by John Galt
August 19, 2009
A question I get quite often in my email is “When will we see the Amero?” The other version, which is of more validity in my opinion, is “When will they replace the dollar?” The latter question appears to have the idea that with the massive debt we have accumulated that at some point the United States will have to worry about either a debt repudiation or imagine this (gasp) paying it off. The government has indicated that it has no intention of slowing down the rate of spending and foreign governments are very nervous about investing in the U.S. because they realize that there is no possible way we could ever pay off all of this debt in our lifetimes. This brings up the idea of a dual currency regime where “domestic” dollars (referred to now as USDD) would be used inside the United States and its territories only and “new” dollars (NUSD) would be used for debt service, international exchange and overseas business and tourism. In this brief entry, I shall attempt to offer my opinions on this practical yet dangerous solution to our ever expansive domestic debt problem without getting technical or offering esoteric theories on dual currency theorem.
Believe it or not, there have been numerous papers and discussions on this very subject but not within the use of the dollar being the bifurcated currency within the United States. The analysis has almost always been from the perspective of a foreign nation or emerging economy using the dollar and or Euro as a secondary currency in addition to a domestic issue of their own. Within this perspective of the United States attempting such a split, I deliberately chose the incorrect spelling by using the word “dualing” to indicate a dual dollar system where the American citizen bears the brunt of what would be a near final course of action by our government.
With that being established, one has to accept the word of David Walker, the former Comptroller General of the United States, where he has repeatedly warned that the United States was rapidly approaching the point of no return where revenues generated would barely be able to service the debt but never pay it down provided the spending was frozen in 2007 and no expansion of government programs would be allowed to take place. Granted, I have liberally paraphrased what he said but in summation it is now 2009 and we are continuing to expand our annual deficits under the new administration and creating new programs that are not revenue neutral but in fact forcing the issuance of record amounts of Treasuries to borrow from the domestic and foreign markets to insure that the debt is serviced the programs would continue to have ample funding, regardless of their negative economic impact.
The solutions beyond hyperinflating the currency are numerous and obvious to traditional Keynesian economists but since I am neither a disciple of Keynes nor one who approves of the current administration’s economic policies (nor Bush’s I might add), the phrase that I coined about “thinking outside of the box before you find yourself in one” applies to this paper. The monetarist theory would indicate that eventually the United States will have to begin a rapid monetization of the national debt along with a massive monetary inflation, far beyond what we have witnessed thus far, to maintain the appearance of solvency. It is my idea that the alternative solution of dual dollars could be presented where the hyperinflationary conditions are confined to the domestic markets while the international creditors are serviced with payment in full by what is perceived to be “whole” fiat dollars.
First, let us look at the exchange rates that the American people would possibly endure along with the restrictions on the monetary exchange for the international dollars or NUSD’s. The NUSD’s would be restricted to ownership only to American citizens with confirmed international business, investment or tourist plans and require a temporary or renewable license agreement to obtain and use. The Internal Revenue Service would be used to enforce this policy along with the Secret Service which would set up the prosecution regime and structure for criminal penalties. From a civil point of view a tax for exchange would also probably be added to any citizen’s request for internationalized dollars (NUSD) or a foreign currency. So imagine wishing to exchange the old currency (USDD) for NUSD then converting that into a foreign currency would probably entail a tax rate of 10-15% per every $100 old dollars exchanged. That will chill some small international business enterprises and tourism but not the multinationals nor those who are prepared for such a new currency system.
The basic domestic exchange rate would probably start out in the 2:1 to 4:1 range, fluctuating with supply and demand issues and reset as needed with each joint meeting of the Federal Reserve with the U.S. Treasury which would almost have to occur quarterly. A domestic currency board which establishes weekly resets for the exchange rate between the domestic and internationalized dollars would have to supplant and enforce the edicts of these meetings. Thus the average American citizen will experience an almost immediate 50-75% depreciation in their own holdings immediately and the inflation problem impacting the average America household overnight. Thus while the NUSD might have an internationally agreed upon exchange rate of $1.50 NUSD to 1 Euro, the domestic dollar would be closer to $3 USDD or $6 USDD to the Euro depending on the domestic exchange rate for that week, month or quarter.
