Does It Really Matter What Currency You Own?


Is the trick to preserving purchasing power to put your money in a currency other than the dollar? Perhaps; but as frequent contributor Harun I. reveals, that's certainly not true of the globe's two other major currencies, the euro and the yen.

"The latest talk seems to revolve around which currency one should own. I have gone over this ad nauseam but to no avail. Against the basket of commodities (you know, the stuff we must consume to live) know as the Continuous Commodity Index (CCI) the major components of the USD index, the Yen and the Euro, are tanking in purchasing power at the same rate as the Dollar. What this means for the fiat currency system will only be know as a matter of history but the charts suggest it may not be good.

What the charts are basically saying is that, in real terms, as long as commodities are priced in dollars it does not matter which currency one owns.

I guess the one glimmer of hope is that under-performance leads to out-performance, but against a rising tide of unserviceable debt hope may remain just a glimmer."

Is there anything on the horizon which could change the trend? How about a global recession and some decent weather in grain-growing areas? As I have suggested here before, I foresee a recession of such depth, magnitude and speed that oil demand will fall so hard and fast that there will be a global surplus of oil, causing prices to plummet in half or perhaps even 2/3 back to $30/barrel.

Grain supplies have been stretched by rising demand and extremes of weather/low yields. Perhaps demand for meat won't drop much in the U.S., but as workers get laid off by the thousands in developing nations, those families will be eating less meat, cutting demand for grain. Toss in a bumper crop here and there, and wheat could fall from $10/bushel to $2/bushel in a relatively short period of time. If China slows its hyper-active building after the August 2008 Olympics, the demand for cement, steel and copper could drop enough to send prices spiraling downward.

As the price of gasoline plummets along with global demand for oil, ethenol won't be seen as such a panacea, and corn could suddenly be in surplus again, forcing prices down.

Just to widen the speculation to currencies, consider what would happen if any one currency were perceived to be "safer" than the others. What currency that might be--the yuan, the yen, the euro or the dollar--depends on just how roiled the global financial markets become, and which central bank is debasing their currency less than the rest. Severe social disruption could also quickly undermine the perception of a currency's value; indeed, the survival of the euro itself will become doubtful if the great central bank divide between Germany and Everyone Else widens.

Or perhaps commodities will slowly begin to be priced in ounces of gold. Once the Emperor (fiat money) has been revealed as naked, then perhaps some nation somewhere will demand a currency which isn't constantly losing purchasing power. That currency would rise, perhaps with amazing speed, as it becomes seen as a relatively secure store of value which is actually outperforming commodities and other currencies.

Could a "flight to safety" cause the dollar to reverse course and actually outperform falling commodities? Or could the yuan, euro or yen become a "flight to safety" currency? The cliche is that when the U.S. sneezes, the rest of the world catches cold. Perhaps the major currencies will soon reflect the relative fragility of each currency's home economy; if so, whatever economy suffers the least social turmoil and wealth destruction may be rewarded with a currency which actually outperforms sagging commodities.

Or maybe the "commodity-super-cycle" adherents are correct, and global demand will barely be dented by a massive, deep, long U.S. recession. Maybe gold will continue its climb to $3,000/ounce and the dollar will continue its depreciation to near worthlessness.

Maybe, but the premise that 75% of the global economy (non-U.S. economies) will be utterly unscathed by the sharp decline of the other 25% (the U.S. economy)--this makes little sense when you you look at the huge surpluses the rest of the world runs with the U.S.

If U.S. spending tanks, how can that not affect those who have profited from, and indeed, grown to depend on, exports to the U.S.? And if the exporting nations are actually more vulnerable than they seem, then who can say with any degree of certainty that commodites will continue to outperform all currencies? Could one currency suddenly outperform both the other currencies and commodities? As unlikely as it seems at the moment, we should be open to the possibility.







Readers Journal has been updated! Check out all the new opinions and reports. This is another banner week of thoughtful, provocative (and even some zany) ideas.

Here is but one entry, a fascinating bit of history contributed by Ron Sprouse:

"FYI regarding the air traffic controller strike. My father was an air traffic controller at Boeing Field in Seattle when he retired, just a short time before the strike. He was an air traffic controller in the Air Force in WWII helping the planes over the Hump in China.

