Saturday, January 15, 2011

An ugly chart and a great post

The value of the dollar since the Federal Reserve was founded

The Anglican Curmudgeon nails it...
...If the government elects to follow the path recommended by that financial genius I citied earlier, then there will come a time when the rest of the world says: "The party's over, my friend. No more paper dollars: we refuse to accept them for what you owe. You will have to start paying your debts in gold, or Swiss francs, or some other reliable currency. And guess what: until you reign in your current spending spree, and unlimited printing of paper dollars, you won't be able to buy any gold, or francs, or any other reliable currency, because no one wants your worthless 'money.
Read the rest here.

HT: Bill (aka The Godfather)


Anonymous said...

Money is worth whatever everyone think it's worth.

Perhaps someone may think a certain currency is worthless....until the currency holder shows up with, let us say, a means of persuasion that convinces everyone that, yes, that currency is worth something.

The graph you show is completely meaningless.

John (Ad Orientem) said...

A 96% decline in the purchasing power of the dollar is meaningless? What's the weather like on your planet? It's overcast and kinda damp here.

gdelassu said...

A 96% decline in the purchasing power of the dollar is meaningless?

Yes, meaningless, as in "lacking a meaning." What, in your mind, does it mean to say that one 1913 dollar is only worth four 2011 cents, because it means literally nothing to me. Such a claim is just words about words.

Does that graph mean to imply that we are somehow poorer today than we were in 1913? If so, in what way? Certainly we are not less well fed, or less well clothed, or less well housed, or less well educated, or less able to avail ourselves of any of the many varieties of leisure that God in His mercy has seen fit to grant to our mortal existences. If, on the other hand, it does not mean to imply that we are poorer, then why is the decline in the dollar's "value" (a rather fuzzy concept in the mouth of the Anglican Curmudgeon) of any particular interest.

One can hardly help but notice that the point on that graph where the dollar is really "valuable" corresponds rather neatly to the point in time when we as a country were most deep in poverty (the Great Depression did wonders for the dollar's "value"). This blog post looks to me like a rather glaring example of missing the forest for the trees.

John (Ad Orientem) said...

What the chart means is that anyone lending money to another entity, especially denominated in dollars, has a very good chance of not getting the value of what they lent returned to them. US 30 yr Treasuries are currently yielding around 5%. The money supply has tripped in the last 5 yrs. I would sooner buy Confederate Bonds. My odds of getting my money back at full value are better.

John (Ad Orientem) said...

Actually what the chart shows is that the Depression created a period of deflation owing to the very high unemployment rate. However that disappeared quickly with the outbreak of WW II and the dollar's slide resumed more or less uninterrupted up to the present day. The only period on the graph where we have a brief period of relative stability is during the 1920's.

gdelassu said...

What the chart means is that anyone lending money to another entity, especially denominated in dollars, has a very good chance of not getting the value of what they lent returned to them.

Why? It is not as if the chart shows a decline so precipitous that it becomes impossible to calculate a rate of interest that will ensure a positive return.

Besides, you are not really answering the question. What does it mean to say that a 1913 dollar is worth only four 2011 cents? If, as you suggest, the implication is that the purchasing power of a 1913 dollar is 400 times greater than a 2011 dollar, I confess that I would like to see how that figure was contrived.

$250 today will buy you a decent and workable computer. How many dollars would one have needed in 1913 to buy even a vastly inferior computer? One million? One hundred million? Evidently, then, a dollar today is somewhere between 4,000 and 400,000 times more valuable than a dollar back in 1913.

Of course I am exaggerating facetiously, but surely you see the essential point I am trying to make here. The comparison between 1913 and 2011 dollars depends on the commodities against which one wishes to evaluate the dollar's buying power, and it is not at all clear to me why we should lay more emphasis on those commodities (like tomatoes) which will show a loss in value than on those commodities (like clothing) which will show a gain in value. Once one realizes that much, it becomes clear that the graph in question is, as Anonymous pointed out above, meaningless.

The Anti-Gnostic said...


For your counter-point to be true, consumers would have to take a prescient discount off their current purchases for future technological advances.

Measuring the dollar against the broadest basket of goods or even a single good shows a tremendous decline in purchasing power. Thus, the Fed has failed in one of its primary objectives: maintaining price stability.

One brutal effect of this is that an unsophisticated person can no longer 'save for a rainy day' just by setting some portion of their current cash aside. Inflation, manifested in continually rising prices, forces money into increasingly speculative ventures as us working schleps throw money at 30-yo MBA's running the mutual fund in the hope that they can do something.