Currencies
“Some boys romance, some boys slow dance.
And that’s all right with me.
If they can’t raise my interest, then I have to let them be.
Some boys try and some boys lie.
But I don’t let them play, no way.
Only boys that save their pennies make my rainy day.
‘Cause we are living in a material world,
And I am a material girl.
You know that we are living in a material world,
And I am a material girl. ”
If you are measuring how much you earn in a year, how much wealth you have, or how much something is “worth”, you measure it in terms of the currency in which you live. In the United States, that is the dollar. In the United Kingdom, it is the Pound Sterling, etc. But that doesn’t tell the whole story. That currency has a “value” as well.
Let me give an example. In 1978, I bought my first house in Irvine, California. It was brand spanking new. Once I did all the upgrades and put in a backyard, it cost about $120,000. I’ve kept all the records of it, because, well, it was my first house. According to Zillow, that house today is worth $1,760,000. It is the same house. Same size. Even the same color. Just 46 years older.
You have to look at that and say, wow, it’s gone up nearly 15 times in value. What a great investment! But, let’s look at it another way.
If you look at the value of the house in ounces of gold, the picture changes. In 1978, it was worth about 710 ounces of gold. Today, it is worth about 730 ounces. Nearly the same after 46 years.
You see, the value of the house did not actually go up. The value of a dollar went down.
The U.S. dollar, like all other currencies today, is a “fiat” currency. That does not mean it fits in a small Italian car. That means it is backed by the full faith and credit of the issuing government. But it is not backed by gold or silver or any other metal or measurable commodity. Before fiat currencies, governments could not create more money without buying a sufficient amount of gold or silver to “back it up”. There is a reason it was called a British “pound sterling”. With fiat currencies, however, there is no limit to how much of your local currency a government can print.
And print they do. Measuring value in gold is not perfect. There is more gold mined around the world every day and some is used in industrial products or jewelry. FDR famously banned the private ownership of gold in 1933 in an elaborate scheme to shore up U.S. government finances during the Depression and the price was fixed a $35 an ounce for decades after World War II. So, governments can mess with gold too. But, it has been a medium of exchange for 5000 years of human history and is probably as good a measurement as is out there.
The point here is that in protecting one’s wealth and income, it is not just about the dollars you have, but what those dollars are worth in goods and services today and what they may be worth in the future. There are four major factors that can influence the buying power of your local currency as I see it. They are:
Inflation: Those of us who are old enough have witnessed the impact of inflation on the value of a dollar in the period from 1968 until 1983. People in Turkey, Argentina, and Zimbabwe are seeing this at a much greater level today. I am a believer in economist Milton Friedman’s axiom that “inflation is always and everywhere a monetary phenomenon”. We are seeing inflation today in the U.S. and elsewhere because of the money printing and fiscal deficits of the last 10 years.
Other Currencies: Increasingly, the goods and services we consume are produced in another country. Furthermore, the price of many important commodities like oil, wheat, and copper are priced on the world market and as such are impacted by many factors outside of one’s own country. Therefore, even in the absence of inflation, if the value of your home currency drops relative to the value of other currencies, the purchasing power of your currency will drop. The Japanese Yen has been crashing of late. This makes almost everything in Japan more expensive to those consumers, even while it may not be more expensive to an American buying with the now strong U.S. Dollar.
Cost Pressures: Businesses cannot sell their wares at a loss for very long, or they will no longer be in business. If the input costs of a business go up, they have to raise prices in spite of how little demand for their product may exist. This is how stagflation happens. We are seeing some of this today as “friendshoring” (sourcing from friendly countries like India and Vietnam rather than China and Russia) and inflation in commodities and new labor contracts are increasing the cost of goods for which demand is not increasing.
Innovation and Productivity: On the other side, new innovations in manufacturing or delivery of services can reduce costs and allow the price of a product to decline. We have seen this in technology where, despite inflation over the last 50 years, the prices of computer storage and televisions and such are less even in absolute terms than they were 40 years ago. Productivity increases mean that businesses have figured out how to give you more product for less labor input, which again reduces the price.
All of these factors, which are often conflicting, combine to tell you what the purchasing power of your wealth or income is in your local currency. Right now, inflation and cost pressures are lowering the value of the dollar. Productivity and innovation increases have stalled out as “green energy” and other factors are reducing productivity so there is no net benefit there. However, the dollar has been strong relative to other currencies and this has helped to keep dollar purchasing power higher than it would otherwise have been. Put it all together and the ”value” of your dollar is going down, but not as fast as it could if, for example, the dollar was weak. If productivity were increasing, perhaps the value of a dollar would not be dropping in spite of inflation and cost pressures. That is the promise, although perhaps not the reality, of AI, which will be a topic of a future blog.
Where is it all going next? The answer is “blowin’ in the wind”. (Maybe I should have repeated that song in the intro to this missive). The point here is that watching your dollars, pounds or euros stack up is not the main measure of what you have. You must consider what you will be able to do and buy with those currencies in the future. Keeping an eye on the movement of the factors affecting currency value will help you stay ahead of the curve.
Until next week, I remain respectfully,
Congressman John Campbell
Drive Fast & Live Free