The bonus to such a program is that it would force an almost immediate redevelopment of domestic industries to service the American consumer but the interim inflationary impacts while industry returns would destroy savings, retirements, and households to a point resetting our standard of living back to an early 1920’s or possibly 1890’s level. The key thing to remember is that foreign governments might be satisfied as the United States would cease exporting inflation to their nation’s economies and internalize our own foolish policies to mitigate the impact of our domestic debt loads.
Secondly, let us consider the impact of the NUSD on international trade and debt servicing. The USDD would insure that the brunt of the inflation tax was borne by the citizens that authorized and encouraged the expansion of our government to almost one third of domestic GDP and soon close to three quarters of the GDP in years to come to service the debt load. As American citizens traveled abroad, the new currency could easily be issued as a credit card type of instrument which could be used at foreign exchange offices when physical cash was required for commerce. There would never be a paper “issuance” of the new currency, only an electronic version to insure strict controls. The average U.S. citizen would return home and by law forced to exchange all foreign currency and NUSD credits at the U.S. Customs offices in airports and receive a new card back in exchange or old script for domestic purposes only (USDD) once an appropriate servicing tax is extracted during the exchange process.
The foreign holders of our debt would be satisfied with such an arrangement provided their governments along with the intentional banking community were included within the design aspects of exchange rate protocols for businesses using the NUSD along with tourist and travel exchange systems. Sadly, any new debt would have to be issued in the NUSD denominated instruments causing the American people holding old Treasury instruments to bear the brunt of the pain for exchanging grossly devalued bonds and notes in for old dollars, thus adding to the prospects for expanding domestic inflation while shielding foreign debt holders.
The NUSD would have limited issuance and be managed with the domestic Federal Reserve/Treasury boards along with a coordinated G10 group of central bankers that would bless the size and scope of the new dollars to insure their holdings are not diluted. The domestic board aspects would end up eventually creating more dollars akin to their current rates of monetary expansion to assure the public that they were being treated fairly and the currency was still viable for domestic commerce. Sadly, it will wipe out several generations of Americans financially to achieve this nirvana for the central bankers and limit the ability of our average citizens to travel freely abroad and enjoy a decent standard of living.
The problems with this dual dollar system are numerous and the political dangers are obvious. With a domestic control board for the USDD, the dollar would easily be expanded in volume for political needs based on the time of year or if elections are coming up soon. Benefits programs would continue expanding infinitely and the importation of goods and services would become prohibitively expensive for most citizens. While the rest of the world might pay $3 NUSD per gallon for gas, domestic prices would probably end up in the $12 USDD range for example. Wages would end up being managed by the same board or subsidiaries of the Department of Labor to insure that the average citizen can keep pace with the weekly decisions of a currency adjustment board. Thus you get some idea of the dangers from a domestic policy aspect since the lack of self control and discipline we have failed to display since 1971 would still continue on unabated and the taxation via inflation would proceed forward as it has since that the gold standard decoupling engineered under Nixon.
Is this the solution that the world banker’s discussed last year in their secret meetings in Paris? Who knows. I shall not go tinfoil but the explanation from my perspective to answer the question of how a dual currency might work is now laid out for the world to see. Unfortunately it does seem like a practical short term solution (by short term I mean a decade at most) which allow the American public to eventually decrease the current national debt load should borrowing be restricted via a dual dollar system. The domestic bond auctions would become coveted events until the “investors” realized that a 20% 2 year note was only equal to a 4% NUSD 2 year note and the destructive inflationary nature of a dual currency system caused what was left of our domestic capital to flee overseas, even eating the penalties involved. Regardless of that the theoretical outcome or ideas presented here, eventually the U.S. government will impose capital controls to attempt to service the domestic debt load as deflation and default are not viable alternatives due to the policies pursued since 1971. Never in history has a central bank with control over a fiat currency system ever defaulted on the national debt and thus the likelihood of some sort of inflationary outcome one way or another. I hope this answered the questions of my readers and gives one some pause as to the absurd solutions we might see in our immediate future.