If US currency is rebased, what happens with my cash, debt, etc?

[Going Galt]

On today's show, Jack mentioned the possibility of a rebasing of the currency in the 2012+ time frame.  I'm trying to figure out what exactly this would mean for my own finances. Now, hyperinflation I think I understand well... my cash would buy less but I'd also have less debt, and any PM's would go up in value (at least relative to the money if nothing else).  But, I had not ever pondered a "rebasing" before. 

So, what does it really mean?  If I have a few 10's of thousands in my checking account as a buffer in case I'm unemployed, does that cash become worth less?  I'm guessing it does, but how exactly and is the reduction in value instantaneous (i.e. can I see it coming and react somehow)?  What about my debt (which is a mortgage that now approximately equals my home value, plus an auto loan) -- does that also effectively reduce how much is owed, or are they going to screw with us somehow so that the banks get bailed out again at our expense by somehow keeping up the value of the debt?  And, PMs would still be worth more, right?

Even though I could pay off my auto loan now in full, I'd then have no checking balance left, and I'm nervous about being without a job, so I rather like having some cash.  So, my plan is to build up to around $40,000 buffer of deposits in checking account before I try to fully pay off the auto loan.  And, hopefully I'll have that $40,000 plus the loan paid off before any rebasing happens... but if it happens, where is it best for my money to be?  In checking, or paid off an auto loan?  (Please don't say PMs... I have enough of a percentage of those relative to everything else that I should not buy any more.) 

And then of course there's my slightly underwater mortgage, which I expect will be even more underwater... I'm keeping the option open of halting any mortgage payments the instant I learn of unemployment.  I'd rather eat food than make mortgage payments for a house I'll eventually lose anyway.

[MTUCache]

So... theoretically.... yes, if the currency is re-based and is worth a different amount than before, that would impact all of the balances on everybody's books equally. Money owed to you would be worth less and money owed by you would also be worth less. If the $10k in your checking account is now worth one candy bar and you owe $150k on your house you should be able to pay it off with fifteen candy bars. That's the theory of how it would work...

In practice? The government isn't going to just let that happen naturally. Just like we've always seen with the velocity of money, those who are closest to the trough get the most benefit from any fiscal change. Those further away end up getting crapped on before they can see those benefits. The government has the "best interests" of certain types of organizations in mind (banks) for the "stability of the economy". If the government is going to renegotiate what it's outstanding debt is and come up with a new equation for how much it's "worth", they're going to allow banks to do that with their balance sheets as well.... you know... because if they don't then it might "threaten the American way of life" (or some such bullcrap).

It's my guess that just about every financial institution will be given free-reign to re-cook their books (and leave the burden on their customers). Everything will be opened for renegotiation. People who thought they owed $100k on a 4% fixed mortgage will open up their mail to find that they've been given two options:
1.) Select to be enrolled in a "government-backed mortgage-leveling program" that somehow dictates that they now owe $130k (old dollars) [or $80k (new dollars)] on a variable rate mortgage.
or
2.) Pay the balance of their mortgage immediately.

Likewise, while all this is going on, the prices around are fluctuating wildly depending on which direction things are getting re-based, your employer is going to be sitting there wondering what to do with your salary. What is the new "cost of living" now? And should I give this guy a new salary based upon 90% of that change? 80%? 120%? Who knows... but I'll bet you that first paycheck that it's still not going to buy as many groceries as it did last year.

Abracadabra... everybody's happy! (And by "everybody", I mean everyone who contributed more than $1M into a campaign fund during the last election... anybody else doesn't really matter anyway.)

[PADFH]

Hyperinflation isn't really a concern.  Inflation won't be seen in a depressed economy with falling worker wages.  There is a reason it's been at 1-2% for three years. 

[smurf hunter]

Hyperinflation isn't really a concern.  Inflation won't be seen in a depressed economy with falling worker wages.  There is a reason it's been at 1-2% for three years.

I'm no economist, but isn't it much more complicated?  If we were an isolated economy that would be basically true (as far as I understand things).  Unfortunately the global nature of things makes it interesting.

Growing US unemployment and recessopn might lower price inflation at a certain level, (supply and demand), but most consumer goods are imported.  Price of imported goods will still be driven by the strength of the USD versus whatever foreign currency was spent to produce them.

[PADFH]

But if we're talking about Wiemar/Zimbabwe type hyperinflation, that's a far stretch given our current situation.  Remember the "high" inflation of the late 70's was in the teens.  In addition, if wages are increasing, inflation is actually good for debtors and bad for creditors.  Given what I understand of macro, high inflation can't be produced when wages are flat.

[chris]

In addition, if wages are increasing, inflation is actually good for debtors and bad for creditors.

It depends on the debtor. Anyone on a fixed income is screwed. It also destroys the value of savings. The only people to truly benefit are those with zero savings and a job. This assumes that wages and inflation are increasing at an equal rate. Improbable given the nature of wage levels in a large economy. The inflation will cause job losses, which will remove pressure on wages to increase.

