted, assuring further deterioration of the economy. In this stage, the politicians on both sides fail to focus on a real solution. Instead, their primary focuses are, first, to avoid a painful real solution, and, second, to engage in finger-pointing, each political party blaming the other for the problem. The problem worsens steadily until one of the next series of major dominoes falls. This is usually sudden and triggers the toppling of other dominoes. 4 SECOND WAVE OF CRASHES Major crash in stock market Currency plummets Increased bankruptcies Increased unemployment 5 INTERNATIONAL TRADING PARTNERS REACT Foreign countries refuse to accept more debt Foreign trade slows dramatically At this point, the Government introduces dramatic change, such as ill-conceived protectionism, which backfires almost immediately. 6 GOVERNMENT INSTITUTES DESPERATE SELF-DESTRUCTIVE MEASURES Defaults on debt Restrictive tariffs on imports Currency controls 7 ECONOMY REACTS IN LOCKSTEP TO GOVERNMENT ACTIONS Hyperinflation - dramatic increase in food and fuel costs Massive unemployment Extensive foreclosures Extensive bankruptcies At this point, the dominoes are tumbling quickly, and a rapid unraveling of control is about to take place. 8 SYSTEMIC COLLAPSE Bank closures Extensive homelessness Food and fuel shortages Electric power becomes sporadic, blackouts common As these factors unravel, the public mood turns to a combination of blind fear and anger. 9 SOCIAL COLLAPSE Crime rises dramatically (particularly street crime) Food riots Tax revolts Squatters' rebellions 10 MARTIAL LAW Creation of special army to address "domestic terrorism" Random killings become commonplace At first, the authorities focus mostly on violent subjugation and arrests; then, as prisons quickly become hopelessly overcrowded, camps become the norm. Soon, these too become unmanageable, particularly as a result of high cost of food and manpower. At that point, the solution turns to the killing of anyone who is suspected of a crime and, more frequently, anyone who is not submissive. (This will not resemble the Gestapo of the late 1930's. It will be less organized and more chaotic.) 11 REVOLUTION If revolution is to occur, it will happen at this point. Many people will feel that they have nothing to lose, and anger will be at its peak. If revolution does take place, it will not be an organized movement as such. It will be spontaneous, and breakouts will manifest themselves like popcorn popping, largely at random, with ever-increasing frequency. At some point, it may possibly evolve into something more organized. If you enjoyed this article, you might like our complimentary report, The Best of Jeff Thomas. Pulling no punches, Jeff shares his thoughts on the greatest threat to gold ownership, finding a bolthole on a budget, as well as the coming hyperinflation. You may download this free report immediately in our member's area. Or, if you are not a member, register for free here.

Sep 27, 2012 The Fed is Trapped, Gold is the Exit Darryl Robert Schoon 321gold ...inc ...s

Sep 27, 2012 The Fed is Trapped, Gold is the Exit Darryl Robert Schoon 321gold ...inc ...s

The Fed is Trapped, Gold is the Exit

Darryl Robert Schoon
Posted Sep 27, 2012

47% of US investors dependent on the Fed believe they are victimized by government, who believe they are entitled to enough liquidity to profit when risk is laid-off onto others, to society, to you-name-it…

On September 13th, the Fed announced QE3, a policy of open-ended bond purchases which would add $1 trillion annually to the Fed’s balance sheet. The Fed’s decision to provide liquidity ad infinitum, i.e. QE etc, was framed in reasonable and carefully chosen language:
…These actions, which together will increase the Committee's holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative… Read here.

The measured wording gave the Fed sufficient cover to mask its increasingly desperate condition, i.e. how to keep its fatally-wounded credit and debt ponzi-scheme functioning while searching for a solution that doesn’t exist.
CAPITALISM’S CONSTANTLY COMPOUNDING DEBT IS THE DEVIL’S WHIP OF GROWTH
In capitalist economies, capital, i.e. money, is introduced by central banks into the economy in the form of loans; and because interest constantly compounds, economies must constantly expand in order to pay down and/or service those loans. This is why economists in capitalist systems are obsessed with growth.
Capitalism is, in actuality, a smoke and mirrors shell game where credit and debt have been substituted for money; and, as long as capitalism expands no one is the wiser because the fraud is so subtle. Capitalism, however, is no longer expanding. It is contracting.
Capitalism reached its peak in 2008 when Greenspan’s historic credit bubble burst. What investors believed was a finely-tuned balancing act between credit and debt orchestrated by Fed Chairman Alan Greenspan turned out instead to be a speculative bubble fed by Easy Al’s easy credit from the Fed’s 24/7 discount window.
While Greenspan presided over the greatest credit expansion in the history of capitalism, Greenspan also presided over two of its largest speculative bubbles - the 1996-2000 dot.com bubble and 2002-2007 US real estate bubble. Greenspan would later refer to evidence of these bubbles as ‘froth’; to those who lost homes and fortunes, it was blood.

