Economics

"I give up my vote by voting Libertarian, but so do half the people who vote. All the people who voted for a candidate that lost gave up their vote." Charles Tolleson, Libertarian

My friend Denis and I were discussing the Federal Reserve and inflation caused by printing money.

Denis; "If you think about it, we are still printing money, but the population that uses that money has increased from 200 to 300 million people in this county alone."

I have thought about this and I tried to imagine a fixed amount of dollars in circulation. Those who save a hundred dollars would see their purchasing power increase as the population grew and the demand for dollars increased. With dollars becoming more valuable a barrel of oil might cost 2 dollars instead of 60.

The lack of dollars might hurt the economy because banks, and the big boys like Goldman Sachs would not have as much to lend and start new businesses. But, again, if the dollar is strong one would need fewer dollars to start a new business. These big banks borrow the new printed dollars from the Federal Reserve and pays them back with cheaper dollars, just like the government. I always knew it was advantageous for a consumer to buy a house with a big mortgage. As inflation creeps up, the borrower ends up paying off the mortgage with cheaper dollars.

Currencies are just commodities. If they became too expensive, they would be replaced with another commodity to use as barter. Maybe peanuts! If oil becomes too expensive, in a free market it will be replaced with something else. The late Julian Simon wrote and excellent book about the scarcity or resources, "The Ultimate Resource II". http://www.juliansimon.com/writings/Ultimate_Resource/

Denis; "Another thing to consider is that the U.S. Dollar is now the currency of roughly half the world, whether in their black markets or as a formal CURRENCY system."

Yes, but mostly because of our political and economic stability and super power status, as you point out. Also OPEC had a rule that they must sell oil in dollars. This rule may be threatened as Saddam was just starting to sell in Euros, and now Iran is trying to sell its oil in Euros. http://english.pravda.ru/world/asia/14-05-2006/80261-iran_oil-0 Could this be a reason for our invasion of Iraq??? With globalism, the Euro is fast becoming a stable currency. As the European Union becomes a superpower with political and economic stability, the Euro will compete with the dollar.

Now that international trade is common, it seems most industrialized countries want a weak currency so they can export their goods and services. Japan does not want to see a weak dollar because it means their manufactured goods are more expensive, and when they convert their collected dollars to their local currency, yen, they lose in the transaction.

Denis; "This dilutes the inflation we pay by adding that population, and explains, I think, why you and I don't feel the real decline in the value of the dollar."

One reason I don't feel the decline in the dollar is my spending habits are less than when I was young. Now I do not spend money on women!

In 1979 I was a making around $30K as I recall. I barely could afford a $50K townhouse. Today that townhouse is around $450-500K. Today one probably has to make $100K to buy the $500k townhouse.

Today my son is making about the same as I made in 1985. With the dollar's decline, it would seem my son needs more dollars to live as well as I did in 1985, yet he seems to live as well or better than I did in 1985. This leads us to increased productivity. If it were not for increased efficiency in productivity, my son would really have lost to inflation.

In 1988 I paid around $2000 dollars for a basic DOS computer with a 20 mb hard drive and a 14 inch monochrome monitor. Today $2000 dollars will buy a top of the line computer, with a big flat panel color monitor. The ubiquitous desktop computer today that cost $2000 dollars buys the computing power that only big institutions had in 1988 at a cost of hundreds of thousands of dollars. What brought about this value to millions of consumers? Greed, self interest, and profits.

Many years ago one man used horses and a plow to farm 40 acres. Today one man with modern equipment can farm 400 acres! This increased productivity has allowed the devalued dollar to purchase more.

Imagine what it would cost if automobile miles per gallon had not improved. The devalued dollar would not buy as much fuel, therefore costing more to drive a car.

Airlines used to fly a four engine DC-8 jet from San Francisco to Honolulu using a pilot, co-pilot, flight engineer, and navigator to haul 120 passengers. Today an airline will fly a two engine airplane with only two pilots to carry 200 passengers from San Francisco to Honolulu. This increased productivity has made it possible for the consumer to buy more air miles of travel with a devalued dollar.

We older people may not feel the decline of the dollar because we fight to make a little more on our investments than is eaten away by taxes and inflation. I have some high dividend REITs in my IRA which help beat inflation, but my CDs, even at 5% yield with inflation and taxed as ordinary income, are barely keeping me even in purchasing power. I count on the increases in production efficiency to help me buy things. Cars are more efficient. Computers are more efficient. Medical surgeries are more efficient. A gall bladder removal used to require several days in the hospital. Now it is an outpatient procedure. The increase in cost in health care is caused by all the new offerings in drugs, MRIs, and advanced surgeries that were not available in the past; open heart surgery, artificial hips, etc.

My son started a lawn care business. At the beginning he was doing the lawns by walking. He soon improved his efficiency by buying a motorized spreader. It was about profits, and how to make more profit, which is in his self interest. Without profits and competition there would be no increase in productivity. Many societies that did not allow private property and profits, had no increase in productivity, and no improvement in the societies. The native Americans lived here for thousands of years, but they did not even have the wheel.

The ancient Jewish tribes would settle land and divide parcels among individuals. The individual owners could profit from their parcel of land. This is a contributing reason why the Jewish people have been so successful in science, art, and commerce. With private ownership of land the Jewish people could concentrate on self improvement. Like my son, the Jewish people with private ownership, would look for a more efficient way to do production.

Denis: "Also, if Growth can keep up with the inflation of the money supply, there isn't any real pain felt. The People need all that paper"!

Overall that is correct. It just makes savings unpopular. People who want to save and put their money in a safe place will lose value. The marketing from Wall Street now is even old people should invest some in the market to beat inflation.

Denis: "Incidentally, I don't think it was planned that way, just dumb luck and the result of a relatively stable economy and Government; the super-power status also adds confidence in a currency."

I agree with that! The government likes to say it is their policies that allows the economy to grow. The economy grows because of profits and self interest. The economy grows in spite of government policies! The government rules and taxation are just enough to leave the patient alive and kicking. Too many more rules and taxation and the patient will die.

Charles Tolleson