Sunday, May 8, 2011

The 1934 Interest Bearing Dollar

Adjusted for inflation and interest earned on 3-month treasury bills through the secondary market (oldest data I could find), the 1934 dollar is currently worth $1.02.

It is claimed that the dollar has lost roughly 95% of its value over the period and that this will continue into the future. I agree. I don't find that claim very useful though. I would not have been able to use that information to make investment decisions in the past nor could I necessarily use it in the future.

A much better argument, at least to me, is that the interest bearing dollar could do what it did following the Great Depression, throughout World War II, and during the 1970s (or at the very least not do what it did from 1980 to 2000). I am very sympathetic to this argument. One can still protect against this outcome though by simply buying long-term inflation protected treasuries and holding them until maturity.

Taxes are not taken into consideration on this chart. They will certainly lower our returns. This is true with nearly all inflation hedges. Taxes on the inflationary gains rise as the inflationary gains rise. Worse, hefty inflationary gains can push us into higher tax brackets. Death and taxes are the only sure things. Sigh.

Gold and silver are suggesting that the interest bearing dollar will do very poorly into the future. Even if true, that does not mean that gold and silver aren't already priced to perfection. Further, they could be wrong. Note how stable the interest bearing dollar has been over the past decade. That's not exactly the story I have been hearing from the gold and silver community.

I suspect that the interest bearing dollar will fall some (perhaps a great deal) in the coming years thanks to our ultra-low interest rate policies and massive trade deficit, but I cannot prove it. If we slide into another deflationary mess then even a 0.0% interest bearing dollar would look pretty good.

Just something to think about.

Source Data:
FRB: Selected Interest Rates
St. Louis Fed: CPI-U


Mr Slippery said...


My opinion is that the only way to get deflation in our current system is if Congress or the Fed chooses it. Congress really wants the taxes generated on inflation appreciated assets. Since inflation benefits both and deflation does not, I expect an inflationary outcome of some stripe.

getyourselfconnected said...

Everyone I know has T-bills to hedge their dollar exposure.....LOL. I work with all scientists and 90% of them had no idea the dollar fluctuates in value (relative). Too funny.

Stagflationary Mark said...

Mr Slippery,

At the very least, I would expect more inflation than Japan managed to achieve long-term. I think our trade deficit will do at least that much for us. Sigh.

Japan: Consumer Price: Index

The general inflation rate in Japan has averaged about -0.3% per year since 1998.

Put another way, I don't think the deflation protection of my 30-year TIPS bonds will ever be activated.

Stagflationary Mark said...


Everyone talks about the 1970s being an awful environment for treasuries. World War II was much worse (as seen in the chart).

Just look at that World War II 20% inflation spike. Now picture World War II 3-month treasury bill (secondary market) rates below 2%. Ouch.

If it can happen in World War II and it can happen 30 years later in the 1970s, then I would argue that it can happen again. I'm not predicting it, but it is a risk I would definitely prefer not to take. That's why I like long-term TIPS. I fear negative real interest rates.

There's a reason the government reduced the amount of I-Bonds we can buy in a given year. They don't like that 0.0% real interest rate floor. They'd be setting them at a negative interest rate right now if they could.

Stagflationary Mark said...


As a side note, I'm guessing that 90% of the scientists you work with enjoyed the interest rates of the 1980s and 1990s.

My next post will be a inspired demotivational poster in their honor. I feel some creative juices flowing. :)

getyourselfconnected said...

Rock on Mark, will check it out!

Funny but the end of QE 2 has rates moving lower and a higher demand for short term paper. I am no suggesting that QE has been the fuel for hot money trades, no way!