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Stranger than Fiction

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What I am about to describe still in my mind has a very low probability of happening, but because it is now "not zero", I want to describe what is called a two-tier currency system. I do this in the name of awareness and education. I want to re-iterate that this situation as it applies to the dollar is still a very low probability, but one of our jobs here at Minyanville is to make our readers aware of the possibilities, regardless of how remote.

Let's pretend there is one person living in the U.S. and only two people living in the rest of the world (this is because two thirds of our currency is held outside of the U.S.). Let's now pretend that the U.S. government institutes a two dollar system: one dollar, let's call them "pink" dollars, for the person living in the U.S. and another, let's call them "green" dollars, for the two people living outside the U.S. The green dollars are already out there, so the "Two" don't have to do anything, while the "One" must go to her local bank and exchange her green dollars for pink dollars.

One will not be allowed, as required by the Federal government, to spend her pink dollars anywhere else but inside the U.S. If she wishes to travel abroad or buy anything from the Two, she will have to then exchange her pink dollars for green dollars. Likewise, the Two will not be allowed to spend their green dollars inside the U.S. If they wish to travel to the U.S. or buy anything from One, they must exchange their green dollars for pink dollars.

The first thing you might notice is that there won't be much demand for pink dollars. The Two certainly do not want them and they are only good for One if she spends them inside the U.S. So the first thing that would happen is that the prices One pays for goods produced outside the U.S. would skyrocket in her terms. At the same time Two's green dollars being much more valuable would buy much more of One's services.

The result would be for the nominal value of U.S. imports to fall and that of exports to rise significantly. The trade deficit would be wiped out in a short period of time. This, however, would be done at significant expense to One's net worth: everything that One owns is priced in pink dollars, which would be worth significantly less than the old green dollars she used to have. One would pay much more for things like energy.

Two would probably still be willing to hold and buy the debt of the U.S. After all, when they are paid back they will get green dollars, which aren't like those cheap pink dollars. And here lies the reason for instituting a two tiered currency system: there would be a significant reduction in the trade balance of the U.S. and an increase in the U.S. savings rate, without the prospect of foreign holders of our debt dumping their securities.

One should buy gold you say, that way when this system is instituted One can just exchange gold into the pink dollars and never realize that initial "loss" of value. That would be true, but what if the U.S. government made it illegal to own gold or exchange gold into pink dollars (they can't do anything about the green)? Preposterous, they would never do that you say!

Well they have done it: in 1933-1934. And Argentina instituted a similar two tired currency system two years ago, necessary because of heavy deficit spending.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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