Dollar Devaluation

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hucklejohn's picture
hucklejohn
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Dollar Devaluation

I believe there is general agreement by the participants on this site that at some point there will likely be a devaluation of the United States Dollar (or maybe I should say of the Federal Reserve Note).  The amount of devaluation is of course uncertain.  Also, against what (gold? a basket of commodities?  SDRs?) would the devaluation be made is also uncertain.  My question is, how would a devaluation of the dollar change the nominal value or price of other assets or debts?  I have not seen this discussed elsewhere.  The answer is not obvious (at least not to me anyway). So let's say there were a 50% devaluation of the dollar.  What would be the affect on other assets such as those listed below?  Maybe there are some applicable historical precedents. Maybe this has been discussed elsewhere and I have missed it.

U. S. Treasuries, notes, bonds

Corporate bonds

U. S. stocks

Foreign stocks

Foreign bonds & currencies

Real estate

Commodities

Precious metals

Life insurance contracts

Long term care insurance contracts

Health insurance contracts

Employment contracts

Utility bills

 

 

 

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Re: Dollar Devaluation

As a follow up question to the one above, what will be used once the dollar is toast? As an example, when Chile's currency was trashed, everyone moved to the dollar, as many other countries have in times of difficulty. But, once our lustrous dollar is hyper-eliminated, what will we use? It is very difficult for me to wrap my head around valuing EVERYTHING in something other than dollars.

So what will it be? Grams of silver and gold? Tomatoes? Toilet paper (no, there will be dollar bills for that)? What are some guesses you have? Eventually some other currency will be established, but until then, what?

Thanks- H

 

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Re: Dollar Devaluation

They need to wipe out over 128 trillion of debt. To do that they'd need to say we are re-issuing the dollar. Bring us x old dollars and get one new one. So if it was 20,000 old for one new and you had say a 100k mortgage, 5 new bucks earned would pay it off. If you owned 20k in treasuries (my condolences) you'd have 1 new dollar of treasuries. Gold would bridge the gap and could be sold against another currency (convertible).

Every country wants to export and to do that they need to weaken their dollar.

This is a covert game of extend and pretend the greatest race to the bottom.

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Re: Dollar Devaluation

Davos,

Would you assume that in the future, where new dollars exist, that a typical days wages would be a dollar? and that a dollar is about equal to an oz of silver, or 1/20 an oz of gold?

TD

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Re: Dollar Devaluation

I'm no economist, but I lived in Mexico during their freefall.  I remember pulling change out of my pocket to pay a monthly debt that had been crushing before,.  We owned our own house, and we both had jobs.  Salaries were adjusted from time to time.  Every day was a new day, and had to be greeted  as such.  The vendors in the marketplace kept adjusting their prices too.  There was a while when we couldn't get money from the U.S., but after we did that heped me a lot.  This future crisis will be a whole lot worse.

MA

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Re: Dollar Devaluation
TD wrote:

Davos,

Would you assume that in the future, where new dollars exist, that a typical days wages would be a dollar? and that a dollar is about equal to an oz of silver, or 1/20 an oz of gold?

TD

On the wages yes. On the gold/silver I don't know. I find the MacEves comment about pocket change above on target. I prefer not to speculate on the PMs since this will likely be a global event and I'm not certain - yet - as to which path alliances will or won't be formed.

Those will bear heavily on the price of currency(s) to PMs.

Take care.

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Re: Dollar Devaluation
maceves wrote:

I'm no economist, but I lived in Mexico during their freefall.  I remember pulling change out of my pocket to pay a monthly debt that had been crushing before,.  We owned our own house, and we both had jobs.  Salaries were adjusted from time to time.  Every day was a new day, and had to be greeted  as such.  The vendors in the marketplace kept adjusting their prices too.  There was a while when we couldn't get money from the U.S., but after we did that heped me a lot.  This future crisis will be a whole lot worse.

