Understanding currency markets means dismissing the U.S. dollar chart.
Since the invention of the microchip in 1971, it has multiplied by the trillions, creating more chips per person and a revolution in human communications.
So why is the multiplication of dollars not seen as a sign of progress that similarly fosters a revolution in urbanization and the rich specialization of skills and trade… all of which raise our standards of living (just like the microchip did)?
I’ll tell you why.
It’s because, when people see the chart below, they react like a deer caught in the headlights.
Gold bugs and fiscal hawks just love to flash this chart all over the place, claiming it provides irrefutable evidence that the dollar is going to hell in a hand basket.
“Look!” they whine. “Your wealth is being eaten away by evil inflation and the debasement of our currency.”
This simpleton chart is the most moronic and dangerous thing I have ever seen in economics. In fact, it actually means the opposite of what it is portrayed to mean.
If this was in fact proof that our wealth is being eaten away by inflation then that should mean people are much poorer today than they were in 1900.
Have you seen what life was like back then?!
It may have been House-on-the-Prairie simple… but it was dirty, dangerous and back-breakingly hard.
Life expectancy was low and quality of life was even lower. One bad season was life-threatening. Unprovoked raids by outlaws or wild animals were all too common.
Families largely built their homes with their OWN hands, fished and farmed for most of their own food. There was no such thing as microwave dinners or takeout menus… or even baby sitters for that matter.
By comparison, today we live practically like royalty.
The problem is, we’ve all been conditioned to believe that inflation is a bad thing… and that ridiculous chart is used as the proof.
So let me bust this myth once and for all…
Inflation is actually a good thing… except when it goes extreme in the near term, as it did in the 1970s, but even then it was a major instigation of innovation to re-balance our economy with an unprecedented boom to follow from 1983 to 2007.
Ultimately, over the long-term, inflation correlates with rising standards of living.
When the population is growing, urbanization is rising, empires are being built and new technologies are advancing… inflation rises. I learnrned this back in the early 1980s, when I was intensively studying 3,000 years of westernrn history.
Inflation rose as the Greek and Roman empires rose.
It increased during the centuries following the printing press, gunpowder and the discovery of America, which saw huge advances in our standard of living for over a century to follow.
Inflation advanced during the last century with the creation of electricity, automobiles, mass production and now the information revolution and Internrnet.
Inflation was necessary because we needed more cash and credit as each development made our lives better. We needed more money to pay for the food that someone else hunted or gathered and prepared for us. We needed more money to pay for someone to deliver that food to us 24/7.
We needed more money to pay someone else to take our kids from us for six hours a day and educate them… to look after them while we’re at work or out on the town “taking a break from it all.”
We needed more money to pay someone else to build our homes and holiday homes for us… to clean those homes for us… to supply electricity, gas and water to them so we can stay warm and clean… to cart away our sewage for us so we don’t have to worry about it.
We needed more money to pay doctors, tax accountants, lawyers, dentists, financial advisors, mortgage brokers, real estate agents…
You get my point.
That’s why inflation is natural. The costs of goods you consume are going to be higher when you pay a lot of middlemen to produce them and bring them to you. You simply pay more for those conveniences and higher levels of service, while your incomes go up even more to afford them and a higher standard of living.
The simplest fact is that, over time, our higher wages have more than offset the rising costs of living in a more urban, interactive and specialized economy. In fact, our wages, adjusted for inflation, are 7.1 times higher than they were in 1900 when inflation started rising and the dollar started falling. As a result urban societies have a three-times standard of living advantage over rural societies.
So do yourself a favor…
Next time you see that dollar chart and someone tries to tell you you’re worse off now thanks to inflation and a declining currency, tell them they don’t know their asse(t)s from a hole in the wall.
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