Monday, December 23, 2013

The Value Of a Dollar

Among the powers of Congress listed in the Constitution are the powers "[t]o coin Money, regulate the Value thereof, and of foreign Coin ...."

But regulating the value of money, it seems to me, cannot really include setting the value of money, that is, determining what the actual value of money is. Because in order to do that, you have to set the price of, well, everything, including labor, and that is not just a slippery slope, but a greased pig that's bound to get away from you in due time.

So what sets the value of money? We do, every one of us, by being willing or unwilling to exchange a certain amount of it for a certain amount of merchandise. If we are willing to pay $200 for a TV set, than a dollar is worth 1/200th of a TV set. If we are willing to work for an hour to earn $7.25, then a dollar, to us, is worth 1/7.25 hours, a bit over eight minutes.

And put another way, if you earn $7.25 an hour it takes you about 27.5 hours to earn the TV set (ignoring inconvenient truths like taxes).

Of course, it goes both ways. Someone has to be willing to part with a TV for $200, and someone has to be willing to pay you $7.25 an hour (and what with minimum wage laws, that's pretty much an all-or-nothing proposition at that rate). And billions of individual transactions over time determine the value of a dollar, or a pound, or a euro.

Now, there are things that governments can do to interrupt this process. One of them is to issue more money into the system. With more money in the system, eventually the money becomes worth less, and that creates inflation. But if everything were to equal out in the marketplace, all of that extra money would create both higher prices and higher wages, and eventually we'd still be working, say, 27.5 hours for that TV set (doing the same low-paying job).

But it doesn't seem to work that way.

For one thing, anyone who is holding money in savings or cash is going to lose out, so inflation punishes thrift. For another thing, that extra money that gets dumped into the system doesn't get distributed evenly—it tends to collect in the coffers of the banker class—and so anyone who is not on the receiving end of this new cash flow loses out, meaning around 99% of us (actually close to 99.9% of us, although the top 10% of earners feel the pain far less than the other 90%).

So, while the value of a dollar is still a dynamic thing, set by the laws of supply and demand, the demand pressure in the current system is skewed by people who get most of the money and, therefore, are willing to pay more for goods (but, these days it seems, not labor) than the rest of us. This puts upward pressure on prices.

But it's not just the things that the rich buy for consumption that get inflated. It's also the things they buy as investments. Like oil, food, and housing.

Leaving the rest of us, often, priced out of the market. But that's a subject for another day.