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The Targeted Lifetime of the US Dollar is 35 Years - Nico Simons (24/3/2017)

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March 24, 2017

Why does the Fed aim for 2 percent inflation over time?

The Federal Reserve System (Fed) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures (PCE) is most consistent over the longest run with the Fed’s mandate for price stability and maximum employment.

But what does this targeted 2 percent inflation mean for the lifetime of the US dollar?

Statistically, the targeted 2 percent inflation works out as follows:

So the consequence of the targeted 2 percent inflation is that the lifetime of the US dollar ends after 35 year, if the target is realized. Then there is no purchasing power left.

How about the other dominant central banks?

For the European Central Bank (ECB) the price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2 percent.

The Bank of Japan (BoJ) set the price stability target at 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) in January 2013.

For the Bank of England (BoE) the price stability is defined by the inflation target of 2 percent, also based on the CPI.

And:

People’s Bank of China around 3 %

Bank of Russia 4 %

Swiss National Bank < 2 %

Central Bank of Republic of Turkey 5 % +/- 2 %

So the consequence of the targeted inflation is that the lifetime of the most dominant world currencies ends after 35 years, if the target is realized.

Then there is no purchasing power left.



Nico Simons is a Dutch investigative journalist on financial issues, especially monetary issues. His articles are regularly published on MoneyInsights.org.


The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

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Comments

Jamie
March 24, 2017 at 1:52 PM
Is this even right? If the cumulative inflation is 100%, that doubles the price of the goods, and purchasing power is HALVED. It doesn't go to zero. If it did, we'd have hit zero purchasing power a long time ago. Over the life of the dollar so far, we've far more than 35 years of inflation to date, and we've lost a ton of purchasing power. 50 cent movies anyone? Now they're $15. Which is much more than 100% inflation, and yet the dollar still has plenty of purchasing power.
Robert Happek
March 25, 2017 at 1:17 PM
Jamie, you are absolutely correct. The author of this article should go back to high school and learn elementary arithmetic of which he is clearly not proficient. It is a sad fact that so many uneducated people feel entitled to comment on financial and economic issues which they clearly do not understand.
Mario Morin
March 25, 2017 at 2:07 PM
Good point. Any would like to comment on response?
Mikiel de Bary
March 25, 2017 at 3:42 PM
The math is completely wrong as you say. Also, this type of intentional depreciation of currency can go on more or less indefinitely with repeated currency "reforms," like the 1960 introduction of the "new Franc" (1 NF exchanged for 100 old Francs). This article is disgrace--but much more so is the policy of deliberate devaluation of the monetary unit that it is trying to criticize.
KJ
March 25, 2017 at 9:14 PM
I'm not an expert/economist, but I always thought that inflation % is [old price]/[new price]. So if [$1]/[$2]=50% inflation, but a 200% increase in prices.
ZH'er
March 26, 2017 at 10:20 PM
you're correct, and Nico made a math error in the last column. 2% to the 35th power results in 2x the original currency supply, resulting in a 50% depreciation in the purchasing power of the currency. The undisclosed sin, of course, is that we're much higher than 2% -- John Williams offers a better read on such matters.