Purchasing Power of US Assets Declines With the Dollar

Many a tear has to fall
But it’s all, in the game

“It’s All In the Game” – Music by Charles Dawes

As far as we know, only one American vice president ever made a contribution to public life worth remembering. That was Charles Dawes, vice president under Calvin Coolidge.

Mr. Dawes was a Chicago banker who was also a songwriter. He wrote the tune for what became a popular song – “It’s All In the Game.”

Oh… And he also won the Nobel Prize for coming up with a plan – the Dawes Plan – for ending the reparations arguments following WWI. As with so many Nobel Prizes, the committee probably acted too hastily. The Dawes Plan never worked.

Dawes operated in a different world. The US dollar was still as good as gold. And any money that wasn’t backed by gold was suspect. Said Dawes after composing his song:

“I know that I will be the target of my punster friends. They will say that if all the notes in my bank are as bad as my musical ones, they are not worth the paper they were written on.”

Banks issued money back then – bank notes. Sometimes the banks were good for the money. Sometimes they weren’t. But at least customers knew where they stood. If a bank failed, they’d lose money.

Now it’s not so simple. Banks no longer issue their own notes. Now, we all use dollars. But what are the dollars worth? Are they going to be the cause of tears and suffering?

Yesterday, stocks rose 108 points on the Dow. Gold up $3.

“House prices expected to decline for a fifth successive year,” says The Financial Times.

Foreclosures are rising and will continue to rise until March of 2012, according to the projections in the FT, wiping out possibly trillions more in household wealth. Sales are at a 13-year low.

Houses are Americans’ most important asset. And the average house is down about 25% since 2006. But that’s in terms of dollars. In terms of gold, the loss is over 60%.

Hey, it’s a Great Correction. After such a big run-up in housing prices in the bubble years, what would you expect? Housing prices are bound to run down.

So much the better. Americans are having a hard time making ends meet; they’ll need cheaper housing. Their incomes are falling in real terms. Measured by the official core CPI, incomes are about flat for the last 10 years. Measured by raw cost of living numbers, household incomes are going down by about 3% to 5% per year.

But look what has happened in terms of real money. The average US household has lost about 70% of its purchasing power.


You’re probably thinking: “Who cares what happens in terms of gold? Gold is in a bull market…it’s fickle…it could go up…it could go down. So what?”

But some of the world’s most important commodities – including oil and food – are priced in real terms. Oil has soared in terms of dollars. But in terms of gold it has barely moved. Food prices go up and down. People may pay a lot more for their wheat and corn in dollars. But if you have gold, almost nothing is more expensive.

The point is, gold is real money. It is not a fiction. It is worth as much today as it was when Charles Dawes was humming tunes. And gold is telling us that the average US family is getting poorer.

Meanwhile, the feds keep pretending that the problem is not enough paper money. People don’t have enough money to spend? No problem. We’ll print up some more Ben Franklins and more Andrew Jacksons.

The average lumpenconsumer might not be able to tell the difference. But gold knows. And gold tells.

Bill Bonner
for The Daily Reckoning

The Daily Reckoning