Sunday, November 17, 2013

Joe Weisenthal and Matt Busigin Got Some ‘splainin To Do

(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.

Simply put:

  • 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?


  1. Your math is completely wrong.

    As it happens, I already did show my work:

    As you suspected, it was compounded without taxation. Your estimated 40% tax is a crazy high assumption. But let's pretend that it true. This is what your compounded returns look like with only 60% of each yearly return:

    Your assumption on the veracity of your rebuttal was wrong.

    And I'll again show the math, with taxation:

    As for a commodity-backed dollar, that's irrelevant to my chart. But I'll bite anyway: a commodity-backed dollar would typically have a *negative* interest rate. The cost to hold commodities puts the futures curves of nearly every commodity into normal backwardation, which then costs the holder what's known as roll as they have to sell the front contract before it matures at a discount and purchase the back (or farther into the future - it doesn't matter) month contract at a premium.

    Take the value of USO vs the spot oil price:

    Oil is is up a bunch, yet USO has been crushed, and so to have anyone long oil... unless you can store it for free indefinitely and make it nonperishable.

    I have no idea what you are talking about "of the larger cut taken by the state due to the benefit of receiving the fiat dollar before it is deflated". But I suspect each other point has been addressed to satisfaction.


  2. Oh, and next time you'd like me to say something about something you write about me or my work, you should actually let me know by Twitter. I'm not difficult to find.

    1. Matt, I am humbled by the fact that you found me.

      I do not use twitter, so I wouldn't have looked there.

      I might be mistaken, but lending gold earned interest for the one doing the lending - it still does so today. To speak of futures and backwardation in this context does not seem relevant.

      As to the larger cut taken by the state due to inflation, this is a rather well understood concept - the entity that has first access to the fiat dollar gets to spend before prices react to the monetary inflation. In our economy this would include the government.

      Additionally, the state taxes nominal interest income, which includes a component to compensate for inflation.

      Hence, the cut is larger.

      Finally, 40% marginal tax rate is not crazy at all - check historic federal, state and local tax rates. And consider which income bracket is more likely to earn significant interest income - as would be necessary for your idea to hold water.