Money, Money, Money, Its a Rich Man's World

Economics and economic policies have always been way over my head. That is, until I started thinking about them from a kitchen table perspective and doing a little research. You may have noticed I included a quote box over to the right, showing the price of gold and silver. Here’s why.

Think of the United States as a giant corporation. It provides goods and services to all of its shareholders (that’s us, folks). It is a not-for-profit corporation that issues shares to the shareholders in the form of dollars. Every dollar we own is a share, and they are easily traded on a day to day basis for the things we need. The US Treasury makes sure there are enough of these shares floating around to satisfy their demand.

Now, suppose a regular Corporation wants to raise some additional cash. They decide to issue some more shares. Of course, when they do that, the value of all the shares decreases by some factor. In stock market terms, the shares are diluted, which is a fancy way of saying each share is not worth as much.

The giant corporation called the U.S. Government is constantly issuing new shares, keeping the Treasury’s printing presses humming. From September 2008 through August 2010, they increased the supply of dollars from  1458.5 billion to 1745.6 billion, a whopping increase of over 19%. Put another way, each dollar has been diluted by 19%. Put yet another way, the dollar in your hand has decreased in value. But it is not quite that simple, because I have only used the M-1 supply figures, that only include currency and demand deposits like checking accounts. A more complete picture emerges when you look at the M-2 supply figures, which include M-1 plus a whole slew of other cash holdings. Using M-2, the dilution drops to around 9.6 %, much better, but still nearly a 10% loss in two years.

In the same period, the value of gold has gone from around $725 an ounce to about $1250 an ounce. This is a 72.4 % increase in the value. So what would you have preferred to hold over the past two years--dollars that have  been diluted nearly 10% or gold that has shot up over 72 percent? I imagine you have heard the derisive term applied to those who accumulate gold as being “gold bugs.” Looks to me like those folks are on to something. 

Source: http://www.federalreserve.gov/releases/h6/current
September 16, 2010

JP