Devaluation (banking, currency, investment, government)

[Grandpa Pipes]

Originally Posted by lumbollo

Indeed. When the Federal Reserve was created in 1914 the Federal Reserve Note was worth .... well $1. Today it is worth about 4 cents.

Actually one 1914 dollar was worth (in buying power) at the time........

"$1.00 in 1914 had about the same buying power as $21.02 in 2009.
Annual inflation over this period was about 3.26%."

If this don't put meat on the bone to show how bad buying power has been eroded nothing will!

[user_id]

Originally Posted by wheelsup

2nd or 3rd quarter 2009 the Fed "bought" ie printed more money than other countries loaned. Which means they are continuously devaluing the dollar and have stepped up their measures to do so.

No, it does not mean that. MV = PQ

Originally Posted by wheelsup

Either way your savings will erode. I'm putting mine into commodities. Risky? A bit. But not if you see what's actually going on.

Commodities are more than a "bit risky", they are more akin to Vegas. One just needs to pay attention to real interest rates, most CDs, savings accounts, etc are paying positive real interest rates.

[Sandpointian]

Originally Posted by Tightwad

Actually one 1914 dollar was worth (in buying power) at the time........

"$1.00 in 1914 had about the same buying power as $21.02 in 2009.
Annual inflation over this period was about 3.26%."

If this don't put meat on the bone to show how bad buying power has been eroded nothing will!

This is the correct way to think about the $.

The spurious argument that the USD is only worth 4 cents is based on $ price of gold and how an ounce of gold costs many more $ than previously.

The price of gold was fixed in 1834 at $20.67/ounce. This lasted until 1933

If had bought 100 ounces of gold then for $2067, it would be now worth (at today's price of $1128.70), $112,870.

What annual return would that be? Answer: 2.299%

The only question then is whether other investments over that same time horizon have returned more than this (adjusted for risk).

For some countries, 2.299% over 176 years might be a decent play given the lack of superior alternatives. However, in the US I would imagine that the long term return to investing in the US economy is 4-5% per annum, perhaps a little more (I do not have the data going back to 1834 in front of me).

But for the sake of argument, say the risk free rate has been 4% pa. Pretty reasonable, no?

Then that $2067 would now be worth $2,056,876 today. In other words,
your investments could be liquidated to buy 1,822.34 ounces of gold!!

So let;s see 4.0% vs. 2.299% over 176 years means 18.22 times more gold!!

How about a risk free rate of 3.0% over 176 years? It means 332.7455 ozs of gold or 3.327 times more gold that by simply holding onto gold.

Gold is a great short to intermediate hedge, but a rather modest longer term investment. At best, it should occupy a modest 5% portion of the long term portfolio with occasional tactical positions to take advantage of market meltdowns.

S.

[DSOs]

Originally Posted by DSOs

I have a hypothetical question: Can the financial System (the Fed, Gov’t, IMF, whoever) say that starting ‘tomorrow’ the USD is now, across the board, only worth 60% (example) as much as it was yesterday? I’m really starting to worry about cash; my life savings!

I bumped this thread because of this article. http://www.marketoracle.co.uk/Article19206.html The quote below is located in the 2nd to last paragraph of the article.

Example: What the government can do is issue a new dollar that's worth two of the old dollars, by fiat. If it owes $1,000, it pays off with $500 of the new dollars. But, again by fiat, it makes everyone else accept the new dollars on par with the old dollars. In this way, the government defaults on its loans to all its creditors, who get half what they expected. The government debt is thereby cut in half. Of course, lenders will now want twice the interest rate. So the government, by fiat, makes banks or savers or both, take its bonds at the old interest rate. It's simple. Power can attempt anything in order to preserve itself.

Is this where the world is heading?

[k374]

Originally Posted by DSOs

I have a hypothetical question: Can the financial System (the Fed, Gov’t, IMF, whoever) say that starting ‘tomorrow’ the USD is now, across the board, only worth 60% (example) as much as it was yesterday? I’m really starting to worry about cash; my life savings!

