Another Day In Omerica

A report last week in The Independent claiming that China, Russia and Gulf States are among nations prepared to ditch the dollar for oil trades has heightened the uncertainty surrounding the US currency’s future. The U. S. dollar faces increased pressure as the financial crisis allows emerging economies greater influence on the world stage. The dollar slumped against rivals last week.

The Gulf Arabs, China, Russia, Japan and France plan to switch to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar. This would mean an end to dollar dealings for oil. Obama and all the Liberal Democrats should be jumping up with joy since they want to alternative energy. How many years have you heard some Liberal talking about the dangers of Oil and George Bush Oil buddies, and Oil This, Oil That? Now these same fools are running around trying to save the dollar to purchast….OIL. John Q. Public, if you sit back and let the Liberal fools do their thing you will see how foolish they look and sound.

Since Obama has been in office the Dollar Value has dropped to an all time low. Remember the G20 summit in Pittsburgh last month, world leaders unveiled a new vision for economic governance, with bold plans to fix global imbalances and give more clout to emerging giants such as China and India. Who was left out? The United States. Following the summit, US Treasury Secretary Timothy Geithner repeated Washington’s commitment to a strong dollar. Two weeks later the Gulf Arabs, China, Russia, Japan and France plan to switch currencies for oil purchases. Who did they leave out, Obama and the United States.

How do we determine the relative value of an amount of money in one year compared to another? There is no correct measure, and economic historians use one or more different indicators depending on the context of the question.

• The CPI is most often used to make comparisons partly because it is the series with which people are most familiar. This series tries to compare the cost of things the average household buys such as food, housing, transportation, medical services, etc. For earlier years, it is the most useful series for comparing the cost of consumer goods and services. It can be interpreted as how much money you would need today to buy an item in the year in question if its price had changed the same percentage as the average price change. Construction of CPI Indicator

• The GDP Deflator is similar to the CPI in that it is a measure of average prices. The “bundle” of goods and services here includes all things produced in the economy, not just consumer goods and services that are reflected in the CPI. Construction of GDP Indicator

• The Consumer Bundle is the average dollar value of the annual expenditures of a “consumer unit”. The consumer unit could be a family or another type of household. The main point is that spending is a joint decision of the members of the unit. The bundle increases over time as household income increases. Unlike the CPI, not only the cost but also the amount of goods and services increases over time. Note, the 2008 value of the consumer bundle will not be published until November 2009. Link to the Consumer Bundle Indicator

• The Unskilled Wage Rate is good way to determine the relative cost of something in terms of the amount of work it would take to produce, or the relative time it would take to earn its cost. It can also be useful in comparing different wages over time. The unskilled wage is a more consistent measure than the average wage for making comparisons over time. Construction of Unskilled Wage Indicator

• The GDP per capita is an index of the economy’s average output per person and is closely correlated with the average income. It can be useful in comparing different incomes over time. Construction of GDP Indicator

• The GDP is the market value of all goods and services produced in a year. Comparing an expenditure using this measure, tells you how much money in the comparable year would be the same percent of all output. Construction of GDP Indicator

Lets look at comparisons in US dollars between any two years from 1774 to 2008. They are the CPI, the GDP Deflator, the consumer bundle, the unskilled wage rate, the GDP per capita, and the GDP.

• George Washington was paid a salary of $25,000 a year from 1789 to 1797 as the first president of the United States. The current salary of the president has recently been doubled to $400,000. Making a comparison using the CPI for 1790 shows that $25,000 corresponds to over $608,000 today, so the recent raise means current presidents have an equal command over consumer goods. When comparing Washington’s salary to an unskilled worker, or the measure of average income, GDP per capita, then the comparable numbers are $11.5 and $25 million. To show the “economic power” of his wage, we see that his salary as a share of GDP would rank him equivalent to $1.9 billion.
• The Civil War lasted from 1861 to 1865 and has been estimated to have direct cost about $6.7 billion valued in 1860 dollars. If this number were evaluated in dollars of today using the GDP deflator it would be $137 billion. The relative value of $6.7 billion of 1860 would be $22 trillion today, or about 145% of our current GDP.
• The Model T Ford cost $850 in 1908; by 1925 the price had fallen to $290. Using the CPI, the GDP deflator or the consumer bundle, $850 in 1908 is equivalent to between $1,485 and $1,670 in 1925. Using the wage indicator we see that the labor cost of the 1908 car in 1925 wages was $2,094 and by using the GDP per capita indicator it was $1,957. If we wanted to consider the costs of the Model T using today’s prices we would find that the $850 cost in 1908 is $19,760 in today’s prices using the CPI, $14,700 using the GDP deflator, about $45,000 using the consumer bundle, $84,700 using the wage indicators, and $115,000 when comparing using the GDP per capita.
• Babe Ruth signed a contract on March 10, 1930 with the American League Base Ball Club of New York (The Yankees) to play baseball for the next two years at an annual salary for $80,000. In 2008 the CPI was 14.1 times larger than it was in 1931 and the GDP deflator 11.6 times larger. If we want to compare Ruth’s earnings using the index of what the average household buys, it would be over $2,200,000 today. The relative cost of unskilled labor is 42 times higher in 2008 than in 1931. So if we wanted to compare his wage to what someone selling hot dogs would earn, we could say his “relative wage” is $3,200,000.

GDP per capita and GDP are 747 and 189 times larger in 2008 than they were in 1931. Ruth’s earnings relative to the average output would be $5,100,000 today. As a share of GDP, Ruth “output” that year would be $12,670,000 in today’s money.

Over the past 5 years, our federal debt has increased by $3.5 trillion to $8.6 trillion.  That is money that we have borrowed from the Social Security trust fund, borrowed from China and Japan, borrowed from American taxpayers. And over the next 5 years, between now and 2011, the President’s budget will increase the debt by almost another $3.5 trillion. This year the Federal Government will spend $220 Billion in interest. That is more interest to pay on our national debt, education, homeland security, transportation, and veterans benefits combined. Listen to what Senator Barack Obama said March 16, 2006 Senate Floor Speech on Public Debt. No wonder China, Russia and Gulf States are  prepared to ditch the dollar for oil trades.

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