MA

maceves, thanks for sharing your own experience with money devaluation in Mexico.  Very interesting to those of us with no such experience, yet trying to abstractly imagine what it could be like!

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Re: Dollar Devaluation
pinecarr wrote:
maceves wrote:

I'm no economist, but I lived in Mexico during their freefall.  I remember pulling change out of my pocket to pay a monthly debt that had been crushing before,.  We owned our own house, and we both had jobs.  Salaries were adjusted from time to time.  Every day was a new day, and had to be greeted  as such.  The vendors in the marketplace kept adjusting their prices too.  There was a while when we couldn't get money from the U.S., but after we did that heped me a lot.  This future crisis will be a whole lot worse.

MA

maceves, thanks for sharing your own experience with money devaluation in Mexico.  Very interesting to those of us with no such experience, yet trying to abstractly imagine what it could be like!

+1 and oh by the way: I would have STOPPED reading if you said you WERE an economist, which in my book is synonymous with being a moron. 

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Re: Dollar Devaluation
Davos wrote:
pinecarr wrote:
maceves wrote:

I'm no economist, but I lived in Mexico during their freefall.  I remember pulling change out of my pocket to pay a monthly debt that had been crushing before,.  We owned our own house, and we both had jobs.  Salaries were adjusted from time to time.  Every day was a new day, and had to be greeted  as such.  The vendors in the marketplace kept adjusting their prices too.  There was a while when we couldn't get money from the U.S., but after we did that heped me a lot.  This future crisis will be a whole lot worse.

MA

maceves, thanks for sharing your own experience with money devaluation in Mexico.  Very interesting to those of us with no such experience, yet trying to abstractly imagine what it could be like!

+1 and oh by the way: I would have STOPPED reading if you said you WERE an economist, which in my book is synonymous with being a moron. 

 

You're killin' me, Davos. Way too funny!

I thought almost the exact same thing when I read that sentence.

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Re: Dollar Devaluation

lol, not surprised, we both have been kicking around here for a longgggg time. Snake oil is noticeable.  

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Re: Dollar Devaluation

I started this thread with the question how would say a 50% devaluation in the U. S. dollar affect all other assets.  Maybe I am making this overly complicated.  So I will answer my own question.  All things being equal -- and yes, I know they never are -- I would think every asset would double in price if measured in new dollars compared to the old dollar.  For example, if a share of Chevron stock were priced at $80 in old dollars then a share of Chevron stock priced in new dollars would be $160 since each dollar is worth half as much. The same for bonds and other assets.  With regard to foreign currencies the answer is very uncertain since any dollar devaluation would create havoc in the currency markets.   So am I on the right track?  Have I missed anything?    Any other comments?  

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Re: Dollar Devaluation

I suspect the opposite would be true.  Your 80 dollars of stock would now be worth 40.  Debt disappears,  but so do assets.  To double the value of assets like stock would defeat the purpose of the devaluation.  In this case your assets become less valuable across the board.  And your debts become less valuable.

I am still stumping around the issue of employment contracts though.  I would suspect MOST would be reset at the new value.  Employers could not continue to pay at twice the rate of earnings.  Most contracts for large unions that I have seen are set at value,  not dollar amounts.  Percentages based on inflation etc..  Not sure,  I'll have to look that one up.  Those contracts have loop holes in them.  I really question life insurance though since those are for dollar amounts.  Do you hit the lottery when grannie dies or does the insurance company go under?

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Re: Dollar Devaluation
hucklejohn wrote:

I started this thread with the question how would say a 50% devaluation in the U. S. dollar affect all other assets.  Maybe I am making this overly complicated.  So I will answer my own question.  All things being equal -- and yes, I know they never are -- I would think every asset would double in price if measured in new dollars compared to the old dollar.  For example, if a share of Chevron stock were priced at $80 in old dollars then a share of Chevron stock priced in new dollars would be $160 since each dollar is worth half as much. The same for bonds and other assets.  With regard to foreign currencies the answer is very uncertain since any dollar devaluation would create havoc in the currency markets.   So am I on the right track?  Have I missed anything?    Any other comments?  

