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The Incredible Shrinking Dollar
The plummeting value of the dollar is making for a restless electorate: no wonder "change" is a successful campaign theme.
Picture the money that is in your checking account as you read this. Your bank is federally insured, but something strange is occurring. As the months and years go by, the money you’ve saved is worth less and less. No one’s robbed you, but in a very real sense, you’ve been a victim of thievery.
The above is the certain result of inflation. Contrary to Federal Reserve assumptions suggesting inflation results from too much growth, the real truth is that inflation is a decline in the monetary standard. In our case, it’s a decline in the dollar’s value. And when the Federal Reserve oversees a falling dollar, it is robbing you in much the same way a thief might by removing actual dollars from your pocket.
Sadly, inflation is what Americans have experienced over the last several years. While the dollar as recently as 2001 was worth 1/250th of an ounce of gold, as this is being written a dollar would only buy 1/1000th of a gold ounce.
This helps to explain why all manner of goods, from gasoline to rent to food, have become more expensive. All are priced in dollars, and with the dollar far weaker today that it was at the beginning of the decade, each has risen alongside the dollar’s decline. This is inflation, and its first order impact is one whereby your money doesn’t buy as much as it used to.
When we take this further, we have to say that inflation is a tax; albeit a hidden one. Many of us blanch when our legislators seek to fund all manner of government spending through greater penalties on our work effort. That’s a tax we can see with the arrival of each paycheck.
Sadly, inflation is a lot more insidious. It creeps up on us gradually, but it’s a tax just the same for eroding the value of our work week by week. Even though our paychecks may look the same in terms of dollar amount, those dollars we’re receiving surely buy a lot less. The government can increase taxes by raising our rate of taxation, or through inflation it can reduce the real amount of its debt through dollar debasement. The average worker is harmed either way.
Worse, the ravages of inflation don’t just end there. Lest we forget, most of us have jobs thanks to the savings of others. The paycheck we receive each month is the direct result of someone else having saved. The saver, rather than spending the money, put the money in the bank or invested it such that entrepreneurs and businesses could access it in order to create jobs.
And inflation is most harmful to job-creating savers. First off, each day they hold onto money rather than spend it, their money is worth less. As such, there exists the incentive to spend rather than offer up job-creating capital. Secondly, those who save do so in the hope that their investment will be worth more in the future. When the Fed allows the value of the dollar to decline, investors see any investment gains eroded by the falling unit of account. Rather than risk their money on uncertain ventures, they consume it.
What this means for the average worker is that just as inflation makes the money we earn worth less, it also reduces the amount of money available to fund our wages. That is so because when we inflate, investment capital shrinks. Inflation is a sharp knife that cuts myriad ways, all to the detriment of our individual economic health.
All of this speaks to a fairly consistent pattern when it comes to successful presidencies. If it’s agreed that falling currency values enervate and often impoverish the average worker, we can then see why certain presidents succeeded, while others failed. Richard Nixon’s decision to take us off the gold standard opened the inflationary floodgates, and the falling dollar had voters unhappy enough such that the minor break-in that was Watergate ultimately ended his presidency. Inflation similarly made Jimmy Carter a one-term president.
Conversely, Ronald Reagan and Bill Clinton both presided over a rising dollar. The economy and stock markets under each president soared. Reagan emerged from the Iran-Contra affair unscathed, while Bill Clinton managed to escape impeachment given the electorate’s happy countenance when it came to their personal economic circumstances.
Like Nixon and Carter, George W. Bush has overseen what in GDP terms is a rising economy. Still, the dollar has been in freefall under him, and the electorate is unhappy. This is always the case. Voters will excuse many mistakes, but when government policies undermine the value of their earnings, they necessarily become unhappy.
So when we look to the presidential candidates in our midst, we in many ways shouldn’t be surprised by the success of Barack Obama’s populist message. Voters have a real economic complaint, and it has to do with an inflation that has taxed their earnings all the while making it harder for them to increase their pay. Voters DO want change, and while it’s safe to say Obama’s ideas aren’t pro-growth, it’s also true that the inflation in our midst has made his message of hope far more appealing than it would otherwise be in a normal, inflation-free environment.
