Inflation: What it does to your money

[Givemelibertyor.....]

This site has a tool to find out just how badly inflation will eat away your hard earned cash.

Be warned, the truth hurts.

MEASURING WORTH (http://www.measuringworth.com/ppowerus/)

[Rich333]

This site has a tool to find out just how badly inflation will eat away your hard earned cash.

Be warned, the truth hurts.

MEASURING WORTH (http://www.measuringworth.com/ppowerus/)
While it may be ballpark correct, it's based on the CPI and thus can't show the true extent of the damage being done.

Price baskets like the CPI invariably fail to capture the true extent of the devaluation of the currency, precisely because they're limited to only a subset of all purchasable goods. If the general time preference of consumers shifts towards more future consumption over present consumption (i.e. more savings and investment), the prices of consumer goods fall in response to the decreased demand, and at the same time the prices of capital goods rise in response to the increased demand which results from the greater supply of available credit. If you only concentrate on consumer goods, as the CPI does, then you fail to take into account the price changes for capital goods, and thus fail to truly measure the change in the real purchasing power of the currency. The CPI fails because it ignores that all prices are merely a reflection of the relative preferences of the consumers for each good and service as compared to all others.

Additionally there's the problem of the natural price deflation which comes with economic growth. As new goods and services become available, and as the efficiency in meeting consumer demand for existing goods and services increases, the total available supply of goods and services increases; the purchasing power of the total currency in circulation increases accordingly as there is then more available for purchase with the same amount of total currency. Stable money becomes more valuable with time; this is precisely what we saw in the 1880s, when we were briefly on a monometallic gold standard, and during which we saw what was perhaps the greatest period of economic growth in this country's history. The CPI fails to account for the amount prices should've decreased from economic growth, and only measures the increase against a non-existent static alternative. The true loss of value suffered by every individual whose wealth is stored in dollars is far greater than the CPI could ever show.

The only real way to measure the actual inflation - that is, the actual loss of value - is by measuring the change in the money supply, and that means you need the M3 monetary aggregate, which the Federal Reserve stopped publishing early last year.

[plopolp]

While it may be ballpark correct, it's based on the CPI and thus can't show the true extent of the damage being done.
Yes, and you describe it very well. Using CPI as proxy for inflation, as massmedia always does, is to assume that average prices would never change if it wasn't för the FED! Also, there is the formidable problem of comparing prices on todays better phones with the less sophisticated phones of last year, for example.


The only real way to measure the actual inflation - that is, the actual loss of value - is by measuring the change in the money supply, and that means you need the M3 monetary aggregate, which the Federal Reserve stopped publishing early last year.
I've seen numbers indicating that an M3-measure was 2721 in January 1984, and 10276 in February 2006. That would mean that 73% of all dollars have been created since then and a yearly increase of about 6.2%. The link (based on CPI I assume) shows that $2721 in 1984 corresponds to only $5279 in 2006 purchasing power, roughly half of what the change in M3 indicates. The different might be made up of house prices and other things not captured in CPI. House prices should rise faster than CPI, I think, because money is created to pay for them with bank loans.

[fsk]

Even using the still-published M2 is far better than the CPI as a measure of inflation. M3 was growing a lot faster than M2 when the Federal Reserve stopped publishing M3. All that extra money in M3 should show up in M2 eventually.

Some people estimate that M3 is growing at a rate of 10%-15% per year. M2 is growing at a rate of 6%-7% per year.

If you want an eye-opening exercise, calculate inflation-adjusted GDP or inflation-adjusted household income, using M2 or M3 or the price of gold as your yardstick of inflation instead of the CPI.

[Phenom24]

M3

http://financialsense.com/fsu/editorials/trendsman/2007/1002.html

[Freedom]

Here is an excellent reference book on inflation:

http://www.mises.org/books/inflation.pdf (http://www.mises.org/books/inflation.pdf)

It was written in 1960 and updated in 1964 so some of the discussion does not apply today (for example, US citizens were not allowed to own gold at that time!)