The US Dollar Index is up three percent this year. On the surface, it appears as if we have not experienced a Dollar devaluation this year. But that is not so. Looking at the US Dollar Index or the Dollar against other currencies gives you a false sense of what is happening. The Dollar is being devalued, but so it the Euro, Yen, and most other currencies. All currencies are falling together, but that means they aren’t changing against each other.
How is the Dollar doing against other things, like commodities. Most people look at gold and silver as a currency substitute. Adam Smith looked at wheat prices to measure the value of one’s labor. In today’s global economy, oil may be even more important. So how are the metals, oil, and agriculture doing compared to the Dollar?
Gold is up 28 percent so far this year. Silver is up 79 percent. Platinum is up 19 percent. Palladium is up 92 percent. Copper is up 29 percent.
Crude oil is up 12 percent. Wheat is up 91 percent. Corn is up 56 percent. Soybeans are up 32 percent. Cotton is up 97 percent. Sugar is up 40 percent.
No matter how you measure it, commodity prices are up. Another way of looking at it: the Dollar buys less of each of the above items. Inflation or Dollar devaluation. Whatever you call it, it is happening right now.
So why aren’t we feeling the effects of this falling wage rate or, from the other perspective, this inflation? In fact, we are to a small degree. Just ask anybody around you about their financial situation. Times are tough. But why aren’t we feeling it to the extent the statistics imply? Simply because raw materials make up just a small percentage of the total cost of the things we buy. Personal income, whether it be wages, benefits, capital gains, or corporate profits flowing to individuals, makes up 86 percent of GDP. Raw materials is somewhere around 10 percent of GDP. So it should come as no surprise that rising commodity prices have not, for the most part, not found their way into the CPI statistics. In fact, I’d guess that rising health-care costs have been a bigger contributor to inflation than commodities. On the other hand, falling housing prices are keeping inflation in check.
But what if commodity prices not risen so much? What if the Dollar had not been devalued? In that case, we would either see rising wages or deflation. One is seen as good and the other evil, but they are really the same thing. Either we’d earn more and be able to buy more good with our earnings or we’d have the same wages but lower prices would allow us to buy more with our earnings. Just look at how much we’ve benefited from deflation in the technology area. Don’t we all wish other goods would fall in price as well?
While we have inflation in some areas, such as commodities and health care, we have deflation in other areas, such as housing. Even though the Dollar is being devalued in comparison to non-currency money like gold and silver, it is holding steady against other currencies that are devaluing at similar rates. But we’d be much better off if the United States didn’t devalue: we’d benefit from rising wages or falling prices, either of which would enable us to buy more goods. But the government fears deflation, not for our sakes, but for its own. Deflation makes the real value of the government debt rise. Inflation though makes the real value of that debt smaller, enabling the government to hide its incompetence, that is until interest rates rise. If the government doesn’t right its ship soon, inflation or deflation will become a secondary issues. Interest rates will rise and the government won’t be able to hide its debt and deficit with inflation.