Currency debasement, how far can it go?

[Debaser82]

Bare with me for a moment.

This is not another one of these oh my god the $ is going to collapse buy gold now topics so don't even go there ok?

Nevertheless the following question came to mind.

It has been claimed by many the USD has lost 90% of it's purchasing power since the 1910's.

Ofcourse, as many would say that doesnt tells the entire story or do you think living standards back then where really higher?

I don't know but if we can agree on the factual debasement let's hop on to question nr 2.

Prior to WWII 1£ used to be worth 5$ correct me if I am wrong.

Now for argument's sake let's agree Sterling and the USD are at parity today.

That's an 80% drop in value of the British Pound VS the USD.

Now when you combine that 80% drop with the 90% in purchasing power you get what for Sterling?

A 99% drop in purchasing power?

I'm not that good with numbers.

How do they do this without creating a panic and what does this tell's us about the future of monetary policy across the globe?

Thanks for any responses.

 

[makloda]

Quote from Debaser82:

It has been claimed by many the USD has lost 90% of it's purchasing power since the 1910's.

Which is obviously non-sense because fiat-currencies like Dollars earn interest. Fiat currencies can be exchanged for production assets which yield an average profit. Physical assets do not yield interest; they incur storage costs.

This graph uses the interest paid on 90 day US T-Bills, adjusted for CPI, without accounting for taxes on interest, for the sake of simplicity.

 

[morganist]

Quote from Debaser82:

Bare with me for a moment.

This is not another one of these oh my god the $ is going to collapse buy gold now topics so don't even go there ok?

Nevertheless the following question came to mind.

It has been claimed by many the USD has lost 90% of it's purchasing power since the 1910's.

Ofcourse, as many would say that doesnt tells the entire story or do you think living standards back then where really higher?

I don't know but if we can agree on the factual debasement let's hop on to question nr 2.

Prior to WWII 1� used to be worth 5$ correct me if I am wrong.

Now for argument's sake let's agree Sterling and the USD are at parity today.

That's an 80% drop in value of the British Pound VS the USD.

Now when you combine that 80% drop with the 90% in purchasing power you get what for Sterling?

A 99% drop in purchasing power?

I'm not that good with numbers.

How do they do this without creating a panic and what does this tell's us about the future of monetary policy across the globe?

Thanks for any responses.

first of all you are mixing two different things. the exchange rate (demand for currency) and currency value (quantity of currency) although both are used to set price. they are interrelated however i think you have it confused.

the exchange rate is based on demand for the currency of a country which means it is based on what you can buy in that country so it is related to whether you want something in that country or not. the relationship between the dollar and the pound has weakened because they do not want as much of what the british produce as they used to. this is not necessarily based on the quantity of currency although is linked.

it could mean a change in purchasing habits or an increased demand for domestic products or other currencies. however you could argue a different quantity of the currency could alter the purchasing power of the other currency as there is a less or greater quantity to purchase. effectively although currency devaluation is linked to exchange rate it is not the sole factor so is not completely correct. there are other factors too. other things devalue a currency and create demand for currency.

was that helpful?

 

[Debaser82]

Quote from makloda:

Which is obviously non-sense because fiat-currencies like Dollars earn interest. Fiat currencies can be exchanged for production assets which yield an average profit. Physical assets do not yield interest; they incur storage costs.

This graph uses the interest paid on 90 day US T-Bills, adjusted for CPI, without accounting for taxes on interest, for the sake of simplicity.

Ofcourse, the interest.

When you think of it the perma bears should really include that into their analysis.

Thanks Morganist, very insightfull.

 

[morganist]

Quote from makloda:

Which is obviously non-sense because fiat-currencies like Dollars earn interest. Fiat currencies can be exchanged for production assets which yield an average profit. Physical assets do not yield interest; they incur storage costs.

This graph uses the interest paid on 90 day US T-Bills, adjusted for CPI, without accounting for taxes on interest, for the sake of simplicity.

perhaps i am wrong but i will say it anyway. if the money earns interest it means someone else pays it. it does not create any more money it just takes it from someone else in short the money quantity all other things static does not increase, which i believe is the point made in the earlier post in relation to money devaluation. in relation to the physical assets, they are finite so they will rise in value purely through the fact that they exist. the increase will be linked for their demand depending on need or taste etc. but the overall rise will be directly linked to the overall price inflation.

i really don't see how interest has anything to do with either money quantity or money demand. all it does is encourage people to save or spend. the only way interest is linked to at all is in interest rate alterations increasing spending or saving which would affect money quantity interest on its self assuming it is static will have little affect. so the only thing that might be linked to the comments in the op is the monetary policy of the governments over the period, which is a factor in money quantity.

was that helpful?

