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Yield Purchasing Power: $100M Today Matches $100K in 1979
by Keith Weiner
I wrote a story about poor Clarence who retired in 1979, and even poorer Larry who retired last year. I created these characters to challenge the notion of calculating a real interest rate by subtracting inflation. The idea is that the decline of a currency can be measured by the rate of price increases. This price-centric view leads to the concept of purchasing power—the amount of stuff that a dollar can buy. It’s the flip side of prices. When prices rise, purchasing power falls.
Recall in the story, Clarence retired in 1979. At the time, inflation was running at 14% but he could only get 11% interest. Real interest was -3%, and Clarence had a problem. He was losing his purchasing power.
Suppose Clarence bought gold. The purchasing power of gold held steady for the rest of his life (see this chart of oil priced in gold). Gold does solve this problem. However, gold has no yield. Clarence is only jumping out of the frying pan and into the fire. Sure, he escapes dollar debasement, but then he gets zero interest.
Let’s look at how zero interest impacts Larry. He makes $25/month on his million dollars. Obviously he can’t live on that. So he gives up his nest egg, for eggs. For a year, he feasts on omelets. Since inflation was
slightly negative, the same swap in 2015 nets him the same plus a few additional quiches.
Through the lens of purchasing power, we don’t focus on the liquidation of Larry’s wealth. We ignore—or take it for granted—that he’s trading his life savings for bread. We only ask how many loaves he got.
If you had a farm, would you consider trading it away, to feed your family for a year? I hope not. A farm should grow food forever. Its true worth is its crop yield, not the pile of bacon from a one-time deal.
How perverse is that? It’s nothing more than what zero interest is forcing Larry to do.
A dollar still buys about as much as it did last year. Larry’s purchasing power didn’t change much. However, debasement continues to wreak its destruction. Steady purchasing power does not mean that the dollar is holding its value.
It means that prices are wholly inadequate for measuring monetary decay.
Our monetary disaster becomes clear when we look at the collapse in yield purchasing power. This new concept does not tell you how many groceries you can get by liquidating your capital. It tells how much you can buy with the return on it.
In 1979, Clarence’s $100,000 savings earned enough to support his middle class lifestyle. In 2014, Larry’s million dollars didn’t earn enough to pay his phone bill. To live in the middle class, Larry would need over a
hundred million bucks. That’s a pitiful income to make on such a massive pile of cash. It reveals a hyperinflation in the price of capital, which has gone up 1100X in 35 years.
It also shows that the productivity of capital is collapsing. Back in Clarence’s day, businesses earned a high return on capital. It was high enough for Clarence to get 11% interest in a short-term CD. Unfortunately, the dollar rot is in the advanced stage now. There is scant interest to be earned. Return on capital is low, and so borrowers can’t pay much.
Retirees suffer first, because they can’t earn wages. Normally they would depend on interest, but now they’re forced to live like the Prodigal Son. They consume their wealth, leave nothing for the next generation, and hope
they don’t live too long. Zero interest rates has reversed the tradition of centuries of capital accumulation.
Purchasing power may look fine, but yield purchasing power shows the true picture of monetary collapse.
This article is from Keith Weiner’s weekly column, called The Gold Standard, at the Swiss National Bank and Swiss Franc Blog SNBCHF.com.
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We know that! We know we live in a world without yield. Zero yield means the same result for people with 100k and for people with a billion of assets = ZERO! Of course people take risks and than they make some yield. But I would argue that presently after adequate risk reserves the yield is again zero. At least for all sorts of financial products including bonds, stocks and also for real estate. Experienced investors produce occasionally significant yield by investing into technology or unquoted stocks. That is an exception I would like to disregard here. The burning question remains: How the heck will a world without yield work? Is a world of no-yield compatible with our financial system and can our current system survive a no-yield environment? We know that people on fixed income suffer in a no-yield environment because of inflation (which exists contrary to the statistics we are getting) We know that insurance companies and pension funds will be shreddered. We know that pensioners will die in poverty. But what about the system itself? Will entrepreneurs continue to work if the result of their work (money) vanishes like hot air in an environment with a negative real interest rate and can not be preserved? Why should they! Would they not be in a better position getting rid of all their obligations and making themselves a good time? And what about the banks? Can they survive in an environment without yield? I doubt it. For the moment the people indulge in stocks that have no yields but seem to promise ever increasing stock prices. These are paper gains but no yield. There is no substitute for yield. And the consequences for system stability are still being completely neglected.
The only place I would disagree with this article is that there is a great deal of inflation that is under counted. Been to the supermarket, car dealer or rented a home lately?
Both ends of the candle are burning. Interest rate on capital and the value of that capital in purchasing power. The time value of money today is at an all time high.
The only person to take action against the Fed was a muslim, who tried to blow up one of the Fed buildings. As far as I know, he is the ONLY person to take any kind of concrete action against the Fed. It's possible some muslims understand where all this trouble originates.
I'm still a Zimbabwe trillionaire bitchez!
What kind of people have we become that we would sit on the edge of our seats each week to hear this disgusting woman – this Janet Yellen -- tell us what the bankers have decided we can endure for their benefit? What kind of king is this disgusting women that we should let her rule us?
What kind of media, what kind of congress and what kind of president do we have that they run for cover like cockroaches when the cartel threatens them? These defenders of our freedoms and our property have become the agents of the cartel. And this woman, this disgusting Yellen. is the spokesman for these criminals.
How long will we be forced to listen to her?
What a disease, what a sickness. That a nation must depend on this woman for its livelihood. If it turns out you based your future on your labor, tough luck. If you tried to delay your retirement or your spending and want to use a market yield on your reserves to live out the rest of your life with decency, good luck.
