Try as we might to squirrel away paper funny money, remember that it is losing its purchasing power daily! So much paper funny money is created out of thin air by central banks, that it is an unstable as a 'store of value.' When the dollar was tied to gold and silver it was reliable, and from 1776 - 1933 it held it's value as $20 for an ounce of gold, hence the $20 gold piece was equal to a $20 bill. Today the gold is worth $630 for an ounce, and the so by this measure, the dollar has lost 97% of it's value since 1933. Another risk to our paper funny money purchasing power, is that the trade deficit is very large, and foriegners now own multiple trillions of US dollars. If they sell, the purchasing power of our money falls. China and Japan both own about 2 trillion paper funny money between them. Like anything, dollars are subject to supply and demand. As foriegners accelerate the selling of funny money in favor of other assets, this will weaken the dollar and it will fall, causing prices in the U. S. to rise. It can be that simple. So it is prudent to diversify into assets that hold their value, or that move opposite to the dollar. This can help us stay prosperous. Shown below is a $20 St. Gaudens 1 oz. gold piece. This was worth a $20 bill at one time.
DEFLATION
In a debt-driven economy such as ours, homes, land, cars, and virtually every major purchase out there requires a banking loan to facilitate the sales tranactions. There is a risk here, and that is where the banks have trouble doing this. Or, the cost of borrowing the money (interest) is too high. At some point, with higher interest rates, or with skittish or unwilling bankers unwilling to step in, homes and land and cars have trouble selling. Prices are so high that it simply requires help from bankers to make the deal happen between buyer and seller. If not, then people can't sell their homes, unless, prices fall. If it falls to a cash economy, no debt, then prices could be 1/10 of the previous debt-driven economy. This was last seen in 1930s, but also in the early 1980s. The market adusts the value of the property downward where will sell. We were foolish enough to enter into a 30 year fixed-rate mortgage in 1983 at 13.75% interest rate! However, prices of homes at that time did fall like a rock because people (like me) couldn't afford to borrow much at these high interest rates. OK, more about deflation later, and it's nasty relative, DEPRESSION. It's been said, that it is deflation if your neighbor gets laid off, but it's a depression if you do! Not to worry, it happens periodically, and since the 1960's it has been affecting different sectors of the market, such as real estate price collapses of the late 1970s (remember Houston?), to the Savings and Loan collapses of the early 1980s, to the stock market collapse of 1987, and so on. Fortunately, these different markets didn't collapse all at once...
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Inflation
Before ($1) After (3cents)
Inflation Principles
and Worthless Paper Funny Money
Here are some things we've learned about worthless paper funny money over the years. Maybe it'll help give you perspective too.
Inflation is the creation of money out of thin air. It leads to worthless paper funny money.
This then causes the purchasing power of funny money to decrease over time, appearing as higher prices.
We call this "decay" because the purchasing power of funny money to decrease over time, eventually becoming worthless paper.
Higher food, gas, medical, educational, and energy costs rise the most, but are not part of the consumer price index (CPI). So, the CPI is misleading. Use the pre-1981 CPI, it's 2.5x higher than reported, so a 4% CPI reported in the news is 11% actually. (see shadowstats.com for more data)
Don't blame eachother for high prices asfunny money decays and becomes more worthless paper funny money.
Diversify savings into other areas besides cash, which decays into worthless funny money.
We can also get swindled by smaller portions and higher prices, a double whammy! See the Doritos Effect below.
It's hard to keep track of inflation's effects, so focus on a few things gas, postage stamps, gold, milk, or other stable tangible item to give you perspective on inflation and worthless paper money.
The Doritos Effect
Years ago, a bag of Doritos was $1.79 for 16 ounces. Then, it was $2.29, then $2.59, then $2.79, then $3.29. But, wait, also went from 16 ounces, to 14 ounces, to 12 ounces today. Don't blame these companies, they are struggling just like we are, to adjust to inflation. We seem to be swindled by smaller portions and higher prices, a double whammy, and while it is possible, it is not entirely true. A good portion of the The Dorito Effect is what inflation can cause. When money is created out of thin air, it eventually finds its way back home in unpredictable ways. More paper funny money put out out into circulation (inflation), the chases limited goods and services, causing prices to rise.
