Can they ever be reset? Or will one day a regular chocolate bar cost for example €50? House that costs €200k cost €1,000,000? Will the likes of the euro or US dollar one day be the same as currencies such as the YEN where “1” of them is essentially worthless?
In: Economics
When prices become like that, eventually everyone will agree that €50 becomes the new €5 and inflation just keeps going forward from there.
There was a time when being a millionaire in USA meant you were a big wig and affect how the nation was gonna be governed.
Today 8% of Americans are millionaires.
It doesn’t go back.
They can reset. Society would probably collapse for it to happen. Then a century or so of a dark age. After that though if human society manages to rebuild then yeah, a house might cost 100 of whatever the money units are called
What you are looking for is “redenomination”.
Basically the face values “reset” and are reissued. So if a dollar was only worth the equivalent of a modern penny… the government would reissue 1 dollar bills that were worth 100 old dollar bills (along with all other denominations) and we would just play ball.
Otherwise currencies do rise and fall in value, constantly. A massive increase in value would be deflation, which does happen. However economically it is often just as bad… if not worse… than inflation.
Why? Because if I can spend $100 dollars to hire you to produce $10 dollar of profit, but if I just keep the $100 dollars next month it’ll be worth $120 dollars (making me $20 profit) I’m not going to hire you. I’m going to fire your ass and just sit on my money.
Sure. In the US, prices fell about 27% between 1927 and 1933. Or, the value of the dollar increased by about a third.
The years there should be a clue. When the value of currency gets stronger, that’s deflation and it goes hand in hand with catastrophic depression.
I think people imagine deflation as a time when you just keep right on getting $75000/yr and are happily watching all the prices get cheaper. But in reality, one of the prices that gets adjusted downwards is the price of your labor.
Currencies can be reset by the national banks that control them, but it’s only been done under extreme circumstances.
Like when inflation hits absurd numbers, usually as a result of a war or other economic collapse, and you’re dealing with billions and trillions in regular transactions.
Deflation of a currency is typically quite bad for an economy. When goods will be worth less tomorrow than it is today, you are incentivized to not spend money. If you think a car will cost 20k next year, but 30k this year, you can weigh if that 10k you gain by waiting is worth the wait. This is very bad for economy at scale because a large percentage of people will shift towards spending as little as possible today in order to get bigger returns later. With less people willing to spend money, products need to lower in value further in order to give incentive to spend now rather than later. This can spiral into total economic collapse.
Because of this, the governments of the world with strong central banks work very hard to maintain a constant state of inflation. The goal is typically an inflation of around 2-3% per year. At this level of inflation people do have incentive to spend now rather than later as that car will never get any cheaper than it is today. Its also low enough that consumers are incentivized to take on risk and invest in order to beat inflation. All of this helps grow the economy of a country.
This means that in general deflation is not something any government will ever want to willingly implement. We will not be going back. In the event the prices themselves are cumbersome, such as a chocolate bar being 50 bucks, a governments would look toward “redenomination”. This is simply a government issuing a new currency and exchanging it with all existing currency in order to tidy up numbers. For example they could issue the New Dollar, which is worth 50 Old Dollars. All Old Dollars are converted to New Dollars. All payment is now in New Dollars, and so can be divided by 50. This effectively solves the price problem, but has limited economic impact.
Because of all the obligations/debts/wages/etc agreed to in present day dollars.
Let’s take something like groceries – and more specifically we’ll talk about WalMart, which is the largest seller of groceries in the US by market-share…
Over the past 5 years, WalMart has had to increase wages and benefits to keep their stores running… Labor is one of their largest expenses (and it has increased above the overall rate of inflation)…
For the price of groceries to go down, Walmart would have to tell their workers ‘Oh, never-mind… We’re going back to 2019 pay and benefits, and if you don’t like it you can quit’… You can imagine how that would go off…
What you are talking about is deflation. It caused the Great Depression.
>Will the likes of the euro or US dollar one day be the same as currencies such as the YEN where “1” of them is essentially worthless?
Like the US penny? In 1870 you could buy a pound of sugar for 7¢ or a pound of cheese for 5¢.
Ideally no. Deflation is pretty bad for an economy. Currencies might eventually be redenominated which is basically where a new currency is issued to replace the existing one at a set exchange rate.
For example the dollar might be replaced with the super dollar, and 1 super dollar equals 100 dollars. Banks etc would accept both for a number of years but only pay out in the new currency, accounts etc would switch to being denoted in the new currency.
If inflation is kept at 2% you would on average need to drop a zero about once ever 120 years.
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