I ended up reading “Lords of Finance,” a book detailing how four central bankers from across the world, including Benjamin Strong from the U.S., handled finances, before, during, and after WW1. It was interesting how similar the rhetoric was then as compared to today.
It writes how in 1930 the Fed pumped in $500 million in the economy, driving down interest rates, and attempting to stave off a collapsing economy. At the time, some argued this wouldn’t help but would instead cause inflation. Further, banks horded cash anticipating trouble ahead, and this somehow gave a momentary signal things where getting better, eventually the banking system collapsed, starting with “Bank of the United States” located in the Bronx.
The difference between then and now, then we were the greatest creditor nation, now, the greatest debtor nation…obviously. Personally, I think we are more closely aligned with how Germany was at that time. They, struggling to pay reparations after the war, debased the German Mark to help their struggling economy and to pay for reparations. This ultimately led them into hyperinflation.
In the end, when the world was a mess, it seemed a move AWAY from the gold standard is what worked (as the author seems to be a champion of). Also, it didn’t matter if a country chose to deflate or devalue; both had severe consequences in battling inflation.
It does not seem likely that we are on the road to hyperinflation, at least at this stage. Since Bernanke has led the charge to QE and devaluation of the US dollar he has encouraged a massive carry trade in the reserve currency--with oil prices collapsing that carry trade is unwinding and I would look for that trend to continue.
If RE prices in most of the world (CHINA, AUS, CANADA, BRAZIL) follow the US and Japanese example, the US dollar could strengthen further.
One might also argue that the US government supported the gold price during the depression or it may have fallen like other commodity prices.
One thing I find strange in a deflationary enviroment like we may be heading into (again), during a dollar carry unwind, is why people would want to short the 10 year and the 30 year US bonds. Wouldn't it make more sense to short TIP, since it is around a point away from its all time high. Just look what happened to it when the SHTF in 2008.