I remember him sleeping for 8 hours after a shift and then returning to work for another 8 hours. There were not enough controllers hired for the work at hand. There was no radar, and he prefered it that way. All lights, and radio and Sea Tac control tower radar if they needed it.

They were interested in some sort of help, but a union was not an option then. The FAA wanted them to buy their own uniforms, but they refused and wore white shirts and ties instead. They were constantly asking for more help, but there was no relief. Wages were not very high.

The Seattle Times posted a cartoon of traffic control operators holding strings to numerous planes illustrated like balloons with the number of passengers written in the balloon. A hundred here a hundred there. (Westcoast was just trying out their 747 Jumbo jet, not in commercial use yet.)

Here's my point on the strike issue. Air traffic controllers were essentially still part of our armed forces under the FAA. What would happen if our armed forces personnel went on strike? They can't. Our defenses would be put at risk.

When the Cuban missile crisis occured, they gave the control tower a Red Phone to the White House. My dad also got a rad meter and a sign to put in the front windshield of his 1952 Nash Statesman that said "Air Traffic Controller must get to control tower". Reagan could not allow a strike because our national defense would be at risk. Therefore, they were replaced.

I believe this action sent an unintended message to some businesses that they could do the same, and therefore bust some of the smaller unions around the U.S. Hope this was of interest.

PS. I was a musician in Vegas Showrooms until our Union Local #369 was busted in the late 80's. "

Thank you, Harun, Ron and all the other contributors to Readers Journal for your thought-provoking commentaries.


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Introducing Whine Magazine


Every time I read about the big bucks other sites are pulling in from advertising, I get jealous. Why am I so stupid? Who cares whether there's ads here or not? Why bother with dumb "ideals" when I could be pulling in thousands a month?

Then I drop all scruples, honor and my most closely held values and accept a big fat ad. So please welcome our big-bucks sponsor, "Whine" magazine.



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Been thinking of contributing, but don't think your few bucks would matter? Hey, it's just you and me here; we don't have any big-bucks advertisers or sponsors. Believe me, it matters; you are it. Without your support, this thing's a tumbleweed blowing aimlessly along in the zephyrs of the Web.

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What Are the Risks of Hyper-Inflation?


More than a few citizens are worried about the possibilty of a hyper-inflationary cycle taking hold in the U.S.--a cycles which would impoverish everyone.

New correspondent Scott M. describes the situation and reaches an important conclusion:


Thank you for your most recent submission on Inflation/Deflation and Purchasing Power.

I have been a loyal reader of your site for about the past year, and while always interested in your commentaries on the markets in particular, was moved to make a comment for the first time.

I too have been sucked into too many expert opinions on whether we will experience I nflation/Deflation or some other esoteric academic iteration or combination of the two. If one looks one can find the concept hotly debated on the web ad nausem (not to imply criticism of the web as at least we can enter into the debate, unlike with mainstream media). Alternatively one can read the commentary of experts (economists and the like) and be swayed back an forth by one side or another.

For a time I became captivated and obsessed with learning the answer to the question. Your submission has clarified and simplified the problem for me. However I cannot help thinking that there are still practical realities and impacts to me as an individual investor – depending on whether we experience hyper inflation generally, or a general decline in the cost of housing, consumable products, etc. brought about by an oversupply and a lack of demand (essentially because the spending mania has or will soon end).

First and foremost you are essentially correct. What matters to me, as an individual, is what my unique experience will be in the face of what is known and or can be reasonably projected (for example rising food prices, lower big screen TV prices, higher gas prices, and stable or falling house prices). It is clear to me (more clear after reading your blog) that their will be both gains and losses in purchasing power. It’s the net effect in your circumstance that matters most. For those that planned well there may be significant gains in purchasing power. I for example,

sold my house 18 months ago, rented a condo, invested one half of the equity in safe interest bearing vehicles and the other half in Gold and Oil/Gas investments. I am also a Canadian and we are fortunate that our currency has done well relative to the rest of the world – at least of late. So far so good. For perhaps many more individuals – who perhaps have not planned ahead, I fear that there will be a significant and continual loss of purchasing power.

Am I worried that my equity investments are susceptible to a potential deflationary spiral? Yes. The reason is that less purchasing power in the population generally, means less aggregate spending. Less spending means less demand for goods. Less demand means overcapacity. Overcapacity means lower prices. Eventually less demand for goods and services in general (and agreed not for everything like healthcare, gas, food, etc.), will mean lower corporate profits.