For the purpose of this exercise we need to consider two factors, they are:

  1. A covert devaluation like we have going on today - by design or pure stupidity this is what we have. No country wants a strong dollar, they are all trying to weaken their currency. This is helping with the sale of exports, how much they can take in with taxes.
  2. An overt, print a new dollar which would be sold to you for 10,000, 20,000 or however many old thousand dollars.

In case #1 everything goest up until the price creates demand destruction and there is collapse. I don't think #1 will work like many suspect it will - and I'm talking about the folks who say we are going to inflate our way out of this. I say this because fuel is an integral part of everything and when oil hit 147 a barrel in 2008 wages stayed flat.

In the case of #2 everything would be priced in new dollars. 5 new bucks could pay off a mortgage, 3 a car....

Many say they have several options:

  1. Default
  2. Inflate the debt away 
  3. Haircuts
  4. Re-Value and re-issue the currency
  5. Raise taxes

1 will work but gosh knows what that would do to our currency and our personal debt. Big [email protected] shoot. 2 won't work well because it'll be hard to compete against some poor worker making 2 bucks a day (hyperinflation could kick in - in a NY minute though), we are so beyond 3, 5 will crush the economy - we already work 227 days for Uncle Scam and for 138 days we earn 1973 wages.

I see door #4 as the answer.

Remember we have Bernanke, Geithner, and Summers up there so short of a seeing eye dog, sonar, a gps, brail, and several escorts I can be assured these morons will pick door #4 last - if at all.

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Re: Dollar Devaluation

Davos what about people (myhusband) who say that re-issue is impossible with the size of our Country.  Plus there would be no way to keep this quiet...someone in the Treasury would leak something and this would create panic.  What say you?

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Re: Dollar Devaluation

By Porter Stansberry in the S&A Digest:

"To disrupt our services because we can't make a bond payment would just be unconscionable. And as a leader I couldn't do it." So explained Linda Thompson, the mayor of Harrisburg, Pennsylvania. She was explaining the city's refusal to repay part ($3.29 million) of the $288 million it owes for an incinerator it bought. The total obligation for the incinerator comes to roughly $6,000 per citizen of the city. It is a debt that can't be repaid and should have never been lent.


Unless you happen to live in Harrisburg, you probably didn't see this item in your local paper. And you probably wonder why we'd lead with it in the
Digest. After all, why should the impending bankruptcy of a small Pennsylvania city matter to you?

We led with it today because it represents the next leg of the debt crisis – the failure of municipal finance. We were also struck by the logic of the mayor... who clearly views paying the city's debts as optional. She knows the state of Pennsylvania will be forced to bail out her city. (If the state doesn't intervene, it will be impossible for any other city in Pennsylvania to issue bonds.) And even if the state refuses, the bonds are insured by Ambac, which means, in the eyes of the mayor, it's likely that no one will get hurt by her decision. That's how a $288 million loss can become irrelevant to an elected local official. Like a subprime borrower living in a house without paying his mortgage, the mayor of Harrisburg thinks paying for its debts is someone else's problem. She's bringing Obamanomics to city finance.


We have this warning to offer: When our elected officials no longer care about repaying hundreds of millions of dollars, the entire system of municipal finance is going to collapse. And the damage that's going to occur will be material to our entire country. The system that exists today was created in the 1970s. The entire system is predicated on the lie that states won't allow losses to muni-bond holders. That's the only reason muni-bonds are insurable: The insurance companies know there will never be a claim. They have no reserves to cover the risk of municipal losses because there have almost never been any. Over the last 40 years, the default rate on investment-grade municipal debt was 0.03%, according to the credit-ratings service Moody's.


You can think of this system as similar to the subprime-credit bubble. No banker in his right mind would loan money to a person with no credit and no job who was buying a house in a slum. But once you took the credit risk away from that banker, he was happy to lend billions on deals like that because the risk became someone else's problem. Billions in bad debts piled up. Suddenly, it was the banker's problem again because he'd destroyed the entire system.


