economics question

Factual Questions
1

First, I know NADA about economics. Somehow managed to get my undergrad degree several yrs ago without a single economics class.

So this is admittedly coming from a sincere desire to understand this, but not a heck of a lot of background.

That said, in the 1980’s Israel’s inflation was out of control. To avoid a soda costing $100 (I know they don’t use dollars, just using the symbol for convenience’s sake) due to rising inflation, they minted an entirely new set of bills and coins that effectively were (on the face) 1/100 of the old bills.

So you could buy a Coke for $100 old bucks, or $1 new buck. The new money was easy to differentiate from the old money, and the idea was to allow both currencies to co-exist for a certain amt of time until the new currency completely took over.

Well, to me it seems like it worked, at least at the time. Money made more sense – perceived value for the amt of currency required. After all, a coke just shouldn’t cost $100.

Today on a financial radio show, a college-aged caller said that according to his calculations, a 3% inflation rate in the US would mean that when he was ready to retire in 45 years, if he had $1,000,000 saved up it would only have the purchase power of $250,000 in 2003 currency.

That, plus the fact that houses now cost $500,000 instead of $5,000… cars cost $20,000 instead of $200… etc., etc…

Wouldn’t it make sense to adopt a similar strategy in the U.S.? Sure, we’re used to the current cost structure, and I’m not advocating this as something we should actually DO, because adjusting may be challenging at best.

But part of me wonders if it would actually make more sense to try a similar approach.

Can someone who understands economics comment on this?

2

Could you do it? I suppose so. There would be some hassle - convincing people that you were really “just knocking off a zero” and that it wasn’t somehow an admission of failure etc. But it could be done.

Why would you bother? What matters is purchasing power, not the absolute level of prices. Unless you get to a stage where words for big numbers are being hugely overused I don’t see why you’d care.

3

But, AFAIK a soda does not look like it will be costing US$100 in the near future.

Are you suggesting we make a $1.25 item cost $0.0125? Or something to that effect? I don’t understand economics, but from a common sense point of view all that matters is that the notes and coins are appropriately valued for everyday purchases, and that the math involved for everyday purchases isn’t too difficult. How many people pay for a $20,000 car with cash? If you’re paying by other means, it doesn’t really matter if you call the amount $2 or $2,000,000 provided that the same effective amount is being withdrawn from the bank account.

My gut feeling is that the only real concern is that people don’t have to carry round wads of cash to buy a carton of milk.

4

By completely ignoring the other side of the issue – the wage structure – the OP is missing half the pie chart, so to speak.

For example, I bought my first house in 1978 – just prior to the Carter/Reagan recession and the resultant near-collapse of the real estate market – for around $21,000, including the mortgaged cost of some initial improvements. Today that same house would probably sell for something close to $100,000. But back then, I was earning around $3.75/hour; today, my hourly wage is somewhere over $23. Granted, my earning power – in real dollars – has increased over the years due to education and accumulated skills, but my point is that I was able to buy that house then, and I still can today, despite its cost inflation.

There is no direct economic benefit to reissuing money in fractional denominations. It could be argued that the psychological effect on consumers might help a bit. On the other hand, a reissue is a pretty blatant admission of failure and desperation on the part of the issuing authority.

One widely-cited example of catastrophic runaway inflation is the currency in use in post-WWI Weimar Germany, which inflated beyond a factor of 1,000,000,000,000 – yeah, a trillion! The Reichsbank for a time issued “overmarked” paper currency, that is old Reichsmarks stamped or printed over with new denominations. In 1923, the bank began issuing new marks worth a huge multiple of the old ones. Some historians credit this new issue with helping to stabilize the German economy, but there is no evidence that it had any effect; the new issue just happened to roughly coincide with a number of changes in economic and fiscal policy.

5

We already did that.

It was called, “going off the gold standard”.

You will be amazed at what just a handfull of $20 U.S. gold coins can buy.