Has the Dollar Really Lost 97% of Its Value? (No)



One of the favorite tropes of the “End the Fed” crowd is the “falling purchasing power of the U.S. dollar.” Google that phrase, and you will be rewarded with 91,100,000 results. (drop the “U.S.” and it doubles to 187,000,000 results).

The problem is, nearly all of these arguments are wrong.

As Matt Busigin of Macrofugue points out (echoed by Joe Wiesenthal of Business Insider), measuring the buying power of cash by functionally burying it in Mason Jars in the backyard is a misleading and inappropriate metric.

You would never measure the performance of dividends stocks without factoring dividend payouts; you certainly would not measure returns from bonds by ignoring their coupons. So why pray tell does anyone try to measure purchasing power by ignoring the inherent power of the dollar to generate guaranteed interest rate returns?

Let is ignore for the moment the compounding benefits of putting those dollars to work in stocks, bonds or real estate. Let us make the most conservative, liquid, riskless investment possible for cash: 3 month T Bills.

As the chart above shows, if you were dumb enough to bury those Mason jars, you would have lost purchasing power. But unless you played football without a helmet in the 1950s and 60s, then you surely would never have made such a foolish move with your cash. And your purchasing power would be pretty even with inflation.

Busigin points out that with “so little of household net worth in cash, the current dollar value is irrelevant, anyway.” What matters more is the purchasing power of an hour of labor to acquire a need good — food, shelter, clothing, iPhones. How many hours of labor required to make these purchases is much more important than the currency used as an intermediary between the laborer/wage earner and the consumer.

The St Louis Fed has even whipped up a graph to track the purchasing power of your hourly wages. That is actually good news for consumers, as Matt points out, because “real hourly wage level is at its highest value in two decades.”

In actuality, the current Fed policy effectively punishes rentiers — not consumers. That, alas, is a column that will have to await another day . . .


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