A dollar’s true worth will shock you. Superficially, the value of the U.S. Dollar can be gauged by Treasury Notes, current exchange rates, the level of foreign currency reserves (dollars held by foreign countries) and the value of today’s dollar as compared to previous years. Austrian school economist Ludwig von Mises was not really being glib when he said, “Government is the only agency that can take a valuable commodity like paper, slap some ink on it, and make it totally worthless”.
The last honest money issued by the Federal Government was the $50 Gold Certificate of 1913, which clearly stated on the front “United States Of America Fifty Dollars In Gold Coin, Payable To The Bearer On Demand.”
Today, the value of the dollar fluctuates according to demand for U.S. Treasury Notes, which are sold at a fixed interest rate and face value. When demand is high, buyers pay above face value, and get a lower yield. When demand is low, buyers pay below face value and get a higher yield.
CURRENT EXCHANGE RATES
The most common measure of the U.S. Dollar is its exchange rate, which compares its value to other major currencies. Currencies are traded in the foreign exchange market (forex), and the value of a currency can change because of the strength of the nation’s economy and the nation’s debt level.
LEVEL OF FOREIGN CURRENCY RESERVES
Foreign governments with an excess of dollars – usually the result of a country exporting to the U.S. more than it imports – hold them in foreign currency reserves. When the dollar declines in value, the value of the foreign country’s reserves also decline. That country then diversifies into other currencies which further reduces demand for the dollar, applying additional downward pressure on the dollar’s value. Foreign investors are currently diversifying their portfolios with more non-dollar denominated assets.
U.S. made goods become cheaper when the dollar declines, making them more competitive when compared to goods produced in other countries. Although this aids U.S. exports and economic growth, it also leads to higher oil prices because oil is priced internationally in U.S. Dollars. A declining dollar causes oil-producing countries to increase the price of oil, often by threatening to restrict supply.
THE DOLLAR: TODAY VERSUS YESTERDAY
An obvious reference point is to compare what a dollar buys today with what it bought in past years. For example, if you bought goods/services in 1913 that cost a dollar, those same goods/services today would cost $23.52. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a ‘market basket’ of consumer goods and services. The percentage change in the Consumer Price Index (CPI) is therefore a measure of the rate of inflation.
Federal printing presses are creating an oversupply of dollars at the rate of 85 billion a month and 13% each year. Too many dollars chasing too few goods and services leads to inflation. Backed by gold for 179 years, the U.S. Dollar was taken off the Gold Standard in 1971 when the Federal Government ceased redeeming dollars for gold. The dollar has lost 98% of its value since Federal Reserve Notes were issued in 1914, meaning that today’s dollar would only be worth 4 cents back then. When the price of an item increases, people think of the item being worth more, and not that the dollar is worth less. But the latter is often the true explanation, as in the increase in the price of a barrel of oil, because oil prices are quoted in U.S. Dollars.
In short, our dollar-denominated monetary system is irretrievably compromised and loss of faith in the credit of the U.S. government, followed by sudden and unexpected currency failure, is certainly not impossible. Concerned over rising debt ratios, Moody’s, Standard & Poor’s and Fitch may soon be downgrading U.S. debt once again.
Postscript…….. You can download the free app What Is A Dollar Worth? from the iTunes store, and the app will work on your iPhone, iPod Touch, or iPad. An Android version of the inflation calculator is also being developed. The app lets you enter an amount in dollars, then it compares values between 1913 and 2012 or any intervening year.