Lower corporate profits means lower stock market prices, fewer jobs, etc. One could then make the argument for a downward spiral ala Japan. If that is the consequence then my purchasing power has been negatively impacted if I do not prepare accordingly (e.g. increase the cash component).

One often reads that Bernake, as any good Central Banker would, fears “deflation”, and will flood the “system” with money thereby forestalling deflation but as a necessary consequence, will cause prices to increase (agreed the incorrect definition of inflation). Nobody has properly defined what “flooding the system with money” actually means. At least not to me. How does this money get into the hands of the debt satiated consumer who apparently is a key ingredient of the economy (to the tune of about 70% of GDP)?

Is it simply as easy as offering 1 % interest rates to the masses? Of course the deflationists take up the argument and say that you can lead a horse to water but you can’t make him drink (in other words lower rates and more and easy credit will not induce more spending) when (1) banks are not willing participants, (2) credit is “maxed out”, and (3) people suddenly “get” that it makes sense to save.

But what if the hyper-inflationists are right, and one last time the masses are granted this easy money and they in turn drive up the price of all goods. Not just gas, food and healthcare (that are clearly going there anyway) but stocks, Chinese made electronics, and perhaps even Real Estate once again? While I am confident that the value of my gold and gold stocks will appreciate at an even greater rate than general prices, I still have to prepare in a different way for this consequence, do I not? (e.g. decrease my cash component).

There are no easy answers, but at least you are bringing the debate down (from the lofty academic level) to the practical and individual level. I hope that you will continue the debate this topic in light of my questions and confusion - which I am sure is shared by many.

Perhaps it can be boiled down to one simple question. While the impact of whatever happens (inflation or deflation) is a function of each individual’s circumstances, is it not true that what happens to the general population (ie either a mass loss of purchasing power, or an illusionary increase in purchasing power through dollar devaluation) will in turn impact the individual investor and how they should plan?"

Excellent point. Scott. A cycle of hyper-inflation or deflation will certainly affect individual investors. I believe the following simple chart definitively answers the question of just how likely hyper-inflation might be.




The question this chart poses is this: would The Powers That Be who own the vast majority of the nation's wealth and influence its policies allow those policies to effectively destroy their wealth?

I think it is very safe to say the answer is "no."

Next, think about the banks. Let's say a bank has a $200,000 mortgage on a home and is making a nice safe return on that mortgage. Now let's say hyper-inflation explodes and the owner is "earning" $100,000 a month, soon to be $200,000/month. The owner peels off 10% of his pay and in a few months the mortgage is paid off. In terms of purchasing power, the bank received peanuts for what was once a substantial store of value.

If you're the banker, how can you make money in a hyper-inflationary cycle? Whatever money you loan today drops precipitously in value tomorrow, and so on, to near-zero.

The top 1% do own fixed assets, of course, just like the rest of us, and they are of course diversified around the globe. But their U.S. liquid assets would be rendered worthless by hyper-inflation. Why would they allow that cycle to take hold?

Finally, consider their position in a deflationary environment. Things are looking quite cheery for the super-wealthy in a deflationary cycle. All their liquid assets buy more real assets every month. Yes, perhaps there are another 30-40 million debt serfs struggling to make ends meet below them, but the poor have always been present and it hasn't really affected their wealth.

So which cycle serves the top 1%? The answer to that question is not hyper-inflation. Therefore policies will not enable, support or allow a hyper-inflationary cycle to take hold. It might be argued the policymakers are playing with a fire they don't understand; but my entire point is those who hold the nation's wealth do understand that fire, and they will never allow it to flare into a conflagration which destroys much of their wealth.


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Thank you, Renee S.-J. ($10), for your fifth donation in support of this humble site. I am greatly honored by your ongoing contribution and readership. All contributors are listed below in acknowledgement of my gratitude.


Reader M.G. sent me a link to a web-based cartoon site which declared a fund-raising goal of $20,000 for the year. A wealthy patron promptly sent in $20,000 in the first week. So wealthy patrons of this site (if any), how about doing the same for this site? Heck, $10,000 would meet my goals for the year. After all, I am not a talented cartoonist, just a poor dumb scribbler. So if $10K is a trivial amount to you, why not give a tip to the poor dumb writer?

