The Fed\'s Secret Weapon
 

With all the epic discussion on monetary policy and its far reaching effects into the economy, I have been thinking of the unthinkable. That is, an utter collapse of the currency. It is conceivable that the circumstances might exist one day for the fed to lose its grip on control of the fiat dollar system.

We are far from those circumstances now. A lot, and I mean a lot of earthshaking, changes would have to transpire for the situation to reach these circumstances, but there is a possibility. Even with the collapse in the sub prime lending market and its ripple up the mortgage food chain, there are still economists out there who take the position that there is a boom in the making after the fed cuts rates to stem the tide of lenders who cannot balance their finances in the face of increased dollar costs.

The gold bugs, on the other hand prey for armageddon. They secretly hope that the dollar will begin a death spiral brought on by banking collapse, dumping of dollars into the US market by foreign holders, runaway inflation, surging energy prices, etc. I have read estimations that under such circumstances, the dollar would fall so far that gold would be worth on the order of $50,000 an ounce. Conservative estimates would put the short term from $3,000-$5,000 after a sudden seismic shift. All else being equal, I'm sure gold would only still buy you a suit, a hotel room for a night, and a good meal if you had an ounce of it. The investor, however, would be able to eliminate masses of debt after such a revaluation, and thus the appeal.

But, what would the fed do? Suddenly, the power to control interest rates would be only a random force in a stormy sea.

It dawns on me that I have already witnessed the use of this in my lifetime. But, it was quiet and hardly anyone noticed.

The fed would reissue the dollar.

Large holders of cash would suddenly find their stockpiles worthless. Citizens holding currency in domestic banks would suddenly find themselves holding equivalent new dollars and all that funny money being hoarded by foriegn governments would be completely useless.

This has already happened with the $100, $50, $20, $10, and $5 bill.

Holders of cash would have a big problem if the currency suddenly changed color. They would have to divest themselves of their dollars by spending them and getting new dollars back in return.

This would have the effect of getting everyone to do business with each other again. That is, after all, what the fed is for.

Re: The Fed\'s Secret Weapon
 

Secretly?

Re: The Fed\'s Secret Weapon
 

I read this post three times and I can't understand:

1) How reissuing the dollar would combat uncontrolled hyperinflation.
2) What your are saying reissuing the dollar would do to combat uncontrolled hyperinflation.

Re: The Fed\'s Secret Weapon
 

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Large holders of cash would suddenly find their stockpiles worthless. Citizens holding currency in domestic banks would suddenly find themselves holding equivalent new dollars and all that funny money being hoarded by foriegn governments would be completely useless.


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Unless I am mistaken, most of the "money" being held by foreign govs are in T Bills.

But anyway, the strength of the dollar has been its attractiveness because foreign banks could redeem it for gold up till the 70s, and traded for oil since then. Reissuing that you would destroy the economies of saudi arabia which uses Dollars as reserves, and China who holds masses of debt. The new dollar would be as worthless as the old dollar had become.

Re: The Fed\'s Secret Weapon
 

are you referring to the plan to go the "amero"currency for north america, much like the euro supplanting european national currencies?

Re: The Fed\'s Secret Weapon
 

I think answering the 1st question answers the second.

Reissuing the dollar would destroy the value of large hoards of cash, effectively lowering the money supply.

Re: The Fed\'s Secret Weapon
 

I'm not sure about the T-Bills. I have read that foriegn banks hold vast vaults of $100 bills. Sometimes, this is to back up a local currency.

I don't think that the new dollar would be as worthless as the old. You have to bear in mind that oil would still be traded for in dollars. New or not, The US would still guarantee the security of the largest oil producing country (Saudi Arabia). Also, much of Saudi Arabia's reserves are held in US banks. I'm sure that their dollar holdings would be converted quite readily.

As for China...Recently the Chinese have made threats to undermine the value of the dollar by flooding the market with their $1 Trillion of reserves. If the currency was reissued, this would destroy their ability to destabilize our currency. That wouldn't be a bad thing, in this scenario. A remonitization of the value of foriegn reserves would severly limit one country's ability to affect the value of the new currency.

Re: The Fed\'s Secret Weapon
 

Wouldn't such a tactic hurt or ability to trade with other countries? Seems to me that they'd be pretty wary about exporting stuff to us if we show that the dollars we pay them with may not be worth anything the next day.

Re: The Fed\'s Secret Weapon
 

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I'm not sure about the T-Bills. I have read that foriegn banks hold vast vaults of $100 bills. Sometimes, this is to back up a local currency.

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If this is true, when they start buying gold with their vast horde of $100 bills, we will know that the [censored] is about to hit the fan, won't we?

Re: The Fed\'s Secret Weapon
 

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Reissuing the dollar would destroy the value of large hoards of cash, effectively lowering the money supply

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Huh? Nobody will be hoarding cash in hyperinflation.

If you are suggesting they decide not to honor the dollar anymore no one is ever going to accept the new dollar. And they certainly will pick something else to trade oil.