## Thursday, October 21, 2010

### The dollar is NOT being "debased!"

One of the things that we hear all the time is that the dollar is being "de-based."

People blame the Fed or excessive government spending or that we went off the gold standard or who knows what else, but they all say the dollar is losing its value and we are having to pay more and more for things.

Well, the fact is, this is absolutely not true! It's totally wrong!!

When people complain about debasement they usually speak in terms of the nominal price of something. For example, they say that a car used to cost \$2500, now it costs \$25,000, so we're having to pay more: the dollar buys less.

But that's a totally flawed way of looking at it.

The way to look at it is to calculate the amount of labor that it takes us to earn enough money to buy a car. (We work to earn money so we need to know how much of work is required to earn a certain amount of money.) If we work less nowadays to buy a car than we did back in 1970, then the dollar buys us more, not less.

And that's exactly what the truth is.

Using data from the Bureau of Labor Statistics and the National Automobile Dealers Association I did a little comparison.

Average hourly earnings today are \$19.10.
Average hourly earnings back in 1970 were \$2.58

The average price of a new car today is \$28,500.
The average price of a new car in 1970 was \$3,900.

Using these numbers we see that it took 1512 hours of work to be able to afford a new car back in 1970.

However, it takes only 1492 hours of work to afford a new car today. We work less today to be able to afford that new car, therefore, the price of the car in real terms HAS GONE DOWN!!!!

Which means...THE DOLLAR BUYS MORE, NOT LESS!!!!!!

And here's the kicker: back in 1970 all you really got was a basic car. A body with an engine. That's about it.

Today you get a car with an engine that starts every time you turn the key (no small feat back in 1970, especially in winter), air conditioning, power steering, power brakes, airbags, power windows, radio, all standard. You get warranties of up to 100k miles and much, much more. In other words, not only do you have to work less to be able to afford the car, but you get much, much, much, much, more car for your money.

The whole notion of debasement is totally, totally, false!!!

And it's not just about cars, it also applies to homes, clothing, food, medical care...pretty much EVERYTHING. The quality of everything has gone up and their real cost has gone down. That's with the Fed and the government spending and the fiat currency and all the other nonsensical crap that these debasement clowns talk about.

When they say the dollar is being debased, that is their BELIEF, but it is not the truth.

And as any smart person knows, there is a difference between belief and truth!

Райчо Марков said...

Nice post!

Do you need any more logical and stronger argument, you MORONS?! :-)

Matt Franko said...

Great post Mike,

And reserve balances (which people often confuse with "money") are very esoteric regulatory interbank balances the quantity of which naturally ebb and flow depending on how much is required to settle transactions in the real economy from time to time; in order for us to buy cars, get paid for working, govt interest rate maintenance, etc... sounds simple!

Many people are still deceived though.

Spooner Magoo said...

Mike, I get your point if you are arguing for the value of the USDollar as a money system, and not the USDollar in my pocket, per se. Yet, either way, to credit the dollar for maintaining the purchasing power of labor and wages, IMO, takes in the credit or blame of many integral factors beyond the primary policy actions of the Fed, which surely have the most impact on performance.

[Isn't an assessment of the USDollar OR the Dollar System really a critique of the Federal Reserve's stewardship every bit as much as the Executive Branch policy and the GDP?]

I believe firmly that standards-of-living, and the wages upon which they are based, are very often derivations of the leading wages for a field, and NOT altruistic assignments by some 'equilibrium stew', courtesy of the dollar.

In my experience, even the leading wages usually (read: always) lag behind cost-of-living increases, and generally only advance due to formal contracts from tough, collective bargaining negotiations.

Given, that it is always a game of catch up, to seek wage increases commensurate to the depreciation of the dollar, I can agree with your argument. Although, I have to remark, it could also make for an argument defending inflation. :)

welfarewarfare state said...

Everything should be much cheaper given the incredible amount of productivity gains over the last 40 years. Those "hours worked" per purchase of a car should be far less today if we would have only had a stable medium of exchange. The incredible productivity gains of some sectors have only helped to hide the rate of true dollar debasement.

As a point of reference, from 1788 to 1913 (the date of the inception of the Federal Reserve) prices DROPPED by 13% during that period. This should be expected if the medium of exchange is stable while productivity gains are being realized. Prices were dropping during the 19th century save for the Greenback era. It was a deflationary boom period. The purchasing power of the money was going up, not down. People have become so inured to steady price increases that they think it is as natural as air. Earlier periods of American history absent fiat paper currency prove otherwise.

