October 07, 2009

So, What if the Dollar Fails: Simple Breakdown

I am not an economist but I have tried to make myself understand what it would mean for the dollar to lose its credibility. We have to start with a little history.

1. After WWII we were the ONLY industrialized nation whose economy was functioning properly. In a very real sense, we rebuilt Europe.
2. Nations historically have paid their debts using Gold. Gold is a rare substance; there is only so much in the world, and that is one reason it has always been used as currency. So after WWII all the nations of Europe and really the world were broke from the war and they were buying everything that they could from us (using gold). We told them that we would hold all their gold and to make trade really easy
everyone could just use the dollar. Gold is difficult and dangerous (theft) to transport and really for the amounts of money that were being traded it was no longer working all that well. So we got almost all the Gold and everyone else gets to use Dollars. The de facto currency of world trade is the dollar and oil among other things, is only traded in dollars (for now).

So what does it then mean if other countries dump the dollar?

Imagine that the world is a community. Imagine that each country is a business in this community. Let's say that the United States is Wal-Mart. Every business in the United States lists prices in dollars. So each store has gift cards. Now imagine that Wal-Mart was so large and profitable that other businesses begin using Wal-Mart gift cards (Wallybucks) as cash instead of Dollars (gold). ---–that is all a real Dollar is, a gift card redeemable for stuff in the United States, except everyone has agreed that they will also redeem the United States’ gift cards because they are as “good as gold.”—(back to our scenario)

It all starts falling apart.The result of this is that Wal-Mart ends up with all the dollars (gold) and the rest of the stores end up full of Wal-Mart Wallybucks. Everyone is happy because Wal-Mart is huge and insanely rich and they PROMISED that they would not ruin their Wallybucks. In our little imaginary world Wal-Mart then begins to mismanage things. They open too many stores and they pay their people too much; there are way more people employed in management than there are employed as workers. They begin to give their employees insane perks like everyone gets a new house and a car. They borrow lots and lots of their own gift cards from other people to pay for things they want to do in their stores like repainting things and buying bigger shopping carts. They start giving ice cream cones out to every shopper. Slowly Wal-Mart profits cannot keep up with their spending and are not enough to meet their debts but they just keep cranking out Wallybuck gift cards (because they can). Soon, other stores start to notice that Wally world gift cards are not worth quite as much as they used to be because Wal-Mart's stuff is not worth as much as it used to be. So Target, Sears, Starbucks, Barnes & Noble, and Walgreens get together and they say... “Not too sure about still honoring those Wal-Mart Wallybuck gift cards. Let's just go together and make a Unibuck and we can all honor each others Unibucks but not Wal-Mart’s Wallybucks any more”. As a result of that everyone everywhere who holds Wallybucks that used to be “good as gold” everywhere , now just have…store credit at Wal-Mart. Blah, everyone hates having Store Credit. Store Credit is not as good as Cash. Wal-Mart gift cards are now only good at Wal-Mart meaning that Wal-Mart has tons of gift cards out there that used to be traded to everyone and now they have to honor all that outstanding debt obligation because they are the only store still redeeming Wallybucks. They cannot possibly cover that debt so what are they to do?
They either have to artificially raise prices to make it take more gift cards to pay for products. They cannot do that because then no one will ever shop there; or, make 20 Wallybucks not be able to buy what it did yesterday, or twenty seconds ago. Let’s say that 20 Wallybucks are now worth what 2 Wallybucks would have bought last week.

So everyone has truckloads of Wallybucks but Wallybucks are not worth much of anything anymore; now Unibucks are much more versatile and you can use them anywhere. All the other stores get richer while Wal-Mart fails.

But everyone says, hey but Wal-Mart has all the dollars (gold) because that is what the other stores traded to Wal-Mart to get the Wallybucks, and that is right they do. But who will set the price of the dollar (gold)? The people who have the new Unibucks will. They get to decide how much one dollar is worth in Unibucks. And realistically by this time Wallybucks (Dollars) are not tied to Dollars (Gold)anymore because president Carter suspended that indefinitely in 1971. ---We have what is now called a fiat currency, which means that it is worth something because we say so and people trust Wal-Mart (United States)---

Make sense? If other countries dump the dollar then our gold won't even be worth as much. And if you get stuck holding dollars instead of the new currency it is worthless.

But maybe you are thinking.. The downfall of the U.S. will also cause other countries to lose value... I thought about that too. We have the largest economy in the world. So if we are not able to buy then other countries will not be able to sell. Aha! Remember and realize most other countries are either dictatorships or socialists of one stripe or another. Most of them do not work under the assumption that wealth is created and not distributed. So, naturally, they think that a failure of the United States will ultimately lead them to greater prosperity. They believe that there is only so much wealth in the world and we have too much of it. We have more than our "fair share". Now I hope that anyone who reads this sees the ridiculousness of this notion when applied to my little scenario, but it is exactly what Obama is peddling. That “it is better when you spread the wealth around.” Anyone with any critical thinking skills can see that if we fail, so goes the rest of the world.

Which brings me to that place I always hate to go. Why, as Alfred would say, do they “just want to see the world burn?” Because they want to REMAKE it. They I am King of the World Ma!want to break all the toys so that they can get new ones. They want to be able to get CONTROL. They do not want to change the rules; they want to create a new (very old) game. That is the only logical reasonable outcome. It is literally enough to keep me awake at night writing stories about Wallybucks…


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