The same thing is about to happen in the muni-bond market: Nobody has paid any attention to credit quality because everyone believed the states won't allow cities to go bust. As a result, a truly stupendous amount of money has been lent to cities – cities that have no hope of ever repaying the debts. Specifically, municipal debt now totals $2.8 trillion – roughly 22% of our country's GDP. That's an all-time high. The amount of debt owed by cities has doubled since 2000. And the debts are now too big for individual states to guarantee.


Harrisburg is small potatoes. Mass transit systems are a much, much bigger problem. Almost every local politician in America has promised a subway, a train, or a bus to take his constituents to work for next to nothing – but running these systems is incredibly expensive. In Boston, the mass transit authority is now $8.5 billion in debt and has been paying $500 million per year in interest. Does that sound sustainable?


What about all of the stadiums and arenas built over the last 20 years? Politicians love to build these things as part of citywide "revitalization" efforts. But paying for them? That's somebody else's problem. Take the Meadowlands – the football stadium built nearly 40 years ago. It was torn down last year, but it has never been paid for. The New Jersey Sports and Exposition Authority (aka the State of New Jersey) borrowed $302 million to build it and never repaid the debt. Today, it owes more than $800 million and spends $100 million per year on interest for a stadium that no longer exists. California has 380 different local redevelopment agencies, which collectively owe $29 billion. This money will never be repaid.


When I warn people about muni-bonds I always get the same reply: "Governments don't go broke." Oh yes, they do. States face a cumulative budget gap of $140 billion in the next year – they don't have the money to guarantee these debts. Meanwhile last year, more than 187 tax-exempt issuers defaulted on $6.4 billion of securities – the most since 1992. These numbers are going to get bigger – a lot bigger.


You see, all of this credit was only made available because lenders believed (foolishly) that there was no risk in lending to cities and states... just like they handed out all those subprime loans, believing they would never default because "home prices never decline." But after a few city bankruptcies (like Harrisburg), that thinking is going to change – forever.


With less (or no) additional credit available, how will cities and states be able to refinance at a reasonable price? Just like when the subprime credit markets shut down, the whole system collapsed because no one could refinance. The same thing is going to happen with the cities and the states. There's a very good chance that once the dominoes start falling, there won't be any way to stop them without a massive federal bailout.


Oh... one more thing... guess which bank has the most exposure to the muni bond market? Again, just like with subprime, it's Citigroup. It holds $13.4 billion, roughly twice as much as the other major banks.

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Re: Dollar Devaluation
Romans12.2 wrote:

Davos what about people (myhusband) who say that re-issue is impossible with the size of our Country.  Plus there would be no way to keep this quiet...someone in the Treasury would leak something and this would create panic.  What say you?

I'm not Davos but it seems to me that one of two things can happen. Either there will be a leak about a new currency and people will panic or a new currency will happen without a leak - then people will panic. In either case as Hugh Hendry says "It's time to panic"

 

Ken

 

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Re: Dollar Devaluation
Romans12.2 wrote:

Davos what about people (myhusband) who say that re-issue is impossible with the size of our Country.  Plus there would be no way to keep this quiet...someone in the Treasury would leak something and this would create panic.  What say you?

On the size issue - the percentage in print versus what is digital is tiny.

On the keeping it quiet issue, you can look at Mexico - they denied it Friday, Saturday and I think announced it Sunday or Monday morning. They had to have been working on it for weeks/months.

Today with credit/debit cards and checks this would be so simple and fast to roll out you could wait months to print new dollars.

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Re: Dollar Devaluation

So in this situation would it really suck to be sitting on alot of physical cash?  My husband thinks it would make no difference....we would just have more of the new $.  I think we should dump all cash into more PMs or property RIGHT NOW.  What would you do if you had saved 80k?  Please I'm so confused..

