Saturday, February 25, 2012

No, the dollar did NOT really lose 95% of its value since 1913

There is a chart making the rounds lately,  that claims the dollar lost 96.2% of it value since 1900.  One of Ron Paul's fav talking points. Though technically true in a very narrow sense, if you look at average incomes during the same period, it is clear why this is deceptive.  Additionally, the way the line chart is presented is highly deceptive. It makes it seem that there has been higher inflation in the last 40 years.  But if you look at the actual numbers in the chart, that is clearly not the case. See the last 2 paragraphs for more detail.

Let us take at the period from 1913-2006, where we have complete data. So what do they mean, when they say the dollar lost 95.1% of its value in those 93 years? Essentially, an average good/service that cost $1 in 2006,  used to be priced at 4.9 cents in 1913. In other words, the average price level of goods/services increased by 1930% since 1913.  True, but guess what, average earned income increased by 6560% during the same time period. Average earned income rose from  $740/yr in 1913 to $49,300/yr in 2006.  Adjusting for inflation, $740/yr in 1913 is $15,000/yr in 2006 dollars.  Average incomes, not only kept pace, but beat price inflation by 230%.

So does it make any sense all to say the dollar lost value?  In reality, the REAL purchasing power of the average American, has increased by 230% in the past century.  Sure, prices were cheap in 1913, but $740/yr doesn't buy you a whole lot, not anymore than 15,000/yr today.  Even this statistic doesn't fully capture the quality of life gains of the last century.  A household making $15,000/yr today is well below the poverty line, but yet, they are highly likely to have a refrigerator, indoor plumbing, electricity, tv, cell phone and maybe even heating and cooling.  They are highly likely to have government help in making ends meet - food stamps, subsidized housing, Medicaid etc:.  And yeah, thanks to advances in medicine, they don't have to worry about half their children dying before the age of  5.  Their analogue in 1913, making $740/yr had none of these "luxuries".  And that was the average income...  Can you imagine what the poverty line looked like then?

Anyone who says the dollar lost value, is really trying to sell the false point of view, that somehow things were better off in 1913.  Seriously?? Maybe we should send them back in time to live in the slums of New York.  Yeah, we had actual slums back then. Update 3/2/2012:  Yes, technically, in the parlance of mainstream economics, the dollar dropped in value.  But, anytime Ron Paul says the dollar lost 95% of it value, but conveniently ignores the fact that average incomes and average savings beat price inflation, he is deceiving the American public.  The fact the incomes and savings beat inflation, it makes the "fall" in the dollar completely irrelevant.  What I am saying is we need a change in terminology. 

Inflation Adjust Average Income 1913-2006 (2006 dollars) h/t

 Further more, according to the ridiculous logic in the article, the dollar "gained" in value during the great depression.  This must have been a very prosperous time. Maybe we should start another depression so the dollar can "gain" in value. The dollar "gaining" in value is deflation, and that is rarely a good thing, especially for debtors.  Deflation doesn't usually happen in prosperous economic times. The question should not be whether the dollar "gains" or "loses" in value.  The question should be, will incomes beat inflation?  That is the real metric of progress.

During the pre-depression years (1913-1929) average incomes barely kept up with inflation.  During the market liberalization era (1979-2006),  things were slightly better, but not by much. Average incomes beat inflation by just 22%.  Most of the real income gains of the last century came during the high tax, "big" government New Deal era (1933-1973), when average REAL income increased from $9,980/yr to $40,500/yr. In other words, average incomes beat inflation by 300%.  Had real average income grown at the same rate during 1979-2006,  it would be $97,200/yr in 2006!!  The contrast is even more stark, if you look at average real income of just the bottom 90%. For them, average incomes beat inflation by 400% during 1933-1973, as opposed to 1.6% during 1979-2006![1]

In addition, the line chart showing the price level, is  highly deceptive. It makes it seem like there has been higher inflation for the last 40 years. But, inflation is not a linear dataset[2]. Note that the 2nd highest inflationary period in the chart was 1910-1920, when the dollar "lost" half its value (and yes that was during the gold standard).  In other words inflation was 100% in the 1910s, while it was 33% in the 1990s and 28% in the 2000s  But yet the chart makes it look like the 1990s and 2000s have a steeper slope than the 1910s. If the chart were accurately depicted they would use percentages.  This is how Fox news style propaganda works, take factual data and present it in a deceptive way, to sell a false point of view.

