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View Full Version : Real currency vs Fiat curreancy Exercise



Alma the Younger
09-22-2008, 05:42 PM
Here?s an interesting exercise that will illustrate the value of real money versus that of fiat money that is subject to inflation.

Let?s use variables that we are all familiar with; the price of a gallon of self-serve unleaded gasoline. We?ll compare how much a $1.00 FRN will buy against silver.

In our first example we?ll use a simple comparison. Today (09/22/08) I filled up in Queen Creek, AZ and paid $3.389 a gallon. Today silver closed at $13.50 an ounce. A silver American Eagle coin contains one ounce of silver and has a minted value of $1.00USD. So we can see that a silver American Eagle nearly four times more valuable than a $1.00FRN.

Let?s look at how silver holds value over time in comparison to a fiat currency.

Using the chart found here: http://www.eia.doe.gov/emeu/aer/txt/ptb0524.html (http://www.eia.doe.gov/emeu/aer/txt/ptb0524.html) we find that the first year that regular unleaded fuel prices were kept was in 1976. That year a gallon of gasoline was $1.53.

The last year that coins were minted with 90% silver was 1964. Using this chart: http://www.coinflation.com/silver_coin_values.html (http://www.coinflation.com/silver_coin_values.html) we can calculate the silver value of a coin based on today?s spot price. In this case we?ll use a Kennedy half dollar. The silver value of that coin would be $4.8539. Since this coin has a minted value of $.50 we?ll double that value to get approximately $9.70.

So, two (2) 1964 Kennedy half dollar coins would have enough real value to purchase 2.86 gallons of gasoline, whereas, a $1.00 FRN will only purchase one-third of a gallon. Making the two silver coins, with the same minted value, over 8.5 times more valuable.

Here?s another test. Using the inflation calculator found here: (www.westegg.com/inflation/ (http://www.westegg.com/inflation/)), we find that what cost $1.00 in 1976 would cost $3.60 in 2007. They didn?t have data loaded for the current year, but I wouldn?t be surprised if when they do it?ll be pretty close to our aforementioned exercise.

So, it seems to pretty much settle the question about what type of coins to store for a TEOTWAWKI situation.

419!

waif69
09-23-2008, 02:57 PM
So, what you are saying is that despite inflation, the commodities are holding in value to each other? Makes sense.

LoudmouthMormon
09-24-2008, 08:51 AM
So, with this explanation under our belts, how do we account for the following reality?

http://i36.tinypic.com/2lafuwx.jpg

Alma the Younger
09-24-2008, 09:13 AM
That chart does not address the effect of inflation of the USD.

If you examine the buying power of silver in relationship to goods and services over time, you will see that silver/gold will hold its value over the USD.

Simply do as I did and select a common product that is tracked over time. Then do a few Google searches to find out what prices were compared to the value of silver.

The main reason I posted my original post was to better answer/support the question about whether to store everyday dollar coins vs pre-'64 coins.

419!

LoudmouthMormon
09-24-2008, 10:09 AM
So, I'm waay out of my area of expertise here - just trying to understand.

Are you saying that pre-64 silver coins might posess an actual value that is different than the current spot price for silver?

I'm assuming with my chart that silver and gold both have ups and downs. 1981-2001 wasn't exactly a time of deflation in the US, and yet gold spot prices went down by almost half.

Well, probably the best way to help me understand what you're saying, is for me to go run the experiment you propose.

LM

Alma the Younger
09-24-2008, 03:24 PM
So, I'm waay out of my area of expertise here - just trying to understand.

Are you saying that pre-64 silver coins might posess an actual value that is different than the current spot price for silver?

I'm assuming with my chart that silver and gold both have ups and downs. 1981-2001 wasn't exactly a time of deflation in the US, and yet gold spot prices went down by almost half.

Well, probably the best way to help me understand what you're saying, is for me to go run the experiment you propose.

LM

The comparison I am making is between pre-'64 dimes, quarters, halves and dollar coins that were minted with 90% silver content and today's coins that do not contain any precious metal.

For example, let's look at two coins: A 2008 Kennedy Half Dollar and a 1964 Kennedy Half Dollar.

Metal contents and value for the 2008 half dollar:
There are 0.0458 pounds of copper and 0.0042 pounds of nickel with a total melt value of $.17

Metal content of 1964 half dollar:
There are 0.3617 troy ounces of silver with a melt value of $4.84

Check here (http://www.coinflation.com/coin_calculators.html) for all the data.

So, two coins with the same face value ($.50) have two very different real values. One, the 2008 coin, derives its value from a government promise while the other the 1964 coin derives its value from silver.

The silver contained in the 1964 coin is the same as it was nearly 25 years ago, but it has held it's value over time whereas the fiat currancy has been ravaged by inflation.

This thread goes back to a question regarding what coins would be best to store for use after an emergency.

419!

BackBlast
09-24-2008, 10:28 PM
So, with this explanation under our belts, how do we account for the following reality?

http://i36.tinypic.com/2lafuwx.jpg

You're taking your initial readings of gold at the top of a gold bubble.

Everything fluctuates in value. Gold goes up and down in relation to other commodities. Different charts are less flattering on the dollar, you picked essentially the perfect span of years to show poor gold performance. It is what it is, but the effects you are really seeing is the exportation of inflation and the pseudo strong dollar policy of the 80s.

Commodities will likely see a boon as money tries to flee the market to a safe haven. Unfortunately wage inflation is not setting in, nor does it appear likely to - nobody is getting a raise. So we will in fact be in an overall deflationary period as people lose their jobs. If faith is restored to the system, this will KILL commodity values. If uncertainty, bad economic times, war, etc continue to grow, gold, oil, brass, lead, and other "safe haven" commodities will continue to go upwards.

That's my take on it.