The Decline of the US Dollar



First off lets be very clear. There are many people who would rather avoid this topic. It makes certain people extremely uncomfortable when this topic is brought up for discussion. They would rather people ignored the giant elephant in the room, but for the sake of being open I would like to take some time and discuss it anyway.

First lets review how the value of the US dollar dollar has held up. The US dollar lost 95% of its purchasing power over a hundred year period, from 1913 when the Federal Reserve was created until 2013, and has continued to drop even further since then. That might surprise some people, as many are unaware. The reliability of the US dollar as a storage of value has been a complete failure. You might think this fact should draw some attention. Many people might be alarmed and even think that something could be up, if they were aware, but strangely it is a topic that is not discussed.  Instead it is almost completely avoided. It is avoided by the world leaders (including all US presidents, congress and the house), they don't talk about this, except when "inflation" is completely out of control as it was in the late 1970's. It is avoided by the central banks, of course because this is largely their doing. It is avoided by the retail banks. There is no sign in the window saying your money is losing value. Not good for business I'd say. It is also avoided by most large financial institution and it is avoided by the mainstream media, who the public look towards for honest reporting. Yes, not too many people want to remind the masses that the purchasing power of their money has been disintegrated into pennies on the dollar.

Sources: US Bureau of Labor Statistics : The Resilience Group

Surely there must be some form of explanation for this. What's happening here?

Where is the outrage? Well I guess if the average person is kept in the dark they can't really complain much. A very good strategy for those benefiting from this situation.

So some will say it just a little inflation, what's the big deal. So let's start off with the term "inflate". Merriam-Webster Dictionary defines "inflate" as:

  "to expand or increase abnormally or imprudently".

 So the act of inflation is also the act of expansion by definition. So what is being expanded? The answer is the monetary base or the base currency supply.



The level of monetary base has skyrocketed under the watch of the Federal Reserve to say the least, much to the unawareness of average person. A dollar is a dollar is a dollar to the common man and the less he knows the better it is for some. This is not rocket science though. The more you increase the supply of anything will push the value of that item down if all else remains constant. The value of the dollar is no different. This was the most common definition until the mid 1960's.

After the mid 1960's an alternate definition took hold. Today some people like to subscribe to the altered definition of  inflation as being the decreased purchasing power of currency. While this has become the preferred definition of academics from the Keynesian school of economics, the reality is the devaluation of currency is just one of the symptoms of inflating the money supply. You must separate the cause and effect of inflation to truly understand the issue. Inflating the money supply is the cause of decreased purchasing power and the decreased purchasing power of the currency is the effect.

Another symptom of expanding the money supply, that gets less attention, is how it works to devalue debt. For example if you borrowed $10,000 and inflation is an even 2%, than after one year the principle owed in terms of purchasing value of the date it was borrowed would only be $9,800 of that original amount. Of course it is easier to repay debt with devalued currency. The devaluation of currency through inflated money supply has allowed the outstanding debt to become cheaper over time. With that said, if one has the ability to borrow currency at rates below real inflation they have a very power tool to build wealth.

Of course there are two sides to the same inflated coin. There is no such thing as free lunch in economics. If one side gains from expanded money supply then another side must pay. Expanding money supply works to devalue debt, but it also works to devalue savings. Retirees and pension funds are witnessing this first hand. In addition, expanded money supply devalues purchasing power of wages over time if it does not keep up to at the real rate of "inflation". Of course this has been shown to be the case, but I will cover this more in a future post.

Some interesting facts about the decreased purchasing power of the US dollar "inflation":

* When you do the math over a 30 year period, the US dollar loses over half (50%) of its value if inflation were a mere 2.5%.

* A $1,000 in 1900 had the same purchasing power as $29,245 in 2016.

* The rate of average wage growth in the United States has not kept up with inflation over time.

* The common measurement of the loss of purchasing power is the CPI (Consumer Price Index)

* The formula to calculate CPI has been changed multiple times since 1970 to reflect a smaller loss of purchasing power.

* Core CPI does not include food or fuel.

* The 7 years following the United States leaving the Gold Standard the US dollar lost over 45% of its purchasing power.


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