San Juan Mountains

San Juan Mountains
San Juan Mountains: Grenadier Range

Thursday, November 19, 2015

Do You Know The Value Of A Dollar?

Most people have no idea what the value of a dollar is.  In the old days we used to refer to people who were foolish with their money as folks who had no concept of the "value of a dollar. They would spend and spend their money on ridiculous and unnecessary things, believing that the government would eventually support them anyway. that I think about it, things have not really changed at all.  One thing that has changed, however, is the colloquial expression about the value of a dollar.  I don't hear anyone use it any more.  Do you?
Maybe one reason it is hard to talk about the value of a dollar these days has to do with the fact that its value is in constant flux.  Since the US Dollar is not backed by anything other than the promise of the federal government to honor it, a worthless promise if there ever was one, it has basically decreased in value every year.  Like any commodity, money will have less value per unit when more units are created.  Since the Federal Reserve exists for the purpose of creating more dollars and giving those new, counterfeit, dollars to the federal government to spend on various vote-buying boondoggles, the dollar has consistently decreased in value over the years.  Here is a chart gathered from information provided by the US Bureau of Labor Statistics.  Look at it carefully:
Year Amount it took to
equal $1 in 1913
1913 $1.00
1920 2.02
1925 1.77
1930 1.69
1935 1.38
1940 1.41
1945 $1.82
1950 2.43
1955 2.71
1960 2.99
1965 3.18
1970 3.92
1975 $5.43
1980 8.32
1985 10.87
1990 13.20
1995 15.39
2000 17.39
2001 $17.89
2002 18.17
2003 18.59
2004 19.08
2005 19.73
2006 20.18
2007 20.94
2008 21.57
2012 23.27

What cost $5.43 when I graduated from high school now costs me $23.27.  That dramatic, almost five-fold, increase in cost is nothing more than the impact of inflation as the Fed creates more and more dollars over the years.  The more dollars there are in circulation, the more dollars it takes to buy the exact same thing from years ago. What I am buying today is not worth five times more than what it was in 1975, it just cost that much more because there is so much more money circulating around.
In recent times all the countries of the world have followed the example of the Socialist Democracy of Amerika and created national banks that exist for the purpose of inflating their currencies.  Governments benefit from this because it gives them an unlimited supply of their nation's currency to spend.  An unlimited supply of money is what allows career politicians to become career politicians as the envy-filled citizens of the land expect the government to provide an increasingly long list of freebies and fringe benefits in exchange for their votes.  The citizens living under the tyranny of those rulers are harmed by it because the value of their currency is constantly depreciating, although they scarcely realize what is happening.  
In the business world there are people known as currency traders who make their living trying to guess which country is going to devalue its currency the most, thereby profiting on the spreads between a somewhat devalued currency and a horribly devalued currency.  Lots of money can be made by those who guess properly about which country is going to commit financial suicide first.  All of this is to make my point that when someone talks about the value of a dollar these days it has everything to do with how the dollar compares to other inflated currencies around the world, not how much it might be intrinsically worth.  Let's think about that for a while.
People who trade the world's currencies speak of those currencies as being either weak or strong in comparison to each other.  You have probably heard people talk that way and wondered just what they meant by it.  A weak currency is one that is inflated more than another country's currency whereas a strong currency is one that is inflated less than another country's currency.  It would be nice if all of the central banks in the world got together and agreed to inflate their money supplies at the same rate but that does not happen.  Each country believes that there is some sort of economic value and advantage to having a weak currency when they are engaged in trade with other countries around the world.  It is an amazingly stupid idea but it is what government financed economists believe.  When it comes to exports, most central banks seek to devalue their currency more rapidly than the country the goods are being sold to.  Why?  Here is the argument, taken from one of my favorite websites:
"Theory and conventional wisdom say a weak currency boosts exports because it makes goods cheaper overseas, boosting demand. A strong currency, by contrast, makes goods pricier overseas, hitting demand. However, if this were true, one might expect a given country’s exports and imports to move in opposite directions from time to time: exports up and imports down when the currency is weak, exports down and imports up when the currency is strong. As Exhibit 1 shows, however, this isn’t so. Exports and imports usually move in the same direction, with economic growth the primary driver. Currency trends hold little to no visible influence."  That quote is from my favorite investment adviser, Ken Fisher, and can be found at his website.  And what he writes is true.  Just look at the graph below:

As a perfect example of an application of this erroneous economic idea to today's world, consider the gaggle of bozos who are currently running for next King/Queen of the SDA and how they all seem to like to talk about engaging in some sort of trade war with China.  Donald the Trumpet in particular likes to rattle his economic saber as he accuses the Chinese of all sorts of immoral economic activities.  He accuses China of engaging in a trade war with us because the Chinese government allegedly devalues its currency more quickly than the Fed does.  The various candidates also declare that the best weapon in a trade war is for the Fed to create more counterfeit money than China does, thus theoretically making SDA goods cheaper for the Chinese and encouraging them to buy more of our products.  But as the above graph clearly shows, currency wars have nothing to do with international trade.  International trade is driven, as Fisher points out, by economic growth and the desire to improve our economic standing in the world by means of free trade.  The fact that something might cost more or less, depending upon whether the central bank in that country is inflating quickly or slowly, is just a cost of doing a business in international trade and nothing more.
If you allow yourself to consider this nonsense in common sense terms it will all make more sense.  Only a politician or an economist could make the argument that shooting myself in the foot by devaluing my own currency is good for me because it allows the Chinese buyers of my goods to pay less for them.  I end up subsidizing Chinese buyers and destroying the value of my own currency.  Please explain why that is a good thing?  If the rulers of China are dumb enough to devalue their currency in order to make their goods cheap for us, who am I to complain?  I am certainly not going to accuse the Chinese of engaging in unfair trade practices if they make the stupid decision to devalue their currency to make their goods cheaper for me to purchase.  All I am going to say is "thank you."   If Chinese taxpayers are forced to subsidize my purchases, why should I find fault?  The only thing that enrages me is when the shoe is on the other foot and the Fed, by pursing a weak dollar policy, forces me to subsidize foreign buyers of SDA goods.  I know the value of a dollar and I want it to remain strong.  In the absence of perverse political incentives the dollar could be strong but I live in the real world and understand that perverse political incentives and immoral motivations determine just about everything that happens when career politicians are at work.  I therefore conclude that my dollar will continue to devalue until, at some point, it goes the way of the Continental.  The million dollar question (quite literally) is, when will that happen?

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