Finster Dollar Index
The following charts plot an index
of the value of the US dollar in terms of human time. The plots are logarithmic (the
natural log of the index for charting purposes), with the index itself referenced to the beginning of 2000.
This chart shows the past eight hundred weeks of the FDI.
This chart shows the past two hundred weeks of the FDI.
This chart shows the past one hundred years of the FDI.
FDI Data
Details
Conventional inflation indices
suffer from well-known defects which cause them to tend to
understate inflation. For example, the US CPI omits house
prices, using instead homeowner?s equivalent rent. This is a
severe drawback, because the same low interest rates which can
feed inflation also put downward pressure on real estate cap
rates, making rents low in comparison to actual prices. The
result is that even as the prices of these assets escalate
with inflation, the homeowner?s rent substitution cancels that
out of the CPI. In addition, the CPI also contains some
"quality adjustment hedonics", which are questionable in that
they reduce effective price increases for some goods, but do
not take into account quality decreases such as those
encountered with genetically engineered and irradiated
foodstuffs.
But the problem goes far deeper than that.
The CPI itself was not intended to be an overall measure of
inflation. Just as the name suggests, it is no more than an
index of consumer prices. And although the US dollar is
ubiquitous in global commerce, it only measures domestic
prices.
Consumer prices embed domestic wage rates as
well. Wages are notoriously sticky, in economist?s parlance,
especially in the downward direction. Much of wages are
determined by contracts negotiated and effective for years.
And although notable exceptions can be found, workers, being
habituated to inflation, are very reluctant to accept
decreases in nominal wages. So if the dollar rises in value,
the real value of wages increases. This leaves wages
artificially high, and as we know from Econ 101, when prices
are artificially high, surpluses develop. In the case of labor
surpluses, we merely call them "unemployment". So in fact
unemployment can be a temporary manifestation of deflation.
With so many prices being slow to adjust, what takes
up the slack when the rate of inflation or deflation changes?
Any prices that are determined on a real-time basis. These
include asset prices such as stocks and bonds, home prices,
commodity prices, and currency exchange rates. Corporate
profits also increase or decrease in reaction to shorter term
changes in the money supply.
Market based currency
exchange rates are very important. For while US domestic wages
very reluctantly adjust to changes in the money supply, the
dollar equivalent of foreign wages changes in real time. If
for example the dollar increases by 5% versus the euro over a
short span of time, it also increases by 5% against European
labor. European dollar wages thus can fall precipitously while
no such deflationary change is captured in conventional US
inflation gauges.
Yet the conventional dollar index,
which does measure these effects, is also incapable of giving
a true measure of inflation or deflation. It merely measures
the value of the dollar against other currencies, which
themselves may be losing or gaining in real value. This is
especially the case over longer periods of time, as virtually
all national currencies tend to lose value to inflation. And
in the case of competitive devaluation, this effect can be
significant even over relatively short time frames.
The FDI therefore is designed to be a broad measure of
the value of the US dollar somewhat analogous to a reciprocal
of the CPI in that it tends to capture long term changes in
the value of the dollar against real things, but takes into
account the full scope of global commerce. It is analogous to
the US Dollar index in that it provides a series explicit in
the value of the dollar, but measures it in terms of human time, rather than currencies which
themselves fluctuate and decline in value.
In
calculation of the series, the value of the dollar during a
period centered on the beginning of the year 2000 is taken as
one. For charting purposes, a log transformation is done in
order to proportionately show proportional changes in the
value of the dollar.
FFF Home