Perhaps the point of view they are selling, is that inflation has been higher due to the termination of gold convertibility in 1971. And it does seem many of the post's commenters perceive it that way.  That is clearly, not the case, inflation was pretty normal for most of the 80, 90s and 00s. Yes, the 1970s was the decade with highest inflation rate at 104% (just beat the 1910s by 4% points). But, the primary reason for high inflation in the 1970's and early 1980s were the twin oil shocks of 1973 and 1979.  If you compare inflation vs crude oil prices from 1973-1984, they track pretty close together.  Crude oil prices nearly tripled within a few months starting in late 1973, and that is not going to affect the prices for other goods?  You know, oil is used for transportation of other goods. What a coincidence that inflation peaked right after the oil shocks, twice.  What a coincidence inflation subsided, right after crude oil prices fell of a cliff in 1982-83.  Nothing whatsoever to do with termination of gold convertibility.

Update 3/1/2012:

Many Ron Paul supporters make the argument that the real value of a dollar saved in 1913, would only be worth 5 cents if spent today.  Yes, that would be a valid point, if we assume, that we live in a parallel universe where everybody holds mostly cash savings.  Let us look at data from the real world, that looks at non-home wealth distribution (mostly financial) from 1983-2007. See page 46 in the pdf.  You see three distinct classes. First, the bottom 40% household with an average net financial wealth of $-10,500(yes negative). Then, the 3rd quintile (40-60 percentile) who have little net financial wealth on average (just $26,500). And finally, there is the 4th and top quintile who have most of US net financial wealth.

Paul's argument is completely irrelevant for those bottom 40%, who have no savings. They live paycheck to paycheck. A little inflation, will actually help reduce their debt burden. Thus real income gains are what matters for these folks, and to enable that we should rollback market liberalization .[3]  For the top 3 quintiles, their non-home investments beat inflation on average by 122%, 83% and 66% in 24 years. Even the 3rd quintile who had no REAL income gains in the same period, gained 66% in their financial investments.

I will grant you, this was in 2007 before the financial crisis. By 2012, at most the cumulative returns were cut by half. They still beat inflation. The point is real people, who have actual savings are clearly NOT holding 100% cash.  If they were the average REAL return would have been negative 52%.  In reality, liquid assets only comprise 6.6% of all assets in 2007. Obviously this category include money market accounts. Hell, even money market accounts and online savings accounts had returns that beat inflation 5 years ago, before the Fed funds rate was cut. Same was true of time deposits. And usually in normal times the FFR is set higher than inflation.


1. All average income figures in chart and rest of blog in 2006 dollars. Source: Emmanuel Saez  UC Berkeley   Table A4 based on IRS data
2. Inflation isn't linear.  If you have 9% inflation/yr over 10 years, the price level doesn't increase by 90%.  It increased by  1.0910 = 2.37 or 137% .  From 1910-1920 the price index rose from 1.1 to 2.2,  while in 1990-2000  14.7 to 19.6.  Which decade shows greater price inflation?  The line chart deceptively makes it seem like it was the 90s.  But, really prices doubled (100% increase) in the 1910s, while it only rose 33% in the 1990s.
3. The main reason the bottom 40% are in this quandary, is due to market liberalization, as more and more share went to top 1%, less went to them. That wasn't always the case, from 1933-1973 the average income of the bottom 90% beat inflation by 400%. 


dsimon3387 said...

It amuses me how the arguments about inflation and its relationship to monetary policy became a game of making the statistics truer when interpreted in a different light. For example, while gold standard people say that the stability of a dollar and its ability to buy essentially the same amount shows an increase in inflation....Your counter argument is that on a strictly percentage basis real wages have overtaken any inflation.

If what you are saying is true mind answering me one question? Why does a household need TWO wage earners? I don't know how old you are but I remember being a kid and seeing "Mom" starting to go to work, which coincided with people leaving the city because real rents became unaffordable, etc etc etc.

What say you? Again my question is after all the statistical Bullshit...which is what this argument has become, i.e. I read em my way you read em your way....How is it that an average household in this country? one that you claim is ahead of the game inflation wise? needs TWO wage earners? and not one?

Real Fact Bias said...

@dsimon3387 you provided no facts to support your assertion. It is certainly not inflation. I already addressed this in the 2nd paragraph after the image.

To elaborate further from 1979-2007 59.8% of the real income gains were captured the top 1%. By comparison from 1949-1973 the top 1% captured just 6.5%. Much fairer. And that is why most families can't make ends meet.

