Dollar Devaluation

I would guess from your answer that you are quite young. I know your response is the "modern" answer, but I am old enough to actually recall the time when the following [from the Wikipedia article on money] was standard economic theory taught in Universities. Everyone should ask themselves why this is and who pushed the change.

"In the past, money was generally considered to have the following four main functions, which are summed up in a rhyme found in older economics textbooks: "Money is a matter of functions four, a medium, a measure, a standard, a store." That is, money functions as a medium of exchange, a unit of account, a standard of deferred payment, and a store of value. However, most modern textbooks now list only three functions, that of medium of exchange, unit of account, and store of value, not considering a standard of deferred payment as a distinguished function, but rather subsuming it in the others."

 

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There seems to be a tradeoff between being a good medium of exchange and being a good store of value. If something is too good a store of value, there's a risk of people holding on to it rather than spending or investing it. When money or blood stops circulating, the economy or the body is in trouble.

Mainstream economic theory holds that an inflation rate around 2% is actually healthy if it can somehow be kept stable and controlled (historically problematic). Over a lifetime, that inflation rate would destroy almost 80% of the value of a currency.

 

There is no conflict at all between being a good store of value and medium of exchange. Just keep in mind the law of supply and demand. If [for example] silver was money, and people started hoarding it, then prices of good and services would fall. This would encourage silver owners to spend the silver to take advantage of the bargain. They would also benefit from their silver having more purchasing power. The "2% inflation is good" lie is circulated by those who get to spend the money first, before it is devalued. It is an outmoded economic theory that is dying before your very eyes.

 

Deflation is an incentive to hold onto money, because the bargains will just be better later on. E.g. Japan, or the Great Depression.

 

I have no time for "economic theory" as that would imply some sort of science behind it, and these yoyo's have no such training.

It's simple mathematics. If you grow any system at a consistent linear percentage over a period of time, it blows up. The math can't be escaped. Consistent inflation is exactly that. Specifically towards the end, in monetary systems where consistent inflation is applied, the a graph of the money supply over time will look like a hockey stick with the puck end turned up, and the danger is when you enter that puck end. Eventually the money supplie goes to infinity and the currency is done. In linear percentage growing systems this will happen very fast relatively speaking which is why the graph looks like a hockey stick. History is littered with examples of it and has no examples of a completely fiat currency surviving.

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On the earlier comment about silver in the currency, it is a matter of perspective. If one can only conceive of prices in terms of federal reserve notes, then yes silver became too expensive to use. However this rather narrow view misses the point being made completely.

 

You would guess wrong. I'm fifty-one, and a self-made man. I've also studied of money as an avocation since I was five. The idea that commodity money was a great thing until it was mucked up by fiat money is a canard. Commodity money means the money supply is subject to the whims of shortage and oversupply, as mines go dry, supplies are hoarded, new mines are discovered and hoards are dispersed.

A money supply that is subject to the whims of fate, and the vagaries of hoarders, speculators and spend-thrifts, is a ball-and-chain on an economy. Spain made the largest discovery of gold and silver in world history in the wake of the discovery of the New World. The result was runaway inflation, grandiose government projects, civil discord and economic and social collapse that lasted for centuries. What seemed a boon became an almost unsurmountable burden, because the medieval Spanish, like some others today, confused gold with wealth, and had no concept of the worthlessness of money of any kind if there's nothing to buy with it.

 

In the seventy A beer was 30-40 cent range, about the same for cigarettes, gas.
Soda was .10 Candy was a Nickel.... Now add a zero to the end. first new VW Bug was
under 2,000 around 1972. Next thing is go to the bank and get a box of nickels for
$100. has almost $125 of metal and no sorting of pennies.

 

Nice post, but it is an irrelevant response since my only point is that money is also a store of value [of varying quality depending on the monetary system]. If money completely ceases to be a store of value, you may not like the outcome. What you cite from Spanish history is easily repeated with a fiat currency.

