Guest Post:Defeating Demon Deflation

Defeating Demon Deflation

Submitted by Machinehead, of Chris Martenson.com

Since early April, the yield on 10-year Treasury notes has dwindled from 4.0% to below 2.5% on August 24th.  Meanwhile, the 12-month change in the Cleveland Fed's median CPI has hovered feebly between 0.5% and 0.6% since March.  These abnormally low interest and inflation rates are fanning fears of renewed GDP contraction, a plunge into price deflation, or both.  Boardrooms and blogs are humming with rumors of a 'QE II' (Quantitative Easing II) program to counter a chilly deflationary dip.

One reason fears are so acute is that the Federal Reserve's main policy tool, the overnight interest rate on Fed Funds, is flatlined at zero.  Moreover, via 'extraordinary measures' beginning in September 2008, the Federal Reserve added some $1.4 trillion of securities, including $1.1 trillion of MBS (mortgage-backed securities), to its balance sheet in a stimulus bid.  Yet despite these heroic efforts, economic leading indicators have turned weak this summer, as sinking Treasury yields add to the disquiet.

In its August meeting, the Federal Reserve downgraded its economic outlook, and backed away from plans to let its enlarged securities holdings run off as MBS mature.  Instead, it committed to buying about $18 billion of Treasuries from mid-August through mid-September, mostly in the 2- to 10-year range, by reinvesting MBS principal payments.  It also set a $2.05 trillion floor for its securities holdings -- thus freezing 'QE I' in place (perhaps forever) and hinting that a larger 'QE II' could follow.

But if QE I isn't working, what hope would QE II have of achieving its purpose in a fresh emergency?  This paper discusses a faster-acting alternative, which is feasible within the existing statutory and institutional structure -- namely, targeted purchases of international reserve assets instead of Treasury notes.

---

Papers published by central bankers place great weight on managing expectations.  In Seven Faces of the Peril, James Bullard of the St. Louis Fed discusses how a zero percent Fed Funds rate could actually entrench deflationary expectations.  Now, as fractional interest rates infect the yield curve from the short end into multi-year maturities, expectations are growing more somber, while what may be a dangerous safe harbor Bubble in bond prices develops.  (Bond prices rise as their yields fall.)

What if the intended stimulative effects of buying T-notes (cheaper borrowing, more bank reserves) are outweighed by deflationary expectations engendered by plunging yields?  In that case, QE II would be counterproductive.  As Bill Hester of Hussman Funds asserted in a paper titled The Paradox of the Zero Bound, 'In periods where the economy gets stuck in the “unintended” state, long rates become the primary signal for expectations of growth and inflation. Lower rates imply an expectation of deflation and economic weakness, and become associated with weaker stock prices.'  Ouch!  Ungood!

Although the Fed's assets are mostly Treasuries, agencies, and MBS, it also holds international reserves -- meaning gold, SDRs, and foreign currencies (specifically, euros and Japanese yen).  As a student of the 1930s, Fed Chair Ben Bernanke is conversant with the competitive devaluations which marked that era.  The US sharply devalued the dollar against gold, from 0.0484 troy ounce in 1933 to 0.0286 troy ounce in late 1934.  Strikingly, the crushing 10% deflation which prevailed during 1929-1932 ended then, and didn't return.  And a brisk economic recovery unfolded from 1933 to 1937.

Coincidence?  Perhaps not.  Devaluation is a recognized third way of easing financial conditions, in addition to the traditional policy tools of fiscal deficits and monetary base expansion.  When fiscal policy is tightening and monetary policy is immobilized at the zero bound, currency devaluation is the only tool left in the box to counter deflation.

Let's examine the five largest trading partners of the US, as well as the US itself.  We're interested in their bilateral trade volume with the US, their international reserves, and how those reserves compare to the size of their economies:

Traditionally, the adequacy of international reserves is evaluated in relation to import volumes, foreign debt obligations, and the like.  The US is a special case, since the US dollar still accounts for over 60% of international reserves globally.  Even allowing for its [revocable] privilege of trading in its own currency, US holdings of international reserves are a miniscule 0.9% of GDP -- one-fifth of Canada's ratio and one-fiftieth of China's.  In dollar amount, US reserves are only 22% higher than Mexico's.  Ay, benditos americanos!

