LA Times reports on purchasing power loss

It’s nice to see a major newspaper reporter writing about purchasing power. Most reporters talk about prices. When prices rise for all things, this is usually because the currency is losing value, and a loss in value is a loss in purchasing power.

The reporters explains that since Federal Reserve started issuing more dollars back in August, 2010, the dollar has lost about 10 percent of its purchasing power compared with other major currencies.

Here is my reply:

Comparing the Federal Reserve dollar to other currencies is like comparing one sinking ship to another. Other central banks have issued more of their own currency during the same time period, and that devalues those currencies as well It’s a race to the bottom.

I compare Federal Reserve dollars to the items I buy, such as bread made with wheat. I can’t use euros or Swedish krona to make bread.

In Aug, 2010, $10,000 dollars was worth 41 metric tons of wheat. Now, $10,000 dollars is worth 28 metric tons. In other words, the dollar now buys 32% less wheat. So things are even worse than the dollar’s average 10 percent loss compared to other currencies. Forget about traveling to Sweden, traveling to the nearby grocery is more expensive.

If you owned stock that lose 32% in six months, you’d likely sell it. You can sell your dollars as well. Simply convert most of your dollars into anything else, such as stock, gold, oil futures, comic books, etc. Then when you need to buy a big ticket item, convert your stock or gold back into dollars, and make your purchase. Note, you would pay some transaction costs ($9 per trade) and capital gains taxes.

If you had bought wheat futures back in August of 2010, your wealth would still buy the same amount of bread at the grocery store today. By holding dollars, you can buy one-third less, or you’ll have to shell out one-third more to buy the same amount of bread.

This is why prices have risen in dollars. Since dollars are worth one-third less, bread makers have raised their “dollar” prices by one-third.

See LA Times Article.

Hat tip to the Sound Money Project.

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