In August 1971, on the eve of the dollar’s disconnection from gold, a U.S. minimum wage worker in the United States could buy two and a half McDonald’s Big Macs in exchange for his work hour, and by 2019 such an hour would barely be enough for two.
In 1971, three years of median wages in the United States were enough for a family to purchase the median residence. By 2019, such a family would need more than five and a half years to finance such a purchase. Slightly less than half of her monthly income, in 2019, a two.month salary would barely be enough to fund that year. Which was in 2020.
● 50 years have passed since Nixon’s decision to change the face of the economy forever
If the Midian family wanted to expand the family while in 1971 it had to devote for the birth and the hospital approx– 1.5 salaries, by 2019 at least 2.6 salaries will be required. Ford’s classic car would have cost the median family about 3.3 salaries in 1971, for the corresponding model in 2019 it would have already needed about six months’ salary. If the family also wanted to save for the future, then in 1971 its median monthly income would have bought it about 7.65 units of the S&P 500, compared to barely two units in 2019, not to mention about 1.5 units in August 2021.
Rarity has been replaced by the possibility of infinite production
The uniqueness of gold is in its rarity, only three Olympic swimming pools filled with metal have been mined since the days of the pharaohs to the present day, and with all the progress and technology barely 1.5% of the existing stock is added to the inventory each year. But from the fiat dollar (fiat money is money whose value exists under state law) it was possible to produce an infinite amount. All according to the will of the Federal Reserve which produces money from the air, as well as sets artificial interest rates that encourage banks and the public to produce more money in the form of debts.
In the money base as it is and its production sits what is known as the “Monetary Base” Monetary Base (M 0) This is by far the total initial money produced by the Federal Reserve. As long as the monetary base was coveted for gold both by virtue of the law (the law obliges to hold gold backing at a rate of 25%) and by virtue of the Treasury’s commitment to convert paper banknotes to gold (for everyone during the classic gold standard, and to central banks only). In quantity. With the disengagement from gold in 1971, the monetary base lost all real meaning and could be increased indefinitely. And so it was done.
On the eve of the Nixon Market, the monetary base stood at about $ 75 billion and by June 2021 it had grown 80 times to about $ 6 trillion. This, along with other printing operations, brought the Fed’s balance sheet (the total money the Fed printed) to a record $ 8.25 trillion, an increase of 100 times its volume in 1971. At the same time, interest rates fell. From a peak of 21% in 1981 to zero interest rates in 2009 and since. With the help of interest rate policy, the banks turned this money base, through credit and through the partial reserve banking mechanism, into more than $ 85 trillion in debt. This was an increase of more than $ 83 trillion in the supply of money to the American economy since 1971. About $ 56 trillion of these new dollars were added in this century alone, and over $ 30 trillion since the 2009 crisis.
The large amount of new dollars has reduced their value, and what one dollar bought in 1971 needed about $ 6.74 in the middle of 2021, so according to official indices, the truth figures are much larger. But a dramatic increase in the amount of money, a decline in its value and a rise in prices that its massive production has dragged have not been shared equally among all players and parts of the economy.
President Nixon announces repeal of gold standard as base for dollar / Photo: Associated Press, HWG
The deficit against China was impossible by the gold standard
Richard Nixon, the president who brought the Fiat dollar to the world was also the president who started relations with China. When China’s economy opened up to the United States, China’s depressed and cheap labor market also opened up, and some of the new dollar cascade began to flow east.
1975 was thus the last year that America had a positive trade balance, and from then on it deteriorated both in terms of dollars and as a percentage of GDP. Over $ 10 trillion worth today.
In an age of limited money, for example under the gold standard this was an impossible reality. Responsible for this is a mechanism known as “price.space.mechanism”. In a world of gold.backed money, countries with a continuing import surplus are losing their gold reserves while it is being paid to exporting countries. This loss leads to a reduction in the amount of money in importing countries and an increase in exports. These changes in the amount of money will affect the price systems of wages, products, and money (interest) for everyone.
The depletion of the amount of money in countries suffering from a persistent surplus of imports will push the local wage and price market downwards, and the interest paid to international lenders upwards. And vice versa in the exporting countries where wages will actually start to rise. As the cost of wages and products in the importing countries decreases and exports increase, the relative advantage of the exporting countries, which brought about the continued surplus of imports, will continue to erode until a new balance is achieved.