 

[m22au]

Makloda is spot on with regards to currency holdings earning interest.

However in addition to the taxes (which Makloda did mention), there is another issue about future returns on currency holdings.

With debt levels at all three levels (consumer, business and government) at ridiculously high (and historic) levels in many western countries, including but not limited to the USA, it's unlikely that interest rates will rise by much.

Hence the current concern about the US Dollar (and other currencies, eg. GBP) as a true "store of value" now and in the future.

Quote from makloda:

Which is obviously non-sense because fiat-currencies like Dollars earn interest. Fiat currencies can be exchanged for production assets which yield an average profit. Physical assets do not yield interest; they incur storage costs.

This graph uses the interest paid on 90 day US T-Bills, adjusted for CPI, without accounting for taxes on interest, for the sake of simplicity.

 

[Daal]

Quote from Debaser82:


It has been claimed by many the USD has lost 90% of it's purchasing power since the 1910's.

The real cost of a fiat dollar to the average american is the sum of all the seniorage collected by the government, adding the taxes that are charged on interest income if the after-tax return is bellow inflation(but only part of the tax revenue should be counted, that is the part the makes the return negative when adjusted for inflation)

I dont have any numbers on this but the point is that a fiat currency is just a hidden tax, nothing more. It doesnt prevent human progress or rising living standards. It just ups the tax rate a bit and if the central bank is not efficient increases macroeconomic volatility and maybe even destroys the economy(zimbabwe). It has positives and negatives just like a gold standard

 

[morganist]

Quote from m22au:

Makloda is spot on with regards to currency holdings earning interest.

However in addition to the taxes (which Makloda did mention), there is another issue about future returns on currency holdings.

With debt levels at all three levels (consumer, business and government) at ridiculously high (and historic) levels in many western countries, including but not limited to the USA, it's unlikely that interest rates will rise by much.

Hence the current concern about the US Dollar (and other currencies, eg. GBP) as a true "store of value" now and in the future.

yet again perhaps i am wrong but i will say anyway. i take it you mean that by paying interest on the currency it will act as an incentive (made return) for people to hold that currency thus the demand will increase or decrease depending on monetary policy. this is however only one factor related to money quantity not money demand also any increase or decrease in interest rates will have a alteration in the value of the currency which may offset the interest rate alteration. for example higher interest rate means less money quantity means more expensive for someone to purchase from abroad. or conversely lower interest rate means cheaper to buy but the purchasing power is reduced so any alteration in the interest will be offset by the wider affect it has on the economy. thus interest is not necessarily that big a factor.

was that helpful.

 

[Scataphagos]

Quote from Debaser82:

"... It has been claimed by many the USD has lost 90% of it's purchasing power since the 1910's.

Ofcourse, as many would say that doesnt tells the entire story or do you think living standards back then where really higher?

Actually, the $USD has declined by 95-99% of its value since the creation of the Fed.... and they say "we fight inflation"...HA... they PROMOTE inflation.

So, Dollar declines by 100:1, but prices and wages rose by about $100:1... or a bit less with wages, a bit more with prices.

If the debasement is slow enough, an economy can usually cope with the FIRST 100:1... much as have we.

But sometime later.. like the NEXT 100:1 (of course, that's the last 1% of the 1913 Dollar declining by a factor of 100:1... = 10,000:1 of the 1913 USD), the debasement gets to be too fast for the economy and wages to keep up.... PRICES keep up though! "Things" go parabolic and get out of control.

LIkely we are on the precipice of "getting out of control" right now.

 

[Onlygold]

It has been claimed by many the USD has lost 90% of it's purchasing power since the 1910's.

I think it is a favorite quote of all gold bugs.

It should not cause any surprise or alarm. It should cause alarm if it is found that the Pound (British) or Meter (French) lost 2% due to the creation of the Fed.

The dollar is only a unit of accounting and there is no fixed defined "value" for a unit. Even if it were a pure gold standard, the monetary unit would still vary over time. Because the dollar is fiat and the printed money supply increases much faster then real goods, it is no surprise if the current dollar is just worth 5% of a 1913 dollar.

The dollar losing 90% of its value says nothing much. Saying the per capita consumption of a "basket of goods" (flour, cheese, beef, turkey, broccoli, eggs,...sword, scythe, bricks... ) has dropped 90% since 1913 means Armageddon is around now.