(Note: Significantly modified from original)
Joe Weisenthal is puffing his chest out – he believes he has stumbled upon a real whopper, courtesy of Matt Busigin.
It seems Busigin has discovered that the dollar hasn’t lost over 90% of its value after all. Beginning with the base year of 1948 (apparently; and all statements based on the data will be “apparently or approximately, as no data series is offered), Busigin depicts that the dollar has fallen to about 5% of its 1948 purchasing power.
But, if one includes interest, the value falls only to about 70% of the base purchasing power. And if the interest is calculated using the 3 month T-bill rate, the purchasing power has increased to about 170% of the 1948 value.
Weisenthal’s conclusion about the dollar losing over 90% of its value:
The problem is that it's almost entirely BS.
Well maybe, or maybe not. Whenever some amateur rocket scientist claims he discovered how to get a man to Pluto in 48 hours – and no one ever in recorded history ever saw this obvious fact, it is safe to approach with skepticism.
Again, no data series is given, so I offer all statements as estimates based on the single chart provided by the dynamic duo.
First of all, even with interest, the dollar has lost 30% of its value; with interest from a 3-month T-bill, it has gained roughly 1% per year. But, is it proper to include interest? Maybe, maybe not; I will have to think about this much more. But, at minimum, would not a commodity-backed dollar have earned interest as well? Of at least 1% per year?
So, the excitement is for a real return of 1% on an invested dollar when using the 3 month T-bill return. When compared to a commodity-backed dollar would likely have earned the same or more interest.
But what about taxes – it is not mentioned if returns are pre- or post-tax. My rough calculations indicate that he is using pre-tax returns and therefor pre-tax compounding. I will examine the 3 month T-bill assumption, using this Fed chart.
I am not going to get too detailed here: my rough eyeball glance settles in at about a 5.5% rate over this time period.
At 5.5%, on a dollar that has lost 95% of its value will get to about the 170% depicted by Busigin and praised by Weisenthal. So, I conclude he is using pre-tax returns and compounding same.
I will be obnoxious and assume I am right: HAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA.
Now, here is one of the big clues as to why the state loves inflation: income taxes on 5.5% interest income on a fiat dollar will be much higher than income taxes on 1% interest income on a commodity backed dollar. But, as the state gets the new money first, it gets full purchasing power on a significantly larger cut.
But back to my I-am-certain-I-am-wrong calculations. Making some simplifying calculations (again, no data so no way to test the claim), I come to a slightly different conclusion. Assume an average tax rate of 40%, and returns spread evenly over the 64 year period in question (1948 to 2012), I get the following answer:
Purchasing power of a 1948 dollar (with interest and after paying tax every year): 7.4 cents
Purchasing power of a 1948 dollar (with 3 month T-bill interest and after paying tax every year: 13.4 cents.
Now again, I might be wrong – in fact, I am certain I am wrong. I can think of many reasons why I am wrong. In fact, it is possible that Busigin’s calculations are correct – although he cannot escape the several other issues I have raised outside of the calculation.
However: No data, no proof. That isn’t my problem; it is the problem for those making this somehow-never-noticed-before claim.
- Show the calculations
- What of taxes?
- What of interest on a commodity-backed dollar?
- What of the larger cut taken by the state due to the benefit of receiving the fiat dollar before it is deflated?
So put up, gentlemen. Weisenthal and Busigin: what say ye?