According to the New York Fed's most recent quarterly report, Treasury and Federal Reserve Foreign Exchange Operations, foreign currency in the Treasury's Exchange Stabilization Fund totaled $23.8 billion, in euros and J-yen.  Likewise, the Federal Reserve's holdings consisted of $23.8 billion of euros and J-yen, plus $1.2 billion in carrying value of swaps.  Other US international reserves include SDRs and gold held by the Fed.

One quick and dirty survey of foreign exchange rates -- The Economist's Big Mac index -- indicates that the euro is overvalued; the J-yen and Canadian dollar are about neutrally valued, while the Mexican and Asian currencies (ex-Japan) are quite undervalued.

Source: http://www.economist.com/node/16646178 (July 22, 2010)

Since US forex holdings already consist of J-yen and euros, intervention should concentrate on seven other currencies -- those of the 'Asian five' of China, South Korea, Taiwan, Hong Kong, and Singapore; the US's two North American neighbors, Mexico and Canada -- plus gold.

While most of these purchases would be straightforward, three issues would nonetheless arise.  First, China has capital controls.  Since China pegs its yuan to the dollar by buying dollars, US sales of dollars to buy yuan securities would run counter to China's intervention.  For its part, the US could point out that China holds 20 times the international reserves of the US.

In any event, the US can indirectly pressure China by purchasing other Asian currencies.  Bloomberg reported that China has doubled its allocation to Korean Treasury Bills (KTBs) in 2010.  Why shouldn't the US do a little front-running of China in southeast Asia, to underscore its reasonable demand for access to Chinese securities?

Second, US gold reserves have languished at a reported $11.041 billion for years.  This piddling sum is based on a 40-year-old historical value of $42.22 an ounce.  In order to account for new gold purchases, the Fed would be obliged to mark its gold to market, raising its carrying value to over $300 billion.  Though only an accounting change, the substantial numerical boost in the Fed's reported assets would send an expansionary signal while augmenting the Fed's equity.

Finally, the lead agency for foreign exchange intervention is the US Treasury.  Practically speaking, bolstering international reserves would be a Treasury project, carried out operationally by the New York Fed.  Prior interventions, such as a loan to Mexico by the Treasury's ESF, have been accomplished without Congressional authorization.  So, apparently, can this one.

Will it work?  Ten years have passed since the last US intervention to boost the euro.  A coordinated international purchase occurred after the euro fell below $0.85 in Sep. 2000.  Although the euro fell back to this level several more times through mid-2001, the threat of further purchases seems to have prevented it from sinking much below the perceived intervention threshold of 85 cents.  By July 2002, the euro reached par; it carried on rising to reach a peak of $1.60 in April 2008.  This result is encouraging.

Unlike the US, none of the economies targeted for exchange intervention are on the verge of debt deflation.  If they choose, they can counter US intervention with their own dollar buying.  But such offsetting purchases would be expansionary unless sterilized.  In practice, sterilization is rarely fully achieved.  More likely, their central banks would choose to raise interest rates to counter the expansionary effect.

And this is exactly the objective: to push up global inflation and short rates a notch or two -- first and foremost in the US -- to help the at-risk large economies (the US, Japan and euro area) extricate their policy rates from reposing at or near the daunting zero bound.  (For our purposes, a 'notch' means a percentage point.)

Doubtless, the intervention targets will whinge and moan.  Owing to the dollar's still formidable status as the dominant reserve currency, the US doesn't need as large a stash of forex reserves as others do.  Nevertheless, with the US representing a quarter of global GDP, other countries have a vested interest in its economic well-being.  Ultimately (with a caveat concerning China), they will prefer a bit of exchange rate pain to the more inflexible alternative of hiked tariffs, which remain a political risk.  Cross-holdings of reserves may also confer strategic advantage, if they are viewed from a keiretsu or chaebol perspective as implying cooperation and linked destinies.

According to Bloomberg's Alex Tanzi, international reserve assets (excluding gold) have risen a breathtaking 20.6% over 12 months, to a record $8.55 trillion. Nearly 30% of this total is held by China, and over 60% in Asia.  Unless sterilized (and they mostly aren't), these reserves expand foreign money supplies.  By contrast, US holdings of international reserves are frozen and stagnant.  To ward off demon deflation, the US needs to change its timid, catatonic profile in the reserves arena.

Buying gold may prove to be even more effective than forex purchases.  Over the past 30 years, the correlation between the dollar and gold has been a strong minus 0.65, reported Jeff Opdyke in the WSJ, citing a study by Ibbotson Associates.  Writing up US gold to market value and announcing further acquisitions would exert a potent downward push on the dollar.

