Posted by: Calmseas (Mike) | March 27, 2008

The Rising Value Of The Dollar

Dollar BillIn a time of soaring fuel costs, runaway inflation, financial sector meltdown, and looming recession, the dollar continues to dazzle as it enjoys its ever increasing value. Wait a minute. Did you hear that right? The dollar is increasing in value?

Well, yes. It is. Stop and think about it: The more things cost, the more value the individual dollars used to pay for your things become, simply because it takes more and more of them to buy the same things, so you have less and less of them left, as they say, “at the end of the day.” Literally at the end of each and every day.

I was once of a mind that in buying a new house, for example, one might be fine in stretching oneself a bit thin at the outset, since one’s income would eventually increase to the point that a modestly scary monthly payment would become easier and easier to bear over time. I have recently rethought that position.

Let’s say, continuing with the mortgage scenario, your income in 2000 was $4,000.00 per month and your mortgage was $1,000.00. You were then spending 25% of your income on your monthly mortgage payment—well within the bounds where most banks and finance companies would be comfortable lending you the money.

Now let’s skip ahead to 2008. The “real” rate of inflation is somewhere between and 8% and 15% despite the government’s attempt to convince us that their contrived “core” rate of inflation is only 3% or less (gasoline, for example, is up a compounded rate of 10% per year over 8 years, from about $1.55 per gallon in 2000 to $3.30 today). This is where things start to get tricky, so stay with me.

Your employer has given you annual “inflation indexed” increases of 3% meaning that your $4,000.00 salary is now about $5,100.00. Meanwhile, it really takes nearly $7,600.00 in 2008 (assuming a “real” inflation rate of 8%) to buy the same goods and services that could be had for $4,000.00 in 2000. So you have fallen behind by $2,500.00 in eight years (thank you China).

Your $1,000.00 mortgage hasn’t changed in eight years, but is now worth only $530.00 compared to year-2000 dollars. So you are, in a sense, saving $470.00. But you have fallen behind by $2,500.00 in your salary, so even if you mitigate your $2,500.00 loss by $470.00, you have still fallen behind by $2,030.00!

So tell me, does your $1,000.00 mortgage “feel like” $530.00? Or does it feel more like $2,500.00? In fact, if probably feels like about $1,900.00 when you factor in the 8% compounded “real” rate of inflation on everything that you purchase (on average) and take into consideration your annual compounded salary increases of 3%. That being the case (and even though showing it mathematically is a bit of a stretch), it also “feels like” you are paying out 37% of your income now on your monthly mortgage commitment (compared with 25% in 2000). This is now a mortgage-debt-to-income ratio that would cause many lenders to hit the brakes, and should be even more scary for the borrower who must foot the monthly bill. Is it any wonder that homeowners today are really feeling the pinch and lenders are going under like a flotilla of concrete luxury yachts in 40-foot seas?

Suddenly, we find that we are more reluctant to reach into our back pockets for 4 bucks for a Starbucks coffee, or 6 or 7 dollars for a quick drive-through lunch. Instead, we will throw those few dollars in with a 50-dollar bill and maybe get a tank of gas for the old jalopy. All of those individual dollars, we find, are now much more valuable to us than they were just a few short years ago.


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