William Beers said...

Your really did not answer his question. And certainly not in the 2nd paragraph after the chart. Nor does the change in income distribution clear anything up except that top wage earners can keep up with costs while the rest of us can't. Still, by your numbers we should all be sitting pretty for quite some time yet it is not so.

Unknown said...

I think you provide some decent analysis here, but I think you're exaggerating to say that the chart is at all misleading.

That many people are not intelligent or focused enough to properly interpret clearly presented data is a different thing. The red line starts at a unit of one at the beginning of the time span, so we see what the multiple of that price is over time. The purchasing power bar graph starts at 100 cents, to represent a dollar at that time. The red line is in essence the inverse of the data shown in the bar chart aspect. Seems a very clear and useful way to represent the data.

In 1930, as purchasing power was only fifty percent what it was in 1900 (50 cents compared to 100), the red line indicates that the price of the hypothetical item purchased has doubled. All quite logical and straightforward, and not, to me, at all very slanted.

As I said, you're right to add income data to the conversation, but the conversation was a complete one on its own without it. Inflation already means a very specific thing, and people generally understand that - that it is referring to how much stuff costs. This is not some strange statistical tidbit, but instead a term often discussed and cited. And it is exactly what is represented here.

It is particularly relevant, even without the data you suggest, when it is tied to what is the historical driver of inflation, the increase in money supply over time. And Paul, who you single out, is pretty much always connecting the two. But even without that connection, the drastic rise in prices is dramatic information worthy of presentation.

Finally, you say that good economic times rarely occur without at least some inflation. I would submit that is probably true, but as much for the reasons of the nature of the beast (pun intended) since 1913 as it is for anything inherent. Since our money is now an instrument of debt, it does mean that when it increases, debt has increased, reflected as loans, which is often related to economic activity. But that doesn't address how that would pan out if our system wasn't currently based on money as debt. More importantly, there's a question, once the nature and effects are understood, of the morality of such a system. Most of the money "lent" is created out of NOTHING, and bankers get to act as though they possessed it all along, and are putting their hard-earned or hard-saved money at risk, when they generously or at least "fairly" "lend" it out. Meanwhile, the people who have to "pay it back," have to trade their sweat and tears and significant portions of their lives to do so. Once you understand that, you realize that the very claims banks are making are really EXACTLY what could be considered contractual fraud - misrepresenting your side of the bargain and the risk you were undertaking. They mostly don't put THEIR money at risk, because most of it didn't EXIST before the person or business desiring the loan signed on the dotted line. So the bank got not only the benefit of getting "paid back" all the primary and interest, but in reality never took on having to risk "their money," because it was not their money to lose until the person getting the loan gave them the "right" to conjure it. It is THE most immoral mechanism in all of society once its entire reach is understood. Responsible for the fraudulent transfer of property between societal classes in epidemic proportions. And that's before you even consider that inflation truly just acts as an invisible transfer of wealth, from the people who have the existing money, to the people who are able to take advantage of the newly conjured money.

sheep_no_more said...

I understand where your going with this article. There are always two perspectives to everything. You just focused on the other side of the coin as appose to ron Pauls perspective for example. Having that said, the bottom line really is the banking ponzie scheme that's been enforced on us has been robbing the people for far to long. Minimum wages do not keep up with cost of living. As someone commented earlier. Big Family's could live comfortably on one salary not all that long ago. Now a days families are smaller and many struggle with two incomes. People have to work harder and longer today for the same life they did 20 years ago. For example where I live gas has risen nearly 50% in the last 10 years with only a 20% increase in minimum wage. Bread has risen over 120% in that same timeline. Not to mention things were built to last even 30+ years ago , a family could buy a TV and actually have it last the entire time the family is raised in that house. Nowadays things are built not to last but to be replaced. To keep people spending. This applies to everything from your car to your shoes. How much more money do people spend on car maintenance today then 40 years ago? Now this may seem a little off topic in a sense. However it all ties together. And when i see an article more or less defending the dollar I have to point out that the fact that the dollar is based on debt with the banks having the power to print, compounded with a system that deliberately builds things that need constant replacing leaves the people in a shortage . And struggling paycheck to paycheck. You can use all the charts and numbers you want. But the fact remains our current monetary situation robs the people everyday and would cease to do this if the power to print and control currency was given back to the people to whom it truly belongs.

Jake Mottern said...

This article shouldn't be called Real Fact Bias, be False Fact Bias.