John Tamny is editor of RealClearMarkets, and a senior economist with H.C. Wainwright Economics. He can be reached at jtamny@realclearmarkets.com
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15 Comments
1. freetoken:Do Americans really care, or even think, about the falling dollar?
During my daily shopping chores I’ve heard people complain about gas prices… and taxes. However, I’ve never heard anyone (in person, on the street) complain about a falling dollar.
Amongst financial intelligentsia – yes, the dollar comes up in conversations. There, and of course on the internet.
My suspicion is that most Americans will react negatively when hearing about a “weakening dollar” not so much out of economic theory, but rather as a reflex; in a sense it sounds to the ear as if America is losing face (if I may use an Eastern concept.)
The weak dollar has helped the balance of trade problem, and were it not for oil we would have made serious progress by now in balancing our payments.
Inflation itself (and not a falling or rising dollar) when manifesting strongly does, I agree, tend to ruffle the feathers of the electorate. However, Obama’s popularity does not seem to me to be based on any fear of inflation or sense of loss in value of one’s savings.
Mar 24, 2008 - 4:11 am 2. syn:“The weak dollar has helped the balance of trade problem, and were it not for oil we would have made serious progress by now in balancing our payments.”
Agreed, and if it were not for restrictive and oppressive eco-imperialism we would not be so freaked about oil.
Mar 24, 2008 - 5:22 am 3. Andrew:Do any of you realize that the price of oil has raised in part because of the falling dollar? It isn’t just a coincidence that the dollars fall and the rise in oil prices have happened simultaneously. As someone who has just come back from abroad I can say that the falling dollar IS a huge issue and one that we should be concerned about. Now I do think that things will even out in time as I have a very hard time believing those countries in the Euro zone have higher productivity than us. But this event will happen faster if we change or spending as a country and move beyond our debt culture.
Mar 24, 2008 - 9:34 am 4. Ken:But how is the change in the price of dollar compared to other currencies relate to inflation? The title talks about the currency exchange rates, while the article talks of inflation. Are we really left to assume that they are one and the same?
Mar 24, 2008 - 10:10 am 5. Webutante:Thank you for this astute piece. Am starting to get what you’re saying and it’s making more sense.
Mar 24, 2008 - 11:05 am 6. Republicae:Ah, the falling dollar, there really is nothing like Fiat Money to devalue a monetary system of a nation, is there? Every single Federal Reserve Note must be borrowed into existence, whether that “dollar” is digital or physical, it must be borrowed in order to be put into circulation. Since ever single “dollar” is a legal notification of a debt obligation that basically makes it little more than an IOU. There is one major problem with a monetary system that totally relies upon debt as its foundation, eventually due to the over-zealous use the Federal Reserve’s “printing press” and expansion of the money supply, the money will eventually enter into negative value and hyper-inflation will destroy all economic viability and thus prosperity, our prosperity.
Evey Fiat Monetary System has an inherent maximum possible life-span, a termination point that is reached when the system reaches the boundries of mathematical law. The debt becomes so massive and irreversible that it consumes all economic growth and eats away at all economic activity until the system collapses. Every Fiat System in history has met the same fate, ours will be no different.
Consider a few things: today it takes over $22,000.00 to purchase what $1,000.00 purchased prior to the 1913 Federal Reserve Act. Now, what has happened to all that real wealth? It has been systematically drained away from the People who labor long and hard to realize a living through the hidden tax called inflation.
Consider this: a person making $32,000 per year today has the equivalent purchasing power of $5,907.40 1970 dollars. So, the same person making $15.38 per hour today is equal to making $2.84 per hour in real purchasing power in 1970 dollars. It is not the price of goods and services that have risen so much, but the purchasing power of our dollar that has been so drastically reduced. Our standard of living has been effectively reduced through fiat money inflation.
Is there any wonder that poverty is becoming rampant? The government has no other choice but enforce minimum wages in order to keep the working poor at some level of subsistence. At the current $5.85 per hour a person has the same 1970 purchasing power of $1.08 per hour, at 40 hours per week that person is effectively making $43.20 per week to make ends meet.
