Imagine living in a world where all distance was measured
with a tape that shrank year after year, and almost everyone there believed
that this shrinking tape was an immutable and absolute constant, something
which all could be reliably measured against.
In this world based on an inconsistent base value we would now have "distance
inflation" - original distances in 2002 would be
perceived
to be much longer a few years later, as our universal measuring yardstick
shrunk with time.
Welcome to our shrinking USD-based financial world
The US dollar has been universally perceived as an absolute yardstick -
most of the world's wealth has been measured against it since the end of
WWII.
Yet, the mighty USD is a
fiat
currency, a shrinking electronic/paper debt-based
representation
of wealth, with nothing but public trust and good faith to back its perceived
value. The debt-based USD is only worth as much as any other promissory
paper note, and its worth has been excessively diluted and debased continually
by the US Federal Reserve Bank as it continues to "print" more
USD notes (and the US government continues to "borrow") at an
alarmingly accelerating pace, well beyond
real US GDP rates. Today's
USD is a very different dollar from the one of just a few years ago.
The true value of the US dollar cannot be reliably measured against
other
currencies either, as those paper notes are also going through a similar
devaluation process as shown in the currencies vs Gold table above. Measuring
the USD's value against other paper currencies is akin to measuring a car's
speed relative to other moving vehicles - a dangerous distraction.
A truer and objective measurement of the USD's real value would be its
real purchasing power at any given time.
The
USD Value Index chart shown above is basically a realistic measurement
of the greenback's (steadily decreasing) purchasing power, a measure of
the US dollar's buying power against a small but essential basket of leading
commodities:
Gold - a real and stable currency.
Putting aside temporary market fluctuations, Gold is as close to an absolute
and constant measurement of wealth over time as can be found. It is a precious
commodity that can neither be artificially created nor destroyed.
It has been proposed by one
author
that at the time of Caesar Augustus (first Roman Emperor 2,000 years ago),
an ounce of Gold would buy a fine toga, sandals and a sash.
At the end of the American Revolutionary War (1783), an ounce of Gold would
buy a good tailored suit, a pair of shoes and a belt.
At the end of the Spanish-American War (1898), an ounce of Gold would buy
the same items.
At the end of the Second World War (1945), the same.
Nowadays, well after the end of the Cold War, an ounce of Gold will buy
the same goods.
In 1908 a basic US tradesman's weekly salary was approx US$25 or
1.2oz
Gold - in 2008 it is approximately $900-$1000, or
1oz Gold.
80 years ago, a Model-T Ford cost US$300, or
15oz Gold - now a 2008
Ford Focus is priced at around US$14,000, or
15oz Gold.
However, the same goods and services that are bought today for $100 would
(if they were available then) be paid for with $4 in 1913. The US dollar
today is not worth a 1913 nickel.
In other words, in terms of buying power,
Gold
retains its purchasing value over time - its price rising at a rate
roughly on par with the devaluation of the USD paper currency.
Gold has truly withstood the test of time - realistically it is the best
long-term hedge against monetary devaluation (i.e. inflation).
Oil:
Currently a most essential source of energy - civilization as we know it
would cease to exist without it. Most of society's goods and services depend
on oil to a large extent.
Wheat:
One of the major sources of food (and essential ingredient in many foodstuff
items) for an increasingly hungry world.
USD Value Index:
(RoC%(USD/Gold)+RoC%(USD/Oil)+RoC%(USD/Wheat))/3
The USD Value Index - what it means in real terms
• Since the start of 2002, the USD's real purchasing power has dropped
to a quarter of its former value.
$1,000 saved in Jan 2002 only buys around $250 worth of essential commodities
in 2008.
• The US stock market's true worth is much lower than generally perceived
by the public.
To compensate for a devalued US dollar, the Dow Jones index should now
(2008) be trading at around 20,000 just to stay on even terms.
•
Prices go up as a result of inflation, and not the other way
around.
Price inflation as generally re-defined in today's terms, has little
or no relevance to the real and original meaning of
monetary inflation.
There are basic but important distinctions between real and nominal prices
- more on these issues
here.
• The US's real
monetary inflation (i.e. currency devaluation)
is being massively
under-reported
as
price inflation, and in reality is
now
around 10-12%pa. This is consistent with the explosive growth in
USD
money supply. Cheap Chinese goods and lower (exported) wages also contribute
to the everyday illusion of low "price inflation".
Don't be fooled by the current temporary deflation caused by the biggest
financial crisis since the Great Depression - inflation will return with
a vengeance sooner or later (2010?). The bottom line is that storing wealth
in any paper-based currency is a sure path to eventual total loss of wealth,
courtesy of the central banks' invisible tax, monetary inflation.
Now that the US Federal Reserve Bank has stopped publishing money supply
data (
M3),
relative measures such as the
USD Value Index have become an essential
yardstick. Visit MetaStockTools.com's daily-updated charts and tables,
and watch history unfold as the USD's value drops rapidly in real terms.