A lower dollar will hike import prices, boost exports, and stimulate the US economy.  As a pertinent example, Germany's GDP received a sharp boost from the euro's depreciation in early 2010, rocketing to 9% annualized in the second quarter.

Lesson:  Devaluation works.  When interest rates have reached the zero bound, the fisc is tapped out, and deflation fears are tainting the collective consciousness, devaluation may be the only lever that works.

One can imagine a less profligate, less interventionist, less militarized US economy, which might not have fallen into this plight to begin with.  Whether the US should have a dirigiste mixed economy and central bank are outside the scope of this essay.  Taking an interventionist bent as a given among present-day policymakers, this paper merely offers a Realpolitik argument that they should intervene effectively, if they intervene at all.

---

machinehead is a member of the ChrisMartenson.com community and a frequent and prolific comment poster to the site.  His views and opinions are his own.

Comments

[LostWages]

Deflation Bitchez!

[Smu the Wonderhorse]

Oh, shut up.

[tmosley]

Yeah, we need to intervene in the currency markets.  I mean, look how well it worked out for the Swiss.

Printing money to buy gold will make the monetary authorities look really smart.  I'm sure it won't send gold prices into the stratosphere and collapse the dollar.

[bugs_]

"demon deflation" LOL

devaluation may be the only lever that works

whats next if that doesn't work?  how about just shooting us?

[Reese Bobby]

Yes.  Why just print money to buy UST's?  Let's really throw 'em a curve ball and print dollars to buy foreign stocks, by the zillions!  WooHoo!!!

[Spitzer]

QE 2 is not needed to have hyperinflation, just a bond bubble pop is all we need.

[24KGOLD FOIL HAT]

Machinehead is on the right track, or should I say [yellowbrick] road!

[hamurobby]

Second, US gold reserves have languished at a reported $11.041 billion for years.  This piddling sum is based on a 40-year-old historical value of $42.22 an ounce.  In order to account for new gold purchases, the Fed would be obliged to mark its gold to market, raising its carrying value to over $300 billion.  Though only an accounting change, the substantial numerical boost in the Fed's reported assets would send an expansionary signal while augmenting the Fed's equity.

I had no idea that was the Fed's gold, I feel much better now.

[knukles]

The gold held at Ft. Knox is the property of the Government of the United States of America, not the Federal Reserve System. 

And the preceding proposal regarding foreign currency intervention merely transfers ownership of a dollar denominated demand deposit from the Fed to the FX desk of a dealer bank as opposed to the bond desk of a dealer bank.  No magic panacea, for both activities inject reserves into the banking system which will remain unused for lending purposes until borrowers of above threshold credit quality wish to borrow from banks who wish to extend loans to the same.

And it matters not who or what owns any debt instrument, but rather how much is to be owned. 

At this point, injecting more reserves into the US or global banking system to spur economic activity is like pissing more rain on Pakistan because it's still too dry. 

Long ago, people like our Neo-Keyenesian friends were gifted with ocular lobotomies to induce less peripetetic, more rational behavior. 

[blunderdog]

Uh, gee...couldn't we just print money to buy debt back from China and then void it?

Seems that would help inflation (because we're printing money) while simultaneously also cutting the deficit at the same time in addition as well.

It's a no-brainer of a win-win.

Economists are stupid.

[ATTILA THE WIMP]

In order to get that much money to “buy back” all the U.S. Treasury IOUs that China has the Treasury would have to sell tons of Treasury IOUs to the Fed, the only body that can create FRNs out of thin air. The debt would simply be transferred to the Fed. That’s exactly why the Federal Reserve was created in 1913 so the U.S. can never get out of debt to the international bankers that own the Fed.

Also, the Chinese and other foreigners who would now have tons of USA cash would drive up the price of commodities such as oil to the moon. That’s basically what’s going on now because our IOUs pay so little interest that they do not pay real interest when inflation is taken into account which means our “interest bearing” Treasury IOUs are actually currency. China will continue on its asset buying binge and the price of commodities will slowly drift upwards despite any slow down in global commerce until such time as commodity prices explode due to yet more “quantitative easing.” Welcome to the New World Order and may the Cyclops eat you next to last.

[blunderdog]

I thought one big point of QE in the first place was that the treasury COULD print money without any backing.  IE: no Fed involvement.