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Stagflation: The Epic Battle Between Labor and Capital


Now that 25 years of high growth and benign inflation appears to be ending, the term stagflation--stagnant economic growth coupled with stubborn inflation--is once again in the news.

For a novel and perceptive interpretation of stagflation, we turn to frequent contributor Albert T.:


What is staflation really? High inflation and low growth is what we hear but why? The truth is stagflation is the battle between labor and capital for the share of the economic pie--wage share of income as we call it in one of my classes. (emphasis added--CHS)
This story is the trend in my view: Italians Dressed in Sunday Best Forced to Dine in Soup Kitchens

Dressed in his best Sunday suit, Fausto Cepponi took his wife and seven-year-old son out for dinner -- at a soup kitchen.

"I never thought I would be in this position,'' said Cepponi, 45, a security guard, dining in an 800-seat charity cafeteria near Rome's main train station. "I have a job, I had a car, but everything has become so expensive and what I earn just isn't enough. I panic every third week of the month.''

With salaries on hold, prices for staples such as pasta and bread rising and mortgages soaring, efforts to keep up appearances -- ``fare la bella figura'' in Italian -- can no longer disguise that thousands of job-holding Italians are failing to make ends meet. They've been labeled ``The New Poor,'' the title of a book published this year. "

The problem with inflation is that repricing of contracts (labor contract being one of them) is problematic unless you have leverage. Hence the writers strike and stagehands strikes (both have tremendous leverage).

Inflation is in essense a gambit of attacking your costs by raising prices, assuming your own costs will rise but fall short of the net benefit between the two increases. Unfortunately for capital in this battle my guess is the writers will win out in the end. However that doesn't mean that labor won't lose out to capital in other areas.

I personally think the coming bankruptcy of small cities and towns will make them merge and eliminate work force, ergo "civil servants" and those people will rejoin the world of the living.

You think large corporations got great tax breaks before for shifting new businesses to one state or another, just wait. We will see deals of the century; I am sure offers of 99 years without taxation perhaps even decades of subsidy and tax free bonds financing. Ergo capital for capital that is intensive will become very very low cost but labor will be driven into a state of frenzy so high that it will force politicians to compete to placate it's plight.

Imagine having a tough time buying food like the people in the story above and I am sure any wage where you can buy food will look good. That is what we call subsistance wage in one of my classes. Subsistance wage is where you cover your necessities but have no money at all for savings--just like the U.S. wage earner on average--many Americans now live paycheck to paycheck.

Although some of us are thriftier and do choose to save, that choice will soon be gone for the majority. The wonderful point about subsistance wage is that is where the capital return is highest for capital.

It might seem odd that everything is falling around us but if we think about it the world is making perfect sense. Assets are repricing because they are being sold off by those whom aren't capital holders. People who are laid off by the job cuts in banks etc will probably sell off any 401k they managed to bulk up to pay for the mortgage or daily expenses until they get a job. I would be very reluctant to go to a lower paying job until all my savings were gone too, or if I didn't live with my parents. Prices take a long time to adjust.

Italy truck strike ends -- for now

The short end of the story is basically truckers in Italy stoped all traffic for about 3 days + with food shortages and store shelves going empty along with gas pumps, etc... To get higher wages ofcourse because their income hasn't kept pace with inflation.

Germany: Train Drivers Strike Again


German train drivers brought local rail services across the country to a standstill to press their demand for higher wages. The railway has refused to meet the union’s demands for a wage increase of as much as 31 percent.

Train strike brings Germany to standstill

French rail authority says labor unions announce plan for 36-hour strike next week

(French and German unions have struck before and continued to strike until their wages were bumped up or some other economic benefit is provided to keep pace with inflation.)

Thank you, Albert, for a very insightful and deeply provocative interpretation. Now I get to add my three cents. (It used to be two cents but costs have risen.)

Albert makes some key macro points. The first is what he calls labor leverage. Albert's example is the current Hollywood writers strike. The writers have leverage because the production companies are bound by contract to hire union writers. Legally, they cannot just go hire new screenwriters from Bollywood for a hundred bucks a movie/TV show. There is also a fraternal system in Hollywood which does not lend itself to outsourcing of creative material.