Given what I understand of macro, high inflation can't be produced when wages are flat.

Inflation is the decrease in value of money. There's no reason that it would be coupled with wages. This sounds like an outgrowth of the Phillips Curve. Which is patently wrong.

[endurance]

But if we're talking about Wiemar/Zimbabwe type hyperinflation, that's a far stretch given our current situation.  Remember the "high" inflation of the late 70's was in the teens.  In addition, if wages are increasing, inflation is actually good for debtors and bad for creditors.  Given what I understand of macro, high inflation can't be produced when wages are flat.

This is about a year old article and slide show on how hyperinflation could and likely will come to American.  One problem most folks have is understanding that hyperinflation isn't really bad inflation.  You can have a stagnant economy and hyperinflation.  For conventional inflation you need velocity, but not for hyperinflation caused by currency debasement. 

Be sure to click on the "how it will happen" slideshow.  It does a much better job explaining all this than I can.

[Going Galt]

Given what I understand of macro, high inflation can't be produced when wages are flat.

Sure it can.  The government prints the money it needs to pay its own bills, and companies simply don't raise wages.  You still have more money in the economy from the printing (but not from wage increases), so you have hyperinflation.

Half of me says I should get out of debt as fast as I can (and I am).  But, the other half wonders why I'm bothering if it'll all be hyperinflated away anyway and my savings gone should I have any.

[endurance]

Half of me says I should get out of debt as fast as I can (and I am).  But, the other half wonders why I'm bothering if it'll all be hyperinflated away anyway and my savings gone should I have any.

Keep paying, because you might lose your job.  That's what keeps my debt limited to the mortgage, which either the wife or I could support on one income alone.  I always remind myself that until my home is paid off, I'm one budget cut away from a very uncomfortable situation.

The other challenge that isn't brought up in the fantasy that debt in a hyperinflation environment is that the county won't raise your home value, thus your property taxes and your insurance company won't raise your rates.  Given enough inflation, there could easily be a scenario where your property tax exceeds your monthly Principal and Interest payment portion of your mortgage.

[Ken325]

Look at what has happened in outer countries.  One pattern that I have seen a few times is they say say your old money is now worthless. You may exchange 10 of your old dollars for one new one. Here is the kicker, you are limited to exchanging only 10,000 dollars and anything over this is now gone.  Take that rich people.

I think that we have to expect massive corruption in the system.  Police who are paid in worthless dollars will want bribes, bureaucrats will want kickbacks, and politicians will pander to the most powerful group.  Look at the bank closures in Argentina where accounts were frozen for months while the money was debased. Look for pensions not being paid.  Do not expect things to be fair.  We have a lot more paper wealth than actual wealth.  It will be like a game of musical chairs when the music stops and everyone will grab all they can.  The only people who will do OK will be the ones who get out first.

[fred.greek]

The dollar is debased… decreased in purchasing power… every time the folks in DC shove more dollars out.  Whether the just put higher numbers into a computer, print cash with no basis, or borrow it, “new” money spent by them into the economy is inflationary.

For decades, it was happening relatively slowly.  Since the politicians WILL NOT cut back the spending (to be “fair”, what are they going to cut that make a difference in the amount to be spent) and the economy is falling, the spending of created money continues to increase.

Your debts SHOULD stay the same.  Unfortunately, expect your income to also remain relatively fixed.  However, as everyone outside the US trusts the dollar less and less, expect the international currency exchange rate to progressively hammer the dollar.  Think folks, WHAT is actually made 100% in the US from US raw materials?

Purchasing power plummets.

[Freshman Preppy]

PLEASE correct me if I'm wrong but wouldn't land be the best place for "money" to ride it out?  Thinking of buying two chunks of land outright with $; one for a BOL and the other to sit.  Wait out the debasement (even a word?) And then sell it for new money.  Too simple? 

[Ken325]

However, as everyone outside the US trusts the dollar less and less, expect the international currency exchange rate to progressively hammer the dollar.  Think folks, WHAT is actually made 100% in the US from US raw materials?

  This is something  that people need to consider when you think about oil prices.  I keep talking about peak oil and some people still doubt this for some reason but consider the effect of hyperinflation on imported oil.  I think that people will be unwilling to exchange valuable oil for worthless dollars.  They will want hard currency or assets.  We currently import over 60% of the oil we use. 

but wouldn't land be the best place for "money" to ride it out?  Thinking of buying two chunks of land outright with $; one for a BOL and the other to sit.  Wait out the debasement (even a word?) And then sell it for new money.  Too simple? 

I don't think that we are done with the housing bubble, but I don't think this affects rural land.  I think that we will see interest rates rise soon.  This will cause housing prices to go down even more as fewer people can afford to buy houses. The housing market is still saturated with foreclosed homes, so prices will fall when loans are harder to get.  This will trigger fear of buying while prices are going down and the market will continue to go down.  On the other hand if you need a loan to buy a house you might do better getting a low interest rate and buying now.  If I had cash I would wait for things to go down.  I would also avoid houses in the exurbs.  I think prices in outer suburbs will crash when gas is a lot more expensive. 

