Saturday, January 2, 2010

Hyperinflation and Gresham's Law

Doug Ross has a great post about the US's impending financial Armageddon. He also talks about the Zimbabwean nightmare:
The cumulative devaluation of the Zimbabwe dollar was such that a stack of 100,000,000,000,000,000,000,000,000 (26 zeros) two dollar bills (if they were printed) in the peak hyperinflation would have be needed to equal in value what a single original Zimbabwe two-dollar bill of 1978 had been worth. Such a pile of bills literally would be light years high, stretching from the Earth to the Andromeda Galaxy.
I don't fully buy into the idea of hyperinflation in the US. I think it's possible, but very unlikely. Nevertheless, I think you should take reasonable precautions, just as you should for natural disasters.

That said, I have a pet theory which some economist has probably already formulated. My theory has to do with Gresham's Law which, simply stated, is "bad money drives out good". Here's my theory:
If inflation drives the value of a dollar below the value of a square of toilet paper, then the bad money (dollar bills) will drive out the good (toilet paper)—greenbacks will replace the roll/role of toilet paper.
You should have a stack of ones on hand if you expect financial Armageddon. They will serve you well in less dire catastrophes, too. It's not really in the interest of vendors to make exact change, so you'd better bring it. Again, reasonable precautions.

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