That is what IS happening, there are definite signs that inflation is up and coming, see the other thread on this topic here. I have noticed this as well, things are getting more expensive. Our dollars are worth less.

This is a very tough situation because though everything is getting more expensive wages and income are actually going down and jobs are still hard to come by. Great job this administration did of debasing the currency and not even improving the economy..where did all the money go? well, ask the criminals in suits (aka Goldman Sachs).

[wheelsup]

Originally Posted by k374

This is a very tough situation because though everything is getting more expensive wages and income are actually going down and jobs are still hard to come by. Great job this administration did of debasing the currency and not even improving the economy..where did all the money go? well, ask the criminals in suits (aka Goldman Sachs).

Starting two wars costing hundreds of billions certainly didn't help under Bush and can you really blame all the spending on this administration? I mean really? Bush signed a couple hundred billion dollar stimulus package as well.

I'd much rather have a debasing of currency (inflation) vs. massive unemployment and possibly a crumbling of our country. My guess is so would everyone else besides anarchists.

[dazzleman]

Originally Posted by wheelsup

Starting two wars costing hundreds of billions certainly didn't help under Bush and can you really blame all the spending on this administration? I mean really? Bush signed a couple hundred billion dollar stimulus package as well.

I'd much rather have a debasing of currency (inflation) vs. massive unemployment and possibly a crumbling of our country. My guess is so would everyone else besides anarchists.

The problem is that the debasing of the currency will ultimately lead to massive unemployment anyway. The key is to find a way out of the blind alley into which we've taken ourselves without triggering either. It's a balancing act, but I think it's wrong to think that inflation can be used as a way to avoid massive unemployment resulting from the accumulated results of bad economic policies. It may work temporarily, but often the crash that comes later from out-of-control inflation is worse than what would have happened if the problem had been confronted earlier.

[wheelsup]

Originally Posted by dazzleman

The problem is that the debasing of the currency will ultimately lead to massive unemployment anyway. The key is to find a way out of the blind alley into which we've taken ourselves without triggering either. It's a balancing act, but I think it's wrong to think that inflation can be used as a way to avoid massive unemployment resulting from the accumulated results of bad economic policies. It may work temporarily, but often the crash that comes later from out-of-control inflation is worse than what would have happened if the problem had been confronted earlier.

Define "out of control inflation". Are you saying it exists today in the US? I don't think we're even close to that point yet, or for the past 100 years. Some years inflation has been extremely high, 10% or so, while others it's been low. Even now it's higher than the government reports (just look at the cost of bread, milk, and eggs) but certainly not out of control.

[golfgod]

lumollo wrote;

When the Federal Reserve was created in 1914 the Federal Reserve Note was worth .... well $1. Today it is worth about 4 cents.

Actually NO. In 1914 Henry Ford shocked the world, and particularly other manufacturers by paying his workers the unheard of wage of $5.00 PER DAY. What do you think you could get for that wage?

You couldn't buy a plane ticket ANYWHERE.
You couldn't buy penicillin, a polio vaccine, a heart stent, a replacement hip, or knee, frozen fruits or vegetables out of season, or education beyone high school.

If you were lucky enough to live in the US you likely would live another 5 years, if you were a young man in most of Europe you likely wouldn't.

BTW, if you were born in 1914 you had a life expectancy (all races and sexes) of 54 years, slightly lower for white women. For blacks born that year life expectancy was LESS THAN 40.

Even with a good wage it's likely that you wouldn't keep your job in the next, post-WWI economic collapse.

Based on what the "typical" worker can buy with his typical dollar today we are much better off.

The only way to look at the "value" of any currency is to look at the "labor" equivalent. Even if you were earning $3-$5 per day, you were more than likely working a 48 hour week to get it.

[HappyTexan]

Originally Posted by lumbollo

Indeed. When the Federal Reserve was created in 1914 the Federal Reserve Note was worth .... well $1. Today it is worth about 4 cents.

You beat me to it lumbollo. The Fed has been the biggest robber of our money.