(Click on images to enlarge)

THE 1990 JAPANESE NIKKEI – THE MOTHRA OF ALL BUBBLES
The collapse of Greenspan’s two massive bubbles followed the spectacular collapse of the Japanese Nikkei. The catastrophic crash of Japan’s stock market in 1990 was the world’s largest since the US stock market had collapsed in 1929.
In Time of the Vulture: How to Survive the Crisis and Prosper in the Process, I wrote: …fueled by excessive amounts of liquidity, [the price of Japanese real estate and stocks] exploded upwards. Japanese real estate prices increased 70 times over and stock prices increased over 100-fold, with the Nikkei reaching a market top at 38,992 in January 1990.
As with all speculative bubbles, the Nikkei collapsed - and the collapse of the Nikkei in 1990 unleashed deflationary forces not seen since the Great Depression of the 1930s. Prices of stocks and real estate in Japan began a long and steep multi-year descent.
Commercial real estate lost 80% of its value in the next decade and the Nikkei fell from 38,992 in 1990 to 8,237 in 2003. Deflationary cycles are long and protracted and if not stopped will become deflationary depressions, an economic phenomenon for which there are no ready answers.
In 1990, Japan escaped a complete deflationary collapse only because Easy Al’s credit bubble was underway in the West. Rising credit-driven Western demand combined with Japan’s high savings rate helped slow Japan’s inexorable descent into deflation. Nonetheless, after 1990, Japan would need to borrow increasingly large amounts of money in order to survive and borrow it did.

After the 2008 economic rendering, the central banks of the US, the UK and Europe have joined Japan in the desperate need to constantly increase money-printing to keep their economies afloat; and while reviving growth is their announced goal, the unspoken intent is to avoid a fatal deflationary collapse in demand.
As Credit Suisse recently noted: …Japan’s titanic struggle with private sector de-leveraging has spread to the rest of the developed world. Rapid succession of asset bubbles (at least 12 since 1980) led to the global private sector de-leveraging causing deflationary “winds”, regularly stalling global growth and leading to waves of expansionary public sector response.
While the extent of an asset price collapse in Japan was far more severe than either the Dot.com or Subprime crises, the basic dynamic of subsequent response (i.e., private sector moving from borrowing to net lending, forcing public sector into stimulatory monetary and fiscal policies) was essentially the same in Japan in the 1990s as it has been in the US, the UK or Eurozone since 2008. Read here.

The Fed, the Bank of England, the European Central Bank and the Bank of Japan are all having to print more and more money to keep their economies functioning

CENTRAL BANKES ARE NOW PRINTING MONEY AD INFINITUM
EVERYTHING ENDS; EVEN AD INFINITUM
On September 18th, Ambrose Evans-Pritchard’s commentary in The Telegraph UK was titled Japan launches QE8 as 20-year slump drags on. Evans-Pritchard noted that QE8, Japan’s latest round of quantitative easing, i.e. money-printing, is only the latest of Japan’s serial attempts to avoid a deflationary collapse.
Although Japan has survived deflation’s endgame for over 20 years, the US, the UK and Europe will not be so lucky - nor, this time, will Japan. With all major economic zones deflating simultaneously, the West’s demise will be far quicker than Japan’s protracted agony; and when the West collapses, this time Japan will collapse with it.
The US, Japan, and Europe are all trapped in deflation’s ever-widening net, i.e. a constantly expanding liquidity trap.
We’re trapped too - unless we own gold and/or silver.
QE3: THE BANKERS’ MONETARY DEATH MARCH
In 1949, the Austrian economist Ludwig von Mises wrote in Human Action:
The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved
Von Mises words, written in 1949, are being played out today. In the intervening years, bankers did not abandon credit expansion. They did the very opposite. After WWII, bankers continued expanding credit until what von Mises called a crack-up boom occurred - where excess credit and money drive valuations to all time highs (from 1982-2000 the Dow rose from 777 to 11,723, a increase of 1400% in 18 years).
The collapse of financial markets in 2008 signaled the beginning of the end; and ever since then, central bankers have been printing more and more money hoping to stave off a final collapse.
Money-printing, however, will not prevent capitalism’s systemic collapse. It will, in fact, do the opposite. Collective central bank money-printing will trigger a final and total catastrophe of the currency system as von Mises predicted.
In August 2008, in Gold and the Collapse of Paper Money , I wrote:
We are about to see a variation of [the Great Depression], except this time it will be worse because this time sovereign monetary defaults will accompany the defaulting of debt and the contracting of credit. This time money itself will be a victim. Fiat paper money systems have always ended in failure. This time is no exception.
QE3 is the beginning of the bankers’ monetary death march. Central banks in Japan, the US and Europe are now openly engaged in massive monetary debasement, printing more and more money in the futile hope they can reverse the deflationary collapse now in motion. They can’t.
They can, however, in trying to do so, instead destroy the currency system.
My video, Wake-Up! The Crisis and the 2-Party System, is especially timely. Shot on October 29, 2011, it discusses today’s relevant issues months before they happened.
Buy gold, buy silver, have faith.