By Clay Wyatt
Quite a few stories have come out in recent weeks about the Fed’s plan to devalue the dollar by 33 percent over the next 20 years. Most are filled with financial jargon that can be difficult to understand for the average person. What does this all mean to the common citizen?
Tax On Your Savings
Imagine if Fed Chairman Ben Bernanke announced a plan to loot all savings accounts to the tune of 1/3 of their value. I’d be surprised if he made it through the night. However, that is just what will happen to savers over the next 20 years if the Fed gets it’s way.
Suppose that you inherited $10,000 from a deceased relative today. You decide to place this money in a savings account to be used for your child’s future college tuition. In a system with no inflation, that $10,000 would be worth the same amount 20 years from now, when your child is in the middle of his or her college career.
If the Fed’s goal plays out according to plan, that same $10,000 will be worth approximately $6,670 20 years from now. That’s a loss of 1/3 of it’s original value – a tax for not spending it.
Of course, you could invest this money to help offset the loss in value, but the loss will still affect it. Let’s take an example in which you invest this money and earn an average of 8 percent in interest each year. After 20 years, you’d end up with approximately $49,268. In reality, though, that amount would be worth less than $33,000 after adjusting for inflation.
So, this plan will devalue your money whether you put it under a mattress, in a savings account or invest it in the best stock available. The best you can do is offset it with interest income, but you’ll still have far less purchasing power in the future as a result of this plan.
A Moral Dilemma
Most of us would agree that the current US economy is in bad shape. The national debt is nearing $15.5 trillion – an amount that is higher than the nation’s entire GDP. Also, the national trade deficit is nearly $745 billion. Something must be done, and the planned inflation would certainly help cure some problems, particularly the trade deficit, as it would make American goods cheaper to foreign customers. However, should those who live within their means (savers) foot the bill for a spendthrift nation?
The Gold Standard
The US dollar is backed by nothing more than your belief in it’s value. There is no physical commodity that backs the dollar in it’s current form.
This hasn’t always been the case. Until 1971, gold backed the US dollar. This is the year in which President Nixon cut the last ties to the gold standard.
Interestingly, today‘s dollar is only worth less than 18 percent of what it was in 1971. Had you inherited that $10,000 in 1971 and put it under your mattress, it would now be worth $1,786 after adjusting for inflation. As you can see, this is a major loss in value for doing nothing more than holding on to your money.
With the ravaging effects of inflation in mind, some have called for a return to the gold standard. The most notable mention has been from Republican Presidential candidate Ron Paul, who favors returning the US to the gold standard and ending the Federal Reserve entirely. Others warn that returning to the gold standard is not practical. This debate is likely to remain heated as long as the current mess lingers on.
As we can see, inflation erodes the purchasing power of ordinary Americans every year that the current system remains in tact. Currency manipulation often favors large banks and other wealthy parties, meaning that it will be difficult to break away from this system without political courage and public demand for it. There may be no perfect solution to the current mess, but most of us would agree that it must be changed.
What is your take on the Fed’s devaluation policy?