The Decline of the US Dollar: Causes and Implications

Over the past decade, the United States dollar has seen a significant decline, losing about 32% of its value. This phenomenon, often referred to as Bidenflation, is partly due to an increase in the number of dollars in circulation, a practice known as money-printing.

Causes of the Dollar's Value Decline

Money-Printing: The increase in the monetary supply, or money-printing, is the primary driver behind the decline in the US dollar's value. Central banks, such as the Federal Reserve (Fed), have been responsible for the unprecedented levels of money printing. This practice does not create new wealth but rather dilutes the purchasing power of each dollar, much like reducing the buying power of coupons given out in bulk.

Historically, the trend has been downward for the value of money, driven largely by the proliferation of fiat currency. Unlike precious metals or other tangible assets, fiat money has no intrinsic value and is based solely on the trust and belief that this currency will maintain its value. In this context, the Fed's balance sheet has more than doubled, leading to trillions of dollars being printed and circulating in the economy.

Why is Inflation Occurring?

The term inflation carries a lot of connotations, but it essentially describes the increase in the general price level of goods and services in an economy over time. In the US, the average inflation rate over the last decade was approximately 2.85%, leading to a compounded decrease of about 32% over 10 years. This can be calculated using the formula: (1 0.0285) ^ 10 - 1 -0.323.

It is important to note that, while the dollar's value has declined, wages have risen for most people, and investments have appreciated between 56% and 156%. Home prices, in particular, have increased significantly, affecting the value of residential assets.

Impact on People's Finances

The decrease in the value of the dollar has had both positive and negative effects on individuals. For many, there has been a substantial tax reduction, equivalent to 10-15% of their income, six years ago. As a result, the purchasing power of their net expenses, which only increased by 21% over the decade, remained relatively stable. This means that on average, a 2% annual wage increase was sufficient to maintain a similar standard of living.

However, while this can be seen as a positive in most cases, it does not apply universally. Those without substantial savings, those without mortgage payments, and those in industries where wages have not seen significant improvements are potentially more vulnerable. Additionally, extraordinary costs in areas such as healthcare, college tuition, childcare, and essential utilities can disproportionately affect certain individuals.

The Role of Central Banks and Reserves

Central banks, such as the Fed, are increasingly diversifying their reserves to include bullion. This move is not arbitrary but is driven by the need to maintain the value of fiat currency. Central banks are aware that the massive increase in the money supply has diluted the value of money. By holding tangible assets like gold, they aim to provide a buffer against further devaluation of fiat currencies.

Conclusion

The decline in the US dollar's value, while significant, is a complex issue with both positive and negative implications. Understanding the mechanisms behind this decline, such as money-printing and inflation, is crucial for individuals and policymakers alike. While the overall impact is not uniformly negative, it serves as a reminder of the importance of fiscal and monetary stability in maintaining the purchasing power and overall value of a currency.