Mike Norman had an intriguing graph a while ago ... showing that if one uses the broad, rather than the major currencies, index for the US trade weighted exchange rate, then the dollar did not depreciate.... I decided to explore the issue....
... the real indexes are quite similar, and by all measures the dollar has depreciated in real terms from the early 1970s, with two big swings associated to the Reagan and Clinton (asset bubble driven) booms. The point is that in countries with higher inflation than the US depreciated their currencies in nominal terms significantly (in part that explains their higher inflation rates), and in nominal terms the US currency appreciated, but once inflation is taken into consideration the index looks very much like the major currencies one, with an overall depreciation of about 20% or so in real terms.Naked Keynesianism
The dollar has NOT depreciated since the 1970s?
Matias Vernengo
23 comments:
To me, based on observation, if two FFNC country's govts are not creating price instability (which some call "inflation" if the govt is price setting increasing prices), ie as long as two country's govts keep prices stable by not increasing their bid for public provision or allowing their banks to use increasing collateral prices,
ok so as long as their is price stability in a pair of countries, the country whose govt is delivering increasing quality of life to it's citizens IN REAL TERMS will have the stronger currency.
rsp,
It makes little sense to compare changes in the nominal exchange rate of a fiat currency like the US dollar with nominal exchange rates of other fiat currencies if all of these currencies are inflating most of the time because in a race to the bottom the nominal exchange rate movements are all relative.
Better to look the appreciation or depreciation of the dollar relative to gold as a proxy for the general price level, which like it or not remains the best (not perfect) monetary constant available. The median US income in 1971 was $7,900, which could buy 225.7 ounces of gold at $35/oz. By contrast, the median US income in 2012 was about $50,000, which could only buy 30 ounces of gold at at average price in 2012 of $1,669/oz.
This means that in terms of what a an ounce of gold can buy in the market place, today's median income is only worth a little more than 13% of the purchasing power of the median income in 1971. Of course this does not compare apples to apples, because most products are vastly improved in the past 40 years and entire industries have emerged which previously did not exist.
"Better to look the appreciation or depreciation of the dollar relative to gold as a proxy for the general price level"
No, that's completely irrelevant.
Gold is a speculative asset which largely serves no real purpose. It's just held in vaults or used to make pretty jewelry.
I don't know why you austrians are so obsessed with that shiny metal.
If you have a personal fetish for that shiny metal then buy some. But please don't expect everyone else to share your fetish.
"Better to look at the appreciation or depreciation of the dollar relative to gold as a proxy for the general price level"
"No, that's completely irrelevant.
So say you, but I reckon market participants may also have a say with regard to the relevance of gold.
"Gold is a speculative asset which largely serves no real purpose."
Any asset can be speculative but gold also has a pretty good track record as a store of value.
"It's just held in vaults or used to make pretty jewelry."
Agreed. Central banks all over the world hold gold in their vaults as a reserve monetary asset. My father had his own jewelry business in the diamond district on 47th St in Manhattan and did rather well for a guy who never completed high school, but I think he produced more jewelry in platinum than in gold.
"I don't know why you austrians are so obsessed with that shiny metal."
First of all I'm not just an Austrian. I'm also part Supply Side and part MMT with a touch of Marxist outlook as well. I'm not as phobic about deficits as Austrians are and I'm not as hostile to gold as MMT is. Fact of the matter is that gold is still viewed by many as the currency of last resort. A derivatives pal of mine described gold as CDS for currencies. In any event, as the monetary system evolves I think it is likely that gold will play some kind of role going forward.
"If you have a personal fetish for that shiny metal then buy some. But please don't expect everyone else to share your fetish."
y - No need to get so condescending, but if you must know I do own some silver & gold as insurance against bad things happening because if by chance and circumstances paper money ever does become worthless, people will always accept silver and gold in exchange for goods and services.
"market participants may also have a say with regard to the relevance of gold."
Only a tiny fraction of the population owns gold in anything other than tiny quantities.
"gold also has a pretty good track record as a store of value"
So have other things. Gold had a massive run recently but before then, not so great. Overall it's been downhill since august 2011.
Gold would be a "monetary asset" if it were used as money. But it's not. Central banks don't use gold as money.
I'm not hostile to gold, I'm hostile to people who fantasize about imposing a gold standard on everyone, like Ron Paul.
"if by chance and circumstances paper money ever does become worthless, people will always accept silver and gold in exchange for goods and services"
You'd better buy yourself some machine guns and a bunker too. Just in case :)
If there is a big hyperinflation for some reason, gold might be a good thing to own, but so would other things.
Countries that have experienced hyperinflation haven't "gone back" to using bits and pieces of gold as money. There's been a number of hyperinflations around the world, but last time I checked all national currencies are currently "paper" currencies.
y, I think that Ed is saying that gold is one of the factors to look at in assessment. I look at it, if only because a lot of other people do, and markets move based on perception ("expectations") rather than reality ("fundamentals"). I am not too concerned with what gold is doing by itself, but rather in ratios.
