The U.S. dollar and eight-track players?
First, the brief history of the eight-track player
Do you remember the eight-track player? Because of their convenience and portability, eight-track cartridges rose to popularity during the early 1970's, in many cases as a preferable alternative to vinyl records. Of course, it wasn't long before their popularity declined, when cassette tapes were introduced, followed by CD's, then the digital MP3 format. If you can find an eight-track player today, it's probably not worth more than the parts it's made of.
Imagine for a moment that we're back in the '70s and you're a successful manufacturer and distributor of eight-track players. You sell them to retailers, who sell them to consumers. Demand is so high, you can barely make them fast enough.
Fast-forward a few years (pun intended): As time goes on, orders and sales begin to decline, but you're so involved in running your business, you don't see, or perhaps you may even ignore, the signals the markets are sending. After all, you think to yourself, "This is by far a superior product. That can't possibly change."
Despite your best intentions, it doesn't take long for your company's financial situation to deteriorate, and your business debt begins to grow. Since the product isn't completely dead, you cut a deal with your largest customer. To keep up with your debts, you will manufacture and sell more units at a discount. This cycle repeats itself a few times, but each time, you need to sell a few more units to satisfy the same amount of debt. Meanwhile, your debt continues to grow and the eight-track player becomes all but obsolete.
You wake up one day with the realization that you have a mountain of debt you are unable to pay. You don't have the cash and you can't continue to manufacture eight-track players, because your best customer is already overstocked with enough units that he is unable to sell. Actually, he has already initiated a closeout sale in an effort to sell as many eight-track players as he can at ridiculously discounted prices.
Much to your dismay, the situation has become unmanageable. By now, you have amassed mountains of debt, growing by the minute as interest accumulates. You and the rest of the world are loaded with more eight-track players than anyone could possibly want, and they've declined so much in value, your customers can't even give them away.
You don't have to be a genius to determine how this story ends.
Next, the dollar
Fast-forward again, this time to 2011. Imagine that the federal government is the manufacturer, but instead of manufacturing eight-track players, it manufactures (prints) money to fund its ever-increasing mountain of debt. Imagine further that, instead of your retailer, the government's best customer for its product (money in this case) is – pick a country – let's say China. This astute customer, China, begins to sense that the supply of those dollars is beginning to outpace demand, so it begins to gradually get out of the dollar business by methodically dumping them. At the same time, the government's debt, and related interest charges continue to grow.
If this all sounds like a business model doomed for peril, you're correct. Unfortunately, it's all too real, and the government I refer to is the United States of America. Despite the fact that the government, politicians and the press generally don't talk about it in these terms, the scenario I just described is factual. If you owned the "business" I just described, you'd most certainly file for bankruptcy. Unfortunately, for a variety of reasons, that's not a viable alternative for a country. Besides, when we're a few dollars short, we simply print more.
Given the facts as I've described them, how long is this scenario sustainable? Are we naive enough to believe that the almighty dollar is invulnerable to decline or devaluation? Do the principles of economics not apply here? Are we naive enough to believe that what happened recently to Greece can't happen here?
