According to AAA, the average price per gallon of regular gasoline is $3.12, up 14% from a year ago. But another way of viewing the price change is as a decrease in the value of your dollar. And a weaker dollar eventually leads to a lower standard of living, since your quantity of dollars isn’t limitless.
When government controls the money supply, its quantity of dollars is limitless. And the government’s ability to print more dollars may be the force most destructive to your personal wealth—and even to your well-being in your lifetime.
In When Money Dies: The Nightmare of the Weimar Collapse, Adam Fergusson points out that in the 1920s:
“[I]t was the natural reaction of most Germans, or Austrians, or Hungarians—indeed, as for any victims of inflation—to assume not so much that their money was falling in value as that the goods which it bought were becoming more expensive in absolute terms; not that their currency was depreciating, but—especially in the beginning—that other currencies were unfairly rising, so pushing up the price of every necessity of life. It reflected the point of view of those who believe the sun, the planets and the stars revolve with the moon around the earth.”
It may not be fair or realistic to compare the Federal Reserve led by Ben Bernanke and the expansion of our monetary base as measured by M2 to the Weimar collapse, yet. But isn’t any devaluation of your money another form of stealing your wealth and a lifetime of work? That’s why I certainly don’t like what I see unfolding for the purchasing power of your dollars.
According to the February 2011 issue of Monetary Trends from the Federal Reserve Bank of St. Louis, depository financial institutions (DFIs)—commercial banks, savings banks, saving and loan institutions, and credit unions—have seen their level of deposits increase by a factor of 50—from $20.4 billion at the end of August 2008 to more than $1 trillion at the end of December 2010. The report notes, “This expansion, in the aggregate, is entirely due to a single factor beyond the control of the DFIs, either individually or in the aggregate—the aggressive expansion of the Fed’s balance sheet.”
What this expansion could eventually lead to is a spike in the velocity of money as it enters the marketplace. It may take years, but over time your dollars will become less valuable if the Fed doesn’t counteract the problem of excessive high-powered money in the system. And based on recent history, its timing and ability to do so is suspect at best as we’ve seen from the bubble economy of late-20th– and early-21st-century America.
The underlying narrative for your retirement years will be protecting your purchasing power and counteracting a declining dollar—maybe not this year or next or the year after. But at some point I believe it will be devastating to many unprepared baby boomers when they realize what has happened—not higher prices but a lower dollar. Your ability to counter the devastating impact of inflation will be paramount. You can start by thinking about the lower dollar value at the gas pump rather than higher prices.
E.J. Smith
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