More Thoughts on the “Economic Tsunami”….

Yesterday I linked to a post which argued that QE2, “quantitive easing” will blow up the economy. In that post was an assertion that the dollar has lost 96% of its value since the Federal Reserve was created in 1913.

It is an interesting statistic which is found around the internet, but I think it is  rather slippery . If you read much history you will eventually read about a topic in which the author tries to give some sense of what the value of a good or service was at some point in the past when expressed in modern dollars. It is very difficult to do.

It is true that the purchasing power of a dollar in 1912 was far greater in a general sense than it is today. I suppose you could say that $1 today buys four percent of what it did then. You could buy a quality restaurant meal for $1 in 1912, some people (If I remember correctly) received that much for a day’s wage and there was, in fact, Nickel Beer.

But the devil is in the details. 

Let us look at housing. Most Americans were still rural in that time, and many, if not most, built their own homes. As late as the 1920’s Buster Keaton could make a comedy out of newlyweds purchasing a build-it-yourself home kit (pre-cut lumber, mostly) and having a whee of a time building it. Once that house was built it was probably quite small and may well not have had electricity, phones, indoor plumbing and gas service. It didn’t have television and a host of modern conveniences. In other words, a 1912 “house” can barely be compared to a modern house and most people would find it as unlivable as an igloo. Who really wants to have a pot belly stove as your source of heat as well as cooking? do you want to use the Sear’s Catalog for toilet paper (assuming you can find a Sears Catalog).

So, to say that the current dollar has lost more than 90% of its value is facile in the sense that it ignores how much more there is to buy today. How many makes and models of cars were available in 1912 and in how many colors?

But in another sense there is a great truth. A great percentage of the cost increases has come from government intervention if you will. Let’s take another example:

My late father had his own gauge of inflationary change. He told me that in 1940 he walked into a Cadillac showroom and bought a Cadillac for $1,000 cash. You could say that since 1940 the dollar has lost so much purchasing power that it buys 1/50th of what it did. Or, you could look at the features of a 1940 Cadillac and wince, as most people probably would.

Of course an irony is that a collector would probably pay more for a 1940 Caddy than he/she would for a new one, and be quite happy about it. So the deflation in real, functional value is offset by the absolute rise in collectibility.

I digress. When looking at the change in value you do have to look at the costs added by government in the form of taxes, licenses, environmental attributes, safety changes, pay for subsidized unions and a host of other things. In the larger sense government has been highly inflationary because it keeps inventing services and using taxes to pay for them and thus distorting the market.

Although the 96% figure may be misleading, the problem is very real. A government that inflated us since 1913 may have taken us to the max and face actual collapse.

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