Since the creation of the Fed the dollar, which isn't even defined anymore, has lost over 95% of its purchasing power. Since we went off the gold-exchange standard in 1971, the dollar has lost over 70% of its purchasing power.

Mike is completely discouting productivity gains in his example. The questions that need to be ask are: how much lower would real prices be if not for dollar debasement, how many fewer hours worked would be required to purchse a car than 40 years ago a bsent dollar debasement, how has the government robbed the American citizen of most of the productivity gains of the last 40 years?

Lastly, can any of you name a pure fiat currency that lasted for more than 100 years? Come next month we'll be 39 years into our foolish experiment with fiat paper.

Райчо Марков said...

Welfarewarfare state, do me a favor, find some time and read this:

http://heteconomist.com/?p=658

Forget for a moment your religion -be open-minded.

mike norman said...

Median home price in 1970 \$65000 according the Census

Median home price today \$204,000 according to Census

A worker in 1970 would have had to work over 25,000 hours to afford a home, whereas today a worker need only work 10,600 hours. That's Huge! Still not convinced??

welfarewarfare state said...

Mike, nope--not convinced. You are ignoring the incredible productivity gains over the last 40 years. If the medium of exhange were stable it should require far fewer "hours worked" today to purchase a home than 40 years ago. Neither one of us knows exactly how many fewer "hours worked" it would take to buy a house today as opposed to the early 70's if the rate of productivity gains and rate of dollar debasement aren't correctly measured.

On a positive note, I am heartened that you haven't resorted to name-calling today. Perhaps as a gesture of good will I won't ask you when you stopped buying gold today.

welfarewarfare state said...

RVM,

In my life those that defined me as "open-minded" simply meant that I agreed with them. If I only swallowed whole everything that you have been force-fed then I too could be "open-minded."

I am always amused when I am accused of being a religious zealot. Your economic school of thought isn't a purely empirical science though you imagine it to be. Economics is a science of human action and can never be treated like the physical sciences. Much of what neo-liberal economists do is akin to building castles in the air.

I have read Galbraith and a couple of books by Keynes and Krugman. I even once trudged my way through your guys bible, Keynes's "General Theory." I know exactly where you guys are coming from. How many of you have read one blessed word of Menger, Hayek, Rothbard, Mises or other Austrian/classical economists? Thought so.

Unknown said...

In a productive economy where most are engaged in producing activities, price tend to go down because consumables are easily available. Cheaper goods means one has to work less to pay the price. As a result society has more time available for research, entertainment or other activities as per maslow's hiearchy.

However at a time when US has been loosing its manufacturing base to turn into a service economy, prices didn't shoot up as expected because of high imports on borrowed money which fills the supply side gap.

This arrangement can continue until the lenders lend. But growth when you are borrowing requires more borrowing, thereby, increasing our debt.

One more point Mike, since you consider debt as just a matter of double entry accounting. debt at some point of time has to be repaid with interest and if it is as easy to repay as to print money then nobody needs to work.

Printing of money steals the purchasing power from those who earns it with their hard work while the quantity of money with the owner remain unchanged.

Райчо Марков said...

Welfarewarfare state, it might sound not very modest, but I am smart :-). I will tell you why I am smart - because I knew what I didn't know about Economics. For instance until a year or so back I knew for myself that I don't know some very basic terms, like what money is, and how the economy really works - this despite my two semesters of Economics.

Now I see that the world's political elite and majority of economists don't know that they don't know how the modern monetary system operates and what fiat money is - they know it WRONGLY. If they knew, like me, that they don't really know these things, they, like me, would have prized MMT for opening their eyes.

bubbleRefuge said...

WW, I think your argument about productive gains is a red herring because you leave out capacity utilization. Its possible to have productivity gains in deflationary environments. In fact its happening right now. The point is are people getting all the 'stuff' they want. Is the economy running at or near its full potential? Can people get jobs?

welfarewarfare state said...

bubbleRefuge,

Of course prodcutivity gains are possible during a deflationary environment. Most of hte nineteenth centruy was a defationary boom. I really dont know what you mean by "people getting everything they want." People can only purchase things if they have buying power unless they resort to borrowing. In the case or borrowing, they are spending someone else's productivity in the present. Buying power can only come from productivity. My demand is unlimited. Supply creates its own demand, not the other way around.

sparc5 said...

welfarewarfare,

You're getting two things confused. There is more produced for every dollar, that is your productivity gain, then there is how those dollars are distributed. Had the distribution if wages been the same as they were historically, then yes, most of us would be able to buy more. However the top 1% (mostly the top 0.01%) took most of the income gains at the expense of everyone else.

Unknown said...

