As we enter 2009, many if not most agree that the US economy is struggling, and that these struggles will continue. An increasing number have been making comparisons to the Great Depression. With that in mind, let's compare and contrast the situations:

Similarities

1. Both were preceded by an extensive period of credit-fueled bubbles. Before there was the Great Depression there was the Roaring '20s; likewise, before Depression 2.0 were the Greenspan NASDAQ and housing bubbles. Consistent with Austrian business cycle theory, the end result of a credit-fueled bubble will be a corrective recession that purges out the malinvestments resulting from an excessive expansion of the money supply.

2. Both were marked by government interventionist policies designed to prevent falling asset prices. For instance, bans on short selling occurred in 2008 and at the beginning of the Great Depression. Likewise, stimulus packages were the prescribed remedy at the onset of the Great Depression, and are in vogue once again now. It's worth noting they were unsuccessful back then, and don't appear to be succeeding now.

Differences

1. There is a lack of a gold standard, which serves as a restriction to how much the money supply can be expanded. The dollar was devalued relative to gold during the Great Depression, so there were attempts to circumvent restrictions on the money supply, but ultimately the gold standard was not fully abolished until 1971, and so the Federal Reserve was a bit more restricted in how much money it could create. This restriction does not exist today.

2. America was not as debt-ridden during the Great Depression as it is today. Credit cards are a rather new creation, and the national debt and deficit spending were significantly lower.

3. America's debt is owned largely by foreigners. This introduces the possibility of economic warfare; foreign debt owners can devalue the dollar by selling Treasury bonds as well dollar reserves.

4. All major currencies are fiat currencies, and the US dollar is the world's reserve currency. This helps the United States in a way, as central banks have been inflating their money supply along with the US dollar to maintain parity of sorts. In this way, the US gets to export its inflation.

Conclusions

1. Because of the similarities, it is reasonable to expect asset prices to continue falling in real value. It is easiest to define "real value" as the price in gold; in other words, assets will fall relative to the price of gold.   

2. Because of the differences, currency devaluation, as seen in Argentina in 2001 and Iceland in 2008, is much more likely. Those who argue for deflation and a scenario similar to Japan are not considering that the Federal Reserve under Bernanke is willing to use unorthodox measures to inflate; Japan was more cautious, and did not heed the recommendation of economists like Paul Krugman, who had called for the Bank of Japan to fully monetize Japan's budget deficit by simply creating more money. As there are no restrictions on the Federal Reserve to expand the money supply as it pleases, currency devaluation is more feasible. Moreover, unlike Japan and like Argentina and Iceland, the US is a debtor nation -- not a lender. This increases the likelihood of a run on the currency, which will result in significant currency devaluation.

3. Because of the US dollar's role as world reserve currency, other economies may try to devalue their currency along with the US dollar to avoid the pain and chaos of decoupling. This would result in the value of all fiat currencies falling.  

4. Depressions that are purely deflationary, like Japan and the Great Depression, last significantly longer and can be characterized by reversals that last for years. Inflationary depressions, though, have a much sharper and harder fall, and thus do not have genuine rallies until currency stability is restored.

5. While zero percent interest rates and quantitative easing are the tools currently being utilized, should currency devaluation begin to be an issue, raising interest rates will be the most likely and most effective way of preserving the US dollar's value. Paul Volcker's policies during the late '70s and early '80s are a historical precedent in this matter, and interestingly enough, Volcker has returned as an economic advisor. Should interest rates rise, this would likely send stocks falling.

6. Should foreign currencies devalue along side with the US dollar, gold and silver should rise. Should foreign currencies decouple, the US dollar may fall relative to them.

Disclosure: Long gold and silver.