Precious metals are also a portfolio category and % of portfolio allocated to precious metals is usually counter-cyclical, especially when uncertainty appears great and there a strong possibility of crisis is perceived.
In a thousand years time there'll probably still be people going "The end is nigh! Buy gold!! From me!!!"
"I'm not hostile to gold, I'm hostile to people who fantasize about imposing a gold standard on everyone, like Ron Paul."
y - Ron Paul is not trying to impose a gold standard on everyone. What he is trying to do is introduce competition in currency by seeking to end federal, state and local taxation on the purchase and sale of gold and silver coins. What's so horrible about letting people choose which currency to use? I suppose that undermines the monopoly of the currency issuer, but if most people really are not interested in carrying around shiny metal coins then it would be a moot issue.
Radical libertarianism of the left and right is fundamentally opposed to national sovereignty aka "the state." Radical authoritarianism is fully committed to national sovereignty and state control of the levers of power. The political spectrum on this axis ranges between these two positions, those on the libertarian side desiring weaker national sovereignty and greater individual liberty, and those on the authoritarian side desiring greater national sovereignty and weaker individual liberty.
He wants to turn gold into a privileged tax-exempt asset.
He also wants to end government issuance of "paper money" by forcing the government to use only gold and silver, as he doesn't know how to read and thinks that this is what it says in the US constitution.
He also wants to ban private credit by outlawing what he calls "fractional reserve banking".
So basically what he wants is an economy in which only gold and silver are money. He wants to impose this on the US by law.
"those on the libertarian side desiring weaker national sovereignty and greater individual liberty, and those on the authoritarian side desiring greater national sovereignty and weaker individual liberty."
I think you're wrong there Tom. I don't see right-wing libertarians as being in favour of liberty. They want power to be wielded only by those with the most wealth, and to abolish all rights and freedoms that are not directly dependent on private property and wealth.
right-wing libertarians want a sort of dictatorial police state which enforces property rules defined by an absolutist law that can never be changed, in which all other rights and freedoms have been abolished and are forcibly suppressed.
I am an engineer and my daughter will graduate as an engineer in May. My starting salary in 1971 inflated to 2013 comes up with almost exactly her starting salary in nominal terms. In 1971 gasoline cost $0.35 a gallon. Using that and $3.75 today (and assuming 40 hours of week of work) I calculated in 1971 it took me 3.4 minutes of work to buy a gallon of gasoline and it will take my daughter 6.7 minutes. That says (I think) that real buying power (at least for gasoline) is roughly about half of what it was in 1971.
I don't see right-wing libertarians as being in favour of liberty. They want power to be wielded only by those with the most wealth, and to abolish all rights and freedoms that are not directly dependent on private property and wealth.
That's what individual sovereignty and an absolute right to private property entail. There are no civil or human rights other than non-coercion, although one may use violence to defend oneself and one's property, and a person is free to can ally with others for mutual protection. Since there is no state there is no law or public enforcement, only custom and alliances.
"I think you're wrong there Tom. I don't see right-wing libertarians as being in favour of liberty. They want power to be wielded only by those with the most wealth, and to abolish all rights and freedoms that are not directly dependent on private property and wealth.
"right-wing libertarians want a sort of dictatorial police state which enforces property rules defined by an absolutist law that can never be changed, in which all other rights and freedoms have been abolished and are forcibly suppressed."
Wow! That's fascinating!
Today's environmental regulations, increased taxes and more complex extraction techniques make each gallon of gasoline a more labor intensive, better quality product with fewer negative externalities than the gallon purchased in the 1960s.
It is really hard to come up with any comparables that don't change over time. You have to give credit to the folks that do the inflation measures in the CPI and PCE -- they actually shop for items and calculate these things. It is very difficult.
I calculated in 1971 it took me 3.4 minutes of work to buy a gallon of gasoline and it will take my daughter 6.7 minutes. That says (I think) that real buying power (at least for gasoline) is roughly about half of what it was in 1971.
Vehicles get at least twice the mileage they did in 1971,and there's the lead — externality figures into true cost.
"non-coercion"
The right-wing libertarian dictatorial absolutist police state dystopia is profoundly coercive.
"there is no law or public enforcement"
There are both, but they only serve a dictatorial absolutist regime in which there can be no dissent.
where does the US get most of its oil from? Isn't it Saudi Arabia?
I guess they must have some price setting power. The US seems to be ok with this so long as they sell it in dollars.
I was exagerating, but that's what right-wing libertarians do all the time.
But yes, they do want to take away your rights.
Gold is probably the worst measure of anything. Gold is not in anything. Gold could go to a million an once. and only the 2% of the population that own it would notice or care. It would be like using the price of a Honus Wagner baseball card as the dollar benchmark.
"This means that in terms of what a an ounce of gold can buy in the market place, today's median income is only worth a little more than 13% of the purchasing power of the median income in 1971."
my god Rombach are you delusional enough to think that the median household is 87% poorer than in 71
The only real measure is how many hours of labor it takes to buy a comparable basket of goods.
recent post here had some excellent analysis.
http://jerrykhachoyan.com/the-affordability-of-food/
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