Friday, December 03, 2010

Devaluing Your Paycheck

After reading some argumentation about the possibility of devaluing while in a currency union, I wondered just how far you can go. How small a political entity can realistically pursue an internal devaluation with a shared currency? Rather that start theorizing my way down, I started by theorizing my way up, with the smallest political entity--the individual.

When I started to consider how an individual could conduct an internal devaluation, I realized that credit cards have produced exactly the scenario I was contemplating. An individual with credit card debt has vastly reduced purchasing power--it may take $1.20 worth of income to purchase $1.00 worth of goods. Their "imports" are vastly more expensive than their "exports" (typically labor).

Ironically, though, because of the nature of credit, we are, on a micro-level, in exactly the same position that the United States is with China. Their labor is overvalued, but that position is maintained by providing credit, which maintains the trade environment at its current levels.

Therefore, the current deleveraging will flatten the real (not nominal) income distribution in the United States. As debts are paid down, the purchasing power of the lower class will rise, and the income (via interest) and goods available (due to increased competition) to the upper class will decrease without changing who received how much income. It's an odd way of doing things, but it'll do.

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