Gas prices give an idea of inflations effects. But, it is also affected by politics and geopolitical instability. Still, gas in 1969 was $0.15/gal, and now it is $2.70. By this measure the dollar has lost over 94% of it's purchasing power.
Between World Wars 1 and II, it cost about 2 cents to mail a letter. Today it costs 39 cents - notice how there is no number on there anymore, so it's hard to monitor this obvious effect of inflation. By this measure, the dollar has lost 95% of it's purchasing power. 2 Cents was worth a lot!
Then Now
So, by these 2 different measures, gas and stamps, the dollar has lost 94% and 95% of its power - or the dollar is currently worth a nickel of what it used to be.
The amout of money in the bank, the value of my home, the value of stock in my IRA, can give the illusion of properity because the number may go up, but when you are using that money to pay for medical services, college, food, or other needs, we are not as well off as it may seem.
Gold is an unchanging measure of inflations effect, and like anything, is subject to supply, demand, and other market forces.
Here is an article on Inflation, monetary collapse, worthless paper funny money, you might enjoy:
Inflation Strikes Treasure Hunters' Dream House
Long ago there was a treasure-hunters magazine with an article about a house that was being remodeled. It was an old house built at the turn of the century. Construction workers had removed all of the old appliances and then began ripping out the old plaster and lathe. As one wall was being ripped out, small bundles, wrapped in aged white linen cloth came tumbling out. Workers opened the bundles and were stunned at what they found. Inside the bundles was $20,000 in paper funny money (cash) and 1000 ounces of gold. The owner apparently stashed the bundles in there and then died, not telling anyone where he had stashed his nest egg - a huge nest egg for the 1920's. At that time, gold was worth about $20 per ounce, or $20,000, just like the funny money, so the nest egg in the 1920's was worth $40,000. The sad thing about the find was that the funny money dollars were still worth $20,000, but the gold was now worth $630,000! The total find that day would be valued at $650,000! This means that the deceased owners' nest egg had grown tremendously in value, right? Actually, the growth of the nest egg was only an illusion. Read on to see why.
Over time the amount of paper funny money in circulation increases, and it usually increases faster than the population growth rate so over time there is more money around for people to use. Time is not to blame, but it simply reveals how things work, namely that the dollar loses it's value over time. How fast it devalues is continuously changing, but the trend is down. Everyone knows this. Usually we think in terms of prices rising, rather than worthless paper funny money losing its value. Inflation is really the wrong word for this effect. Therefore, this writer will coin, or electronically create as the case may be, a new term for this phenomenon, called monetary decay - as in radioactive half-life. By the way, the term "rust" was also considered, and was the runner-up in this naming contest. So, as paper funny money decays, more of them are needed in order to pay for a gallon of gas, or gallon of milk, or a trip to the doctor, or to pay for books and tuition. Some indicators used to measure the decay of funny money strategically exclude energy, food, and education, but include tin, molybdenum, and hundreds of other lesser-used commodities in order to give a stable appearance. If we revisit the home remodel incident above, we could also say that the gold did not decay, and is still 1000 ounces, no change. The funny money, however, had decayed from $630,000 to $20,000. It decayed 97%. Therefore, the guy who stashed his money in the walls of that old house did not posthumously grow his nest egg, as previously thought. But, rather, his $40,000 investment, if all gold, could have been worth $1.26 million in today's dollars. The paper funny money actually caused his nest egg to decay from $1.26 million down to $650,000, for a loss of $610,000, or 48%, mostly because of the investment in paper money. To make matters worse, the gold did not change at all, but the poor guy gets taxed on his 'capital gain' of $650,000 - $40,000 = $610,000.
Some beneficial conclusions can be drawn from this incident involving gold, paper funny money, and inflation.. Aside from the benefits of ripping out old walls and telling someone you love about your hoard before you die, the point to be made here is that money decays. Paper money rusts. So, look elsewhere for the long-term investment or store of value.
