Tuesday, December 06, 2011

Every picture tells a story

Since the creation of the Federal Reserve, middle and working-class Americans have been victimized by a boom-and-bust monetary policy. In addition, most Americans have suffered a steadily eroding purchasing power because of the Federal Reserve's inflationary policies

~Ron Paul

I'll give him the boom and bust part (though I'm not sure why it only applies to "middle & working-class folks), but I have to call bull*&^* on the steadily eroding purchasing power part.

Here's Ron's go to graph:

Looks, pretty bad, right? The "purchasing power of the dollar" has been grotesquely eroded by inflation
(the graph is an inverted graph of the price level). But what Dr. Paul fails to inform us is that we all have a HELLOVA LOT MORE dollars than we used to.

The average hourly wage in manufacturing in 1949 was $1.26!

Here is the graph Dr. Paul apparently is unaware of or at least hopes that you are unaware of:

People, inflation is a sustained rise in the general price level. That INCLUDES wages. Perhaps not month to month or quarter to quarter but over time, wages rise with the price level. In post world war two America, the standard of living of most Americans has steadily risen, not fallen.*

Now that I've worked up a full head of steam, let me go ahead and assert that there is little to no evidence that business cycles are more frequent or worst now than they were when then US was on the Gold Standard!

*Of course we can debate LeBron's Stagnation hypothesis over the most recent period, but that phenomenon is clearly unrelated to the modest inflation levels we have seen in the past decade.


Anonymous said...

But the paranoid Ron Paul voter who saved by burying a handful of twenties in a jar in his yard back in 1949 lost out!

Richard Stands said...

Does inflation happen all at once, throughout the economy? Or do some groups get the new inflated dollars first, before wages rise?

Angus said...

Hi Richard: Sure, not all prices start rising at the same time, some may take a long time to catch up.

Richard Stands said...

And isn't there money to be made by surfing the ripple of inflation as close as possible to the source (the Fed)?

Maybe if I get my reserve requirements up to snuff, I could borrow some pittance like the 2.3 billion Harley Davidson got at Uncle Ben's discount window. I bet I could re-lend that for a bit more than .75% and do pretty well without making a single bike.

But then again, maybe I'm missing something here. I'm no economist.

Regardless, I very much enjoy reading your blog. :)

Tom said...

The first graph shows that the Fed failed utterly in its mission to provide stable currency. The second graph shows that the market reacted to that failure.

All that time, inflation acted as a hidden tax. Paul didn't tell the whole story, but he is right that the poorer part of society is less able to protect itself from that tax.

John D. said...

Sir Angus,

I'm not sure where you are going with this, beyond being upset with Ron Paul. It seems to me that this analysis compares two separate purchasing power factors - the dollar, and the average man-hour. There is no dispute that the value of the dollar as a *unit* of currency declined dramatically, and it is not accurate to dispute Paul for stating the obvious. The point that we have a lot more of the devalued dollars, and that our average standard of living is higher may also be true, but it does not change that one dollar buys much less. Is it perhaps more accurate to say that higher productivity, and not moderate inflation, is the factor which enables allows us to consume more goods and services for one man-hour than we could decades and centuries ago?

Derfel Cadarn said...

Lets put on our thinking caps now. on the subject of how many more dollars we have now. In 1970 a quarter(25cents) would have bought you a loaf of bread. Now that same quarter (93%silver)will still buy you the same loaf of bread. So all those extra dollars you have now don't get you squat.That is why the Fed. loves inflation they steal all the real money and your happy because you got a lot of pieces of paper that won't buy diddly.