And tough luck if you intend to plan a small business or save for a home.
You’re out of luck with this woman. She doesn’t care about you. Her bosses need the money, your money; already filthy with riches and with the power to get more, it is not enough; they need yours through inflation - and those zero interest targets are their weapons to get yours and get it every day.
Because money is power and they intend for you to have none.
None of this criminal activity by Janet and Stanley is possible, of course, without the express intent and approval of the owners of the Federal Reserve.
The owners of the Federal Reserve control the currency, which means they control most every major financial operation in the world, down to whether this company is to go or this company is not; whether this sovereign is on go or that sovereign is not; down to whether you and your savings and your future are to go.
Ironically, without the economies of Germany and the U.S., the Fed would be powerless. The taxpayers need to go for the lynchpins at the core of the real money power—the men behind the Fed, not with the lieutenants, the field staff of the mob – be it by hook or crook or bazooka.
WE are all cowards
In 1956, my mother sent me to the grocery store with $5 to "get some food". I bought so much food, I could not carry it home. The grocer sent a stock boy to push a full grocery cart and help me with all that food and to bring the cart back to the store. Early eighties, I bought a waterfront handiman's special for $37,500.
Today, that food, would, probably, cost $300 and that fixer upper... A lot more.
I remember when that cart would have cost 25 or 30 bucks. now its 250 all day.
This chart really tells the entire story.
https://research.stlouisfed.org/fred2/series/BASE
The rest is just thought control to prevent people from understanding the consequences of this.
Fuck 2 million in 1979, we where fucking rich.
1.4 million now and i think i will die poor .
But in 1979 we had the worst President in the history of the United States. In 2014, we have.... Oh, wait now, never mind...
1979--right, that was the year that Reagan was elected--the most overated demented president ever! The guy who was able to delay the release of the Iranian hostages so he could get elected. What a piece of shit.
Pitz - you do work at the Fed? right??
But Clarence over the past 35 years benefitted from massive asset appreciation. The government can afford to borrow to pay lavish social security and medicare. And inflation is under control and comfortably below 2%. The contemporary retiree is dramatically better off with low interest rates than "Clarence" was in 1979.
Higher interest rates will be devastating to retirees. Bond portfolios will melt down, either through defaults, or through inflation. The US stock market, similarily, exhibits significant leverage to falling long-term interest rates. Housing prices will plunge from their inflated values. And the government will be unable to finance programs like medicare/medicaid, and social security -- and will thus reduce them. So seniors who feel they're 'hard done by' with low interest rates really should think of what the true consequences of high rates may very well be.
pitz ,
Go tell that to my 85 year old mother, asset stripped by the FED and living in a condo with ever increasing maintenance fees , ever increasing electric and water rates ... living on SS and half of my (deceased) fathers pension.
My father never understood what the gov't was doing to him although he was a pretty bright guy... I know I need to leverage myself to the hilt in property (preferably income or farm) and other real assets (AU AG , miners , FOOD ) but I can't right now.
We're all along for the ride.
I don't know what assets your mother has, but if she retired 20 years ago with a fixed income portfolio (or even a mix of stocks and fixed income), she has benefitted significantly from the low rate environment. If she retired with little to nothing, she has also benefitted through a significant expansion of medicare. Social security, basically an unfunded program, has also provided her with a significant amount of income. And the price environment has been relatively stable with inflation held at roughly 2%-3% for the past 20-25 years.
Contrast this with periods of high rates, where inflation and taxes destroyed most investments in fixed income. And government transfers to the elderly weren't anywhere near what they are today.
asset stripped by the FED...
7 years into their buying spree and they still won't allow their books to be audited. It could all be returned to the free people of the USA if our Legislators would gird up their loins and dissolve the institution, confiscate all their ill gotten gains and issue Constitutionally mandated coinage / currency. It's not all on the back of the executive branch, that's just the bully pulpit.
What a waste.
jmo
I'm hoping you forgot the /s
NonSense! Inflation may be "under control", but it is not under Clarence's control. His assets have "appreciated", because the purchasing power of his stored labor (dollars) has been depreciated; in fact, the very word "appreciate" in relation to assets is desensitizing balm. It seems one should appreciate the apparent value of their assets increasing, but with a printing press syndicate in full swing, it's not the assets appreciating, but the purchasing power being robbed away.
Higher interest rates will NOT be devastating to retirees - (How could you even know how a retiree will react to higher interest rates? - RUGOD? You act like only you know how to react to changing environments; such as, normalized interest rates.
If you're going to talk about "the true consequences" of anything, please present the Seen and Unseen effects.
Yep, by 1972 dollars I'm a member of the evil rich. In 2015 dollars, not so much. I should of got a liberal arts degree instead of an engineering one because being able to actually do the math depresses the hell out of me. If I'd of been a sheep, I could be grazing without a worry in the world, except for the occasional shearing......
For well over two decades I've been telling people that a million bucks ain't what it used to be. And look what has happened in that time. A million bucks used to be ten houses, now you're battling to get more than one.
Re the old "Debt doesn't matter" : This was first explained to me when I was a teenager ... by several small businessmen. They laughed at my naivete and hatred of debt as they explained "Debt doesn't matter. Servicing that debt is what matters." Who was I to argue? I was just a kid and they ran successful businesses! I guess we are now seeing the end result of that kind of thinking. In a sense it is true. If someone is willing to lend you an extra million billion dollars every week, which you then spend on groceries, and that lender is happy with you repaying one dollar in interest per week, well then, I guess the Ponzi really can go on forever. And you're a fool to work for cashflow while everyone else is spending Capital Gains.
So now the question becomes, what will cause cashflow to become more important than Capital Gains? What will REALLY stop the money printing?