Production moved to China, the upper class was not harmed
Simply put, under a monetary system related to gold, or all to hard money, the United States could not maintain a high negative trade balance and lasted for 43 years, simply because its gold, which is the basis of silver, would run out. But the Fiat dollar is not limited to the amount of ink in Fed printers, and the amount of credit that banks are willing to provide. Since these were not in short supply, along with the flood of money production and imports, most of America’s industrial base began to move to China, where it could be produced at much cheaper prices. Thus, while in the late 1970s, about 23% of all those employed in the American economy worked in the manufacturing industries, their number dropped to about 8.4% today. The disappearance of America’s industrial base, most of which has occurred since 1995, has hit hard hard most in the industrialized countries, the “rust belt,” located far from the shores.
Continued competition from the Chinese labor market severely affected the wages of the classes and communities employed in jobs exported to China, but did not at all affect the classes whose jobs remained unrivaled. On the contrary. For these – doctors, lawyers, financiers, defense industries, and CEOs – the printing of money was actually reflected in dramatic wage inflation. 29%, compared to a real increase of 80% in the top 5% wage. This is according to an analysis by a non.partisan research institute for data from the Government Ministry of Statistics.
A jump in stock prices and also in real estate
While one part of the cascade of money flows to China, taking with it the industrial base of America, and crushing under it the working and middle.lower class, another portion of the cascade turned to New York and produced an unprecedented tide in asset prices in general and stock markets in particular. Thus, while in 1995 the median annual income could purchase about 64 units of the S&P 500, in 2019 the annual income of the median household was sufficient to purchase barely 22 such units.
The money cascade has raised not only stock prices, but also real estate prices and especially in urban centers have swelled similarly. While median income has barely doubled in nominal terms since 1995, the average home price in the Denver Colorado area has quadrupled, that in Los Angeles it has quadrupled 4.66 times The one in San Jose has risen 4.3 times and the one in San Francisco almost five times. In Miami and downtown Texas, prices have risen “only” 3.4 times, according to the Case Schiller index.
The rich got richer and richer
And so while the purchasing power and wealth of intoxicating life has eroded over the past few decades, families and generations, mostly Boomers, who have owned property, or been fortunate enough to have such property over the years, have become immeasurably richer.
The developments over the Fiat Dollar years can be clearly seen in Forbes magazine’s list of the 400 richest Americans. In 1990 he topped the list alone with $ 5.6 billion. A $ 2.6 billion fortune placed you seventh on the list. In 2020, the wealth of first place, Jeff Bezos with Amazon shares, increased more than 30 times to $ 179 billion. In seventh place was Alon Musk with $ 64 billion. The $ 2.6 billion total of seventh place in 1990 now barely bought the 327th place. And without $ 2 billion of wealth left at all off the prestigious list.
Today the 50 richest Americans together hold more wealth than the 160 million who are among the 50% lower in America, who hold an average wealth of $ 12,000 per person. But stock wealth, of which 88.2% is held by the top decile, did not go to just 400 rich Americans alone. There is no place where the growing gap between those living from wages and those whose wages come from stocks and capital markets is more noticeable than the ratio between the salaries of CEOs in the S&P 500 companies and their employees’ salaries. With the explosion in the stock market, the ratio increased and rose to $ 1 salary per average employee compared to $ 351 salary for the CEO of the same company, most of whose salary today is based on stock grants.
Decreased purchasing power of most Americans
The rise in local prices included not only property prices but also prices of products and services that could not be imported from China and these skyrocketed including housing, university and kindergarten fees, and of course the cost of medicine. All of these have become very expensive, sometimes twice as much (health care), and even four times as much (universities) as the median wage increase since the end of the last century lowering the purchasing power of most Americans.
Most of the population is caught between the continuing price increases, in 2021 their official rate is over 5% and an inflatable property bubble that concentrates wealth by fewer and fewer people – as of the first quarter of the year by the top percent 15 times wealth than by all the bottom 50% attached and the top decile holds Alone about 70% of all national wealth. This is how America celebrates the jubilee year of the Fiat money era. But the Fiat and debt regime not only changed the American economy from the edge, it also profoundly affected American government, politics and democracy, these changes we will discuss in the next and final article in the series.
The writer is a lawyer by education who deals with and is involved in technology. Manages an investment fund in cryptocurrencies, and lives in Silicon Valley. Author of the book “A Brief History of Money” and recorder of the KanAmerica.Com podcast