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Guest Post: The Dollar In Your Wallet Is Only Worth 18 Cents
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Said another way, 18 cents now will be worth one dollar in 38 years.
Huh?
Strong deflationist much?
The dollar is not worth 18 cents in terms of gold.
Divide $20 an ounce gold by $1065 an ounce gold and
get 1.87793427 cents, rivaling the pre 1983 95% copper
penny worth $0.0187628. A penny for our thoughts worth
more than ever thanks to the Fed era...
http://www.coinflation.com/
Why start measuring the dollar debasement from when we went off the domestic gold standard? Measured from the year of our Fed, that little ole green back is worth considerably less, somewhere around 4 or 5 cents.
We should start our calender over, with day one - year one beginning December 23, 1913. And we should adopt the terminology "in the year of our Fed" instead of "in the year of our lord."
Same thing, right?
"In Fed We Trust"
So true, so true...
Said another way 18 cents today will be worth one dollar in 2047.
I endorse this message. Caveat: 40% downside from this level, upto 500% upside if dollar index is at 40 in 2019 and the Fed printing presses trickle down to the average joe.
We might not be able to buy oil, but we sure can burn dollars like the germans burned marks in 1923
hey tyler,
so much for your deflation arguments from about 6 weeks ago!
everyone conforms eventually, even you!
Obamafraud....change we can believe in
"The name's Yukon Cornelius. The greatest prospector in the North!"
"Gold! Gold!"
"Gold and Silver, Silver and Gold!"
"Wahooooooooo!"
http://www.youtube.com/watch?v=BePFbDTqmfg
Experience has taught me that when everybody's dumping dollars and buying gold, buying dollars just might be a good play. Yes, I know all Clark's arguments. I have no interest in refuting them. You can go to Rosie or Deninger or Mish if you want to know the arguments on the other side.
Last time I checked, the dollar valuation that matters is vs. other currencies. That's what $DXY measures. That's what everybody is talking about and here's the key.....THEY'RE ALL FIAT CURRENCIES AS WELL. So what's going to happen? Who knows, but if I was gonna play this, I'd bet some other CBers start manipulating their currencies to protect their export markets. When the do, the dollar goes up and gold goes down. That doesn't mean gold isn't a good long term investment. It might be, but Clark suffers from the same disease as every other gold bug. He loves what he's investing in. Big mistake.
You've got it all backwards my friend - he's investing in it because he loves it - just like you are investing in the dollar because you love it (i.e. think it will make you money). $DXY is just a meaningless distraction.
Sometimes the numbers used in these research notes are disigned to present a specific, and often biased, view. The research paper says that 1 unit of gold has maintained its purchasing power but $1 from 38 years ago is only worth $0.18. But burrying 1 unit of gold is not comparable to burrying one dollar. Placing it in an interest bearing account is the comparable scenario.
But a very back of the envelope calculation (I am using 1-month CDs) shows that $1 invested in 1971 grows to $12 today.
From ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt the CPI in 1971 was 40 and today is 216. So $1 in 1971 burried in the ground is worth around 40/216=0.185 (as given in the research note). But that $1 invested in rolling 1-month CDs, would be worth around $12*40/216=$2.22 today.
Is there something wrong with my logic here? Is this not more of an apples-to-apples comparison?
What is the dollar doing while it's in the CD? How does a CD earn interest?
Well my son, CDs (Certificates of Deposit) are interest bearing accounts. You allow the bank use of your money for a set period of time, and in exchange, they pay you.
It's pretty magical. You should look into it.
Good comment. I think your analysis is central to investment patterns for the past few generations. Most people know that even in the good decades gone past, there was steady inflation. This is why money in the mattress (or the gun locker) became something laughable. You have to generate enough interest on your savings to stay ahead of rising prices and hopefully earn a small profit. This assumes that interest will not be banished from the banking system...
When you take away the incentive of interest, the smart person knows they are losing 2-4% per year. At a local bank, they are offering 2% for a 2 year CD. This is essentially zero net yield. If you assume that inflation is on the high end of 4%, you have already begun the process of paying the bank to protect your money. (lol)
Gold or property seems attractive here because of the enforced low yields. Of course, the bigger players can always operate in the currency markets or park their money at the Fed.
