Over and over getting my business degree it was repeated that the target inflation was 3%.
It was also stated that deflation, stasis and inflation were all bad.
Currency value is going to do one of those three.
How long until 3% inflation halves the value of your money?
It's not very hard math, but every 23.5 years it takes twice as much money to buy the same thing with 3% inflation.
This is why the surge in property values and box-office receipts are illusory. The money to buy them became less valuable, not they became worth more.
There's a fun little chart showing how much an ounce of gold would buy back when as compared to today. They're remarkably similar lists. Like the value of gold did, pretty much, stay put.
Except for its dollar value. It takes a lot more dollars to buy that ounce now.
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Inflation target of 3% huh?
ReplyDeleteCheck out http://onlygold.com/Info/Historical-Gold-Prices.asp
The de-coupling of the US currency from bullion prices (was that 1971, under Nixon?) seems well reflected in that linked chart.
Interesting project: check out US annual inflation over a similar period
Someday I will remember how to reverse my equation and be able to just get the answer rather than just plugging into the interest rate...
DeleteGoing from $44.60 an ounce to $1,060 over 44 years is an annual inflation rate of approximately 7.47%. Doesn't seem like a lot, but it sure adds up, don't it?
If we'd had the target 3% inflation gold would only be worth $163.75 an ounce.
DeleteDid they go over the rule of 72 in those class? It's an approximation that says doubling time is 72 divided by the interest rate. 72/3 = 24 years.
ReplyDeleteIf you use 69.3, that's more accurate for continuous compounding, which is more like inflation works out. Wiki has a good article: https://en.wikipedia.org/wiki/Rule_of_72
The question is why we should want inflation at all. Over time, the prices on goods should come down, not go up. It's virtually an "Iron Law of Manufacturing" that when you double the quantity produced, price comes down 25 to 30%. Nowadays, it's mostly because we're used to prices going up forever.
Then there's the matter that they try for inflation of 3% but exactly how that's calculated affects your results. They naturally calculate it to make themselves look good. Depending on how you look, inflation is considerably higher than 3%. Check out
http://www.shadowstats.com/alternate_data/inflation-charts
Like you say, if you compare the price of a loaf of bread (granted, there's a wide range of products there), an ounce of gold buys about the same amount of bread now as it did in the days of King Nebuchadnezzar in ancient Babylon - about 350 loaves of bread. In Zimbabwe during their monetary collapse 10 years ago, a gram of gold bought 10 loaves of bread. The fact that it takes more dollars to buy an ounce of gold means the dollar is worth less, not that gold is worth more.
Having money that doesn't inflate away but becomes more valuable really helps saving.
I think they did, but it's been years...
DeleteI have, several times, marveled that the prices on some things have gone down and kept going down despite the dollars that pay for them being worth less.
I've never seen the point of inflating the currency. People say that it's necessary to deal with an expanding economy. ISTR that inflation (save during the Civil War with the "greenback" inflation) was all but unknown during the 19th century, and the economy grew some then.
ReplyDeleteInflation is what you want if you've borrowed money. The dollar value of the loan and its payments are fixed, but the value of the currency is falling; thus you are paying progressively less to repay it over time.
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