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Last Update: August 2021
Most people think in terms of purchasing power. How much can one’s cash buy? I reject this view on two grounds. One, it encourages a liquidation mindset. If your life savings consists of 100,000 dollars in the bank, plus a house and some shares of AAPL and INTC, how many years’ worth of groceries can you buy?
If the grocery-value goes up, people cheer.
Life savings is not supposed to be about liquidation. People used to be able to earn a yield on their money. We should think of an estate as a business, with assets that generate income (as people once did). In this view, you don’t think of selling the business every minute of every day, cheering when its price goes up.
You think of its profits. You think of how many groceries you can buy–by operating a business to generate profit.
You don’t think of the purchasing power of the business, but its Yield Purchasing Power.
The conventional purchasing power paradigm paints a rosy picture. That may help explain why apologists for the regime of the irredeemable dollar promote it.
The yield purchasing power view shows something altogether different.
Below are links to articles I have written about Yield Purchasing Power. I also gave a presentation on it, at the American Institute for Economic Research. You can view the video below.
Yield Purchasing Power Chart
Articles on Yield Purchasing Power
Move Over Entrepreneurs, Make Way for Speculation!
Who the Heck Consumes Capital?!
The Economy is in Liquidation Mode
Yield Purchasing Power: $100M Today Matches $100K in 1979
THERE’S Your Hyperinflation!
Interest – Inflation = #REF
Who Is Worth More: Some Hedge Funds or All our Kindergartens?
Falling Yields, Rising Asset Prices – Rising Yields, Falling Prices
Think Different About Purchasing Power
Podcast Episode
Episode 12: The Yield Purchasing Power Paradigm
Yield Purchasing Power Presentation at The American Institute for Economic Research
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Keith,
Isn’t this analogous with saying that real interest rates have largely been negative since the mid-80’s?
Mark
Keith: Very interesting metric. Fits in with a recent meme “Many of us are rentiers now — whether we want to be or not” kicked off by Thomas Piketty…
That is an excellent observation. However, I prefer the chart not inverted to show the loss in purchasing power. In the link below I added what could be labelled Gold Purchasing Power, i.e., gold/10-year yields. Interesting.
https://stockcharts.com/h-sc/ui?s=%24TNX%3A%24%24CCPI&p=M&b=1&g=0&id=p71453674262&a=406127784
Thanks for the comments.
miamonaco: The discussion of “real” vs. “nominal” interest rates is based on the idea that the dollar is 1/P (P is the price level). If prices double, then that means the dollar has lost half its value. This is wrong on several levels and for many reasons. One, per the first graph in this article, companies are constantly cutting real costs. Two, there are many nonmonetary forces that push prices up including: taxes, California water mismanagement, environment restrictions, regulation, permitting, labor law, litigation, etc. Anyways, in this view, the interest rate we see is not real. To calculate the real one, subtract the CPI.
This isn’t what I am saying, above. I am saying don’t think of selling your assets to buy food. That is to consume your capital. I am saying thinking of the return you get on your portfolio, and buying food with that.
Phil: I looked at the graph but I don’t understand. What did you do with gold? Thanks.
This is an insightful article, Keith, and it’s the first time I’ve seen both currency debasement and increases in efficiency both taken into account in an assessment of the damage. Here’s what I tell people: You know (or may not know) that the dollar is only worth 4% of what it was worth in 1913. What happened to the other 96%? That value was stolen through currency debasement. But what about all the incredible increases in efficiency, economies of scale, etc. that have come about since then? Shouldn’t prices be MUCH LOWER than they were in 1913, all other things being equal? Shouldn’t the dollar buy much more now, rather than less? THAT VALUE WAS STOLEN TOO! It’s akin to Bastiat’s “Things not seen” argument.
Sorry. The link mangled the chart. All I did was to divide gold by the CPI and got interesting results.
davidnrobyn: The dollar was worth 1505mg gold in 1913. Today it is worth about 26.25. This is a loss of 98.3%. I agree it’s theft. And that theft of value is the *least* of the harms done to us by the fiat dollar regime.
Keith, I think this is a very nice and appropriate chart. But why not have another line drawn, giving the development of earnings? That is as an example average hourly earnings adapted to inflation?