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Question for Fin/Econ Folks

- - - - - Warren Buffett Dollar Value

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14 replies to this topic

#1
VolterWight

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Question for you econ and finance savvy folks

 

I was reading an article (link below) by Warren Buffett about why stocks as an asset class vastly outperform other asset classes, and I came across this quote:

 

"the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time."

 

 

I'm aware that the Dollar losing its gold backing in the 1970s  plays a role in this, but what other factors are there that led to this? And what does this mean for the future for the Dollar as a reserve currency? Should people still be saving money?! 

 

I'd love to hear more about this.

 

http://finance.fortu...eholder-letter/



#2
Sarmad

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Well, in fairness, this is oversimplified and isn't a dollar problem--every currency is bound to be devalued from an inflationary standpoint. Of course you should save money! But don't 'save' it by stuffing it under your mattress, save it by investing it--just like Buffett says. Just as you should have a diversified and balanced equity portfolio, you should also aim for currency exposure. A good and simple way for that is to stash some money into international equity funds. Vanguard's funds are the way to go.



#3
VolterWight

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Well, in fairness, this is oversimplified and isn't a dollar problem--every currency is bound to be devalued from an inflationary standpoint. Of course you should save money! But don't 'save' it by stuffing it under your mattress, save it by investing it--just like Buffett says. Just as you should have a diversified and balanced equity portfolio, you should also aim for currency exposure. A good and simple way for that is to stash some money into international equity funds. Vanguard's funds are the way to go.

 

Yes but 86% of its value lost in 50 years?! What gives?! How does this compare with other world currencies in the same time frame? This is a HUUUUGE problem given that wages have remained stagnant in the last 30 years. Its especially an issue in the post recession era (are we still in it?) where income equality is at an all time high 

 

What are vanguard funds exactly? 



#4
Sarmad

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Yes but 86% of its value lost in 50 years?! What gives?! How does this compare with other world currencies in the same time frame? This is a HUUUUGE problem given that wages have remained stagnant in the last 30 years. Its especially an issue in the post recession era (are we still in it?) where income equality is at an all time high 

 

What are vanguard funds exactly? 

 

Currency doesn't have any intrinsic 'value' in the way that goods or commodities do. It's just an artificial benchmark that makes it convenient to have a standard way of expressing value. So, to say that the dollar 'lost' 86% of its value doesn't mean there is anything wrong with the dollar--it just means that inflation (which is perfectly natural) has played its course in the last 50 years or so.

 

Incomes have definitely not been stagnant throughout the years. The government keeps track of the Annual Wage Index. In 1965, the average annual wage was $4658.72. In 1984 (30 years ago), it was $16135.07. By 2012, that had grown to $44321.67. 

 

So yes, it takes $7 to buy what $1 could in 1965. But now you have $9 for every $1 you had back then. 

 

Vanguard is an investment firm that offers mutual funds, just like many others do (Fidelity, T Rowe Price, etc). Mutual funds are good because the fund managers do the daily grind of researching different investments and figuring out which ones to go for. These firms make money by charging commission to pay for the management of the funds. Vanguard stands out because of their good track record and ridiculously low commissions (usually less than 0.25% of your returns).



#5
VolterWight

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Currency doesn't have any intrinsic 'value' in the way that goods or commodities do. It's just an artificial benchmark that makes it convenient to have a standard way of expressing value. So, to say that the dollar 'lost' 86% of its value doesn't mean there is anything wrong with the dollar--it just means that inflation (which is perfectly natural) has played its course in the last 50 years or so.

 

Incomes have definitely not been stagnant throughout the years. The government keeps track of the Annual Wage Index. In 1965, the average annual wage was $4658.72. In 1984 (30 years ago), it was $16135.07. By 2012, that had grown to $44321.67. 

 

So yes, it takes $7 to buy what $1 could in 1965. But now you have $9 for every $1 you had back then. 

 

Well, thats the case for currency now, arguably it had intrinsic value when it was backed by a commodity (like gold, silver) no?  As for incomes, I believe the numbers you've posted are representative of the overall average, is that correct? A very large piece (infact most) of the economic pie has gone to the 1 percent (the .1% rather) over the last 30 years, so I wonder if the average is skewed here. 

 

Take a look at this graph NY times economix blog. Shows that women's earnings are up obviously due to greater labor equality. But if you look at the men's earnings, they went down.  men today are earning less, while women are making more but they started from a lower point, so with all this considered, wages have either decreased or remained stagnant. I could be reading this all wrong though.

 

22economix-gender-earnings-blog480.jpg



#6
VolterWight

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Also Sarmad, I think one really has to take into account that it takes two incomes to live the same lifestyle it took for one income 30+ years ago, thats something to be considered.



#7
Sarmad

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ah, your graph is inflation-adjusted incomes though. Depends how you look at it :) You can either interpret it as remaining stagnant if you expected incomes to rise more than inflation (good luck with that), or see it as meaning that incomes have steadily increased to keep up with inflation over the decades (with a recent dip, but overall quite stable). So, let's say you expected incomes to be raised higher than inflation. Why? If incomes keep up with inflation, that means that overall, purchasing power has been kept at par over the years.

 

I'm not sure I agree that you now need 2 incomes for the same lifestyle. It's just that people's idea of an average lifestyle has changed dramatically due to increased consumerism and availability of credit. This has given people the illusion that they can live beyond their means, in a way that families in the 1970s and 1980s did not. Very simplistic examples--kids were content with walkie talkies, super soaker waterguns, and simple video games. Only the rich kids would expect something like a Super NES console at home. There's a reason why the sub-$200 Commodore 64, which reigned supreme in the 80s and 90s, was (and still is) the highest-selling computer of all time. Consumers had realistic expectations back then. Now you see kids wanting latest-generation gaming consoles, smartphones, etc.. it may seem 'normal' to us but it really isn't.



