"Thanks, But No Thanks for Dollar Devaluation"

Sydney M. Williams

Thought of the Day

“Thanks, But No Thanks for Dollar Devaluation”

November 24, 2010

As the turkey takes his final strut around the barnyard, there are many things for which we can be thankful, but a stable dollar is not one of them. Since the creation of the Federal Reserve in 1913, inflation has depreciated the dollar at a rate of 3.3% - meaning that the dollar has lost a little more than 95% of its value over those 94 years. In contrast, during the 113 years preceding the formation of the Federal Reserve, inflation compounded at a far more moderate 0.5%. Warren Buffet has taught us the value of compounding returns on investment. The inverse – the effect of inflation on the dollar – is insidiously destructive for the same reason.

We should be thankful that we live at a time and in a place where criticism of government is part of our fabric. We enjoy freedoms that most people on earth cannot imagine. We have the ability to go where we choose, to assemble and speak and write as we will. In a democracy as old as ours, these freedoms are often taken for granted. They should not be. Personally, I am blessed with a loving wife for almost forty-seven years, three wonderful children and their spouses and ten adorable grandchildren. As the song asks: “Who could ask for anything more?”

Well, I for one could, in terms of dollar stability. The problem, though, has been rooted more in fiscal than in monetary policy. Following the signing and enactment of the Humphrey-Hawkins Full Employment Act of 1978, inflation accelerated. The purposes of that bill, which replaced the Employment Act of 1946, were four-fold: “full employment (no more than 3%), growth in production, price stability (not over 4%) and balance of trade and budget. Thirty years on, the results have been mixed, at best. Unemployment, in the past decade averaged 5% and is now at 9.7%. GDP, according to data compiled by Chris Chantrill (my daughter-in-law Beatriz’s father), has grown from $2.294 trillion to $14.258 trillion, a compounded rate of 5.6%. Inflation has compounded at 3.9%, indicating that the dollar has lost a third of its value. For most, if not all, of the past thirty years we have been a debtor nation in terms of trade, and, other than three years in the late 1990s, the budget has been in persistent and rising deficit; it is now $1.4 trillion in arrears. Should members of Congress have been employed in the private sector they would all have been fired. One would think they would be held to higher standards.

As a nation of consumers who must become a nation of investors and savers if we are going to compete in the global arena, a depreciating dollar does little to promote the cause. It is not a lower dollar that will be our salvation. What is needed is a better educated more creative and industrious citizenry who are properly incentivized with a tax system that encourages investment and risk-taking. The yield on the Ten-Year is 2.8%; yet, as noted above, inflation has compounded at 3.2% over the past century. Perhaps, Congress, the President and the Federal Reserve now have religion, but that is not a good bet, in my opinion. Negative returns do not induce individuals to save.

Technology and productivity improvements have brought down the costs of many new consumer products, but healthcare and education have seen costs rise exponentially and companies in those sectors have seen their relative market values diminish. Despite arguing their cause, government policy has created an environment unfriendly to capital flows into these vital industries. Steve Galbraith of Maverick in a recent piece entitled “The Visible Hand”, notes: “Biotech companies now trade at steep discounts to DVD delivery companies, HMOs are valued at multiples two-thirds those of fast food chains…education companies are held in lower esteem than Playboy Enterprises.”

An October 20, 2009 Wall Street Journal article pointed out that Congressional budgeters in 1965 said that Medicare would cost $12 billion in 1990. Its actual cost was $90 billion. Richard Lariviere, President of the University of Oregon wrote in yesterday’s Wall Street Journal that “tuition has increased 7.5% each year for the past 38 years.” That means that tuition today, at the Eugene, Oregon university costs 15.6 times more than it did in 1972 – more than double the rate of inflation!

So, at this time of Thanksgiving, I do find myself thankful, but also fearful that the degradation of the dollar may eventually prove Voltaire correct when he wrote more than two and a half centuries ago: “Paper money eventually returns to its intrinsic value – zero.”

On that note, I leave for Connecticut with the thought we should be thankful for those people for whom and to whom we are responsible, for the gift of freedom given to us by those who came before, and I wish the Lord grant wisdom to those who run our government and control our money supply.

HAPPY THANKSGIVING!