Yes, you and Riley are both correct. Gold that is purchased for an investment and not spent is comparable to a dollar that is placed in an investment and not spent. The key trade-off between them lies in the investment opportunities available for the dollar. During the highest inflationary periods of the 1970s and early 1980s wages and interest rates were allowed to rise under market conditions in response to inflation. This meant low-risk investments such as Treasuries, Municipals, and CDs paid returns that kept the total value of the invested dollars plus investment income even with or ahead of inflation. However, with the union-busting policies initiated by the Reagan administration and the low-interest biases of the Greenspan Fed, wages and interest rates since the early 1980s have not kept pace with inflation (as measured either by 1980 standards or by the jiggered reduced current standards). Dollar investments in low-risk vehicles has become a guaranteed money loser as interest rates are no longer straightforwardly market-determined but instead outright Fed-supressed. So, one measure does not fit all. There is a very different outcome in the comparison of dollar investments vs. gold in high-interest environments than in low-interest environments, and the wise investor does not look backward so much as forward, trying to figure out if there is some reason that interest rates will ever be allowed to rise above the rate of inflation again, and if so, when and for how long.
But then if you went one step further and took away the restrictions against using gold as currency, I think you would see a different outcome when comparing apples to apples.
True. And if you took away the restriction of using gold as a food source it becomes even more amazing. Without rules, anything is possible.
Gwynplaine and Anonymous, Thanks for your replies. Yes, I agree that one needs to consider the interest rate and inflation environment and the time scale when making these comparisons as well. And I also don't disagree that gold will be likely be a better investment in the future than dollars (and I have a significant portion of my portfolio in the barbarous relic). My contention with the original article, though, is that some gold bugs slant their facts and arguments and therefore do not present a fair and objective analysis (ok, few research notes are objective but gold bugs have a tendency to show little attempt at projecting level-headed arguments). And hence why I think that gold bugs are lumped together with a perception of being over-reacting, conspiracy-theory chasing, fear mongering, Luddites. With the attention that Zero Hedge has garnered and for the reasons I read the blog regularly, I wonder whether a bit more quality control should be exercised (or at the very least provide some data or internal analysis/commentary) rather than simply posting any article which elicits the standard knee-jerk rallying calls to flee from the dollar. My fear is that Zero Hedge gets accused of having a blinkered view of the world, fails to live up to its manifesto/mission, and loses the network of contributors and posters which make this place unique.
but only gold will carry you through a currency crisis/currency extinction event.
in times like these does gold serve as an "investment"- $1 worth of gold bought in 1971 (gold @ $35/oz) is now worth $30, whereas your interest bearing acct is worth $12.
'nuff said.
"but only gold will carry you through a currency crisis/currency extinction event.
in times like these does gold serve as an "investment"- $1 worth of gold bought in 1971 (gold @ $35/oz) is now worth $30, whereas your interest bearing acct is worth $12.
'nuff said."
Very true.
Now, with the Fed's QE policies and the return available on CDs, what is the projected value of a current $12 in 38 years time at 0% interest per annum ?
Anyone who still has full faith and trust in the Fed assumes in the not too distant future, interest rates will go back to a normal 5 to 6% per annum.
Ah....... when DO you think that will be ?
Tomorrow ?
heh heh, I don't think so.
Bernanke will NOT increase interest rates UNTIL he is compelled to.
By then, we would at best be one step ahead of 'stealth' hyper-inflation.
Through the powers of constant asset inflation, that 'homedebtor' that we're laughing at, may very easily sell his letterbox for an equivalent amount comparable to our savings at the bank.
Who will be having the last laugh then ?
The frugal saver or the spendthrift drunken sailor ?
"When you take away the incentive of interest, the smart person knows they are losing 2-4% per year. At a local bank, they are offering 2% for a 2 year CD. This is essentially zero net yield. If you assume that inflation is on the high end of 4%, you have already begun the process of paying the bank to protect your money. (lol)"
If I may make an observation to your statement, you are actually PAYING the bank to BORROW YOUR MONEY because you are earning 'negative' return on your deposit.
