Purchasing Power of US Dollar

Yesterday's posting showed how the purchasing power of gold has remained relatively the same over thousands of years. Unfortunately, the US dollar cannot make this boost. In fact, the purchasing power of the US dollar has steadily declined over the past century.

Source: International Speculator, November 2005

Different Forms of Money
As the International Speculator indicated, "Anything can be used as money-cows, seashells, salt, silver, copper, to name but a few commodities that have been historically deemed acceptable.

Gold has proved itself to be uniquely suited as money. Its use is not 'irrational' or 'mystical' as hysterical goldphobes would say. Aristotle, in the 4th century B.C., recognized that a good money has five characteristics: it's durable (which is why wheat isn't good money), divisible (why diamonds aren't good money), convenient (so much for lead), consistent (why real estate doesn't work), and has utility in itself (which is why paper doesn't make the cut). Gold succeeds on all counts.

Today, the dollar and gold are competing forms of money. Consumers get to decide which they'll use or whether they will use some of both. Money has historically served two purposes. It is a) a medium of exchange, and b) a store of value. Gold is rapidly gaining on paper in the world's perception as a store of value."

Value of Money
"As the demand rises or falls for whatever is currently passing as money, so does the value of the existing supply of that money-value being defined as purchasing power.

Chart D reflects this nicely. After the Civil War, the U.S. economy entered a period of rapid expansion, and the demand for money grew. But at the same time, the nominal money supply (the number of dollars) was contracting as the government retired the 'greenbacks' it had printed and spent during the war. The growing demand for money against a falling supply of same triggered an increase in the purchasing power of the dwindling number of dollars... resulting in 26 years of price deflation.

From a consumer's point of view, the dollar's virtue is that, even though the dollar may lose 95% or 99% of its value in a lifetime, it suffers no abrupt day-to-day changes in value. With gold, on the other hand, the value may swing wildly. While that volatility may be troubling in the short term, the long-term advantage of gold is that it will still be valued a generation or even a lifetime from now. By contrast, the trash bin of history is decorated with beautifully printed fiat currencies.

A consumer chooses between the dollar and gold the same way he chooses between any two competing products-on the basis of cost. The cost of holding dollars is the loss of purchasing power through inflation. When that cost goes up (e.g. when the inflation rate moves higher), consumers respond the way they always respond to higher cost. They switch to an alternative, which in this case is gold."

Looking Forward
The United States national debt level is approaching $10 trillion. The annual budget has reached $3 trillion a year and expected deficits are approaching $0.5 trillion a year. And looming even larger are the baby boomer entitlements just around the corner. This may cost the government an additional $50 trillion over the next two decades.

How will our government pay for this? There is only one possible answer. Inflation.........they will sacrifice the dollar and its purchasing power will continue to buy less and less.