I couldn’t help but notice the irony (although it wasn’t mentioned) that 1971 was the year that Nixon closed the gold window ending the convertibility of dollars into gold at the exchange rate of $35 per ounce. As of Friday’s close, gold was trading at $1663 per ounce.
Now, the post lamented the fact that inflation has caused prices to increase much more quickly than salaries and that fact is quite true. But should we be more focused on prices or purchasing power? Is the problem with the cost of goods or the fact that the dollar has been losing purchasing power?
What if, in 1971, the average worker drawing a salary placed 10% of his savings in gold which is a reasonable recommendation heard from financial planners today? After all, I don’t want to go all “gold bug” on you.
Dollar Cost of Living 1971-2011
- New House: $25,200 (’71) vs $169,000 (’11) (571% increase)
- Avg Income: $10,622 vs $40,000 (277% increase)
- New Car: $3,560 vs $28,000 (687% increase)
- Avg Rent: $150 vs $928 (519% increase)
- Movie Ticket: $1.50 vs $10 (567% increase)
- Gasoline: $0.40 vs $3.79 (848% increase)
- US Postage Stamp: $0.08 vs $0.44 (450% increase)
So the percent increase ranges from 450% for postage to 848% for gasoline while salaries have only increased 277%. This means that the average worker has lost purchasing power. I won’t go into the food but I bet you can see the trend.
Gold Cost of Living 1971-2011
- New House: 720 ounces (’71) vs 102 ounces (2011)
- Avg Income: 303 ounces vs 24 ounces
- New Car: 102 ounces vs 16.8 ounces
- Avg Rent: 4.3 ounces vs 0.56 ounces
- Movie Ticket: 0.043 ounces vs 0.006 ounces
- Gasoline: 0.011 ounces vs 0.0023 ounces
- US Postage Stamp: 0.0023 ounces vs 0.00026 ounces
S&P 500 Cost of Living 1971-2011
The S&P 500 closed 1971 at 95.88 and Friday at 1199.38. So what has the cost of living done in terms of this popular stock index.
- New House: 263 shares (’71) vs 141 shares (2011)
- Avg Income: 111 shares vs 33.4 shares
- New Car: 37.1 shares vs 23.3 shares
- Avg Rent: 1.56 shares vs 0.77 shares
- Movie Ticket: 0.0156 shares vs 0.00833 shares
- Gasoline: 0.00417 shares vs 0.00316 shares
- US Postage Stamp: 0.000834 shares vs 0.000367 shares
What Can We Learn From This Data?
It seems like a lot of numbers, but I think that we can derive a lot from this information.
- No matter how you slice it, incomes have gone down compared to the cost of these everyday goods and services. That much cannot be disputed. I think there could be several explanations but that is beyond the scope of this post and not the main point.
- The costs of each of the items in terms of stocks or gold have also gone down. It takes fewer shares of the S&P 500 or fewer ounces of gold to purchase each of the above items now than it did in 1971. Thus, the purchasing power has improved across the board.
Take Home Lesson
What this means to me is that both stocks and gold retained purchasing power and so it is important for me to invest in these assets. I stand about a 50-60% chance of living for another 40 years. During that time, I expect the continued erosion of the purchasing power of the dollar. I can also expect that my salary and income will continue to purchase less and less.
But if I invest some of my current earnings in assets that will keep pace or even outpace inflation, I can expect that they will maintain their purchasing power and take smaller amounts to purchase the stuff of everyday living 40 years into the future.
Inflation is one of my favorite topics and is truly a monetary phenomenon. I think that it is also misunderstood and is one of the primary reasons that the gap in wealth in this country continues to grow. Weak dollars cause prices to increase and those who have to spend all their income to simply survive have nothing that can grow with inflation. Incomes certainly won’t. Owners of assets, however, can command higher prices and pass along costs whether those costs are from inflation or taxes or regulations. That is why it is good to own businesses in the form of stock.
Regardless of the recent problems in the stock market or the record high gold prices, now would be a good time to invest in some of these assets. You certainly don’t want to go all in but buying over time is always a good idea. In my next post, I will look at what I use to guide some of my investment thinking so that my assets can outlive me.
Readers: What is your take on inflation? What are you doing to protect yourselves and your future? What do you think about inflation serving as a “stealth tax” on the middle and lower classes?
My family and I recently returned from a trip to the Dallas, Texas area. While we were there, one of the things that we did was went on a “money factory” tour meaning that we went to the U.S. Bureau of Engraving and Printing (BEP) facility in Fort Worth, TX and saw how paper currency was printed. I found it quite interesting and almost disturbing that the website for the US BEP is at moneyfactory.gov.
Fortunately, the tour was free which was a nice change of pace from having to pay admission prices for 8 people at some of the other attractions in the area. The security to get into the facility is much like that in an airport although I could keep my shoes on. There were no cameras or any other electronic devices allowed (like cell phones).
We started by watching a 15 minute film that explained the production and printing process. Then a tour guide took us through the facility to look down onto the printing floor and watch how the bills are made. We were counted at each stop along the tour even though we were in a contained hallway and not even close to the money. There were also plenty of security cameras.
Afterward, we took the time to look through the exhibits on the two floors outside the production area. It was a small little museum that had some history and explained the printing process in more detail. There is also a little gift shop as well.
All in all, it was a fun afternoon and very educational. I would recommend it if you are ever in the area. I would leave about 3-4 hours at most. It is not something that would require all day, but when the temperature is over 100 degrees outside, free indoor activities are great!
Now there are probably a lot of things that could be said about fiat currency, the Federal Reserve, inflation, etc. I plan on saving that for a different post in the future. If you want to offer up any comments on those topics, however, I am certainly willing to discuss.
What are some fun things that you have done on vacation, especially that were free?