 

You're describing asymptotic growth, not exponential (geometric) growth. If the inflation rate is a constant 2%, the price of a good will double in about 35 years, with the slope of the curve steeper at the end than at the beginning. You can make that curve look as steep as you want by stretching the y-axis or compressing the x-axis; by doing the opposite, you can make it look less steep. But the characteristic shape doesn't change. It doesn't go vertical, period -- except at a revaluation.

 

I agree with both Cloud and Texas John to different degrees. Money has to be a store of value but not an optimal one. If I have $100 in bills, yes it is a store of value versus what I sold to get them. I can turn around and buy something else this week or a year from now. So they are still a store of value, just not an optimal one for multi years. What I think of a better way to view this disagreement is that "money" does not really mean FRN's anymore, but something like a CD or a bond. This is the real store of value nowadays, the one in which people place cash to maintain its spending value. The comparison of a dollar losing 96% of its value since 1933 is simply not true if that cash was placed in a bond. If you put a dollar in 1933 averaging 6.5% return you would have the equivalent of a dollar today.

This works fairly well except for the government taxing "gains" made with interest when in reality it is simply inflation that they are taxing. This is the real travesty, government inciting inflation and then taxing your returns you make to simply keep up with inflation.

 

Good points Jeff. Money supply growth is never by itself a bad thing. Remember that if goods and services grow at the same rate as the money supply then you will have zero inflation. The problem is that deflation is much worst off for an economy, so the Fed has to error on the side of oversupply. This would be fine as long as the politicians stopped making the Feds decision for them by limiting government spending.

 

As a matter of math, an exponential growth curve looks like it goes near-vertical because it's plotted based on the original level, which gets progressively further from the current level.

If 2010 quatloos are worth a hundred times less than 1910 quatloos, then a Rip van Winkle from 1910 looks at his 1910 quatloo, converts it to 100 2010 quatloos, multiplies that by 2%, and shrieks "two quatloos per year!". But it's still 2%.

Where you get blowups is when the inflation rate keeps going up. Plenty of historical examples of one year's inflation rate turning into the floor for the next year's inflation rate. That's where you get the runaway inflations that eventually wreck commerce.

 

Oh but it does. The upward turn in the hockey stick curve is explosive and comes with little warning in real time. Look at how long it takes to double the original amount again. Look at what happens in you toss in a few years of higher than 2% inflation, it all adds to the problem. Again it's simple mathematics.

This says it all....

 

I agree.

 

Fatima, there are charts and there are charts. Depending on what data you look at, anything can be supported -- inflation or deflation.

 

What? We're discussing constant inflation. Given constant inflation, you can predict exactly the cost of a good at any point in the future. That's the exact opposite of "little warning".

Okay, I see where you're coming from. And, if you're (say) trying to live off a fixed sum of money that isn't earning any interest, then yes, it gets scary. This is why most people rely on investments that pay interest or dividends -- you want something that keeps up with inflation.

No, it's changing the assumptions in mid-argument. Changes in government policy, natural disasters, and new scientific or technological breakthroughs all can have a profound effect on inflation -- but they are NOT "simple mathematics".

 

anybody else notice how nnn-eee-rrr-vous bernanke was on last night's 60 Minutes interveiw?
his lips were quivering and his voice was shaking.

makes you wonder what our esteemed Fed Chairman so nervous about.
(certainly not confidence inducing)

 

A healthy capitalist society is dominated by people hoping to sell for more than they paid. A sick capitalist economy is dominated by people forced to sell for less than they paid.

Do the math.

 

I don't normally respond to line by line rebuttal posts as they are normally dull and single sentences taken out of context in response are meaningless.

However I will make an exception. The federal reserve admitted on just Friday and were forced to post it on their website that they printed over $2T dollars in the past two years and hand it over to over 21,000 entities just to keep the current economic system from collapsing. This is why the stock market hasn't tanked. It took over 300 years for the first Trillion to be spent in perspective. The time period has now been reduced down to a Trillion every few months from several years.

We are in the curve of the hockey stick. Choose to disbelieve it you like, but history and math isn't on your side. The math IS simple. It's the repercussion of that math that are not.

 

Don't go to Cash4Gold with your stuff. They get mad sometimes. ;-)

Haha!