Pajamas Media: The Incredible Shrinking Dollar

March 24, 2008 12:30 AM

The plummeting value of the dollar is making for a restless electorate: no wonder “change” is a successful campaign theme, says John Tamny.

By John Tamny

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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Comments (7)

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 04:11 AM

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 05:22 AM

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 09:34 AM

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

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

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 01:36 PM

John Moore :

I remember well the '70s, and all the arguments about "fiat money" etc were all over the place.

But things aren't as simple as the gold bugs would have us believe (if they were, Gold would not have *suddenly* increased in price - it would have tracked inflation).

There is competition in the world for energy - so of course we pay a bunch more for it. Much of the world is free-riding on our military expenditures - and we pay. Much of the world is free-riding on our Pharmaceutical industry - and we pay.

Today, with a very real credit crisis, resulting not from governmental action so much as failure to regulate, there is a need for liquidity, so that the relatively small bad debt can be unwound from the unbelievably complex ways in which it has passed through the system. If the money injected into the system is taken back out after the crisis fades, that part of government action won't contribute to inflation.

Mar 24, 2008 05:13 PM


Return to PajamasMedia Bookmark PajamasMedia Latest PJM Exclusives Obama and His Temple How I Learned to Stop Worrying and Love Cold War II Hillary?s Done, But Universal Health Care Proposals Live On Live from DNC: Bill Get His Digs In PJM Political 8/27/08: Michelle Malkin & Co. Survive Denver?Plus A PJTV Preview! Pajamas TV Launches Support Pajamas Media; Visit Our Advertisers Related PJM Links The Incredible Shrinking (Or Is It Growing?) al-Qaeda The Incredible Shrinking Candidates The Incredible Shrinking New York Times The Shrinking News Dollar The 10 Most Incredible Recordings of All Times Subscribe Enter your email address and check the appropriate button to subscribe or unsubscribe to a daily digest from this site: subscribe unsubscribe	What I Would Say to Eliot Spitzer Frontline's 'Bush's War': Not About Bush or His War The Incredible Shrinking Dollar March 24, 2008 12:30 AM The plummeting value of the dollar is making for a restless electorate: no wonder “change” is a successful campaign theme, says John Tamny. Support Pajamas Media; Visit Our Advertisers By John Tamny 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 ——— Return to Pajamas Media homepage digg this del.icio.us comment email print x Email this link to: Your email address: Message (optional): Related PJM Links The Incredible Shrinking (Or Is It Growing?) al-Qaeda The Incredible Shrinking Candidates The Incredible Shrinking New York Times The Shrinking News Dollar The 10 Most Incredible Recordings of All Times Latest PJM Exclusives Obama and His Temple How I Learned to Stop Worrying and Love Cold War II Hillary?s Done, But Universal Health Care Proposals Live On Live from DNC: Bill Get His Digs In PJM Political 8/27/08: Michelle Malkin & Co. Survive Denver?Plus A PJTV Preview! Pajamas TV Launches Comments (7) 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 04:11 AM 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 05:22 AM 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 09:34 AM 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 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 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 01:36 PM John Moore : I remember well the '70s, and all the arguments about "fiat money" etc were all over the place. But things aren't as simple as the gold bugs would have us believe (if they were, Gold would not have suddenly increased in price - it would have tracked inflation). There is competition in the world for energy - so of course we pay a bunch more for it. Much of the world is free-riding on our military expenditures - and we pay. Much of the world is free-riding on our Pharmaceutical industry - and we pay. Today, with a very real credit crisis, resulting not from governmental action so much as failure to regulate, there is a need for liquidity, so that the relatively small bad debt can be unwound from the unbelievably complex ways in which it has passed through the system. If the money injected into the system is taken back out after the crisis fades, that part of government action won't contribute to inflation. 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Comments (7)

freetoken :

syn :

Andrew :

Ken :

Webutante :

Republicae :

John Moore :

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