What is a Dollar? Inflation?


Why do we need to know?

Normally, we don't.  However, during a contracting economy as we faced in the 1930's and we are now facing, we need to know because of the effects of decisions that our government is making and particularly those of the "Fed" (Federal Reserve) which controls the flow of money.  These decisions will affect our lives in ways that few people living have  experienced.  History may help, but only if we carefully examine what happened as a long term result of policies instituted by the "New Deal" of President Roosevelt.

Briefly

This is a simplistic explanation and there are those who would present a much more complicated view.

At one time the dollar represented the amount of gold held at Ft. Knox divided by the number of dollars in circulation.  At one time, coins, silver and gold, had intrinsic value and they could be exchanged for goods and services without representing anything except what they contained of the precious metals.

Now the dollar is a certificate roughly representing the net worth of the United States divided by the number of dollars currently in circulation. This removal of the relation of the dollar to gold, known as the "Gold Standard" was removed as late as the Richard Nixon administration.  From that time, the Federal Reserve with its powers that are to a great extent ungovernable by the Federal Government has printed money and been responsible for its relationship to products and services.  The formulas that are used by the Fed and various economists are very complex and will not be discussed here, nor the means used to increase the supply.  The bottom line is that any time the money supply is increased, it becomes less valuable.

Another factor is confidence in the value of the dollar, particularly internationally.  The dollar has for some time been used as the standard by which other currencies have been measured.  Now, other countries are looking at other currencies on which to measure their own.  One such standard is the "euro" but more likely a new world currency will be created.  Any of these solutions are not good for the United States because an outside entity will control the ability of us to buy from and sell to international markets.  

How Does It Affect You?

Many would try to convince you that inflation ultimately doesn't affect you because the dollar is uniformly worth less.  In fact, it may even benefit you.  Let's look at two examples of the effect that inflation may have on you. 

Looks Good!

Note that the following table illustrates what  happens is we inflate the money supply, decrease the value of the dollar, by 100%.  Even though this is an extreme example, it is not beyond possibility.  Note that if your debt exceeds your savings, your net worth actually increases, being over double the amount before inflation.  Also note that because you are likely to move from one tax bracket to another your income after federal taxes is less as a percentage of your pay.

It looks like you are making more! But, in reality your salary is not purchasing any more.

Inflation Rate 100%
Item Current Value After Inflation Value



House 200000 400000
Furniture 20000 40000
Car 1 25000 50000
Car 2 25000 50000
Savings 100000 100000
Stock 50000 100000
Debt -200000 -200000












Net Worth 220000 540000



Income 100000 200000
-Tax 90000 170000

Note that your net worth, measured in dollars, has increased.  But notice that your income didn't double as you would have expected because you entered a higher tax bracket.  So every thing appears to be better, except you have less disposable income to buy the more expensive products from the market.

Not  so good!

So you are one of the frugal ones.  You have worked hard and you have saved your money and kept your debts to a minimum.  You are rewarded by loosing half of what you have saved in addition to paying even a higher percentage of your earnings to the Federal Government. And, your net worth is LESS than double what it was before inflation.


Inflation Rate 100%
Item Current Value After Inflation Value



House 200000 400000
Furniture 20000 40000
Car 1 25000 50000
Car 2 25000 50000
Savings 200000 200000
Stock 50000 100000
Debt -100000 -100000












Net Worth 420000 740000



Income 100000 200000
-Tax 90000 170000

Do you know how to say "Redistribution of Wealth"?

The dollars representing the increase of the net worth in the first example must come from some where.  Look at the second example.  THAT is where it comes from!  In order to support  inflation as a means of solving economic problems, one must discard the moral imperative that we were taught "You shall not steal."  By inflation, decreasing the purchasing power of the dollar, wealth is transferred from the frugal who have savings, to those who have debt. 

And, do you remember the pledge that no one making over $250,000 will see their taxes increase.  All you need to do is devalue the dollar through inflation to increase the tax base making more that $250,000.

Today, the stock market is showing constant gains.  Our GDP is up 3.5%. Those reports use $ values to show the increase.  How much of that increase is due to the decreased value of the dollar.  Has our gross national product increased? Look at "Why Rulers Aren't Made of Rubber" to see the answer.

Probably the hardest hit part of our population is our retired.  Many have purchased annuities that promise a fixed income after a certain age.  Those annuities are now worth 1/2 of what they were before inflation after 100% inflation.  And now we have more people that cannot afford insurance and the benefits that they saved for during their working life-time. 

With more going to the government and to the debtors, there is less available for entrepreneurs to create more jobs and investors to grow companies creating more jobs and wealth for the United States.

This article probably should have been written as many government and news agencies present information, that is using smaller relations when describing the negative effects on taxpayers and larger numbers when describing larger events.  Like, the dollar decreased to one half of its purchasing and the supply of money was doubled, causing, in the first example, your net worth to increase by 146%.

Current Status

If you wish to know the current state of inflation, you may wish to visit "Inflation Status".

What should we do?

We should stabilize the dollar by tying it to gold (or some precious metal) again.  There is a limited supply of gold and as such is more stable in value than any currency in the world controlled by political organizations.  Currently, gold is selling at just over $1100 an ounce.  As the Fed prints more money that price will go up.  Note that the price of gold is the first indicator of an inflationary spiral.  In August of 2009 it was selling at less than $1000 an ounce.  November found it selling at $1100 an ounce, an increase of more than 10% in two months.

We should return to a gold certificate from the current un-backed currency that is now available.  This would guarantee to our citizens that their wealth could not be taken by merely manipulating the supply of the currency.