Let's say that tomorrow morning, first thing, the American dollar gets converted to a new currency, the Amero. Milk used to cost one dollar per gallon, and now it will cost one Amero. That is fine, because starting tomorrow you will be getting paid in Ameros. If you used to make fifty thousand dollars a year, you will now make fifty thousand Ameros.

Here's the trick, though. Starting tomorrow, when the switchover takes place, it will cost you two dollars to buy one Amero. You can still buy milk with dollars, but it will cost you two of them instead of one.

What happens to that $20,000 in savings you had, that was supposed to last you a year in case you lost your job? It will now only last six months.

What happens to that $100,000 in debt you had? Well, it's still $100,000, but you can pay it off with fifty thousand Ameros. And hell, now you make that much in a year!

Who benefits from this? The federal government, which borrowed dollars when they were still worth something, and can pay it back with dollars that are now worth half as much as before. All the Americans with tons of debt.

Who gets hurt by this? The people with assets, savings and no debt. The ones who made smart decisions and were frugal and self-disciplined. Except that now, in this scenario, those no longer seem like virtues. Just think, you could have spent all your money and lived like the people on TV all this time. And why did you ever think you should work so hard?

But no one is going to feel sorry for you if you complain. After all, you had assets, savings, and no debt. You're rich!

None of this would surprise me. Every government program we have penalizes the hardworking and subsidizes the stupid. Something like this would only continue the existing trend.

>> The trend is not sustainable,

Oh, they've been saying that for years about Portugal, Italy, Ireland, Greece and Spain. Pretty soon they be saying that about Great Britain...

Seriously though, most of our friends have kids in high school. They are all middle to upper middle class, but the common thread amongst them all now is "how will we pay for college?" It's an interesting mix between unrealistic expectations (they all want Harvard or such) and not one of them sees their kid working his\her way through college. It's all about scholarships and student loans, aka borrowing and subsidies.

"It's all about scholarships and student loans, aka borrowing and subsidies."

Which is why the scenario I described above would not only allow the federal government to pay off a big chunk of debt, it would be politically popular as well. More Americans have debt than savings. They would love it!

Yeah, PJ, that's the classic South American financial regime: Rack up a ton of debt, and then inflate the currency so the money paid back is worth a lot less than the money that was borrowed. Thus hyper-inflation, where back in the 1970s, before computerized cash registers, grocery stores there would have employees with price guns continuously circulating the store and marking new prices on the items. The price of an individual item went up several times a day. (This is where Greece screwed up, from the tactical standpoint. Because they tied themselves to the euro, they can't hyper-inflate their way out of their current debt. California, are you paying attention?)

I read the USA Today article before I came over here this morning. I got an ironic laugh out of the leftist economist that they quoted at the end of the article, who basically said that falling private income means the stimulus is working! He then said not to worry about private-sector wages; they'll come back up once the stimulus has worked and the economy has recovered. "And then we can soak them with even higher taxes", he probably wanted to add... I really do think that leftists see the tax well as bottomless, and that there is no way to convince them otherwise.

PJ, The US has already done exactly that, and not so long ago. On August 15, 1971, President Nixon broke the link between the dollar and gold. The dollar's value dropped one-third overnight and 50% in the first 6 months since that date. This set off a worldwide inflation that made my work life suck in the 70's and early 80's.

The US at the time was struggling to pay the cost of Great Society programs and the Vietnam war.
Bondholders were intentionally repaid in cheaper dollars.

The best account I've ever read of these financial shenanigans was in the book "A History of the Cold War" by Martin Walker.

Government also benefits from deliberately created inflation through progressive tax rates.
As people struggle to keep up with the declining dollar, unindexed progressive taxes put people in ever-higher tax brackets.

And where real estate taxes are based on periodically reassessed valuation, state and local governments get automatic unlegislated tax increases.

Mike, all good points. Note that Nixon's action did have one good side effect: it re-legalized the private ownership of gold, which had been banned under FDR.

And yeah, I remember when people thought they were getting a good deal if they found a mortgage at only 16%. It created a huge gulf between the haves and the have-nots in real estate; the people who had bought homes prior to 1970 were sitting on gold mines (especially in California), whereas the people who had not couldn't afford to get into the market. I grew up in the 1970s and I was pretty well convinced as a young adult that I would never be able to afford to buy a home. And looking back, that 1970s market was where the trends started that led the real estate market to the sorry shape it's in now.

