My general response is to go on a tirade about what the Nazis actually did. Like you said, Nazi is not another word for German.  Not all Nazis were German and there are very, very few around today anyway (Nazis, that is, not Germans!). By the time I've spent ten minutes listing Nazi atrocities and telling stories of all the wonderful Germans I know, most people have got the point.

The one thing to remember, though, is that anyone who says that is ignorant. Anyone who thinks it's acceptable to say that clearly doesn't know what they're saying. Don't let their ignorance get to you: consider it your responsibility to educate them.

-Fern

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Faith is a cop-out. If the only way you can accept
an assertion is by faith, then you are conceding that
it can't be taken on its own merits.
~Dan Barker