Economics - Monetary - Logic puzzle

[Riddick]

Scenario: Beginning tomorrow, everyone in the US wakes up to find he or she has a US Dollar printing machine in their home or apartment that can print $1 through $500 denominations, and, to boot, he or she has a nearly unlimited supply of authentic paper and ink to print on.

Shocked and frustrated, the federal government throws its hands up and says "Well, let's just see what happens!"

Question #1 What will go wrong? (What will the effects be?)

Question #2 Why? (What will cause the effects?)

Question #3 What ways can the problem(s) facing society and its economy end up being fixed? (Government or not)

[chezlaw]

er, no-one will sell anything for dollars because they have no need for them.

So the dollar becomes immediately worthless and you'll have to start bartering or using Euros or yen or something 'till the fed changes the currency.


chez

[Riddick]

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er, no-one will sell anything for dollars because they have no need for them.


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Except for creditors who must accept the US Dollar as payment of debt.

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So the dollar becomes immediately worthless

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I don't know about immediately. How long does it take people to realize their dollar, in the future, will be worthless?

[chezlaw]

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er, no-one will sell anything for dollars because they have no need for them.


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Except for creditors who must accept the US Dollar as payment of debt.

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So the dollar becomes immediately worthless

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I don't know about immediately. How long does it take people to realize their dollar, in the future, will be worthless?



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Yes everyone who has dollars including creditors who can't refuse dollars is going to be very sad.

It would be very fast, you might offload a few if you're quick enough. I don't know how to estimate how fast.

chez

[Riddick]

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Yes everyone who has dollars

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Bear in mind two things as well - that a) many of us new minters wouldn't even have dollars to begin with, and b) over two thirds of all US dollars are held overseas.

Another fact - the dollars in circulation have more than doubled in the last 10 years.

[chezlaw]

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Yes everyone who has dollars

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Bear in mind two things as well - that a) many of us new minters wouldn't even have dollars to begin with, and b) over two thirds of all US dollars are held overseas.

Another fact - the dollars in circulation have more than doubled in the last 10 years.

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It doesn't matter that the new minters don't have dollars. the important point is that they won't exchange labour/goods for something they can just print off (I'm assuming that's pretty easy).

A new dollar might emerge which disallows notes <= $500 but I think that would require fed intervention.

chez

[Siegmund]

Returning to the OP's post for a moment...

"What will go wrong and why?"

Goods and services have some amount of value to their creators and consumers. These values are not fixed numbers of dollars; rather, we use money as a bookkeeping device to help us weigh the value of items, relative to each other and to our own purchasing power.

One simplistic answer, not too far from the truth, is that the values of goods, in terms of *the fraction of dollars in circulation*, ought to remain constant. Printing more dollars has no impact on total wealth. Twice as many dollars in circulation = everything costs twice as many dollars to buy.

If people used their presses in moderation, we might just see a period of rapid inflation. More likely, we'd see a hyper-inflation sort of like post-WWI Germany or post-WWII Argentina, where, while money did not quite become "worthless", the usual concepts of financing (buying on credit, borrowing money at a fixed interest rate, assuming a dollar's buying power stays approximately constant over a time scale of weeks or months, etc) will go out the window.

[chezlaw]

hyperinfaltion where $500 becomes worth almost nothing is possible but it usually starts relatively slowly and the econony is devestated along the way.

Here you have a more or less instantaeneous problem when no-one is going to part with goods or labour for any amount of dollars that anyone could conceivably have access to. So if you want to buy anthing then you better have acess to something someone wants like goods, labour, gold of foreign currency.

The fed not intervening is implausible and I guess if that was the case then a lynching would take place.

chez

[evolvedForm]

There will be a vast shortage of bills under $500 [img]/images/graemlins/grin.gif[/img]

[Lestat]

<font color="blue">Question #1 What will go wrong? (What will the effects be?) </font>

The entire country would shut down within days. This would be worse than any terrorist attack. At first, there would be gluttony of spending as consumers bought as much merchandise as they could. However, soon afterwards even the most basic products would be in disasterously short supply. Partly from rampant inflation ($10,000.00 for a tube of toothpaste?), but also from no one having any reason to show up for work. Companies would shut down. Manufacturing would grind to a halt. However...

I believe that slowly, things would return to somewhat normalcy as the market adjusts. Prices would start reflecting the amount and time it takes to print money. Eventually, it wouldn't be worth it for people to print their own money. They'd be better off returning to work.

Some things the government could do would be to raise interest rates (1000%apr?). They would increase income tax rates dramatically (close to 100%?), and unleash huge amounts of government bonds.

I'm definitely not an economist. It will be interesting to hear what any experts say.

[edit:] I haven't even thought about the overseas ramifications, but of course, there would be many.