In other words, the writers have leverage. Eventually the media companies run out of new content and their advertisers go away. Corporate income drops, the stockholders scream, the head honchos' heads roll, and new management cuts a deal to restore profitability. If labor has a stranglehold on corporate revenue/profits, they can actually win. That's leverage. If not, they lose.

(NOTE: I think you can guess where my sympathies lie in this dispute. Recording artists receive income for decades from their original material, yet writers are supposed to give up their electronic (future) rights for nothing? Gee, I wonder why the media corporations are fighting so desperately for 100% of future electronic profits.)

The opposite of leverage is wage arbitrage. This is the term for moving factories and call centers to places with lower labor costs. Thus the factory moves from the U.S. to China, from Dusseldorf to Bulgaria, from Italy to Sri Lanka, and so on--in an endless chain which eventually leads--and has already led in some cases--to factories in "high cost" China being moved to "low cost" Vietnam.

How many jobs in the U.S. are vulnerable to wage arbitrage? A lot. Manufacturing jobs in the U.S. total about 14 million now, while China has about 110 million factory jobs. In one sense, this makes China far more vulnerable to wage arbitrage than the U.S. All the U.S. manufacturing jobs which could be shifted to cut costs have already been moved; those 14 million manufacturing jobs still here are here for a reason.

Like what? Like the materials are too heavy and the labor costs too small a percentage of the final cost to make offshoring the plant worthwhile. Examples include glass (heavy and brittle, often requires high-tech coatings better done here by robots), lumber products and various pharmaceuticals. (Pirating in China has destroyed many brands and pharmaceutical products' markets, so why bother even making stuff there?)

Meanwhile, we have friends whose family business manufactures specialty steel products. They have already moved their factory from China to Vietnam, and they are not alone. There are plenty of stories about wages rising in China to the point that wage abritrage is now a factor in China's growth as well.

Albert makes repeated mention of labor union strikes in Europe--especially those in transport. Municipal labor unions have plenty of leverage over public transport and services, as we all know. Subway/train and garbage strikes are usually quickly resolved in the unions' favor.

But as Albert points out, what happens on a macro level when cities and public agencies go bankrupt? As readers know, I have been forecasting just such a tidal wave of public bankruptcies for several years.

The problem for public unions is they don't control or even influence the revenue side of public agencies' ledgers. The basic model for the past 25 years of union contracts has been this: when unions strike, the easiest way to lower the pain (public outcry at the disruptions, etc.) for agency managers has been to cave in and agree to higher wages/benefits. Then the agency raises ticket prices or taxes. The public has grumbled but never revolted.

That will change once people find they can't afford food by the third week of the month. Their sympathy for well-paid transit and public union workers will vanish, and they may, for the first time, refuse to pay the higher ticket prices or higher property taxes.

If politicians start losing elections for trying to raise taxes, then agency heads will also roll. Bottom line: it's the politicians who control the revenue stream, and the public has the ultimate leverage on them.

If we wander back down memory lane, we can recall that President Reagan was faced by what appeared to be a union with tremendous leverage: the air traffic controllers. Now the air traffic control system is in dire need of a complete (and costly) overhaul, and I am not knowledgeable enough to say whether the union being busted was a good thing for the nation or not.

My point is simply this: public officials can stand up to public unions when pushed beyond a certain point--and when the public supports the officials. Europe and the U.S. have a different mix of public and private labor. About 40% of the French workforce is public or semi-public employees. That's a high enough percentage that they can practically control elections and vote in tax increases as a policy of self-interest.

But at some point, the private corporations and businesses who are paying the high taxes may rebel, and either close down (in the case of cafes and small businesses) or leave for more hospitable climes--wage and tax arbitrage, another issue Albert raised so preciently.

If public revenue (taxes) cannot keep pace with public union demands, then something will have to give. I would anticipate a situation in which transit/rail workers go on strike, demanding higher wages. This is a strategy which has worked exceedingly well for 60 years (since 1945). But alas, they will be told by bankrupt public authorities there simply is no more money. The unions will have a difficult time grasping this strangulation of the public revenue stream. But can't you raise taxes on someone, somewhere? No; all the productive businesses have left, exploiting global wage and tax arbitrage.

