Purchasing power of USD holds up fine, as long as you don’t actually spend it.

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The ongoing destruction of US Dollar Purchasing Power has now been relegated “myth” status.

Joe Weisenthal over at Business Insider has gleefully seized on some guy’s tweet, gushing:

You’ve probably heard the line about how inflation has destroyed 90% of the dollar’s value over the last several decades.

It gets repeated ad nauseum by inflation truthers, gold bugs, Fed haters, and all of their fellow travelers.

The problem is that it’s almost entirely BS.

So why is the fact that a dollar today has 3% of the purchasing power it had in 1913 “a myth”, bullshit?

Because (wait for it), of interest.

The argument goes, since nobody just stashes their cash in a mattress or a shoebox, they’d at least put in the bank, earning interest (well, in the days before perpetual ZIRP, anyway), and if you compound that interest, well then the dollar hasn’t really done that bad at all:

no_reallyWhile I can see Nobel Laureates like Paul Krugman and Modern Monetary Realists like Cullen Roche being all over it, this is really just nonsense dolled up to look like deep macro-economic thought.

When you put “a dollar” in the bank and “earn interest” on it, your original dollar is still a dollar, the interest is a fraction of another dollar added onto it. The purchasing power of that dollar has not grown because of the interest – to measure the purchasing power of that dollar you have to look at how much “stuff” will that dollar actually, you know, PURCHASE.

Calculating in compound interest to massage the purchasing power of a currency is similar to alcoholic rationalizations and circular non-arguments that these new macro-economic deep thinkers find so attractive.

At the end of the day most of their work boils down to circuitous rationalizations to justify:

  • Borrowing more money than ever possibly be repaid
  • Spending more than possibly be earned, before it’s earned
  • Inflating away the currency

Whatever a dollar can buy right now is it’s purchasing power. What it can earn in interest in a bank is something else entirely.

You can show some light on how farcical this argument is by looking at two things:

  • The purchasing power of the US dollar from 1800-1913. Guess what? It was a lot higher and relatively stable. See here and here. It didn’t start it’s steady decline until 1913 (the year the Fed was created) and really accelerated after 1971 (the closing of the gold window).
  • An ounce of gold, whose purchasing power has remained relatively stable for thousands of years without having to resort to nonsensical conjuring to massage the numbers.

One of my lawyers like’s to remark “Bullshit baffles brains” and this argument takes the cake for that.


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