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Measure of Worth

How do you measure how valuable something is, and what it is worth? Traditionally we have used money. In the United States between 1880 and 1914, a pound sterling [ 1] was valued as $4.87 and the the U.K. official gold price was 4.24 per ounce. This put the U.S. price of an ounce of gold at $20.67. Since gold had intrinsic value, this kept the value of the dollar reasonably stable until Congress redefined the dollar as having the same value as 1/35 of an ounce of gold. When the market readjusted to the new reference, another period of reasonable stability followed and the dollar was accepted worldwide as a unit of value. Then in the middleof the 20th century, Congress went off the gold standard by letting the value of a dollar 'float'. Since then, the value of the dollar has declined as more and more dollars have been printed. As the value of the dollar dropped, the price of everything went up, not that their value changed, but that the value of the dollar decreased.

Congress can manufacture dollars, but they cannot manufacture time. In respose, Congress has increased the U. S. Minimum Wage so that the least paid worker would receive adaquate compensation for his or her work. The following graph shows the declining worth of the dollar. This graph shows that $100 would buy fewer and fewer hours of minimum wage work as its value declined, and thus buy fewer loaves of bread, fewer gallons of unleaded gasoline and fewer kilowatt-hours of electrical energy. In general, the dollar would also buy fewer ounces of gold, but perceived demand for gold varied greatly and this greatly incluenced its perceived worth.

In looking for a more stable reference, I would like to define the worth of one minimum wage hour of work as 1 MinWageHr. Whether Congress increases the minimum wage to maintain the worth of one minimum wage hour of work because of Congress printing too many dollars, or Congress increasing the minimum wage actually causeing inflation is a subject for discussion similiar to which came first, the chicken or the egg.

Nevertheless, the cost of most goods and services is determined by the labor needed to create it. Much of the cost of union labor is indexed to the minimum wage. Therefore an increase in the minimum wage causes a proportional increase in cost of producing those union goods and services and this contributes to the devaluation of the dollar. For example: for the last 50 years it would take about 10 minimum wage minutes to buy a loaf of bread, about 20 minutes to buy a gallon of gasoline, about 40 minutes to buy a pound of butter, about 7 hours to buy 100 postage stamps, about 10 hours to buy 500 kWhr of electrical energy. Once the worth of a dollar was decoupled from the worth of an ounce of gold, it would take roughly 100 minimum wage hours to buy an ounce of gold. Note that the consumer price index has been worth abouit 35 minimum wage hours. As a wage earner, the hours needed to earn a buck has decreased. But the number of minimum wage hours of work you can buy for $10 has decreased significantly.

This graph could just as well been plotted in terms of 1960 dollars, or in 2000 dollars or even 2010 dollars. In terms of MinWageHr, it is the dollar that decreases in worth with time. This means that those people, states or federal governments heavily in debt are having the worth of that debt decreased. This also means that those people or states that have savings are having the worth of their savings decreased as well. If you are in debt, you lose net worth to interest. If you had put cash into an investment that increased in worth, you lose some of that worth to the IRS. The cost of insurance to reduce risk is anouther drain of net worth. Unfortunately, for some, inappropriate investment causes a significant loss.

The trick is to invest in something that will gain worth faster then the loss to interest, inflation and taxes. In the chart above, compare the worth in MWH of savings dollars growing at 5% per year, with the amount of dollars in the acount as shown in the chart at the end of this page. Also note in the chart above that now, in January 2011, bacon, butter and silver are increasing in worth faster then gold and even oil. But with the forced scarsity of oil, I expect that to change.

Those that control a currency have the ability to manipulate that currency to benefit themselves. Since the early 1920s, the United States government has been in debt. It is no wonder then that they have wanted to make the value of that debt worth less year by year. By decreasing the value of the dollar, they make the debts of the government ever so slowly erode away, until the value of what they owe has little to or no relationship to the goods or services they received at the time they issued their debt.

This system has worked so well for them that they have had no reason to change it. Eroding 3% of the nations wealth is a relatively convenient way to pay for things, especially if the general population doesnt notice it happening. The average person, going to buy a loaf of bread, may vaguely remember it being a few cents less last year, but for the most part they arent likely to make a huge fuss over it.

But to be clear, the government is taxing you. Intentional inflation is as much a tax as any other. The government controls the amount of additional currency released into the economy. They also control where it gets spent, and for what. How different is that from sending every american a bill yearly for 3% of their net worth? Net worth is the measure of our wealth.

The worst thing about this tax is that it is levied upon the most responsible among us. The poor (who are mostly in debt themselves) see a part of the value of that debt decrease every year. The wealthy (who become so generally by using debt to finance growth) likewise see a part of their debt decrease in proportion to their overall position in assets. It is unfortunate that the middle class (who mostly are encouraged to save cash and cash equivalents) bear the majority of the cost of this nations fiscal policy.

Much like gravity keeps mankind from reaching the heavens, inflation constantly keeps the financial hopes and dreams of average citizens from reaching any kind of wealth potential. The goal of any wise investor is to keep his wealth in things that retain their value. Obviously, some cash, both in hand and in the bank, is needed to sustain at least 3 months of daily demands. But since cash does not hold its value, it is wise to avoid large cash holdings for alternative investments that retain their value. Ideally, such an investment will be safe and have a return that is larger then what is lost to inflation and taxes. By minimizing your losses your assets will grow.


--- Russ & Samuel Lemon


Federal Minimum Wage Rates from:
infoplease.com,
Price of Gold came from:
gold-price-history,
Price of electric power, gasoline, bread & Consumer Price Index came from:
U.S. Bureau of Labor Statistics.
United States Energy Information Administration.




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Plot of cost in Dollars versus time for various items. Note the cost is plotted on a semi-log scale so that slope is proportional to inflation.


Things to watch for in 2011:

1. A significant inflation due to the government printing money and spending it without something physical to show for it. i.e. the amount of printed money is rapidly increasing, but this money IS NOT SPENT OF PRODUCING GOODS of value. To much money chasing to few goods.

2. It seems the current administration is determined to distribute the wealth of the United States to all other countries. With less wealth, we are all poorer.

The only way to stimulate a family is to have that family create wealth they can sell. The only way to stimulate a State is to pay private enterprise in that state to create wealth that can be sold in other states or in other countries. The only way to stimulate a Nation is to pay private enterprise in that country to create wealth that can be sold in other countries. In each case, the WEALTH CREATED MUST BE GREATER THEN THE STIMULAS RECEIVED. Investing 'stimulas' in studies of little value, investing 'stimulas' outside the United States, can only drive a country into poverty. The object of 'stimulas' must be to bring wealth into a family, state or country.