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April 22, 2008

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I've gotta weigh in on those 1971 figures. I live in Kansas City, certainly not the home of either the highest wages or the highest prices. "Average," we'll call it. I graduated high school in 1972 and promptly got a good entry-level job and moved in to my own apartment. I realize my job wasn't paying the average, since I was new to the job market. I made less than $6000/year working as a data entry recorder for a major pharma firm. My first apartment cost the supposed average of $150/month, and it was a total dump, almost unliveable. (Trust me on this.) Gasoline was indeed 39 cents/gallon, but I distinctly remember my grandfather plunking down cash on the counter for my first car--a 1972 AMC Gremlin. It and the Volkswagon Beetle were the lowest priced cars available. The car cost $2500, way more than the figure quoted here.

I also remember my father (a banker) lamenting for the rest of his life the day the U.S. went off the gold standard.....

Whats the average wage slave supposed to do about this? If our monetary policy is out of control then what are our options. The mantra of this blog is save less and save, ok I've been doing that before this blog existed. But if the value of my wealth, which is essentially all fiat, becomes worthless than what do you do?

Katy, these figures were drawn from BLS, the Federal Reserve and other government sources. They are not necessarily reflective of what was really going on ;)

Seriously though, averages are just that - averages. Some areas of the country "averaged" a higher wage and lower cost of living, while others "averaged" in the opposite direction. These figures also measure the gamut - from the Mazzerrati to the VW bug. These are overall numbers for the nation (the earlier numbers, for example, didn't calculate the full 50 states, because we didn't have 50 states back then.) Just looking at one figure - gasoline - can have several different local effects; local taxes, state taxes, the cost of moving gas via tanker trucks from the coast to a specific location, etc, that can move the price per gallon wildly.

Certain things about the post stand out. I have read in many places that 1973 was a peak year in the US for purchasing power. The data in the post tends to bear that out.

But in 1934 the official national unemployment rate was over 20%, peaking at 23% around that time. Purchasing power may have been strong, but it may have been because a whole lot of people had no money.

Despite all the current hand wringing about the declining dollar and the Fed reducing interest rates to a point where many economists insist it has to trigger inflation, the year over year core CPI has remained essentially unchanged at around 2.4%.

And the point about improving technology clearly is valid. What new vehicle would you rather drive, a 1934 Studebaker, a 1971 Datsun 1200 or a 2006 Toyota Corolla?

Richard - Knowledge is power. If you know that your money is being inflated away, then you have the choice to put your wealth into other forms than money; land, metals, goods, etc. In an earlier post about gold as an investment (last month sometimes.. I forget when) a comment was made that gold makes a lousy investment as it does not generate any returns. This is absolutely true - gold is a lousy investment. But, as a store of wealth, gold has the longest track record of maintaining its value. If your focus is to grow wealth, then the markets are a better bet. If your focus is to not lose wealth, then assets are the better bet.

rwh - It's funny you should mention the CPI; I'll be going into that next :)

Not only has technology made our lives better in terms of cars, but the size of the new houses we're buying is many times larger, and we presume that things like computers, televisions, internet, climate controlled houses, etc. are necessities,and most of us can still afford them. There is no doubt that I have more purchasing power in terms of cool stuff I can buy that makes my life easier than my parents and definitely than my grandparents. If I lived in a house with well water, heated by a wood stove, and had a huge garden where I canned most of my family's food like my grandparents, I could still almost live on the amount of money they made.

That wage/price comparison chart is a real eye-opener. Thanks!

Good post , you had highlighted many important issuse ,

thanks ,

Tracy Ho
wisdomgettingloaded

Richard:

I'll go out on a limb and predict you will take the position the cpi is poor measure of inflation.

Only until the Boskin/Greenspan changes. :)

FMF,

That was a great post... I've been asking you to do a post about inflation and this is a great start.

Now can you do a post on the theory of peak oil and the implications of this to our global, energy hungry economy? Remember this is informational and not doom n gloom.

-BC

"When a currency has an asset backing it, only major events like a war or a national emergency causes price inflation..." - what about market bubbles?

Market bubbles are more of a creation of credit expansion than true monetary inflation. This is not to say that you can't have a bubble with an asset backed currency (the Dutch tulip mania of the 1600's springs to mind as an example,) but a bubble can only get as large as the total wealth base in these circumstances; with credit, you can actually have a bubble far in excess of the wealth base, which eventually leads to devaluation (inflation) as these debts must either be paid or revoked (which negatively affects the lending institution.) Take a look at the global derivatives market outstanding value to see an example of credit expansion gone haywire; it's currently estimated at $516 trillion as of March (total global wealth is estimated at about $115 trillion.)

Rod: Sorry I called you Richard.

Does credit have anything to do with the current price inflation of commodities?

rwh - No problem. In a manner of speaking, yes. Credit is used (margin) to buy and sell commodity futures, which affects the price. However, fundamental pressures are forcing a rapid decoupling the "spot" price of some commodities; these commodities are trading on the street for higher prices than spot on exchanges. Silver is a perfect example of this phenomenon: spot silver is about 17.20 as I write this, yet you can easily sell an ounce of silver to an bullion shop for 25 cents to a dollar per ounce more than spot. Buying that ounce of silver would cost you as much as $2 over the spot price, and I'm not even counting numismatic value. This is due to a lack of physical metal available; there was a period about 2 weeks ago where you simply couldn't buy silver anywhere and what silver was available was being scooped up for industrial usage. In silver, right now, spot price is pretty much meaningless due to over speculation in the futures market enabled by margin buying and selling.

While I haven't done the research necessary to say with any certainty on this, I believe that agricultural commodities might be another area where we are experiencing this; the pattern seems the same, which bodes well for the US if we can take advantage of it.

My biggest takeway from this article is that houses are way overpriced. 673% of wages?! That is way out of wack with historical norms.

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