The Most Meaningless Chart in All of Economics

EditorSince the invention of the microchip in 1971, the device has multiplied by the trillions at exponentially lower costs, creating more chips per person and a revolution in human communication.

Yet people have trouble applying the same logic to the multiplication of dollars.

Why not? With more dollars we’ve been able to foster a revolution in urbanization. It’s allowed the specialization of skills and trade, all of which has raised our standard of living – even when adjusted for inflation.

So why is this not seen as a sign of progress?

I’ll tell you.

It’s because economists and financial analysts, for the most part, are idiots.

More specifically, the analysts who misinterpret the most meaningless chart in all of economics.

You’ve no doubt seen this chart dozens of times.

At face value, it is rather shocking. That’s why people who see it are quick to jump to faulty conclusions.

But it doesn’t mean a damn thing they say it does.

See larger image

Looks bad, doesn’t it? Our All-American dollar has gone down 97%!

Guess again. This chart holds about as much meaning as my left toenail!

Yes, overtime the so-called “value” of the dollar has decreased as we’ve created more of them, like microchips…

But since 1900 we have dramatically increased our standard of living. Yet many continue to whine and complain that, collectively, our wealth has been devoured by evil inflation.

It’s moronic, but who can blame them?

We’ve all been conditioned to believe that inflation is a bad thing. Gold bugs and fiscal hawks tell us over and over again there’s irrefutable proof that the dollar is going to hell in a hand basket. And this ridiculous chart is used as evidence.

But the truth is, inflation – when held in moderation – is actually a good thing.  

Think about how people lived back around 1900 when the U.S. was emerging as the up-and-coming new global leader.

Life expectancy was low, and the quality of life was even lower. There were no microwaves dinners or takeout menus. Families largely built their homes with their own bare hands, and fished and farmed for most of their food. All it took was one bad season to threaten your life and your livelihood.

It was dirty, dangerous, and back-breakingly hard. By comparison today, we practically live like royalty.

And it’s all thanks to inflation.

Over the long-term, inflation correlates with a rising standard of living. Inflation rises as populations grows, empires are built, and new technologies advance.

I learned this back in the early 1980s when I undertook a rapid and intensive survey of 3,000 years of western history.

Inflation rose as the Greek and Roman empires rose. It increased in the centuries following the printing press, gunpowder, and the discovery of the Americas from the late 1400s forward. And it’s boomed in the last century with the creation of electricity, automobiles, and now the Internet.

In brief periods like the 1970s, inflation goes to extremes and hurts the economy, but that is the exception, not the rule. And even in such periods, rising costs encourage new innovations that pay off for many decades…

Do you realize that personal computers emerged in the late 1970s near the top of that inflation cycle?

But swinging back to the broader picture, in each stage, inflation of dollars was necessary.

We needed the cash and more of it to implement each of these developments, and ultimately make our lives easier.

We needed more money to pay someone else to prepare our food and be able to deliver it 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.

We needed more money to pay someone else to build our homes. Clean our homes. Supply electricity, water, and gas. To cart away our sewage.

We need more money to pay doctors, accountants, lawyers, dentists, financial advisors, mortgage brokers, real estate agents…

You get my point… economists call it “the specialization of labor.”

That’s why inflation in the amount of dollars is natural. The cost of goods you consume is going to be higher when you pay a lot of middlemen to produce them and bring them to you.

The thing is, by living in a more urban, interactive, and specialized economy where work can be done most efficiently, our higher wages from higher productivity have more than offset the rising costs of living.

In fact, our wages adjusted for inflation are  7.1 times higher than they were in 1900, when inflation started rising and the “value of the dollar,” as shown in this perverted chart, started falling.

It’s not the number of dollars that count. It’s the rise in your standard of living adjusted for inflation that is most important. And how lucky we’ve been in the last century or two!

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’re a nutless monkey. You can tell them Harry says so.

Harry

Follow me on Twitter @harrydentjr

 

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Categories: Inflation

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.