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Laurence J. Kotlikoff Headshot

The Clash of Generations

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Please find below the prologue to my new book, co-authored with Scott Burns, The Clash of Generations. As we sit back and blithely watch Greece's death by debt, it's easy to assume it can never happen here. It can, and it will.

The Last Straw

The day was coming -- for years, decades, really.

Warnings had been sounded, loud, clear, and often. Most heard, few listened. The problem was distant, its size unclear.

"No worries. We'll fix it. The next election, the next party, the next leader."

There was time.

There wasn't.

The contract was simple: 100,000 barrels of oil, delivered to this country, at this port, on this day. Payment in Chinese yuan. The seller was big and always insisted on dollars.

Not that day.

Thanks to U.S. pressure, the yuan was floating free. You could buy and sell it anywhere. The yuan was strong and rising. The dollar was weak and falling.

No wonder: America's economy was awful; over 30 million, mostly young, looking for work; and Uncle Sam was broke. But Sam's ace in the hole was the dollar -- the world's reserve currency. If Sam needed money, he'd print it, and everyone would take it.

No longer.

"Our shareholders come first. The dollar's too risky. Let's settle in yuan."

And so the contract said yuan.

The medium of exchange was the message, and the message was broadcast, posted, e-mailed, tweeted, liked, and texted around the globe, in seconds.

"They switched. We should too."

Denominating contracts in anything but dollars became routine.

If only. If only that company had waited or kept it quiet. If only that company was smaller or foreign. But there it was. A major U.S. oil company had publicly called it quits on the greenback.

America's economic death was quick and painful. In short order, the dollar plunged. Interest rates soared. Bond and stock markets vaporized. Towns, cities, states, and businesses -- large and small -- started declaring bankruptcy.

And massive layoffs began. The young got the first pink slips.

The Fed rode to the rescue.

"Not to worry. We'll print more dollars, buy bonds, and lower rates." "Worked before." "You need a loan. Step right up. We've got money."

This time was not different.

This time, ancient economic law prevailed: more money begets higher prices.

With prices rising, the dollar became a hot potato. No wonder. The longer you held it, the less it would buy.

And faster money pushed prices even higher.

Next came the bank runs.

Deposit insurance didn't matter. Everyone wanted to get and spend their money before it became worthless.

Uncle Sam printed trillions of dollars to honor insurance and other guarantees to depositors, money market funds, bondholders -- you name it.

Inflation reached double digits. Per month, per week, per day, per hour.

The economy was unraveling.

And then the next generation took to the streets.

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