Many observers in California have noted the flow of jobs from California to other states--that is, wage and tax arbitrage within the U.S. Businesses and jobs leave California for lower-cost states. At an even finer-grained level, businesses leave high-cost San Francisco for lower cost suburbs. Like water flowing to the lowest level, businesses flow to the areas with the lowest wages and taxes. In many cases, they really have no choice; their competitors are already reaping the benefits of lower wages and taxes, and they can cut prices and increase profits as a result.

So the question for each of us becomes: how much leverage do we really have?

Readers Journal has been updated! An important new essay and many excellent comments on Can a Fragmented Culture Find Common Ground? and inflation/deflation.

Readers commentaries

Thoughts on a Common Culture (Chuck D.)

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Thank you, Jennifer K. ($10), for your most-welcome support of this humble site. I am greatly honored by your contribution and readership. All contributors are listed below in acknowledgement of my gratitude.

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Inflation/Deflation and Purchasing Power


A great debate rages about whether the future holds runaway inflation, Japan-style deflation, or stagflation. Every time I write about the notion of inflation and deflation co-existing, e.g. biflation, or stagflation, I am informed that inflation and deflation reflect only money supply, not price or supply and demand.

My problem with setting money supply as the defining measure of inflation and deflation is practical. This pronouncement leads to an obsession with measuring money supply rather than with the relative loss or gain of purchasing power.

Purchasing power, which reflects plain old supply and demand and the relative store of value of a currency or other money, matters more in the "lived" economy than money supply. In this view, both inflation and deflation are misleading concepts and should be set aside as such.

Look, if I'm paying more money and getting less goods/services in return, do I care if money supply (and what exactly is that? M3? M3-prime? Shall we argue endlessly about that, along with how many angels can dance on the head of a pin?) is expanding or contracting? No, I don't; if money supply is shrinking yet I'm getting less goods for the same money, then why aren't the cost of goods deflating?

If we're not allowed to call rising prices/loss of purchasing power "inflation," Then what the heck do you call it? Rising prices? Fine. Let's go with that. But please don't insist on calling rising prices "deflation." That is Orwellian nonsense of the highest order.

Wittgenstein warned against this kind of linguistic trickery, and the slipperiness of concepts which cannot truly reflect reality. If you live in Japan, as many of our friends do, then it gives cold comfort indeed to hear from some theorist that Japan is in deflation as you pay more for fuel and food than you did last year.

What does it matter to pronounce deflation if prices are rising? Because the land value in Niigata prefecture is declining? That's great if you're planning to pick up some agricultural property in Niigata (not as simple as it sounds for Japan-specific reasons too complicated to go into here), but what about Average Urban Salaryman's declining purchasing power? Do you see the completely absurd uselessness of the term "deflation" when purchasing power is in fact declining rather than rising?

In a truly deflationary setting, then my cash buys more next year than it does now. This was the case in the Great Depression. You could buy more food, more shelter, etc. etc. every year. Now that's deflation.

Pardon my skepticism when "deflation" is announced due to shrinking money supply yet prices are rising, i.e. purchasing power is declining, not rising. This makes a mockery of the concepts "deflation" and "inflation" which are a priori measures of price.

Rather than argue about measuring money supply, which I find particularly useless and distracting, let's revert to discussing supply and demand.

Let's say money is still available at low rates to qualified buyers for the purchase of a house. Is macro-measured money supply increasing or contracting? Who cares? If I want to, and I actually have a verifiable income and 20% down, I can buy a house-- and so can anyone else. That means money is available, regardless of its macro shrinking or expanding.

But what if I have no desire to buy another property? And let's say few others have any desire to do so, either. When demand is near-zero, the price of a good or service will fall even if money supply is expanding.

The reverse is true when money supply is contracting. If you need gasoline to get to work and supply is limited, you will line up at the nearest gas station and pay whatever price is demanded. Demand exceeds supply, hence prices rise, even if money supply is plummeting, i.e. "deflation" to those who insist that money supply is all that matters.

To pronounce "inflation" or "deflation" based on money supply rather than measuring purchasing power is to define an absurdity. You can pronounce this a deflationary economy until you're blue in the face, but if the actual living participants in the economy are suffering from a loss of purchasing power, your pronouncement makes no sense and has literally lost all meaning.

On the ground, a loss of purchasing power is not deflationary, regardless of what macro-money supply is doing. This is self-evident, isn't it? If we stop caring what ideological precept gets gored, then we can admit to the meaningless of "inflation" and "deflation" and focus on the meaningful reality of purchasing power.