[LdMorgan]

PLEASE correct me if I'm wrong but wouldn't land be the best place for "money" to ride it out?  Thinking of buying two chunks of land outright with $; one for a BOL and the other to sit.  Wait out the debasement (even a word?) And then sell it for new money.  Too simple?

Optimally, both of those pieces of land should be productive farmland if the intention is to ride out economic storms, whether they be hyperinflation or deflation based.

In a hyperinflation situation, property taxes may rise to confiscatory levels. Without an income stream from the property in the form of produce, you could wind up losing the property.

The good thing about producing food is that you can price it at the going rate--usually.

Another good place for your money would be in precious metals. Physical gold or physical silver.

Of the two, I lean toward silver for a number of reasons. (Too many to go into here, but it's an easy subject to Google.)

In any case, the one place you don't want your money is in the bank, in the form of Dying Dollars.

People who hold dollars are getting scalped even now, and it will only get worse over time.

[PADFH]

We should differentiate between future expected inflation and our current record low levels.  Inflation has never been as low as it currently is. 

[smurf hunter]

We should differentiate between future expected inflation and our current record low levels.  Inflation has never been as low as it currently is.

I understand there are academic definitions for inflation, but in practice many of the things my family "needs" to buy are appreciably more expensive than 1 or 2 years ago.  Everything from toilet paper to the electric bill costs more than it did a few years ago.   I'm happy to use a more appropriate term, but for the same money I bring home a little less from the super market.

[endurance]

I understand there are academic definitions for inflation, but in practice many of the things my family "needs" to buy are appreciably more expensive than 1 or 2 years ago.  Everything from toilet paper to the electric bill costs more than it did a few years ago.   I'm happy to use a more appropriate term, but for the same money I bring home a little less from the super market.

There's also core inflation vs. commodity inflation.  The problem with the 1990s to recently is that the Fed was making interest rate decision on Core inflation.  Commodity inflation was rising rapidly, but because of cheaper labor in China, core inflation remained low.  Had the fed not been asleep at the wheel... well, now I'm just dreaming...

[PADFH]

Commodity inflation is just pure supply and demand, right?   Core inflation is the only thing controllable by monetary policy. 

Correct me if I'm wrong.  I'm a layman when it comes to monetary policy.

[endurance]

Commodity inflation is just pure supply and demand, right?   Core inflation is the only thing controllable by monetary policy. 

Correct me if I'm wrong.  I'm a layman when it comes to monetary policy.

Commodity inflation is the result of supply and demand on raw materials used in manufacturing.  Core inflation is a government extracted number is the cost of consumer goods with the elimination of volatile consumer goods like food and energy (which may vary seasonally).  It's supposed to include indicators from all sectors that consumers utilize, for example, electronics, furniture, appliances, housing, housewares, etc.  However, the number is often toyed with by changing the average home price to average rent, etc.  The number is a tool used in adjusting Social Security for inflation.

Obviously there's flaws because of the motivation to keep inflation numbers low, but the other thing is even if they weren't tinkering with the numbers, you can have zero inflation because home values are plummeting while energy costs are skyrocketing.  More importantly to fiscal policy for the fed, you can ignore an over-cooked economy with copper and steel prices setting records because instead of a widget being made in the US by union labor making $35/hour for $999, it's being made in China by guys earning $3 a day and sold for $600.

[Malamute]

Your debt will be revalued into the new fiat currency that is backed by shares in a gold ETF overseen by the Bank of International Settlements. 

The interest rates on your debt will be increased.  For the children.

By the way, don't ask for the warehouse containing the ETF's physical gold to be audited, and don't ask to exchange the new fiat currency for its equivalent in physical gold--if you ask such questions then you're a terrorist, and terrorists will be sent to camps. 

[LdMorgan]

We should differentiate between future expected inflation and our current record low levels.  Inflation has never been as low as it currently is.

Just have to jump in here.

The US does not currently have "record low levels" of inflation. What the US does have is a carefully orchestrated program of lies and misinformation that beats anythng Stalin ever thought of in the USSR circa 1950.

Our news is 100% censored, and 100% manipulated to sing only the party line. 

And that's why you hear about our "record low levels" of inflation.

It is only the government figureheads that proclaim the wealth and economic  prosperity of Amerika. The facts do not.

Your money is now worth 15% less than it was nine months ago. (That's just a statistic I ran across in my readings--but it was one that was well-documented at the time.)

Ignore CNN: They lie. Search the internet for alternative opinions and the information behind them.

First your eyes will bug out. Then your wallet will spasm uncontrillably. Then you'll scream at the top of your lungs and go buy some phsical precious metal.

If there's any left...