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Monday, August 5, 2013

Basics: Let's Debase the Dollar!

A lot of people, especially conservatives, complain about the so-called debasement of the U.S. dollar. For example, Craig R. Smith, who is apparently important enough to be interviewed by "FOX News, CNN, CNBC, ABC, NBC, CBS, PBS, CBN, TBN, Time, The Wall Street Journal, The New York Times, and Newsweek," wrote a book last year that claims the value of the dollar has fallen by 98% in the 100 years since the income tax and Federal Reserve were established in 1913. He predicts terrible economic calamity will be the result of this debasement. Smith is not alone in this view; evidently Rep. Paul Ryan shares it, too (h/t Paul Krugman).

Mind you, this is a slight overstatement according to Bureau of Labor Statistics (BLS) inflation data (, series CUUR0000SA0, set date range for 1913 to 2013). This shows that the Consumer Price Index has increased from 9.8 in January 1913 to 233.5 in June 2013, which implies a decline in the dollar's purchasing power of only 96%. To put it another way, according to the BLS, today's dollar is worth 4 1913 cents, while Smith says it only worth half as much, 2 1913 cents. Either way, sounds pretty awful, right?

Of course not. This is another example of something I wrote almost two years ago: "When someone tries to get you to focus on only one part of a complicated picture, it's a safe assumption they are trying to mislead you." The most obvious omission of the "debasement lobby" is the fact that pay levels have risen a lot since 1913. A single dollar does not buy as much as it did in 1913, but people get paid a whole lot more dollars per hour/week/year than they did, then, too!

What actually matters is not how much the dollar is worth, but the ratio of what people get paid to what the dollar is worth. If your dollars earned rise faster than the value of the dollar falls, that is the very definition of rising real wages! And the Lord knows I'm well aware of falling real wages for the majority of workers since 1972; a post I did on that subject is my second-most read of all time.

Ultimately, what the debasement lobby is mad about is inflation. Smith claims that "real everyday price inflation is running at 7 percent or more per year..." Krugman has been doing yeoman's work on this issue. We should note that the BLS has been calculating the consumer price index since 1919 and probably knows a little bit about what it's doing. If you want to doubt its validity anyway, Krugman points us to MIT's Billion Prices Project, which comes up with results very similar to those of the BLS.

So high inflation is not the problem we face. Low inflation is. With inflation so low, people get no relief from their debts, and have to reduce their debt as much as possible. When that happens, they buy fewer goods and services, so unemployment gets worse, and it's already bad enough at 7.4% in July. Government could offset weak private spending with jobs programs, but Republicans have made it clear that they aren't going to pass any jobs bills, so that route is shut off for now.

As a result, millions of people are needlessly unemployed, still at near-record levels of long-term unemployment, and states like North Carolina are cutting unemployment benefits sharply. Shameful.

Let's debase the dollar!

Cross-posted at Angry Bear.


  1. I have just started reading your blog, so I had not seen your "Basics: Real Wages Remain Below Their Peak for 39th Straight Year" until today. Please allow me to comment on it here....

    If we look at the actual COMPONENTS of the CPI, we see that the biggest drivers are Housing (40), Food (16), and Transportation (19).

    Our houses are about 50% larger than they were in 1970, while family sizes have decreased. Our cars have gotten much safer and more efficient (yet the CPI measures fuel cost per gallon, not per mile), and we get far more pre-processed food than we did in 1970.

    You also expressly focused on individual income, not family income. However, the influx of new workers necessarily drives down wages. The women's liberation movement really hurt, because in the early 1970's, they sued the banks to force them to consider the wife's income for mortgage applications. The influx of new money into the housing market drove up the prices, so two incomes are now almost REQUIRED to afford a house.

    To compare median wages to productivity is, frankly, silly. Only rarely does the individual employee increase the productivity of the company. Even collectively, they do not, because the experienced ones retire and the collective productivity remains the same. Productivity increases come from the ownership through capital purchases of more efficient equipment, or from the management through implementation of more efficient procedures.

    The example I like to use is the farmer and the plowman. A farmer hire a plowman to plow his field. With a plowhorse, he can plow an acre a day. The farmer then buys a tractor, and the plowman can now plow ten acres per day. Should the plowman get ten times the pay? Where he was walking behind a horse, he is now sitting on a tractor. Is he working ten times as hard? Did HE increase his productivity, or did his employer do that? Who should reap the rewards?

    The answer is obvious, and not. The obvious answer is that the farmer should, because he put up the money to buy the tractor, and he has to pay for its maintenance. However, the plowman DOES reap some of the rewards, because his work is now easier and his food will be cheaper.

    But THAT is why we have such a growth in the income gap -- those at the top end drive the productivity gains, and they reap most of the rewards for it.

  2. Now, on to this post.

    Obviously, deflation is worse than inflation. So some inflation is good as a buffer against deflation.

    Obviously, hyperinflation is bad. We have seen hyperinflation destroy economies around the world.

    So the question is, what level of inflation is optimal. This is essentially what the Federal Reserve is trying to manage. It does that by controlling the money supply and interest rates.

    Inflation, however, will mean that interest rates go up. Not for those with fixed-rate mortgages and car loans, but most of our national debt is short-term, so that would be affected badly. All variable-rate mortgages would also be affected, as would credit cards.

    I am afraid that inflation offers little hope of relief from debt these days.

    And it seems to me that paying off one's debt is, in the long run, a Good Thing. I do grant that it may be painful for the economy in the short run, but the ability to make short-term sacrifices for long-term gain is how we win in life (and chess).

  3. In the second paragraph of this post you write "the Consumer Price Index has increased from 9.8 in January 2013 to 233.5 in June 2013". Shouldn't that first "2013" be "1913"?