[ATTILA THE WIMP]

No way, not in a million years. By law only the Fed (International Banksters) can create Federal Reserve Notes. That's the whole point of the 1913 law. That's why it says "Federal Reserve Note" on "our" currency. In return for notes that bear no interest (FRNs) the U.S Treasury must hand over notes (to the banksters) that do bear interest (Treasury IOUs). We are a cow being milked ... forever.

[blunderdog]

I'm at least a bit familiar with the premises.  More so than 90% of the US population, anyway.

The "real meaning" of stuff like this continues to elude me:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aE2E0CFl8PEU&refe...

[reckoning]

in july of 1963 president kennedy signed executive order 11110 allowing the US treasury to print "US government notes" backed by silver reserves.  this was the first time since december 24, 1913 that a US currency note was printed that did not have interest due at inception to the, as yet unseen and largely unrecognized true criminals of this entire matrix level event, private shareholders of the privately owned US federal reserve bank.  he was shot dead 4 months later, after about 4 billion dollars of US government currency was put into circulation. if you follow the money, it is not difficult to figure out who would benfit financially form his (un)timely death.  the first official act of the LBJ administration was to reverse executive order 11110 and recall all the currency printed under its direction.  perhaps LBJ had some incentive... and some very greedy and powerful "friends"...

be very careful suggesting to the sheeple that we just print our own currency... free from interest due at inception... as is laid out in the US constitution... a constitutional dictum that has never been amended, but is completely ignored... be very careful suggesting that we just simply cut the greedy robber baron owners of the US federal reserve bank out of their own massive daily looting of the american people with as simple a thought as "we should just print our own currency"...

that's the kind of out of the box, entrepreneurial, american revolutionary free thinking that could get you killed... or free us all... one of the two...

[Bob]

Very interesting.  Got any mainstream-level cites on the JFK-LBJ executive order business? 

Seems this could be an interesting plank for a "third" party platform--spreading the risk across a large group of people.  Sure, the Banksters et al would respond with an advertizing campaign with Hollywood production values and Madison Avenue targeting efficiency that would completely dominate the MSM, but that would open the door to low budget, Web 2.0-type counter-ads--think PC v. Mac.  At the same time, effective web-based "ads" could rule for a large proportion of the electorate as the clearly "cool" alternative . . . especially in an environment where coming elections are going to be explicitly controlled by virtually unlimited corporate funding. 

Stranger things have happened--I wasn't there, but something tells me nobody gave Jesse Ventura a chance in MN before that Big Surprise. 

Hell, I could see Ron Paul running with Nader if they could work out the social safety net thing.  A very big IF, but they agree on alot of other things.  That Free Enterprise bugaboo seems a deal-breaker at first glance, but it seems to me that ending the Fed is fundamentally in effect a plan for nationalization of the banking system, at least at the level where it matters most--printing of money and payment/collection of public interest.  Neither Paul nor Nader would have bailed out Wall Street. 

Just a thought.  Hopefully, it won't get me killed!  On that topic, though, slow death has its own steep downside, regardless of how long it lasts.   

[hugolp]

But this is fallacious. A central banks gives its benefits back to the government so in reality the government debt that the central bank holds is not real debt. The government is never going to pay it back and its not going to pay the interests. Its just an accounting trick.

[ATTILA THE WIMP]

No sir, you are wrong. Both the Fed and the Treasury do whatever they bloody well please. Check this out

http://www.reuters.com/article/idUSN0725372820090307

and this:

http://www.kitco.com/ind/willie/jul222010.html

They are really one entity because both are wholly owned whores of the New World Order and they both answer not to the American people or to our (defunct) Constitution but to the banking cartel headquartered in London. That’s why the UK government owns about 362 billion of our treasury debt even though the USA buys almost nothing from the UK. The Fed and the Treasury both operate outside the law and do whatever they jolly well please and if anybody inquires about what they do they are promptly told to go fuck themselves, although usually in very polite terms. Therefore you can’t truthfully assert that they “give benefits back to the people” or it’s all just a bookkeeping gimmick because no one is allowed to audit the books in the first place. Nobody knows what’s in Fort Knox and nobody knows what the Treasury or Fed really do with their money they have.

[hugolp]

I dont see nothing in those links that refutes what I said. If you are going to keep linking to articles, they should be meaningful, otherwise you are just wasting our time.

[reckoning]

the only central bank on the planet that has a mandate to return its proceeds (interest due upon printed currency) back to it's government (minus a paltry 10 cent per year dividend per share) is the reserve bank of south africa... and those 2,000,000 shares are open for purchase by anyone in the world who would choose to buy them...

all other central banks on the planet collect interest due (from purchasing IOUs from the treasury department) and distribute the proceeds free from any mandate by government... the distribution process is not disclosed to the people...

