We’ve spoken at length in these pages about inflation and the vanishing worth of the dollar. The two are synonymous. I pointed out earlier this year:
It’s not that products and services are worth more, and therefore getting more expensive – it’s that the currency we use to buy them is worth less, because it’s becoming depreciated … The US government, over the past year, printed or electronically created over 40% of all the dollars that have ever existed.
There’s more at the link.
In another article, I noted:
The reason house prices, share prices, etc. are all continually rising is that the “funny money” created by the Federal Reserve (the red in the graph above) is funding the increase. More and more empty, valueless dollars, created out of thin air without any underlying economic value, are chasing whatever they can buy that does have economic value. That’s the very definition of inflation: more money chasing the same amount of goods. What happens when all those “funny money” dollars are exposed as having no underlying economic value, and therefore become monetarily valueless? Just look at how much the dollar has declined in value over the past century or so. Expect an even greater collapse in the not too distant future, as the Fed’s economic chickens come home to roost.
Again, more at the link.
Now Aesop brings his own perspective to bear on the issue, and does so very well.
IOW, in real commodity-based pricing, your dollar is worth exactly 50 times less now than in 1913. That would be…2¢. Color me shocked. Gold, chocolate, coffee: all confirm the data … Your real wages, IOW, have slipped nearly 40% because of just inflation in the last century. You’re making less actual money, and everything is costing more inflated dollars to buy. And it doesn’t last as well.
. . .
$26.14 is now supposedly worth $1. But $1 is worth 2¢. To have the same $26.14 as you had in your pocket in 1913, you’d need $1307 in dollars right now. Or $2407.69 in gold. That’s 5000% cumulative inflation over a tad more than a century. It’s about 4% annually, every year, forever, compounded. And bear in mind, the government pays no taxes on inflated dollars. You do. Put another way, your dollar bill from 1913, when it was gold-backed, should now measure 18 inches high and nearly 4 feet long, because that’s now much it’s been inflated. That’s a beach towel. If you wanted to know how much it’s shrunken in value, it should measure 1/10″ tall by not quite 1/4″ long.
. . .
That’s how you get to 100 trillion dollar banknotes. Because a $50 [bill] today … is a $1 from 1913. And we’re headed for it being [a] $100 bill, soon. Long before you get to $100 trillion, the paper and ink are worth more intrinsically than their actual face value. Hence the toilet paper and kindling stage.
. . .
I say yet again, BRACE FOR IMPACT. Because the first time the US economy hiccups, the whole house of cards comes all the way down. Look what one sector eating it did to us in 1999 or 2008. Now imagine that with everything, simultaneously.
I wish I could disagree with Aesop, but I can’t. I think we’re poised on the precipice of an almighty economic hiccup, and I can only pray that we don’t make this sort of landing (thanks for the link, Aesop!) at the bottom.
We won’t recover from that economic landing nearly as well (or as often) in the real world as Wile E. Coyote does in that cartoon.
Peter
A couple months ago, I bought some moving boxes from Home Depot.
Yesterday I bought some more of the same boxes, but they are smaller, and cost slightly more.
Everything I saw in this post is correct, IMHO. So what are things we can do?
1. If you have money invested, whether in taxable or tax-deferred accounts or 401-type accounts, look for things which hold up better under inflation. DISCLAIMERS: I have some background in investments, but am NOT currently "in the business", and this is NOT investment advice! Common stocks ("equities") have in the past, "over the long term" (but not the shorter term) held up ok. No guarantees that will always hold true. Moscow had a respectable stock market in 1917! PMs (precious metals) are frequently suggested. Don't get defrauded, and don't get robbed. There are precious metals "basket" exchange traded funds. There are also commodities "basket" ETFs. Some use derivatives to emulate a direct investment, some have actual physical holdings. Some even claim to be audited. Derivatives can fail under severe market stresses! (2008) The volatility of an all-equities portfolio can devastate older investors. Brokerages can also fail. Sometimes it all just sucks.
2. Debt securities (e.g. bonds) have NOT held up well under inflation. TIPs bonds might do less awfully, but I don't see how they could fare well through severe inflation. Money market funds did ok under Jimmy carter's 18%+ inflation. That was then. It was just destruction of wealth for fixed-rate savings and most bonds.
3. Complete abandonment of conservative portfolio strategies is usually a very bad idea. No trite solutions exist for this conundrum.
@ES
All very well but I think what the posts and people like Aesop are getting at is the prospect of a currency collapse, i.e., hyperinflation. What's your insight there? Your comment assumes a best case scenario– 1970s style stagflation over years *merely* eating away savings, investments, and purchasing power. Most people here are fixed on the increasing likelihood that the feds are driving us all off the cliff Wylie Coyote style. In that scenario, seems the ability to grow food, barter w precious metals, and defend against marauders is about the only solution i see. Oh, and get someplace with neighbors who are likeminded, preferably who produce food as well.
BRM, I thought it was very good article by Aesop (and commented as such on his site). The only thing I can think of is some level of diversity across multiple types of investments (and actual physical goods are an investment), as well as continually learning to practice a lifestyle of needing and wanting less and less to cut expenses.
At some point, this will become another thing that people who previously sniffed their noses at the idea of "inflation" and "collapse" will suddenly find their courage (amidst their deleting of years of social media comments) to address.
I never realized how accurate the coyote's falls were until I saw the Russian BASE jumper. https://youtu.be/Xsepsq4IDcM
I would be careful trusting the math from Aesop's post. He is looking at 2 different ways of expressing inflation:
1 dollar in 1913 can buy as much as 26 dollars in 2020.
A 1 dollar Hershey's bar in 2020 cost $0.02 in 1913.