Let's Look at your argument:

"Essentially, an average good/service that cost $1 in 2006, used to be priced at 4.9 cents in 1913.
In other words, the average price level of goods/services increased by 1930% since 1913.
True, but guess what, average earned income increased by 6560% during the same time period. Average earned income rose from $740/yr in 1913 to $49,300/yr in 2006.
Adjusting for inflation, $740/yr in 1913 is $15,000/yr in 2006 dollars. Average incomes, not only kept pace, but beat price inflation by 230%."

Okay first off in 1913 there was no income tax. So the $740 you made you got to keep all of it. Gold was $18.92 an ounce.

Let's take our average salary of $740 a year and divide that by $18.92 ($740/18.92) = 39 ounces of gold a year. .

Now today let's say we earn that $49000 you cite. For simplicity sake, we are only taking out federal income taxes (not around in 1913).

We are not taking state, payroll (not around in 1913), or property tax. For $49,300, our federal tax bracket for Single is for between $34,000-$82,400$; 4,681.25 + 25% for over 34,000.

49,300-34,000=15,300*.25 = $3825

Basically just in federal taxes the average wage earner is paying $8500. 49300-8500 = $40800 net income.

With the net income today (which is really less with payroll, state, and property taxes if you own a home) you can buy 24 ounces of gold (40800/1700).

Let's see how much would we need to make in order to have 39 ounces of gold a year today? 39*$1700 = $66300. That would need be our net pay.

Let's say we earn $80,000 a year.

Here is our tax bracket:
$4681.25 + 25%
Over $34000

80,000-34000 =$46000
$4681.25+$46000(.25) = 16181.25

$80000-$16181.25 = $63818.75

This is not including payroll, state, or property taxes. You would have to earn around $80,000 gross today to earn what the average worker did in 1913.

And you think it is better today? You think the dollar has kept its purchasing power? I think Ron Paul is way more right than you are.

Real Fact Bias said...

@William Beers @sheep_no_more I answered this clearly in my last comment. The problem is in no way shape or form, inflation. From 1949-1973 the top 1% got 6% of the real income gains, while the bottom 90% got 78%. Far more equitable than during 1979-2007. In that period the top 1% got 62% of all the real income gains, while the bottom 90% got 9%. This are real gains (i.e already inflation adjusted). If the bottom 90 had gotten 78% as they did before, do you think they would be in the same dire financial condition?

To add to the point, spending equals income in aggregate. A buyer's spending is a seller's income. If you work, you are a seller, in that you receive income from your role in the production/sale of a good/service. Someone's spending is your income. Same is true for everyone else, the economy is one big circular flow.

Clearly, when prices rise for a buyer, income rises for the seller. And since most everyone is a seller also, for the economy as a whole, generally this is a wash. Thus the problem can't possibly be inflation unless it is very high. The problem is mostly of the income distribution kind. So when upper management pockets most of the real revenue gains, and gives you morsels, that is the reason you are falling behind. And that's what's been happening for last 30 years.

Real Fact Bias said...

@Jake Mottern

First of all the first year of the modern income tax was 1913. The original source of this data is the IRS. It is true that for the first few years low income people didn't pay tax. But that is irrelevant after the point I make below.

Secondly, you are basing the dollar's purchasing power on the nominal value of a wildly speculative asset? Even worse, an asset that is rarely transacted by the American consumer? Americans bought less than 0.1 ounce per capita this year. Even most of that is probably skewed by speculators.

To show why your claims are nonsense, let us use your methodology for 1980-1982 - i.e base income to gold

1980 Gold $615/oz Average nominal income: $17,124 In Gold: 28 oz

1982 Gold $376/oz Average nominal income: $19,318 In Gold: 51 oz

So according to your logic, in 2 years, in the middle of the worst recession since the GD, in the middle of double digit price inflation, apparently the dollar's purchasing power improved by 30%. Income based on gold rose by 82% in 2 years Right... that is not nonsensical at all.

Why didn't you go for broke and use Apple stock instead of gold as your criteria? Apple stock was $1 in 1997 now it is about $500. Oh no, the dollar has lost purchasing power by a factor of 500.

Now do you see why we use a basket of goods that consumers actually spend money on to track the dollar's purchasing power (if that isn't obvious), instead of wild speculative asset like gold. And by that reality based metric the incomes of the average American beat inflation by 230% since 1913.

Neither you nor Ron Paul is even close to being right.