And it's been like that for almost a decade. And to add insult to injury, you pay taxes on that nominal interest.
Anyway, once 30% of the population figures this out, we'll all be given a shiny new currency regime to ponder.
Interesting article! I did some research recently on the value of the dollar and found the following (summarized with charts at http://tradesystemguru.com/content/view/288/61/ ) :
1) If you use the official BLS CPI figure, a dollar today is worth a little over $0.18 in 1970 dollar terms. But the CPI bears little resemblance to CPI in 1970 due to all the "modifications" made and insisted upon by various administrations to make them look more effective at fighting inflation than they really were.
2) Use the Alt-CPI (ShadowStats) which calculates CPI as it was calculated pre-1982 and you get a dollar today worth around $0.05 in 1970 terms.
3) Take a three month moving average of the price of gold (around $36/oz in 1970) and a dollar is worth less than $0.04 today.
I agree with the conclusions based on the rate of debasement happening today, the dollar will continue to be under pressure, the rate of which will depend on the ability of the government and Fed to continue keeping Treasury bond buyers happy...
Matt Blackman
TradeSystemGuru.com
Interesting article! I did some research recently on the value of the dollar and found the following (summarized with charts at http://tradesystemguru.com/content/view/288/61/ ) :
1) If you use the official BLS CPI figure, a dollar today is worth a little over $0.18 in 1970 dollar terms. But the CPI bears little resemblance to CPI in 1970 due to all the "modifications" made and insisted upon by various administrations to make them look more effective at fighting inflation than they really were.
2) Use the Alt-CPI (ShadowStats) which calculates CPI as it was calculated pre-1982 and you get a dollar today worth around $0.05 in 1970 terms.
3) Take a three month moving average of the price of gold (around $36/oz in 1970) and a dollar is worth less than $0.04 today.
I agree with the conclusions based on the rate of debasement happening today, the dollar will continue to be under pressure, the rate of which will depend on the ability of the government and Fed to continue keeping Treasury bond buyers happy...
Matt Blackman TradeSystemGuru.com
Anyone have any opinion on why gold and silver prices struggled the past few days while the dollar was getting beaten to a pulp and then today, with equities and oil up and the dollar relatively flat, the metals were taken out to the woodshed? Thanks.
RE: Silver is King
Is it Options-Expiration week in America?
I am sick and tired of these goddamn option expirations.
I think what we need is the 7 cent nickel!
http://vids.myspace.com/index.cfm?fuseaction=vids.individual&VideoID=55311469
Sprott Asset Management did a piece for September that put the Unfunded Social Security Trust Fund at $17.5T and Unfunded Medicare Trust Fund at $89.3T. That's a 39% and 55% difference between the two... ? Either way, still staggering. Poor dollar.
This is already a year-and-a-half old (May 08), but:
http://www.house.gov/budget_republicans/entitlement/roadmap_detailed_ent...
(page 25 of PDF, pg 12 of actual dox)
Today Medicare has an unfunded liability of $36 trillion over the next 75 years (see Figure 3 on the next page). This means that the Federal Government would have to set aside $36 trillion today to cover future benefits for the three generations of Americans: retirees, workers, and their children. This translates to a burden of about $317,000 per U.S. household. Moreover, the problem worsens rapidly: in just the next 5 years, by 2013, Medicare’s unfunded liability is projected to grow by 33 percent, to $48 trillion – or about $412,402 per household.
When Social Security and Medicare are taken together, the total unfunded liability is $40 trillion, or about $353,000 per household (see Figure 4, next page). In the next 5 years, that total will grow to $54 trillion, or $474,077 per household.
And we all know that projections of funding required for Gov't programs are always understated, usually by a large factor.
I'm moving to Chad
Jesus. So the Sprott numbers are likely more accurate. Thank you.
Check out Fed Z.1 and you'll see why that figure is so ridiculous. The net value of everything in this country is less than $40 trillion.
Obviously the solution will be in the flick of the legislators' wrists. Ahhhhh no medicare. Ohhhhh no social security.
