San Diego Housing Bubble News and Analysis

Since you could buy 1 item with your savings and now you can only buy 0.5 items, the value of your currency has clearly declined compared with the value of the item.

You should ask yourself why this item now costs more, and whether it translates into higher wages for somebody.

I've understood inflation to be a product of money supply. In a given economy, if the money supply increases, yet your income remains unchanged, both your buying and saving power decrease.

yes, I understand the traditional relationships - that the buying power is decreased.

However, I wanted to determine the value of the currency as how much effort it would take to obtain that money...which is how that $1000 is view as in the effort to obtain it.

I am trying to see if the money would have the same perception of value by people... in the context of how hard it is to obtain it.

If it took you 8 hrs of sweat to obtain $10 today and 5 years from now it is the same then how would you value $10? Regardless of how much things cost.

Yes, if we earned more and things cost more then something of a fixed value, that $10 would be less significant. But what if income was constant.

Money is a means to some other end. If I am required to work harder or longer to acquire the same good or service, I would perceive that my effort, and thus the means by which I can acquire that good or service, to be worth less.

Money is purchasing power. Most things that cost $50 in 1990 dont cost $50 anymore.They cost more. Therefore, if you put that $50 you earned in 1990 under a mattress and then took it out today, it would buy a lot less than it did in 1990. Yet, it's still $50. Price inflation does not have to be preceded nor followed by wage inflation. This has been proven many times. The fact that you earned $50 in 1990 and it took you the same amount of effort to earn $50 today means that you have in actuality made less in purchasing power. Which is all money really is.

You always value the money based on what it can purchase.

If someone gave you $10 then would you "value" that $10 more or less than if you had earned it?

Say I'm homeless, I dont work and someone gives me $10. I will value that $10 based on the amount of food and/or liquor I can purchase.

If I earned that $10 I would still value that $10 on the amount of food and/or liquor I can purchase.

The OP asked about the value of money in the context of how hard it was to obtain it. If someone gives you money, through no exchange of a good or service, you would probably perceive your effort in that exchange with infinite value but minimize the absolute value of that money received. See Paris Hilton or George Vanderbilt.

Inflation is an increase in the supply of money.

When you increase the supply of anything, its value relative to everything else goes down.

You are conflating price inflation with inflation of the monetary supply. The former usually follows the latter, but not always. Many (most) people make the same mistake.

In your example the purchasing power of both the individuals income and savings has decreased 50% relative to the example 'item'.

A better example is to imagine that the guy was paid two 'items' a month and had one 'item' in the bank.

Fast-forward and he's being paid one item a month and his item in the bank had to be cut in half. This is why inflation is called the 'cruelest' tax; as its really a tax on wage earners, savers and those with a fixed income.

For fun try plotting your salary over the last decade in barrels of oil instead of dollars.

Makes perfect sense: In nominal terms, your work still earns the same $1000. In real terms, the value of your work was cut in half.
Real is what matters.

The onlt jobs that have kept up with inflation over the last 8 years has been bio-tech and defense companies. That's it.

Then there are the incomes of CEOs, hedge fund managers and other sundry (successful)traders.

When we value capital over labor, we will end up with the least productive society with the greatest wealth disparity.
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Inflation can be viewed in different ways. There's credit, which can result in extreme price inflation without any income inflation (espeically with globalization) -- see housing bubble, student loans/education, stocks, bonds, commodities, etc. -- all leveraged. This is very dangerous, IMO, and we are seeing the aftermath of a massive, inflationary credit bubble that had really got going in the early 80s.

It will be interesting to see how far things can unwind.

Your question is a bit naive, so let's do a thought experiment ..

In 1975, Mr. Construction boss made 30K per year in the construction business ... about $15 per hour. Mom stays home. They live in a large ranch house with 7 children. They were able to feed and clothe a large family, send to private school and send 6 of the 7 went to college, and two to grad school.

Fast forward to 2008. Joe Dropout has a laborer job in the construction business making $15 per hour. He spends 45% of his income to rent a 2-BR apartment for his wife and baby. He relies on food stamps to buy milk and cannot afford insurance.

In both cases the 8 hours of labor is valued the same in dollar terms. The only difference is inflation.

I agree with those who said inflation is a side-effect of the increased money supply.

Let's say you made $2000/month, but then I gave everyone $2000 to buy that item that costs $2000. The price of that item will jump to reflect the demand. If I took $2000 away from everyone and burned it, then the demand will drop and the price of that item would drop.

Inflation has occurred in the last 10 years, disguised by rising stock wealth and home equity, due to an increase in the credit offered. People were priced out of houses, but it wasn't considered inflation back then.

Now, house prices are dropping fast, and some traders have speculated in hard commodities, such as oil and food. Now, all of a sudden, inflation is exploding? I think not. I think the play money moved from the stock market to the real estate market to the commodities market.

As credit continues to contract, cash will be needed by banks to repair their balance sheets, leading to more margin calls. Leveraged traders will have to continue selling their equities and commodities to meet those calls, leading to a downturn in the markets.

Think of it this way...so you're spending $300/month more in food and gasoline. Meanwhile, your home dropped in value by $2000 that same month, and your income stayed the same. Are you going to add to the demand of luxuries or reduce your demand for them? Look at Subway and Starbucks...they are offering CHEAPER food to entice you back to their stores.

Our money supply is contracting, and even more so with the trade deficit which is an outflow of our dollars from this country. We have less cash and credit than a year ago.

"if there is no income inflation isn't the relative value of the currency still held?"

relative to what? if not goods (and the cost to purchase them), what else do you do with it?

what if you're the farmer and you pay your workers 1000/mo. they in turn have to buy their food from you. what prevents you from simply charging them more? especially if you're the only game in town? you have price inflation without wage inflation or monetary inflation...

I agree with those who said inflation is a side-effect of the increased money supply.

Inflation is defined as an increase in the money supply.

Or, at least, that is the economic definition of it.