A Question

[Rink]

We all know when we go to a store that products are worth a certain amount in dollars ok? yea?

well my question is, if thats the case, then whats the worth of a dollar? what manner of worth is the U.S. Dollar based upon?

and why?

[Rink]

Well, i guess nobody wishes to answer my financial question. /ubbthreads/images/graemlins/sad.gif

[EagleTed]

The dollar is worth what the market says it's worth, ie, the combined value judgements of millions of Americans. This is influenced by the Fed. If the Fed primps the pump enough and more dollars are chasing fewer goods and services you get inflation.

Of course, the currency exchanges decide what it's worth vs. the Yen, the Euro, etc.

[Rink]

yea but what foundation, what standard is the dollar based on that makes it valuble to begin with, market forces and peoples value judgements are a fickle thing.

what manner of basis and value do they put the American dollar on tho?

credit? if credit what then is credit?
see what I'm askin?

[DesertFox]

Yeah, they're fickle, but they're the only thing that creates wealth. And in the mass they're not quite so fickle and changeable as individually.

Confidence in the American buck is what keeps is strong.

[Rink]

the thing is confidence in the dollar is one thing but.... what makes the dollar worth anything? Cant just be confidence in it, it has to be worth something, hence it has to be worth something, a standard that backs the dollar, some kind of base backing that produces this confidence in the first place

Like you have your home, you get a mortgage on your home, your home is worth so much amount of dollars yes?

the thing is the dollar then also must be worth something, what is the dollar based on since wwe are not basing it on the gold standard anylonger?

[DesertFox]

Actually, it's confidence in the US govt.

[Rink]

hmmm to me thats very poor thing to base the dollar upon.

I would rather have it based on something more solid than just 'confidence in the govt'

I would prefer to bring back the gold standard, but then again i could wish for the moon to turn sky-blue-pink too /ubbthreads/images/graemlins/laugh.gif

[Estragon]

It's not so much confidence in the government as confidence in the US economy.

Under the gold standard, it was simpler to understand. A dollar was backed by gold in Fort Knox. Unfortunately, our economy grew to the point that we didn't have enough gold to back it fully, so we adopted what is called a "fractional gold standard." This meant that we only had enough gold to back a fraction of the currency in circulation, and the rest was backed by the economy itself. No problem, as long as too many people didn't lose faith in the dollar and attempt to exchange their greenbacks for gold.

Oops. The Great Depression hit, and too many people wanted to do just that. So FDR banned the private ownership of gold, except for jewelry. We kept up the pretense of being on the gold standard for another 40 years, until Nixon finally severed the connection formally. Today there isn't enough gold in the whole world, even if we owned it all {which of course we don't} to back the currency of the US alone.

We are on what is sometimes called the "productivity standard," the currency represents all the wealth in the economy. The Federal Reserve has the tough job of trying to make sure the amount of currency correctly reflects the amount of wealth. If they print too much money, we get inflation. If they print too little, deflation results.

Because it is virtually impossible to be exactly right in estimating the total economy, and because slight inflation can be absorbed and adjusted for by the markets, while even slight deflation results in negative growth, the Fed aims to slightly overestimate the currency needs, so they don't risk deflation.

Eagle Ted is correct, though: the dollar is worth exactly what someone will give you for it, and it always has been. There are persistent myths about the gold standard - that it avoids inflation and deflation and enhances price stability. But we had inflation, deflation, recessions, and panics even under the gold standard.

[EagleTed]

Rink,

The dollar is worthless, okay? You can't eat it, drink it, make shelter out of it. Of course, the same it true about gold. So, what's your point?

We use dollars because who wants to tote oxen from store to store.

Anyway, sorry about being snippy, but the gold bugs are getting on my nerves. Gold has no more value than printed paper, except and unless to the two parties involved in any transaction.

[Estragon]

The gold bugs can never answer the question: "How could we possibly enact a gold standard when we have only $110 billion in gold reserves {at current market rates}, and over $535 billion of currency in circulation?"


The only possible way to do it, of course, would be to deflate the currency by 80%. The economy would totally shut down. It would make the Great Depression look like a Donald Trump birthday party by comparison.

The gold standard is one of those concepts that sounds great in theory, but is impossible to put into practice.

[Timberwolf]

[ QUOTE ]
Rink said:
We all know when we go to a store that products are worth a certain amount in dollars ok? yea?

well my question is, if thats the case, then whats the worth of a dollar? what manner of worth is the U.S. Dollar based upon?

and why?

[/ QUOTE ]
http://eh.net/hmit/compare/

This will give you a feeling for inflation and what it's done to the buying power of our dollar.

A dollar today has approxiamately the buying power of a quarter back in 1973.

[Rink]

Thanks

[Timberwolf]

My pleasure...

[Rink]

(I still remember when funny books were only .20 cents apiece, that was like in 1973-74)

Now? thery're $2.99 apiece /ubbthreads/images/graemlins/sad.gif

[EagleTed]

Interesting link, Timberwolf. Inflation is a killer.

Assume for instance that it's the year 1933. If CNBC had been around you'd hear the various experts telling you to buy gold (assuming you could), silver, short the Dow, put your money in a Mason jar (deflation was an actual thing remember), buy bonds, short bonds, talk of a "Secular Bear Market", etc.

So which would have been the "smartest" investment?

Say you decided to go the Mason Jar route. Your paper money today would be worth from a penny to 8 cents, depending upon which inflation standard you use. While deflation was happening, it didn't last long, and FDR was already pumping up the dollar. However, if those were silver dollars you had buried, they would be worth from $8-$20 or more apeice depending upon their MS grade. Almost in line with inflation, to a little better than inflation.

If you had bought gold (again assuming you could) your $32 per oz gold would be worth $400 per oz. Again, just barely staying up with inflation.

If you had bought bonds, $8 worth of bonds would be worth over $800 today. Much better than silver, gold, or the mason jar.

If, however, you had listening to the weird guy in a dusty room off the main drag, Ben Graham, and had bought the DJIA, your $60 investment would be worth more than $10,000, plus you would have gotten dividend checks for seventy years.