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Re: Dollar Devaluation
Romans12.2 wrote:

So in this situation would it really suck to be sitting on alot of physical cash?  My husband thinks it would make no difference....we would just have more of the new $.  I think we should dump all cash into more PMs or property RIGHT NOW.  What would you do if you had saved 80k?  Please I'm so confused..

Romans I'd love to answer that for you.

I can't.

I'm not licensed and if I was I don't know anything about your situation.

If you feel overwhelmed with the decision and don't feel good about making it yourself then I'd get a GOOD financial planner who actually knows the economy not some CNBS watching clown who thinks he knows it. MachineHead has a good post on diversification - something I never believed in but he makes a good point to why it is necessary - though I still refuse to do it.

All I can tell you is that I sleep at night. Anything can happen, I'm young enough where if I jacked this up (though I don't think I did) that I could recover and press forward.

On thing: I myself don't feel that these are regular times or that this is a garden variety or even just a severe recession. I think NBER are a bunch of bafoons for calling this over and I strongly suspect they will go down in history as calling the recession over later to realize we have been in a depression for 33+ months.

 

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Re: Dollar Devaluation

Davos quote:I'm not licensed and if I was I don't know anything about your situation.

I dunno Davos ever since I have been reading these threads you have been in the Gold camp. You may not be licensed but you sure have been right LOL. Hu...hum is that I new high in Gold today I see?

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Re: Dollar Devaluation
idoctor wrote:

Davos quote:I'm not licensed and if I was I don't know anything about your situation.

I dunno Davos ever since I have been reading these threads you have been in the Gold camp. You may not be licensed but you sure have been right LOL. Hu...hum is that I new high in Gold today I see?

Hello iDoctor: LOL, still in that and the silver camp. My faith in the 5Gs: (G*(religious edit)d, Gold, Guns, Grub & The Government Will Continue to Screw It Up) remains strong. Especially the last one. But I could of course be wrong, anything can and will happen, and I'm under 50 so I can scr#w it up and recover and we don't like debt... I don't do anything I don't have faith in.

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Re: Dollar Devaluation
Davos wrote:

 4. Re-Value and re-issue the currency

I see door #4 as the answer.

Remember we have Bernanke, Geithner, and Summers up there so short of a seeing eye dog, sonar, a gps, brail, and several escorts I can be assured these morons will pick door #4 last - if at all.

Davos,

I don't get it.  What good is redominating the currency 100 to 1 if the debts also get redenominated?  How are you better off paying a $3000 mortgage if your assests are worth $100 and your income is $300?

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Re: Dollar Devaluation
Davos wrote:
  1. Re-Value and re-issue the currency
  2. Remember we have Bernanke, Geithner, and Summers up there so short of a seeing eye dog, sonar, a gps, brail, and several escorts I can be assured these morons will pick door #4 last - if at all.

I'm having trouble getting my head around this one. Since the $ is backed by the full faith and credit of the nation rather than any tangible asset how would this work?

If the US decided to re-value the world's reserve currency would not every other significant nation similarly revalue their own currency? So is it even possible to carry this out without some kind of return to valuation based on a tangible asset like gold?

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Re: Dollar Devaluation

I've inheirited a farm with a river running through it.  I was going to sell it to help fund my retirement.  I have changed my mind,  It might be the best place to keep what $$ I've got. 

I'm dreading what will happen to the value of my retirement check and Social Security.  My guess is the new money will make my retirement just enough to not starve on.  Perhaps I will spend my retirement growing chickens or tomatoes.  At least I have a nice place to do that.  It was a good cattle ranch for many years, but I'm not so good with cows.....

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Re: Dollar Devaluation
SteveW wrote:
Davos wrote:
  1. Re-Value and re-issue the currency
  2. Remember we have Bernanke, Geithner, and Summers up there so short of a seeing eye dog, sonar, a gps, brail, and several escorts I can be assured these morons will pick door #4 last - if at all.

I'm having trouble getting my head around this one. Since the $ is backed by the full faith and credit of the nation rather than any tangible asset how would this work?

