Posted: Tuesday , 03 Apr 2012
The Gold Report: Richard, at the Gold Symposium in Sydney, Australia, last November, one of your charts tracked the erosion of U.S. dollar purchasing power. Can you give us a summary?
Richard Karn: It's interesting that if you go back to the late 18th century, the dollar has been on the gold standard roughly the same amount of time it has been on the Federal Reserve System, which presents us with a wonderful opportunity to compare the dollar's purchasing power over time.
Throughout the 19th century, with all of the booms and busts, the wars, and the incredible territorial and industrial expansions, the dollar maintained its purchasing power very well on the gold standard. Since 1914, when the U.S. went to the Federal Reserve System and especially since it has become a purely fiat currency system since closing the gold window in 1971, the dollar's purchasing power has collapsed. Under the Fed's administration, the dollar has lost well over 95% of its purchasing power.
We show this chart in our presentations, pointing out that the purchasing power of the dollar on the left scale is in log format while the GDP, M2/M3 and Public Debt figures are in linear format on the right scale. Our intention here is simply to highlight the explosion of nominal GDP, M2/M3 and Public Debt corresponds with the collapse of the real purchasing power of the dollar that attended the end of any pretense to adhering to a gold standard in 1971.
However, in order to dispel any accusations of bias, here is the same data in log format on both scales: the take-away is still that the explosion of nominal GDP, M2/M3 and Public Debt corresponds with the collapse of the real purchasing power of the dollar that attended the end of any pretense to adhering to a gold standard. If anything, to mathematicians the chart is even more damning.
While public awareness of this problem has grown steadily for 40 years, grassroots objection is just now reaching a critical mass, especially among the younger followers of presidential candidate Ron Paul. That is why Federal Reserve Chairman Ben Bernanke, in reaching out to the next generation of leaders with his series of university lectures, is disingenuously making a point of damning the gold standard for its "volatility" while utterly dismissing the simple truth that at least on the gold standard the dollar retained its purchasing power over time, something the U.S. dollar under the Federal Reserve Bank's stewardship unequivocally has failed to do.
In 1914, the U.S. moved away from the gold standard and into a financial system based on debt and ever-increasing monetary inflation; the transition was completed in August 1971 when Nixon ended dollar convertibility into gold, and John Connelly famously told concerned European bankers, "it's our currency, but it's your problem."
What has emerged is a system under which people earn more nominal dollars of less real value, which disguises the loss of real purchasing power. For four decades, real wages have not kept up with the rate of inflation. Savings have been drawn down and the standard of living in the U.S. has declined. As a consequence, debt levels have soared.
The Fed is targeting inflation rates of 2% to 3% per year, which roughly equates to the inflation rate Americans experienced under the gold standard over the entirety of the nineteenth century. We have long suspected that this figure was chosen because the Fed believes that is the threshold people will tolerate being stolen from their paychecks without complaint. But 2% to 3% inflation compounded annually over the course of a 35- or 40-year working career amounts to a massive loss of purchasing power as well as fostering a false sense of security regarding one's financial situation... Finish reading @Mineweb