Mike, if you travel around the world I think you would find that you can't purchase what you could ten years ago with that dollar.

On the topic of cars- @ \$2,500 vs. \$25,000 today- automation, robotics, plastic injection molds, and other massive labor efficiencies along with R&D costs allocated over millions of units sold vs. thousands have kept costs lower. Selling at a loss (incentives) to keep market share is another cost reducer. Creative financing that was never available before reduces costs.

Oh, I guess that's why they went bankrupt.

If we had to pay the real price I'm sure it would be more.

Voodoosunday said...

Mr. Norman's comments and perceptions of currency assume the validity of the 'Labor theory of value'

This theory is central to Marxism, and discounts the most important property of a functional currency, namely as a store of wealth.

With a fiat paper currency, the nominal value represents a receipt or numeric valuation of a human good, be it a physical product, or a service.
Such goods are brought into being through the mobilization of energy, (as a primacy) capital, (as savings or stored wealth derived from previous production) management (enterprise) and labor.

As long as the numeric face 'value' of the fiat currency continues to represent the same value in terms of human goods as it did when created, then that currency is 'honest'
When more receipts are printed or otherwise created, which do not represent any good or service ever rendered, then such currency receipts are fraudulent, even though acceptance is enforced through legal tender legislation.

The relationship between the numerical value of the currency to that of goods is thereby 'negatively altered', which is a fancy way of saying 'theft'

By way of example, if I trade something today, be it labor or any other mix of goods in exchange for a currency unit which represents the value of those goods as a negotiable instrument, it is reasonable to expect that that instrument will be redeemable for a similar value at a future time.

In reality, this does not happen, because the negotiable value embodied representationally in the instrument gets stolen by other people.

The edges of other peoples coins get nibbled off (coin clipping in medieval times) to make more coins which then compete with mine, stealing some of its value.

Other people melt down their coins and dilute the melt with junk, then make more coins then they had before, to compete with mine, stealing some of its value.

Or the FED (other people, I don't care that they simply declare that they are the government and have a right to do so) just prints more receipts (dollars, 'treasuries', bonds or creates various forms of 'liquidity' in cyberspace) for value additions which never occurred.

Those who suffer most from such theft are the 'Chipmunks" of our society, the elders who are no longer involved in the labor market to which Mr. Norman refers, and couldn’t give a hoot as to what the relationship between labor and currency value now is.
All they know is their store of acorns has been surreptitiously looted, and they enjoy a burdensome dependence upon their children, or upon the willingness of young taxpayers to bear the cost of laboring for the loss of their own provision.

Voodoosunday said...

Mr. Norman's comments and perceptions of currency assume the validity of the 'Labor theory of value'

This theory is central to Marxism, and discounts the most important property of a functional currency, namely as a store of wealth.

With a fiat paper currency, the nominal value represents a receipt or numeric valuation of a human good, be it a physical product, or a service.
Such goods are brought into being through the mobilization of energy, (as a primacy) capital, (as savings or stored wealth derived from previous production) management (enterprise) and labor.

As long as the numeric face 'value' of the fiat currency continues to represent the same value in terms of human goods as it did when created, then that currency is 'honest'
When more receipts are printed or otherwise created, which do not represent any good or service ever rendered, then such currency receipts are fraudulent, even though acceptance is enforced through legal tender legislation.

The relationship between the numerical value of the currency to that of goods is thereby 'negatively altered', which is a fancy way of saying 'theft'

By way of example, if I trade something today, be it labor or any other mix of goods in exchange for a currency unit which represents the value of those goods as a negotiable instrument, it is reasonable to expect that that instrument will be redeemable for a similar value at a future time.

In reality, this does not happen, because the negotiable value embodied representationally in the instrument gets stolen by other people.

The edges of other peoples coins get nibbled off (coin clipping in medieval times) to make more coins which then compete with mine, stealing some of its value.

Other people melt down their coins and dilute the melt with junk, then make more coins then they had before, to compete with mine, stealing some of its value.

Or the FED (other people, I don't care that they simply declare that they are the government and have a right to do so) just prints more receipts (dollars, 'treasuries', bonds or creates various forms of 'liquidity' in cyberspace) for value additions which never occurred.

Those who suffer most from such theft are the 'Chipmunks" of our society, the elders who are no longer involved in the labor market to which Mr. Norman refers, and couldn’t give a hoot as to what the relationship between labor and currency value now is.
All they know is their store of acorns has been surreptitiously looted, and they enjoy a burdensome dependence upon their children, or upon the willingness of young taxpayers to bear the cost of laboring for the loss of their own provision.