If the US decided to re-value the world's reserve currency would not every other significant nation similarly revalue their own currency? So is it even possible to carry this out without some kind of return to valuation based on a tangible asset like gold?

What is your definition of "full faith and credit of the nation"? Mine is tax revenue. We take in about 2 trillion and we spend 4 trillion. We can't borrow the 2 trillion short fall. So we print what we can't borrow. To me that is NOT credit nor is it faith.

How would it work: Simple. 1 new buck is worth 50,000 old bucks. If you have Treasury Bills worth 50k you get one new buck. Currencies would be converted the same way. Basically, you are telling your creditors: Hey, I'm broke you are going to collect .00002 cents on every dollar I owe you - don't like it? Shove it.

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Re: Dollar Devaluation
maceves wrote:

I've inheirited a farm with a river running through it.  I was going to sell it to help fund my retirement.  I have changed my mind,  It might be the best place to keep what $$ I've got. 

I'm dreading what will happen to the value of my retirement check and Social Security.  My guess is the new money will make my retirement just enough to not starve on.  Perhaps I will spend my retirement growing chickens or tomatoes.  At least I have a nice place to do that.  It was a good cattle ranch for many years, but I'm not so good with cows.....

What a great idea! Good for you. "Not starving" is the new opulence!Wink

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Re: Dollar Devaluation
maceves wrote:

I've inheirited a farm with a river running through it.  I was going to sell it to help fund my retirement.  I have changed my mind,  It might be the best place to keep what $$ I've got. 

I'm dreading what will happen to the value of my retirement check and Social Security.  My guess is the new money will make my retirement just enough to not starve on.  Perhaps I will spend my retirement growing chickens or tomatoes.  At least I have a nice place to do that.  It was a good cattle ranch for many years, but I'm not so good with cows.....

Where's your farm? Sounds awesome! If you decide to sell PM me!!LaughingYou may not be good with cows buuuut.................... (Hmmmmmm: bbq, pit roasted, crock pot, hamburgers, shish-ke-bob, etc.)

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Re: Dollar Devaluation

Maceves,

Not good with cows? Try goats. Good meat, good milk, fairly easy to raise. Anyone who tells you a goat is as smart as a dog has never had a dog.

Really, goats are great animals if you do not like 1000lb critters. Easier to butcher with much less meat to store. Give it some thought. About the taste, I cook it the same as beef. I raise Nubians.

Good Luck.

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Re: Dollar Devaluation

East Tennessee .  Even with climate change it should still be fine......maybe with  some flooding now and then on  a flood plain.....

There's even a fresh stream pouring out of a mountain; I've heard the water comes from West Virginia.  It has a passive solar house too, and a fancy fireplace that can also heat the house.  My Dad thought we were headed for an energy crisis way back in the 70's. 

There's good people in those hills who have always been self-sufficient.  They will find a way to muddle through this.  Families and church members will pull together and help each other.   I can't say that about my neighbors here in suburbia. 

So here I am brushing up on my gardening skills and arcane folk arts.  ....  I don't think I'm ready to sell right now.....

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Re: Dollar Devaluation
Davos wrote:

How would it work: Simple. 1 new buck is worth 50,000 old bucks. If you have Treasury Bills worth 50k you get one new buck. Currencies would be converted the same way. Basically, you are telling your creditors: Hey, I'm broke you are going to collect .00002 cents on every dollar I owe you - don't like it? Shove it.

But would not every other nation similarly revalue their own currency?

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Re: Dollar Devaluation
LG wrote:

Maceves,

Not good with cows? Try goats. Good meat, good milk, fairly easy to raise. Anyone who tells you a goat is as smart as a dog has never had a dog.

Really, goats are great animals if you do not like 1000lb critters. Easier to butcher with much less meat to store. Give it some thought. About the taste, I cook it the same as beef. I raise Nubians.

Good Luck.

Amen to that! I've got Nubians too, and you're right on all counts. Great farm critter!!

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