What are we waiting on, to become serfs of the State? The system that has been created by the Federal Reserve is little more than a Fuedal System of Peonage where the men and women of this country labor to pay continual rents to the “lords of the manor”, with the money near negative value and the actual wealth being siphoned off to the Central Bank, the government and those fortunate few who are first in line at the FED’s feeding trough. It has, in essence, become a vast system for the redistribution of wealth from those who produce to those who watch the rest of us produce.
ARE YOU PISSED YET? No, well give it another couple of years and when hyper-inflation makes it impossible for you or I to buy a loaf of bread without spending a fortune, then you will be pissed, then you will rise up in rebellion and look for enough rope to hang those criminals who have done this to our country and this People!
Mar 24, 2008 - 1:36 pm 7. Lily S.:You write very beautifully and this is such a wonderful piece!
Lily S.
Mar 24, 2008 - 9:57 pm 8. John Tamny:Zrii For Life!
http://zrii-for-life.blogspot.com/
Most Americans don’t watch the dollar per se, but they DO notice when the wages they earn buy less, and even more, they notice when their pay increases don’t keep up with price increases. That’s the shame of inflation. It’s hidden when it comes to the paycheck, but then the paycheck has less value.
Still, it’s a basic truth that presidents and governments rarely survive dollar debasement. People point to Iraq, excessive government spending, and all manner of things, but the dollar is often paramount. Had it been stable under Bush, he would not be suffering the approval ratings that he is now.
Mar 25, 2008 - 7:01 am 9. Wolf Pangloss:Ken asks:
But how is the change in the price of dollar compared to other currencies relate to inflation? The title talks about the currency exchange rates, while the article talks of inflation. Are we really left to assume that they are one and the same?
Yes, the shrinking dollar means that the dollar is suffering from more inflation than the currencies against which it is measured. The starkest way to show this is to examine the cost of intrinsically precious metals. In terms of gold, it has gone from 250 dollars per ounce to 1000 dollars per ounce. That doesn’t mean that gold has become that much more valuable, but that the dollar has become that much less valuable. Again, gas has gone from about $1 per gallon to $3 per gallon. This is not because OPEC has it out for us, though that is a problem, nor because China and India are increasing their demands, but primarily because the dollar is worth 1/3 the amount of oil it used to be worth.
The culprit is loose money, as determined by the Fed’s too low interest rates. The rates need to go up to stop US inflation and strengthen the dollar. The two things always happen in tandem. This will drive down the stock market and drive bonds upward, and it will not buoy up home prices, but it is necessary because otherwise we will see another 30% increase in the price of food from this year to next year, and even though food and energy prices aren’t included in the phony baloney inflation computation they are real costs, real big costs, and whether it is counted as “official inflation” or not a 30% increase in costs year after year is hyperinflation. Nobody wants to live in a place like that.
Mar 25, 2008 - 9:00 am 10. Sam:It seems to me that a “global economy” requires a global standard of living and this is where we are headed.
As a computer programmer who lives in constant fear of losing my job to cheaper foreign labor, this is probably the best outcome that I can hope for (not that it’s good, just the best that I can hope for). The higher cost of labor in India (in dollars) along with the already high cost of managing outsourcing relationships will make me more competitive.
I won’t be able to afford consumer goods from Walmart anymore because they are all made in China, but at least I won’t have to work there.
Mar 25, 2008 - 3:46 pm 11. muggsie:The article conflates inflation and the value of the dollar versus foreign currencies. Our level of inflation has been relatively low recently compared to the late 70’s/early 80’s. However our dollar is cheap against other currencies because we have low interest rates. But this helps us to export our goods and that helps our GDP. Exporters are very happy.
Mar 25, 2008 - 4:51 pm 12. Robineus:The government reported inflation rate is more than a little suspect. The price of gold and oil, real commodities, indicate that inflation has been running rampant the past few years. It is likely only to be reported in the coming years, despite the fact that the real inflation has already happened.
Mar 26, 2008 - 12:07 pm 13. Steve:Great piece! Many of the older generation have definitely fallen victim to this monetary fraud. They feel their bank CDs are ’safe’ because they are FDIC insured. If only the FDIC could insure ‘purchasing power’.
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