Okay, let's move on to the complexities of purchasing power. If houses are dirt-cheap but no one can borrow money, then are the houses actually "cheap?" They are to people with savings, i.e. plenty of cash. But to those with little savings, then they are dear indeed. So which "reality" counts? The one for savers, or the one for borrowers?

If a haircut drops in price but your petroleum bill doubles, are you living in an inflationary or deflationary economy? Who cares? The reality is, you spend $500 a month on petroleum (say) and $25 on a haircut (okay, it's a Supercut), then are you wowed by the "deflationary" reduction in your expenses?

Bottom line: your purchasing power has taken a huge hit. Your $500 buys less petroleum products than it did last year. But hey, you moved to a much cheaper rental dwelling because rents are falling. Your purchasing power just increased; you bought the same shelter for less money. But oops, your $500 buys a lot less food than it did last year. Dang, another loss of purchasing power.

Let's say you transferred most of your cash savings into physical gold via Bullion Vault (see link on the right sidebar) last year when gold was $600/ounce. Now it's $890/ounce and you transfer some of your savings back into dollars. Woah, your savings increased rather handsomely in purchasing power.

Let's say you stuck a few bucks in a futures contract on oil or the OIL ETF last year when oil was $60/barrel. Hey, nice move, your cash gained in value as oil rose to $97/barrel; your purchasing power increased significantly.

So what's my point?

1. let's set aside "inflation" and "deflation" as essentially distracting concepts.

2. let's focus on purchasing power, which can be measured in relative terms of currency but which really requires a much finer-grained analysis.

I know we all want a comprehensive answer to "inflation" and "deflation" and "purchasing power," but the reality is too complex for this sort of reductionism. If your U.S.-based (i.e. sales are earned in dollars) business takes you frequently to Europe, your purchasing power overseas has been absolutely decimated by the decline in the dollar.

But if you have a fixed-rate mortgage, you buy most of your groceries at ethnic markets and bulk goods at Costco or Wal-Mart, and your savings have been in a gold ETF, your composite purchasing power has either remained stable or increased.

Did you earn a nice bonus this year? hey, your ability to purchase goods and services rose. Did you receive a mortgage re-set in the mail this month? Dang, your purchasing power just decreased, because you'll be paying more now for the same shelter.

On a macro-level, these complexities render any assessment of economy-wide purchasing power essentially worthless. In other words, you're on your own in this economy. Regardless of official "inflation" or "deflation" of money supply, your purchasing power might rise or fall depending on a number of variables. Wages have in aggregate remained flat for years, so the "average" American family has suffered a decline in purchasing power which they have offset by removing the vast increase in their home equity via a HELOC (home equity line of credit) or re-finance.

Since this was "free money" (unearned), then didn't their purchasing power increase? If their monthly payment stayed the same, didn't they have more money to spend and hence an increase in purchasing power?

Oops, that was borrowed money. Dang, and so was all that money the state of California spent on those roads and benefits and other goodies, and all the goodies like a foreign war and Medicare Druggie Benefits the Federal Government paid for with borrowed money (the fastest rise in Medicare costs in 25 years--how do you like them cookies?)

At some point, complexity renders simplistic reductionist answers meaningless. If oil doubles in price to $200/barrel, and you're a tele-commuting one-car family driving an 8-year old Honda Civic that gets 35-40 miles to the gallon when driven with properly inflated tires and modest care, then exactly how great will be your reduction of purchasing power? $30 a month? So what?

And if the dollar plummets 50% but you buy very little from overseas other than from China, whose currency remains essentially pegged to the dollar, then as long as you don't travel outside the U.S., then how significant will your reduction of purchasing power actually be?

In conclusion: if you live a certain lifestyle, and make certain investments with your savings, then your purchasing power may decline with alarming velocity or remain essentially unchanged, or even increase, regardless of money supply increasing or decreasing. The choice is yours, and ideological pronouncements on "official inflation" or "money-supply deflation" will remain deeply and essentially a priori meaningless.

Readers Journal has been updated! An important new essay and many excellent comments on Can a Fragmented Culture Find Common Ground? and inflation/deflation.

Readers commentaries

Thoughts on a Common Culture (Chuck D.)


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