The US Dollar - Real Value vs. Nominal Value - Caleb Jones

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.

10 Comments on “The US Dollar – Real Value vs. Nominal Value

  1. Excellent points and information – thanks! Some ideas and questions for people:

    1. “Your house is still worth $200,000, in nominal dollars. But in real dollars, it’s now worth $150,000.”

    What about the rent you could receive from renting the house? And the buying power from the rent? With the 2008 bubble, changes in rent remained fairly constant. ***

    Say you bought the house based on the “P/E” of the real rent. In the crash, would the real rent go from $2000 to $1500 (say 1% of the price based on “P/E”)? Maybe not. If the rent stayed the same ($2000), would the real value of the house change? Probably stay the same. If the real rent dropped, would that also mean the real buying power of the new rent fell ($1500), as well? Probably.

    What if the rent was an ounce of gold a month? Would the value of the house remain at 100 ounces? Or if the rent was pegged to gold? I’m not sure. ++

    2. And regarding gold, what does it produce besides a very long history of proven value and thus trading power? Is ultimately most of the practical value of gold that people intrinsically love gold? Besides trading value, how can gold potentially improve one’s life on a daily basis? With paper money, you could burn it to make a fire, with gold you could make jewelry or electrical components^^^?

    In other words, aren’t there probably more valuable things than gold, like electrical generators, water wells and food-producing land? I know that’s a little off subject and a vast oversimplification.

    3. Other factors can affect inflation besides quantitative easing.

    “Printing money”* causes inflation, but there are many other factors to consider as well – these include wages, import prices/costs, raw materials, profit push, productivity, taxes, overall wealth^.

    Could you, in theory, “print more money” as long as the other factors balanced out the monetary policy? And for how long? We might be living that experiment.

    If US consumer demand grows via population growth, and all other things remain equal, wouldn’t there be some level of inflation (in basic theory)? Maybe .5%-1% ^^

    *** http://www.jparsons.net/housingbubble/ Most people, understandably, buy their houses based on monthly repayment numbers. But I think investors buffer a lot of real estate markets. If something is a good deal, the market will eventually reflect the value in the price.
    ++ https://i.ytimg.com/vi/kI5lUn8Oft8/maxresdefault.jpg
    ^^^ http://geology.com/minerals/gold/uses-of-gold.shtml and http://www.businessinsider.com/how-gold-is-used-2013-4/#s-also-found-in-space-suits-1113
    * http://www.slate.com/articles/news_and_politics/explainer/2008/11/start_the_presses.html and http://www.pragcap.com/why-not-just-print-more-money/
    ^ http://www.economicshelp.org/macroeconomics/inflation/causes-inflation/
    ^^ https://www.google.com/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=growth+of+us+population+rate

  2. What about the rent you could receive from renting the house? And the buying power from the rent?

    It’s the same deal. You’ll be receiving rent via those same deflated dollars. It will look like you’re getting $1000 but you’ll actually be getting $800 in spending power (or example). If you are using 100% of the rent to pay your mortgage payment, then *maybe* you don’t care. But if you’re using that rent to support your lifestyle, you’re getting royally fucked.

    What if the rent was an ounce of gold a month? Would the value of the house remain at 100 ounces?

    If you demanded gold for your rent instead of dollars, then yes, you’d maintain the real value of that rent. The problem is it would be harder to find renters, since they’d probably rather pay $1000 a month in deflated dollars than $1200 in gold (when in fact they’re both the same thing!).

    That’s the problem here. It fucks everybody.

    Is ultimately most of the practical value of gold that people intrinsically love gold?

    Gold’s value is made up of two things:

    1. People’s emotional attachment to its long, multi-thousand-year history.

    2. Its physical scarcity. A government can’t just “print” more gold whenever the hell it wants. The only way to get more gold is to mine it out of the earth, which is an extremely slow and difficult process. (The mining business is quite dreadful.)

    Could you, in theory, “print more money” as long as the other factors balanced out the monetary policy? And for how long? We might be living that experiment.

    We are exactly living that experiment. Monetarists think you can print unlimited money forever and everything will be fine because “we owe it to ourselves.” Austrians like me think if you keep printing this shit, you eventually reach critical mass and implode.

    Who’s right? We’ll find out soon I’m sure.

  3. Sure, inflation will lower the real value of your dollars, but deflation is even more dangerous as it distorts the economy. If you see the inflation objetives of central banks around the world, they don’t usually aim for 0 inflation but instead for a low but positive inflation, usually between 1% and 3%. They don’t aim for a 0 inflation to avoid the risk of deflation, which can seriously distort the economy and is much worst than a low but positive inflation. Europe for example has been priting money not only to increase their very low growth but also to increase their very low inflation to a higher and more desirable level. And by the way, one the usual ways to introduce the printed money to the income is by buying back government debt, which I fully approve. Western governments have way too much debt so I fully approve printing money to avoid the risk of deflation and as a happy secondary effect reducing government debt (or at least, slowing its growth, as the central bank may buy bonds but the government may keep selling new ones to finance its deficit). On cases like Venezuela its another story. The government bankrupted the country so they prints lots of money to finance their socialist programs leading to hiperinflation, which distorts the economy even more than deflation and can wipe your live savings in a week.

  4. And no mention of Bitcoin…
    What is wrong with Bitcoin Caleb?
    The financial/monetary system will collapse and Bitcoin is the true alternative.

  5. And no mention of Bitcoin…

    I have a lot to say about Bitcoin. Coming soon.

    What is wrong with Bitcoin Caleb?

    Nothing. Did I say anything is wrong with it?

    The financial/monetary system will collapse and Bitcoin is the true alternative.

    I favor gold over Bitcoin for the reasons I stated above, and think gold will be more popular than Bitcoin in such a collapse for those same reasons, but Bitcoin is great, yeah.

  6. I love thinking about this. I was watching CNBC the other day and they were super excited about DOW 20000, as part of this they had a segment about what the US was like when the DOW first hit 10000. I remember thinking ‘I wonder when that was?’. It turns it it was in March 1999. Then I though ‘I wonder what the price of gold was in March 1999?’, and then the obvious ‘what would the DOW have to be now to be worth the same amount of gold as 1999?’. Turns out over 30000, i.e. the DOW is not only not at a new high it’s actually lower than 1999.

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