[Gonzalo Lira]

Good piece—solid on the details, and so very much appreciated. 

My considered analysis, after much elucubration, calculations, computer simulations and consultations with learnèd worthies is: We're fucked. 

GL

[Gonzalo Lira]

Collapse in Treasuries, moon-shots in commodities, and hyperinflation away we go!!

http://gonzalolira.blogspot.com/

GL

[sagerxx]

Good to see mah boy MH gettin' posted on ZH!  

[SDRII]

Ludicrous post

1. One suspects included in the President's morning briefing is an update on gold flows - if one were to surmise that gold is the only real currency then what  makes you believe that such a move could be controlled and that said option wouldn't have sudden and uncontrolled and unintended consequences? Merely look at the creeping bilateral yuan deals for a hint. The US isnt the only one playing and the US economy ex debt induced growth (operating EPS call it) is only "critical" so far as the long tail logistics engine is restarted.

2. Buying the "strategic assets" presumes a restart of the long tail logistics engine.

3. US devaluation has the immediate effect of commodity inflation thereby offseting (to some degree) the export gain with rising cost of energy imports. Further it exacerbates EM inflationary issues as poresumably the move to commodities would outstrip flacid intervention z(see dumb money post earlier today)

4. Note the muscular demonstrations in Okinawa, Japan preceding the South Korea sinking. One suspects a stronger a stronger yen - Govt already on record with an 85 level as the rubicon - might be just the the mix to reignite those sovereign passions. Then again Chinha is already loanding up on JGBs

5. Attempting to choke off the wage labor arb is nice idea in theory but a tactic requiring a durable long term US industrial commitment and strategy; both are lacking. Exactly who is the US going to export to as the trade war kicks into full gear (h/t Michael pettis who belives this is the logical next as the economic air war turns to ground warfare)? Isnt it the very reserve recyclcing that is buying all those Deere tractors?

6. ...enter the BRIC consumer argument...rinse wash repeat.

[Bananamerican]

" Attempting to choke off the wage labor arb is nice idea in theory but a tactic requiring a durable long term US industrial commitment and strategy; both are lacking."

must you be so blunt?

However, i'd settle for us milling around in panicked obesity for a few years while we "work things out"...We HAVE to sooner or later anyway lest we become mere Eloi

[NOTW777]

"US gold reserves have languished at a reported $11.041 billion for years"

thats a big assumption and based on a report from a government that has been lying on a daily basis.

[NOTW777]

http://www.kitco.com/reports/KitcoNews20100824DC.html

[Eternal Student]

The problem with all of Devaluationists' approach is that they assume that the other countries either don't exist, or that they are going to sit idly by and not do anything (like devaluing their currency). Such an assumption is beyond belief.

The author's approach strikes me as just more smoke-and-mirrors. It leaves intact all of the bad debts out there, and until these are resolved, no lasting progress is going to be made.

[Apostate]

Huh you actually do learn sometimes!

This can only work if the other central banks and China coordinate to inflate together. That worked in 2008/2009. But now the Germans, Trichet, and the Chinese have said "no mas" for the moment.

I suspect that the foreigners are building up their negotiating position by making the US look as impotent as possible for as long as possible. There must be concessions made before the US will be permitted to depreciate the dollar.

Unfortunately for the US, the elections make it impossible for foreign policy in this vein to happen. Honestly, the two-party system just isn't built to handle issues of any real import. I can't imagine leaders from either party discussing such a complex issue in an honest manner with the public. 

[tony bonn]

the central planning urge waxes odious and flatulent

[MarketTruth]

Ft. Knox has actual physical gold... free and clear of ANY obligations to other central banks or countries? When was the last full audit or quantity and fitness?

[Bananamerican]

i believe it was the 12th.....

[Quinvarius]

The Fed's only goal is its own hold on the monetary system.  Once you figure that out, you will realize that Japan style deflation has been the goal all along.  Everyone owes them money.  Everyone is screaming for them to print money.  They get to print as much money as they want and keep it for themselves and their banker buddies while pretending the money in their vaults is stimulative.  The money is control.  Once they have that locked down, they don't care about the economy.

[TimmyM]

Deflation is good. It raises the quaility of life for everyone with cash and income. It destroys everyone with debt or collateral.

