Summarized by Walter Sorochan
Posted January 30, 2011 Updated December 17, 2014 Disclaimer The information presented here is for informative and educational purposes only and is not intended as curative or prescriptive advice.
The dollar has been losing purchasing power since 1900. In contrast to paper money gold is real money! Money can be anything that is widely accepted as “payment” for products and services. This article attempts to explain this complex issue.
So ... How smart are most Americans about the value of money and gold? View the video below to find out:
Below is a 2013 graph illustrating the decline [loss] of the USA dollar purchasing power:
Byron King, in Whiskey & Gunpowder, March 01, 2010, published a
graph illustrating the decline of purchasing power, e.g. US dollar, at various historic times:
Every year, on average, your US dollars lose 3.42% of their buying
power. That’s just the “official” government number. And even at that
under-reported rate, you’re looking at a compounded inflation rate —
going back to the start of the Federal Reserve — of
In today's economy crisis, national governments are unable to balance their budgets. [ e.g. USA running massive deficits in graph on right ] They have continued to spend more than they get as revenue from taxes and other incomes; and created debt. United States and the world’s governments are attempting to solve their debt problems by issuing more debt – debt which they are trying to pass off as money. More debt piled onto more paper debt. USA government has been creating paper money by printing more money in an attempt to have more money to pay loans and bail out banks in financial trouble. This has resulted what is referred to as "fiat" or false paper money because it is not backed up by tangible goods, property, possessions or collateral. Without collateral the new printed money has no real value! This has resulted in devaluation of the American dollar and hence the dollar losing purchasing power. By purchasing power is meant that the dollar buys less goods than it did before devaluation.
The illustration on right of how much a hamburger costs in various cities is one way to interpret purchasing power. Wehr hamburger value A hamburger in different countries costs differently, based how long it takes a worker to earn enough money to pay for the same kind of hamburger in another country; or purchasing power of their money. But real purchasing power is more complicated than this.
Hewitt Purchasing power
"The chart [ above ] visually shows the near-perfect inverse relationship between the amount of money in circulation and its purchasing power. It reflects the simple relationship that prices increase approximately proportionately to money supply. Stated differently, it reflects the basic tenet of monetarism that in the long-run, price inflation is a direct consequence of increase to monetary inflation. It also underlies the classical theory of "money neutrality"; whether one believes that money is "neutral" or not is a completely different story. Hewitt Purchasing power
Looking at the data, from January 1971 to December 2008, the U.S. money supply increased 16.8 times; this was accompanied by an 81.1% drop in purchasing power of the dollar, as implied by the governmentally-reported CPI. Thus, the data suggests that a 17-time increase in money supply has resulted in an approximately five-time fall in purchasing power. This observation does not attempt to explain this significant gap, but suggests that the gap may be due to (1) increases in productivity, (2) over-reported money supply, (3) under-reported CPI, (4) over-valued asset prices (stocks, bonds, real estate), or possibly (5) a fundamental flaw in the quantity theory of money. Hewitt suggests, in order of significance, (3), (4), and (1) as the most important factors explaining the gap." Hewitt Purchasing power
When currency loses value, investors try to protect themselves by investing in more safer securities, like gold and silver. Before 1971, gold was always used as a basis for money. It is generally accepted that gold has functioned well as a store of value and has maintained its purchasing power for over 5000 years.
The table below Dollar vs Gold illustrates the total destruction of paper money against gold in the last 100 years and shows how many ounces of gold that $1,000 bought at various times. In 1910, $1,000 bought 40 oz of gold at $25 per oz. Today in 2010, $1,000 buys 0.80 oz of gold at $1,230 per oz. This is a massive decline of 98% in the value of the dollar measured in real terms in the last 100 years. The next significant year is 1971 when Nixon abolished the convertibility of dollars to gold. It was this disastrous decision that opened the floodgates for the credit and money creation that we are experiencing currently. The dollar is down 97% since then. But even if we take more recent years, the purchasing power of the dollar measured in gold has declined catastrophically. Since the 1999 gold low, the dollar has declined by 80% against gold and since 2002 (when Matterhorn Asset Management recommended major gold investments) by 76%.
source: Dollar vs Gold
Adjusted for real inflation (as per shadowstats.com) the 1980 gold peak of $850 in today’s prices corresponds to around $7,200 today. So gold could easily go up 6 times from the current price of $1,220 and still be within normal parameters.