The first expression indicates the dollar has dropped by a factor of 26.
The second expression indicates the dollar has dropped by a factor of 50.
It is NOT accurate to simply multiply both versions. While the dollar is worth a lot less than in 1913, it has not dropped by a factor of 1300.
As Mark Twain put it, 'There are lies, damn lies, and statistics.' It is wise to be skeptical of implausible statistics from any source.
@Wayne, good point. Economics being the dismal science, we shouldn't expect neatness in the numbers. Not everything inflates identically. If you compared the price of computing power over decades, it looks like deflation. If you compare the price of lunch at McDonald's since 1971 to today, it's a price increase of about 150 percent. But the issue is the overall increase in the cost of what you need, and there is no question that it's going up significantly.
You missed the point, Wayne.
The inaccurate (as I pointed out times beyond counting) graph Says that $1 in 1913 = $26.14 now.
No.
Looking at actual commodities (gold, coffee, and Hershey bars) that can't be fiat-printed from thin air show that the real value of that $1 now is now 2¢. Or less.
That's a factor of 50, not 1300.
1300 comes from the 1307 candy bars of cups of coffee the graph's $26.14 would have purchased in 1913, versus now.
They got that number by using the government's "Offishul Inflation Rate". That is like using the basketball hoops at the carnival (oblong, and a foot higher than regulation hoops) to gauge your free-throw prowess. It's also why the graph maker bungled the entire exercise.
The graph, frightening as it is, is lying.
I was telling you the truth. Not two truths.
Sorry if it wasn't clear, but I didn't think that was a difficult concept.
$1 now was not $26.14 in 1913.
It was at least $50. (Judging only by coffee or Hershey bars.)
Judging by gold, $1 now was actually $106.77 in 1913.
(Gold then=$20.67/oz, Gold now=$2207/oz, give or take.
106.77 X 20.67 = 2207)
That $106.77 then, in 1913, would have paid for 5338 Hershey bars or cups of coffee, btw. It was ten to twelve weeks' average pay, then, with a 48hr workweek. So, how many weeks do you work to earn $5338, after taxes? That'll tell you how your salary is stacking up with 1913, by comparison with inflation.
But $50-$106.77 rather than $26.14 makes actual inflation, in the real world, 2-4 times worse than the graph (and FedGov) is lying to you that it is.
Let me know when the penny drops.
So to speak. 😉
They've been kicking the can down the road for awhile. I remember financial advisor Larry Burkett's 1996 'The Coming Economic Earthquake" He was expecting the crash before 2000 but here we are and it's even worse.
Here is one for you. I found some of my Dad's tax returns from the late 60's and early 70's. His 1969 return showed that he made $13,500 income that year.
Depending which online inflation calculator you use, in 2021 that amount is now about $98k to $102k. But hey, think of all the dumbass MBA's who think this fine and the academic economist who always piss on those Misesians and Austrians regarding money.
I would not go back to 1969 necessarily. I do like LCD TV's, computers, better cars for the most part, and better stuff in some ways. What is left of the free market has provided us with fresh Subway sandwiches and other goods and services not thought of in 1969. But I do wish the damn elites just for once would do something good for us peons.
My dad's return was similar.
Another difference between then and now is that he was able, on that amount of income, to pay off the note on the house he bought, in L.A., for $25K in the late 1940s.
That wouldn't even get me the down payment on a condo in the same neighborhood today, and it's strictly a working class, one or two steps above ghetto neighborhood, not the hoidy-toidy shi-shi bougie part of town.
$13,900 is less than 7 bucks an hour. That's below poverty, now. Then, it was six times minimum wage.
With twice the education he had, at the fat-money end of my career, I don't make 6X minimum wage now.
Yet again, our dollars are worthless.
Wow, Aesop, housing was a lot more expensive there, than in Silicon Valley, it seems. Shared a house in Summyvale, 4bd/2.5 bath, that he had bought new in '65/66, for about $16k. Bought a Marantz tube stereo system with Rolls Royce speakers in ~ 5ft tall Danish Modern enclosures, for $1600 along with the house. (with re-coned speakers, that was the best stereo I've ever heard)
House was junk, an Eichler copy that cost over $300/month to heat. Lots of floor to ceiling single pane glass, with 2×6 lumber, tarpaper and gravel roof. No insulation.
He sold it in '86 or 87 for $550k, IIRC. Within a year, identical house two doors down sold for $750k, but it was in better shape.
(right under the flight path for the NAS/NASA-Ames runway. Blue Angels were spectacular from the roof! You know they are serious about a good show, when they have to pull up to clear some of the neahborhood trees)
@Tschifty, I don't have a problem with the more extreme strategies of lifestyle and related changes, if that is what someone wants to do. I don't see the situation as a whole new world, but as an economic storm over a few years to be ridden out without your boat getting sunk or wrecked, so that your you and your family can sail on when things are more normal. Governments inflate currencies. When incompetents and madmen govern, they can devastate their people, even pulling down their own houses in effect.
The things I discussed were more limited in scope, positing that debt securities and cash currency holders will get hurt worst. I think Aesop might agree with that. For money you don't need for five to ten years, diversified portfolios of quality common stocks will have some casualties but overall, be alright afterward, like they always have to this point in US history. For diversification and simplicity I'd recommend indexed ETFs or quality indexed mutual funds like Vanguard's, but they (ETFs) haven't been stress tested more severely than in 2008-09, when they did ok.
Best and likeliest (IMO) case: Carter. Worst case: Weimar Republic, and/or 1920s Germany with armed Freikorp militias and criminal gangs fighting in the streets, acting like the "tribes" Peter has discussed. So do have ammo and be flexible!