We had a credit bubble. The music has stopped. If you have too much debt because you were a gambler, you cannot now find a chair.

This is justice. This is right and good and natural. Any asshole selling demon deflation is just a bankster wannebe.

All these remedies are just more crap. A strong currency raises my quality of life. A weak currency steals my savings, and puts it in the hands of bankster speculators and their numbskull economist apoligists.

Any questions?

[cathrynm]

"What if the intended stimulative effects of buying T-notes (cheaper borrowing, more bank reserves) are outweighed by deflationary expectations engendered by plunging yields?"

Oh oh oh.  Not sure about the rest of this piece, but this tidbit is tantalizing.  Could conventional wisdom be totally and utterly wrong?   This wouldn't be the first time.  (I gotta' think...)

[Miles Kendig]

Although the Fed's assets are mostly Treasuries, agencies, and MBS, it also holds international reserves -- meaning gold, SDRs, and foreign currencies...

Makes me wonder what the fed received as collateral from SocGen, Barclay's and other EUR institutions when it provided direct assistance via the discount window, AIG and other measures over the past couple of years.

[wintermute]

The whole point of this article is misguided.

Deflation is GOOD. Not a demon. Deflation improves living standards and encourages governments to run a balanced budget.

Karl Denninger explains it well:

"Deflation on a moderate scale is only bad if you're in debt.  Never mind that we've got it and have had it for more than 20 years in certain areas.  Who among the citizens is upset with deflation in technology, for instance?

Anyone remember the price of a color television 30 years ago?  How about a computer in 1981?  A calculator? A cell phone - oh wait, there was no such thing.  All of these things and more have undergone massive and continual deflation since their introduction.  We love it as consumers, because, well, we consume these things.  When our computer wears out we buy a new one that is both faster and cheaper.  Same with our cellphone.  Same with our color TV.

Exactly how is this bad?  It's not - unless you went massively into debt to buy the thing, at which point you got serious problems, as the debt has to be paid off for a product that is worth a tiny fraction of what you paid for it!"

Consider:

Inflation is a stealth transfer of wealth from the people. Deflation is stealth transfer of wealth from indebted governments and borrowers to savers. Savings are the foundation of successful capitalism. The Fed will bang on about how bad deflation is - but this is Orwellian propaganda. The Fed doing everthying it can to stop deflation is doing everything it can to preserve the banker and government aristocracy who suck the financial lifeblood out of the majority of the people - until 40 million need foodstamps to get by.

The Daily Bell has a good article here:

http://www.thedailybell.com/1121/Deflation-Is-Good.html

[lookma]

Well LDO in real money terms, which is what the author is advocating.  Fiat currencies structured like the dollar must inflate to service the debt, which is why they eventually die.

Inflation in fiat is much the the same as deflation in real terms (aka real money = increased purchasing power when fiat inflates and real money increases in value when priced in the fiat).

[Internet Tough Guy]

You don't need to buy gold to increase the value of your holdings. Just mark it to market.

[ZackAttack]

They should really think about, you know, applying all this effort to creating jobs and inflating wages.

So crazy it might just work!

[lookma]

As A FOFOA follower, its great to see others start to talk about/endorse what is in effect Freegold.

[lookma]

As a FOFOA follower, its great to see others start to talk about/endorse what is in effect Freegold.

[Gwynplaine (not verified)]

Devaluation acts like a tariff - lower imports, higher exports.  That's great for domestic manufacturing and resource extraction, but what would it do for the majority of the country?  We have a long standing national policy of outsourcing hard goods and limiting extraction.  This structure in place will not turn on a dime.   Most of the country is geared towards the service sector, and changing that suddenly could result in a severe dislocation.  It worked in the 30's because the US was already an export based country.

The only way out is to build up a large pool of private savings, then use that as investment capital for new businesses and job creation.  A devaluation would wipe out a good percentage of domestic capital, further pressuring the job numbers.  That's where the real action is.  I expect that foreign investors, after a devaluation, would be less likely to invest in US manufacturing.  They will not take the place of domestic capital.  So, even though business would boom for hard goods, the decline in the other 70% of the economy would more than offset the gain in one sector.

Creating savings would mean massive spending cuts, and I don't see that happening.  Devaluation is natural consequence, but it won't solve the problem.

[iPood]

Interesting idea, but IMHO, outright foregn currency purchases by the Fed would be the final nail in the coffin to spark the type of swift dollar devaluation that will not only stem deflation, but lead to hyperinflation.