Virtually all currencies show similar declines in value against gold in the last 100 years.
Economists like to explain the value of money by discussing inflation and deflation.
Inflation Inflation vs deflation is a rise in the average price of goods over a period of time. The rate that prices increase is known as the inflation rate. Inflation happens either when prices go up or when it takes more money to buy the same items. Economists typically consider inflation to occur when the prices increase over a period of time rather than from one month to the next.
Monetary inflation happens when the amount of money in circulation increases faster than the quantity of more print money. Today, the government purchases securities from banks, thereby increasing the money supply.
Monetary inflation is often followed by price inflation – the inflation that most consumers can see and identify. Obviously, price inflation happens when the price of goods increases. When there is an increase in money circulation, the value of the dollar goes down. Subsequently, businesses must increase the price of goods to get the same value from their products.
Until 2010, the US is able to find lenders willing to buy its debt and keep things afloat. But this has begun to change in 2011.
Deflation Inflation vs deflation is when the average price of goods falls. When the inflation rate falls below zero, indicating negative inflation, we know that there has been deflation. Remember that the inflation rate is calculated based on the change in the Consumer Price Index, or CPI.There are four situations that cause deflation. Inflation vs deflation
1. A decrease in the supply of money. Let’s say the only goods
available in the world were green apples, and everyone wanted an
apple just as much as everyone else. If we only had $10, then each
apple would be worth $1. But, if our money decreased to $5, then
each apple would only be worth $.50.
2. An increase in the supply of goods. In the same situation as above, let’s assume the number of apples went up to 20, but we still only had $10. In that case, the value of each apple would again be $.50.
3. A decrease in the demand for goods. If everyone already had an apple, then no one would want to use their dollar to buy an apple. The value of an apple falls.
4. An increase in the demand for money. When the demand for more money increases, it’s symptomatic of people starting to hoard money. The value of the apples falls in relation to the dollar.
Inflation and deflation are both parts of a properly functioning economy when all the players in the economic system have an equal playing field and play by the rules. Typically inflation and deflation happen in cycles and can correct themselves without any government intervention. However, in extreme situations, like the Great Depression, the economy does need a helping hand from the Feds.
"Despite attempts by the lame-stream media to dismiss gold’s value as little more than a barbaric lust for things shiny, gold is money. Always has been and likely always will be. Reasons for gold’s unique monetary properties:
"…[gold] has intrinsic value (it’s valuable in many uses), it’s convenient (houses are not easily portable), it’s divisible (the Mona Lisa isn’t), it’s durable (wheat rots), and it’s consistent (diamonds have different grades that are not always easy to see)." Casey Gold and Europe crisis
Conclusion: Governments printing more paper money results in the paper money losing purchasing value. You buy less but pay more for goods. Inflation cannot be cured through monetary and fiscal measures alone; it requires a fundamental change in social and political attitudes and this change usually does not occur until complete monetary chaos forces a change. You cannot cure too much debt with more debt.
Casey Doug, "We have nothing left to fear," Casey Report, May 24, 2010. online version: Gold and Europe crisis
Casey Doug, The Casey Daily Dispatch, May 20, 2010. Dollar vs Gold
Federal Reserve Board, "Historical data," May 20, 2010. Fed Rev Board
Greyerz Egon von, "ALEA IACTA EST," Matterhorn Asset Management, May 18, 2010. US dollar vs gold
Hewitt Mike and Kraamir Petrov, "Money supply and purchasing power," Dollar Daze, May 25, 2010. Hewitt Purchasing power
King Byron, "Inflation US Dollar," Whiskey & Gunpowder, March 01, 2010.
Larkin Nicholas, Claudia Carpenter and Millie Munshi, "Gold Rising as Euro Weakens Spurs More Speculation (Update3), Bloomberg, May 24, 2010. Speculators buying gold
Money alert, "What causes inflation?" Money Alert, Inflation vs deflation
von Greyerz Egon , "Alea Iacta Est! Past the Rubicon and the Point of No Return," Whiskey & Gunpowder, May 24, 2010. Hyperinflation
Wehr Justin "Big Mac purchasing power [chart]," The Economist, May 24, 2010. Wehr hamburger value