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Exposing the TRUTH about inflation and
the value of today's dollar

By By Harry S. Dent, Jr.

© 2013 Nightingale-Conant Corporation

Inspired by Harry S. Dent, Jr.'s How to Prosper During the Global Meltdown

Don’t listen to people who preach we are going to see hyperinflation ahead, gold is going to go to $5,000-plus, and the U.S. dollar is going to zero, even if it seems to be common sense.

These people mean well. We agree with them 100% on the severity of the debt crisis we are facing and the inability to solve it with short-term panaceas and money printing. But we disagree big time about the consequences, because we side with history and not with human emotions... the same emotions that cause bubbles in the first place and that cause people to go into denial when bubbles start to burst!

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Here are the major myths we can dispel right now:

MYTH #1: Governments are purposely debasing our currencies and eroding our purchasing power so they can spend recklessly and pay back their debts with cheaper dollars.

Our research shows clearly that urbanization, economic progress, and demographics, not intentional government policies, have caused most of the inflation and most of the progress throughout history.

Governments may let inflation get out of control at times, but no central banker or president would want to create inflation on purpose at the level of, say, the 1970s in the United States. Creating inflation is excusable only when a nation is in a major war. And governments don’t tend to pay back in cheaper dollars (unless they default), because the higher the inflation, the higher the interest that the government (and thus everyone) pays.

Yes, governments have to pay back their debts with principal plus interest. The interest more than accounts for the inflation and the lower value of dollars paid back, thanks to our markets, which function well when governments don’t interfere, as they are doing currently, unfortunately.

Chart 1 shows that after adjusting for inflation, wages are 7.1 times higher than in 1900, the very period of rising inflation and the supposedly falling “value” of the dollar. Hence, it’s not the “value” of a dollar, but what your income in dollars will buy over time that counts.

We use manufacturing wages to chart inflation, because we have data for these wages over a longer time than for any other measure of income. Average wages are higher today, comparatively, because managerial, professional, and technical jobs have grown the most and pay the most. So it’s more as if our standard of living has gone up more than eight times since 1900.

Thus, it should be incontestable that our standard of living has not been eroded by the inflation of the dollar since 1900. In fact, it is likely to have grown more than any other time in all of human history, and globally, not just in key areas, as in the past in Rome or Western Europe!

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MYTH #2: The falling dollar is eroding our store of value and capacity to save.


Even as the value of a dollar has fallen, your ability to preserve such value has not, unless you are still living in that little house on the prairie and stuffing your money under your mattress. Now our money is held in financial institutions, and we get paid an interest rate on our savings, largely on the basis of inflation rates plus a premium for risk.

Since 1900, one-year government or risk-free interest rates adjusted for inflation have varied some. However, most have remained steady and have averaged 1.31% over inflation, with long-term averages of 4.59% vs. 3.28% inflation, as in Chart 2. Ten-year Treasury bonds are more volatile but have averaged 1.52% more than inflation (4.80% vs. 3.28% inflation).

A person today can preserve the value of his or her savings plus a bit more with no risk and without being robbed of the savings value. However, in the last four years, governments have pushed risk-free Treasury rates below inflation to save the banks and to stimulate the economy. In this case, the governments are robbing your savings capacity, now and likely for several years to come. That is another issue. Similar phenomena happened in the Great Depression and in World War II... that is, times of severe crisis like this one.

MYTH #3: The U.S. dollar and other currencies will decline to zero.

Boy, if I had a dollar for every time I heard this statement about the dollar. I would be a billionaire!

Currencies trade relative to each other. Do I need to say that again? Currencies don’t have an absolute value like stocks or bonds that are based on earnings capacity and projected inflation rates. Currencies are just a means for trading services and goods among people and countries. Since our economy is no longer commodities-based, as it was up until the last century, gold is no longer the best standard for money. Not enough gold exists in the world to make this happen at any rate.

Also, the value of gold is not growing as fast as that of the higher-value-added goods and services that now drive our economy. We’re talking healthcare, education, financial services, and even homes and autos. Gold was a good standard up until the late 1800s.

If you print more currency for no good reason or just to stimulate your economy artificially as we do now in the United States, yes, you can devalue your currency. But what happens in a period like now when almost all major nations (38 by last count) are devaluing their currencies at the same time?

The Fed has printed $2 trillion in QE out of thin air and has committed to printing much more until U.S. unemployment falls to 6.5% (in your dreams)! But the ECB for the euro zone, which has about the same size population as the United States, has printed more than $3 trillion, with much more likely to come. That’s why the dollar has gone up a bit in value vs. the euro since the crisis set in in early 2008, while the dollar is going down a bit vs. the euro currently, as we are printing more than they are recently.

Overall, when most nations are all printing money together, currencies do not just go down to zero. They appreciate or depreciate relative to each country’s money printing, trade imbalances, debt, and economic progress.

