The US Dollar – Real Value vs. Nominal Value
There are some who have very dark views of the near future of the US economy; much darker than mine. They think everything will collapse soon: the stock market, bond market, real estate, gold, everything.
This won’t happen, and here’s why: the US government won’t let it happen. For example, if a huge stock market crash is imminent, or appears imminent, the US government will do what it always does. It will print massive amounts of money and give it to rich bankers. This might not prevent the stock market (or bond market, or real estate market, or whatever) from going down somewhat, but it will prevent an all-out collapse. However, this prevention will cause other, deeper problems for you and me.
Here’s a hypothetical example to illustrate how this works. If the stock market is at 20,000 (Dow), and the US government (and/or the Federal Reserve) see it suddenly dropping to 10,000, they’ll print trillions of dollars, give it to the elites, who will then funnel it to other elites. (You and I will never see any of that new printed money, but the government doesn’t care.)
Instead of the stock market crashing to 10,000, it will instead decline to perhaps 16,000, and will slowly start rising again. Trump, or whoever else is president when this happens, will then come out and brag that he/she “saved” you from a huge collapse.
“See? The Dow only dropped 4,000! It could have dropped 10,000! And see, look at that, the Dow is already rising again! We, your benevolent overlords, Have Saved You™. Now re-elect us, you idiots!”
There’s just one problem. The stock market will say it’s worth 16,000, but it’s actually worth much less than that in US dollars, since there are now more dollars in circulation. The nominal value of the stock market will be worth 16,000, but the real value of the stock market is perhaps 15,000, or 10,000, or even less.
Let’s say you own a house and it’s worth $200,000. A huge real estate collapse occurs, and the Fed prints trillions of dollars to avoid it. When the dust settles, your house is still worth $200,000, in nominal dollars. But in real dollars, it’s now worth $150,000, because the monetary investment value of the real estate, measured in dollars, is worth less.
You’ve lost $50,000 from the value of your house, and you don’t even know it. On paper, your house is still “worth” $200,000. But in real life, based on the real purchasing power of your newly less valuable dollars, it’s only worth $150,000.
(Nitpickers, please don’t nitpick my above hypothetical numbers; I’m just being hypothetical for illustration.)
The government knows people have no idea that this hidden inflation is going on. Therefore, the government is only concerned about nominal dollars. They don’t give a shit about the real value of your dollars. As long as Trump can point to a 20,000 Dow stock market and brag about it, that’s all he cares about. The fact it’s not worth anything near that in real dollars is meaningless to him, because he knows it’s meaningless to 95% of Americans.
This is going to get much worse. In January, the US dollar had it worst month in 30 years(!). The value of the dollar is likely to decline this year, since Trump actually wants a weak dollar, much like past presidents, for the reasons I just stated. In a slowly collapsing economy like we have, a weak dollar fucks up your life, but makes Trump look great. So, expect most assets to decline in real value, even if their nominal value increases or stays the same.
So when the US government prints a lot of money, everything actually goes down in value even if it looks like they’re staying the same or going up. There’s just one exception to this: gold.
The more dollars in circulation, the lower the value of those dollars become. That means it takes more dollars to purchase an ounce of gold. That means the value of gold goes up when the US government prints piles of money. This is exactly why the price of gold has skyrocketed in the last 15 years; it’s because of all this insane money printing the government has been doing (and will continue to do).
Gold is one of the only ways to tell the real value of your currency. If you live in a government like those in the US, Europe, Japan, etc, which are printing piles of money all the time to temporarily fake-band-aid economic problems, the prices of most things are artificially inflated (stocks, bonds, real estate, etc), and are not indicative of real value, only nominal value, which today is becoming more and more meaningless.
Real value vs. nominal value. If you fully understand the difference, it will save you a lot of headaches in your financial life.