The value of a fiat currency is the total value of the assets that all the fiat currency can currently buy divided by the number of dollars.  The new value of fiat currency after Quantitative Easing (QE) is the total value of what all the fiat currency could buy before QE divided by the newly expanded number of dollars.  The original value of the U.S. dollar was the worth  the amount of gold in reserves before 1960 divided by the number of dollars in existence.  Even though gold was decoupled from the dollar, it remains the total assets.  The total assets is the nominator.  The number of dollars (denominator) continues to increase as the Federal Reserve continues to create more dollars.  As the denominator continues to rise, and the nominator stays the same, the value of the dollar drops.  The equation is total assets divided by an ever growing number of dollars. 

Let’s compare this to stocks; if you owned one stock out of 100 stocks of a company and the company kept adding extra stocks, your percentage ownership of the company continues to go down. 
Since 1960 the dollar has lost over 85% of its value.  Therefore the money supply has grown roughly eight times of the 1960 amount.  The total asset base stay the same.  It now takes 8 dollars to buy the same asset that one dollar bought in 1960.  The value of the asset did not change, the value of the dollar did.  This is like you owning 1 out of 100 shares of stock of a company and over 54 years, the company continues to add more stock every year until the company has 800 stocks.  You now own 0.125% of the stocks instead of the 1% you used to own. 

 


Comments

11/11/2014 6:54am

I am always in search of such posts which provides useful information regarding financial planning. This blog post is one of them. Thanks.

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    Bill Haley

    Bill Haley started Haley2024 in the spring of 2013 in an effort to do his part in restoring freedom to America

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