We Are on The Brink of The Second Great Depression
The comments below are an edited and abridged synopsis of an article by John Mauldin
Mauldin recommends listening to a taped conversation between Ray Dalio and Paul Tudor Jones in which they discuss similarities between today and the 1930s: a large wealth gap; the absence of effective monetary policy; and a change in the world order, in this case the rise of China and the potential for trade wars/technology wars/capital wars. Dalio also addressed the end of the world reserve system, and the collapse of fiat monetary regimes.
The discussion reminded Mauldin of work by former central banker/BIS Chief Economist William White. He warned about potential currency wars, taking aim at the US Treasury’s desire for a weaker dollar. Mauldin believes this is a prescription for disaster.
Currency devaluations against gold were part of the root cause of the Great Depression. Coupled with protectionism and tariffs, they devastated global economic growth and trade.
Mauldin doesn’t think this will happen in the next few years but, he writes, imagine a recession that brings the US deficit to $2 trillion, possibly followed by higher taxes and spending.
This could bring about a second recession with even higher deficits, forcing the Fed to monetize debt in order to keep interest rates from skyrocketing, thereby weakening the dollar.
Couple this with a concurrent crisis in Europe, potentially even a Eurozone breakup, resulting in countries all over the world trying to weaken their currencies with the potential for higher inflation in many places.
In such a scenario, is it hard to imagine a desperate president and Congress, regardless of which party is in control, instructing the US Treasury to use its tools to weaken the dollar?
“Can you say beggar thy neighbor? Can you see other countries following that path? All as debt is increasing with no realistic exit strategy except to monetize it?”