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REALITY: We actually NEED inflation. Yes, inflation can actually be GOOD for our long-term economy.

I always thought inflation was simply a bad thing. And inflation has been bad during certain periods in history, like in the 1970s, when productivity was very low, or the time around World War I for the Germans, when a costly, failed war led to bankruptcy, reparations payments, and finally hyperinflation. So the real question is: How could inflation actually be good on a longer-term horizon?

The answer is simply through the specialization of labor. I know that sounds a bit academic, but it’s not, as I will explain ahead. But first let’s look at the simple evolution of the human family to explain why inflation tends to accompany progress and why a successful and more-urban economy creates the need for far more dollars so that each person can function at a higher rate of affluence.

Our economy actually needs and creates inflation for good reasons. Let’s go back to around the time when the dollar adjusted for inflation started falling: 1900, as shown before in Chart 1. Back then our economy was about 80% rural. Most people were still farmers, trappers, miners, etc. It was a basic, commodities-based economy, not a complex industrial or service economy as is the case today among developed nations.

What did the typical household look like in 1900? “Little House on the Prairie!” Life was much simpler, but also much less affluent, much more difficult and risky.

One bad-weather season could be life-threatening, as could random raids from outlaws or an attack by wild animals.

How much money would a family in such a situation need? Such a family largely would be self-sufficient. They would build their own house; hunt, fish, and farm for most of the food; cook their own food and wash their own clothes; and constantly babysit and even educate their own kids. In that economy and lifestyle, people didn’t rely nearly as much on transactions with others, beyond the need for basic tools and farming supplies, pots, guns and ammunition, flour, and a plow, things a person mostly could buy at the general store. Many people would barter for needed goods. Towns had fewer government services to pay for. Disputes could be settled with a gunfight, and dirt roads don’t cost much to maintain.

The point is that although many families had little income beyond what they got from selling their crop or furs, a lot of money was not needed because people did most things for themselves. People did not need as much credit for buying things like homes or cars. Cars, appliances, and even flushing toilets didn’t exist yet! Are you getting the picture here?

Now let’s fast-forward to the highly urban, industrial, service economy of 2013. Compared with a family from roughly 100 years ago, the typical household today has a much higher income and outsources a massive number of tasks. Almost no one hunts, grows his or her own food, or educates his or her own kids. And who builds his or her own house? I don’t even fix anything at my house, because I don’t have a clue how. Instead, we hire plumbers, electricians, lawn managers, handymen, and so on.

We go to doctors, tax accountants, lawyers, dentists, financial advisers, mortgage brokers, real estate agents, and so on. What was healthcare spending in 1900? The answer is, almost nothing! Did they plan for retirement? NO! We amass information from books or magazines or download it from the Internet.

We borrow money to buy cars over the course of six years and houses over the course of 30 years so that we can afford what we need longer term, especially while we are raising the kids and need these things more. I wish I had a time machine for all the people I hear who want to go back to the “good old days.” I would send them there, and they would beg to come back.

Technologies and greater urbanization allow us to create progress through a simple concept called specialization of labor. The more we focus on what we do best and specialize our skills in that area, the more productive we become and the more we can afford to have others specialize as well, to do for us the things that we don’t do best or are not interested in doing. What a luxury, and we take it for granted!

This goes back to the “invisible hand” Adam Smith spoke of in the late 1700s (wherein the market is self-regulating). Nations benefit from specializing and from trading with others. This concept increasingly is applied at the business and individual level as well.

If we are going to get paid more for our specialized services and then delegate many services to others, we need more money and credit. That’s why monetary inflation is natural. The costs of the goods that you consume are going to be higher when you have to pay a lot of middlemen and specialists to produce the goods and bring them to you. Over time, the higher wages from specialization more than offset the rising costs of living in a more urban, interactive, and specialized economy wherein we pay more and more people to do more and more for us.

We also need a higher share of government services and institutions to oversee and coordinate such a complex, urban economy, much like how larger corporations have more levels of management and bureaucracy than smaller companies. New York requires more government services than Mayberry.

Urbanization, and the specialization of labor that comes with it, is the biggest single driver of rising affluence in history. Technologies like the printing press, the steam engine, electricity, automobiles, jet engines, personal computers, and the Internet increase urbanization and specialization of labor, and have led to globalization and megacities around the world.

The biggest single trend in the world today is the urbanization of the emerging countries that house more than 80% of the world’s population. This trend amplifies what has already occurred in developed countries over the last few centuries and now is happening at ever-faster rates.

The last thing you need to worry about today is a collapse of the U.S. dollar. Worry more about the next collapse of our economy and of assets the debt bubble drove up, including stocks, real estate, commodities, gold... and most other currencies!

What's NEXT for jobs, real estate, and health care — How will the news affect you?

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