#8
VolterWight

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ah, your graph is inflation-adjusted incomes though. Depends how you look at it :) You can either interpret it as remaining stagnant if you expected incomes to rise more than inflation (good luck with that), or see it as meaning that incomes have steadily increased to keep up with inflation over the decades (with a recent dip, but overall quite stable). So, let's say you expected incomes to be raised higher than inflation. Why? If incomes keep up with inflation, that means that overall, purchasing power has been kept at par over the years.

 

I'm not sure I agree that you now need 2 incomes for the same lifestyle. It's just that people's idea of an average lifestyle has changed dramatically due to increased consumerism and availability of credit. This has given people the illusion that they can live beyond their means, in a way that families in the 1970s and 1980s did not. Very simplistic examples--kids were content with walkie talkies, super soaker waterguns, and simple video games. Only the rich kids would expect something like a Super NES console at home. There's a reason why the sub-$200 Commodore 64, which reigned supreme in the 80s and 90s, was (and still is) the highest-selling computer of all time. Consumers had realistic expectations back then. Now you see kids wanting latest-generation gaming consoles, smartphones, etc.. it may seem 'normal' to us but it really isn't.

 

The cost of consumer electronics & clothing today is very cheap relative to the 1970s and 1980s (story here) but back then, the cost of education, healthcare, housing etc. was a lot lower. Those things are super expensive now, so would you still say that we have the same purchasing power despite the cost of everything increasing?



#9
Sarmad

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The cost of consumer electronics & clothing today is very cheap relative to the 1970s and 1980s (story here) but back then, the cost of education, healthcare, housing etc. was a lot lower. Those things are super expensive now, so would you still say that we have the same purchasing power despite the cost of everything increasing?

 

In a very general sense, yes--because incomes have also increased substantially in stride with those higher costs (refer to post #4). Caveat: we're talking national average here. California doesn't fit the average and housing costs in particular have skyrocketed much faster than incomes have grown.



#10
Das Reich

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Oooh look at all the economists.  hopefully you still have jobs in this economy.. :P

 

 

Quick question:  if you tag dollar to gold and there is a finite amount of gold, even if we somehow find hitler's and zardari's secret stash, doesn't that mean that the price of gold would have to go up to account for our $15 trillion and growing GDP?  It is still arbitrary and libertarians have failed to explain it to me how that would really fix things if you don't raise taxes and fix deficits.  For one, close the divident tax hole where, unlike pre-St. Reagan era, the dividends were classified as regular income after 1 year.  Mitt Romney won't be paying 15% year after year on them.



#11
Sarmad

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St. Reagan hahaha  :rofl:

 

and yep you're right--but remember it's all just a farcical fantasy world anyway when it comes to the economy.



#12
VolterWight

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The US middle class is poorer today than it was in 1989

Washington Post

 

Foreclosure.jpg.jpg

 

http://www.washingto...it-was-in-1989/

 

The economy has gotten bigger, but much of that growth hasn't reached the middle class. Indeed, the top 1 percent grabbed 95 percent of all the gains during the recovery's first three years. And that's not even the most depressing part. Even adjusted for household size, real median incomes haven't increased at all since 1999. That's right: the middle class hasn't gotten a raise in 15 years.

 

But one of the biggest, and least appreciated reasons Democrats might be struggling, is that the middle class is poorer, too. Median net worth is actually lower, adjusted for inflation, than it was in 1989. Even worse, it's kept falling during the recovery. Yes, even after the economy started to grow again, and the stock market started to boom, and housing prices began to bounce back, the median net worth of the average American household continued to decline.

 

It's no surprise, then, that people are still so gloomy about the economy. The recovery just hasn't been much of one, if at all, for most of them. Middle class wages are flat, and their wealth is still falling. At least during the bubble years, rising home prices gave people access to credit that helped mask their stagnant wages. But no more. Home equity lines of credit are down almost 25 percent from their peak, and are still declining. The middle class, in other words, can't borrow from the future to pretend that the economy is working for them today.

 

 

 

Sarmad, your thoughts?



#13
maverick86

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Oooh look at all the economists.  hopefully you still have jobs in this economy.. :P

 

 

Quick question:  if you tag dollar to gold and there is a finite amount of gold, even if we somehow find hitler's and zardari's secret stash, doesn't that mean that the price of gold would have to go up to account for our $15 trillion and growing GDP?  It is still arbitrary and libertarians have failed to explain it to me how that would really fix things if you don't raise taxes and fix deficits.  For one, close the divident tax hole where, unlike pre-St. Reagan era, the dividends were classified as regular income after 1 year.  Mitt Romney won't be paying 15% year after year on them.

they didn't really listen to us 'economists'.....they listened o political rhetoric. debt and solvency are determined not just by how much you owe but your capacity to remain a  going concern and the ability to pay back. 



#14
ayesh

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it's no surprise, then, that people are still so gloomy about the economy. The recovery just hasn't been much of one, if at all, for most of them. Middle class wages are flat, and their wealth is still falling. At least during the bubble years, rising home prices gave people access to credit that helped mask their stagnant wages. But no more. Home equity lines of credit are from their peak, and are still declining.

http://dramaonline.pk/latest/comedy/



#15
fahadzafar

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thanks for the information

http://www.siyasat.pk/






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