Thanks, Mike, for saying 1971 wasn't that long ago. I was born in 1970 and now I don't feel so old! Of course that also explains why I have no memory of 1971.

I don't remember what interest rates were doing in the 1970s, but I remember my parents talking about it. What would have happened if real estate interest rates had simply remained high? My guess is that it would have kept the price of homes low, and a lot of people would have taken their extra money, stuck it into money markets (or wherever they could earn those high interest rates for themselves), and then paid cash for a house when they had enough.

And why didn't competitive forces drive interest rates back down?

It irritates me that all these sucky things happened right around the time I was born.

It's all Greek to me. :-)

@Pirate Jo: I would personally put the dollar back on the gold standard. However, it would need to be convertible to gold at 1000 dollars an ounce or so. If it was convertible at 20 dollars and ounce, or even 35 dollars an ounce, given that our gold supply has limits, you would probably see horrendous deflation that would render everybody unable to pay off their loans.

A quick description of a Fiat Currency is one that is not tied to a commodity (i.e. gold, silver, grain, etc.) but is only backed by the full faith and credit of the issuing government.

That means that if the government that issues the currency goes down, they (and their progeny) still owe the money, but now it has to be paid back in the form the receiving entities will take.

So if we owe money to China and the dollar was worth 7 Chinese yuan = 1 U.S. dollars when we borrowed it, but we are no longer are "creditworthy" so the conversion rate is now 2 Chinese yuan = 1 U.S. dollars, when we repay the $500 dollars we borrowed it will now take about $1750 to pay it back (precluding interest).

A good example of that is what happened to Haiti when it revolted from France many years ago.

PJ, I remember 1970 perfectly well, so thanks for that old comment... Seriously, as for why competitive forces didn't drive interest rates back down: I'm not totally sure myself, but the basic narrative as I understand it goes like this. Inflation was really bad in the early '70s because taxes were going up, and a combination of union activity and rapidly expanding government regulation was causing productivity to go down. The Fed responded by adopting a tight-money policy to try to keep inflation in check, and that made interest rates go up. And, keep in mind that a lot of the money-moving technology that we have today didn't exist then, so that market inefficiency further magnified the effects of tight money.

(The Fed's policy didn't work because the federal government kept tightening the regulatory screws on industry. The result was the Carter "stagflation" era, where prices kept going up while wages remained flat, and there were all kinds of consumer-goods shortages because government wouldn't let the market set prices.)

I'm not clear on why the high interest rates persisted so long through the 1980s; it wasn't until about 1989 that rates really started to move back towards traditional norms. The Fed was still maintaining a fairly tight-money policy, but I don't think that tells the whole story. Part of it may have been all the credit soaked up by the early-80s savings-and-loan crisis; the cost to clean that mess up was about $500B in 1980 dollars, so you can see the impact of that.

Cousin Dave said:
> as for why competitive forces didn't drive
> interest rates back down: I'm not totally sure
> myself

It's because interest rates are set by the Fed and not by the market.

When they[our governments, local, state, & federal] tax everything, then we have nothing.

You can quote me on that.

Robert for President.

This is the same thing that killed Rome. Tax shortfalls "had to be" made up by artisans. It only took so long because market communication was slower across the Empire.

Y'all who talk about a gold standard can quit. There isn't enough to back "currency" in circulation, much less the derivatives, such as futures based on contract income. Not even at a million $ an ounce.

"taxes were going up, and a combination of union activity and rapidly expanding government regulation"

So it was just like now, in other words. Great.

At some point nobody will want dollars, nor will anybody lend, at any interest rate. You can give food stamps and welfare checks and paychecks, but nothing will be produced. Blame the farmer for no food, and he'll say I can't buy gas for my tractor. Blame the oil company, and they'll say the Saudis won't take dollars, because they are worthless.

A hundred million welfare recipients don't produce one car, or pair of shoes, or loaf of bread. The government doesn't make anything. You can't drive a TSA screener, nor ride a HEW official, nor wear a FBI agent, nor heat your house with a customs inspector.

It's unsustainable, so it will end.

Mark - you're wrong about one thing: customs inspectors (and all other government employees) are flammable, and therefore can be used to produce heat.

Pirate Jo, there is no need for a new currency. The same effect can be produced by simply inflating and devaluing the existing currency. This redistributes resources from savers to borrowers, as the saver's money is now worth less while a borrower's debts are also worth less.

Countries usually only produce a new currency when the old currency has collapsed in value and become unworkable. Then they say, 'okay, you can trade $1000 of old money for $1 in the new currency'.