Regarding point 1)
There are a significant number of US dollars being held abroad.
Granted this doesn't change the arguement that much.
Who cares if the dollar still loses value? The Dollar index means nothing and hardly effects most Americans. Has the cost of living increased lately? NO. Main reason is, our largest trading partner has a peg to USD and that is why we don't feel it. Locally produced things are cheaper too due to low capital utililisation and high unemployment. Everything is getting cheaper IMO. Whatever is not will soon have to adjust to remain in business. Gold on the other hand is for Jonny come lately's.
PS. how would you feel if you had bought gold in 1980? It has never recovered since. You'd still be down 50% in regards to purchasing power. And as for this article being good advice, I say, don't ask a pimp for an arranged marriage.....Shiiit fool
classic!
thanks for reminding me about the arguments against gold, and how they all essentially depend on buying in 1980. what about $35 to $1050?
i'll dump gold when people quit parroting such tripe.
Why is it you people who are huge fans of gold turn it from an investment into a religion? It's just an investment. Take up the torah if you want religon. There's this amazing insecurity with gold. Who gives a fuck?
You'll dump gold based on comments in some forum? Are you for real?
who gives a fuck? apparently you do.
Maybe you didn't read my comments. They were intended to highlight your ignorance of turning your investment into a religion. Like a true zealot, facts mean nothing to you people.
Ding Ding Ding!
Of course thanks to recent articles from the ZH cast and crew, we know about what the market's value is now don't we?
Ultimately, it boils down to what you need, and what people will accept in trade for it.
The Fed is printing money to reflate the system and I do not think they will allow deflation to happen. Inflation is the likely outcome in a few years
instead.
My personal opinion is that it will be better than expected growth (e.g., a higher than expected GDP later this month, and then for the 4Q09) that may cause the dollar to rally.
Also, given all the negativity recently, I believe that very short term the dollar may have bottomed, and as soon as foreign central banks intervene (e.g., Japan and other exporting countries around the world), it will be heading higher. Long term though, it should continue moving lower, just as it has been doing for years now.
And here is something unrelated to the article, but I believe it is important for any U.S. dollar bears out there to understand:
There is currently no real substitute for the U.S. dollar as a trade and reserve currency, nor will there be one any time soon (i.e., for many years to come).
I can travel anywhere in the world and people in a store will likely get my U.S. dollars for any goods I wish to purchase. I simply cannot walk anywhere with SDRs in my account and have a reasonable chance that people will even know what it is, let alone agree to take it for goods.
admin
at http://invetrics.com
Eventually the rest of the world will get sick of our crap and dump the dollar, the real question is when?
Hey China give us some of your cool stuff and we will give you some more of this really cool green paper....
*sigh*
People.
The biggest reason your dollar is weak is that the wealthy do not hold their dollars in dollars. As a matter fact, most americans don't. They hold it in intermediate forms, such as equity or bonds (non-treasury). These instruments distort the value of your dollar because these items are subject to the principles of interest and discounting. Interest distorts the value of your dollar, the higher the risk assigned to the instrument and the further out its maturity date, the greater the reduction of its present capital value. But you exchange your present capital-wealth for that distorted capital-value subject to time restrictions.
If you held your dollar in DOLLARS, it would reverse the weakness it's experiencing at this very moment. Everyone wants you out of your dollar before they crash the market because then nobody will HAVE dollars during the crash. It's the most idiotic thing ever because it's the one thing they try to convince you to leave. The dollar has gotten weaker over the past 30 years because everyone has pushed their funds into the stock market and different assets. The worst part of it is it's mainly the rich who are in the market and it's mainly the rich with the money. The lowering of interest rates was designed to fool people into a better state and patch over the shittiness of the 1970's. But the way they accomplished this was by readjusting the CPI calculations, we were experiencing the same interest rate, it was just our measurement that was different.
People, people.
Learn what your dollar is. It's not what everyone is telling you.
"It is certain that if people do not understand a true political economy, they will make a false one of their own" ~ W.S. Jevons - The Theory of Political Economy