THE TIME VALUE OF MONEY By David G. Hanger May 13, 2014
People in the media with one exception answered $25 an hour; the exception said $30. The elected officials I asked all said $25 to $30 with one exception who said $40 an hour. What was thus established early on, and to my complete surprise and consternation, is that our elected officials and our media representatives are completely clueless about the true value of money, indeed even of how paper money over time actually works. Due to annual inflation, compounding over time, the American dollar has declined in value 600% since 1970. That is documentable fact; it is not arguable. To have the equivalent buying power of that 1970 $12.50 an hour today requires a wage of $75 an hour, or a salary of $150,000 a year. (At 40 hour weeks X 50 weeks a year, the hourly wage is readily convertible to an annual wage simply by doubling the hourly rate and putting three zeroes behind it, thus $8 an hour is $16,000 a year, $10 an hour $20,000 a year, $12.50 an hour $25,000 a year, $15 an hour $30,000 a year, and $75 an hour is $150,000 a year.) To understand the consequences of this a good historical example is immediately at hand. In 1940 upon the conquest of Western Europe Hitler radically increased the value of the German mark against all other currencies to establish an international exchange rate extremely advantageous to Germany. Thus in effect the currencies in all conquered countries were extremely debased (inflated) basically overnight. The intended effect of this was immediate. Fine wines, champagnes, luxury goods, and art all flooded out of France over a matter of a few weeks, followed by major industrial diversion shortly thereafter. For quite some time the locals nonetheless did not notice what was going on because they were still receiving the same number of francs in their paychecks. Of course, those francs by that point were verging on worthlessness. What Hitler did more or less overnight has over time been accomplished by a financial system that serves itself rather than its customers, and by a wealth diversion scheme that the rich have used to effectively impoverish and to otherwise diminish the American middle class. Every year without most of you even being aware of it, you have been getting a cut in pay. Calculation of the “Present Value of a Dollar” is in fact basic business math, among the simplest to calculate. Charts are readily available, thus the present value of one dollar at an annual inflation rate of 3% is $.9709 one year later. At an annual inflation rate of 4% the value of the dollar declines 300% in 28 years, at 3% per annum a 300% decline in value occurs in year 36. Between 1967 and 1984, because of close to 20% inflation in the late ‘70s and early’80s, the inflation rate was close to 350% in about 18 years. Successful business owners, whether or not they consciously understand the time value of money, generally raise their prices annually to accommodate inflation. At the small business level this is haphazard, and perhaps often reactive behavior (i.e. inventory items have gone up in price), but banks, large corporations and businesses all routinely use present value of money calculations to not only adjust their annual prices, but also to anticipate the true value of an investment project over time by calculating the value of the return using constant dollar values. As example, an investment of $100,000 that returns $5000 in a year’s time with annual inflation of 3% is evaluated as follows: A year later the $100,000 is now worth $97,090 in constant dollar terms due to one year’s inflation. The $5000 earned as a lump sum a year later in constant dollar terms is only worth $4854.50 ($5000 x .9709). Thus a year later the present value of your money is only $97,090 + $4854.50=$101,944.50. In constant dollar terms your actual yield on a 5% purported investment return is only 1.94%. If, therefore, you proposed to a savvy investor an investment project of 5 years duration with annual inflation of 3% at the end of which time you proposed to pay on a $100,000 investment a total of $25,000, do not be surprised at all when that savvy investor simply laughs at you. Even if the payout was $5000 a year the return would rapidly diminish from the first year’s yield of 1.94% to virtually nothing. If you have not figured it out already, there are big time winners and losers in this game, and most likely you are one of the losers. Let’s look at it a slightly different way. In 1970 the price of gasoline was 19 cents to 35 cents a gallon (dependent upon location) in the lower 48; about 55 cents a gallon here. In 1970 a two-bedroom apartment in Tongass Towers rented for $180 a month. The average cost of a two-bedroom apartment in Ketchikan today is $1200 or more a month, a 700% increase over 1970 prices. Gasoline is priced at 800% of its 1970 price, an indication of what monopolies do to you. An even greater indication of what monopolies do to you is the almost 600% increase in freight costs here just in the last decade. No one should expect large corporations or banks to be so stupid as to not try to make money, so when they analyze what they are going to do, they will as a matter of course take into account estimates of the future value of a current dollar. They are in fact quite good at these analyses, and the fact that you are not has since at least the 1970s given big business the opportunity to radically transfer true wealth out of the middle class and into their greedy, bulging pockets. A fool and his money are soon parted, and the middle class has been playing the role of fool now for about 40 years. Let us try another way of looking at this. The World War II generation, the so-called “greatest generation” (far from it, their greed has left the three generations since shorter and shorter financially) from 1945 to 1965 left Mom at home to raise the kids while Dad brought home the paycheck. There was something of a logical societal reason for this conduct. In World War II the USA suffered somewhat less than 400,000 combat fatalities. The boys came home and made up for the lost by having 40 million babies. Mom was real busy. Dad got a low cost GI Bill student loan and got an education or job skills, and together they bought a house for $5000 to $10,000. (In 1964 my father bought a brand new 5-bedroom house for $21,000.) Their children (my generation) went to school using the National Defense Student Loan program and/or the G.I. Bill; borrowed in most instances well under $5000 for four years of college education, which was paid off well before they (we) were 30 years old; then entered a job market where it took two jobs to do what one job did a generation ago. A big part of that generational wealth transfer was via real estate, the WW2 generation selling their homes to the next generation for hyper-inflated prices that required two paychecks to cover. Frequently, a house bought by the WW2 generation for $10,000 or less was transferred to the next generation for ten to 15 times its original value (a value, by the way, exceeding by a considerable margin actual aggregate inflation for the period), or more. Two generations later the situation is even more financially extreme, to the point indeed where I feel sorry for a lot of these young people, because they are confronted with a truly rigged deal. The generational wealth transfers via real estate have been considerably diminished, generally in the range x3 to x6, where the WW2 generation doubled and tripled that; so the bleeding out of wealth in the past several decades is accounted for in substantial measure by other causes. At the macro-level one of the bigger causes is the 401(K). Instituted in 1980 to replace the older, and more stable, defined benefit plans, the 401(K) and the IRA are the driving force behind the massive expansion of the financial sector of the economy. Combined with the 1986 Tax Reform Act, which had as its specified intent the diversion of virtually all investment funds into the stock exchanges, the financial sector of the economy has in effect established what is probably the greatest financial scam in history. Several recent studies have demonstrated how the fee structures of these operations have in many instances raked off the majority of the profits of the funds they are purportedly managing. Not that long ago the Certificate of Deposit (CDs) was a means by which senior citizens sought to secure their nest eggs from the ravages of inflation (i.e. the time value of money). The CD was only semi-effective in this regard, because after taxes even long-term CD rates rarely kept up with inflation; but it considerably slowed the erosion of the principal, and thus often accomplished the purpose of the beneficiary in that it provided the beneficiary with an income for the duration of his or her life. The notable fact about the CD is that the bank paid you money (interest) to deposit your money with them. The five banks which are rapidly monopolizing banking in this country do not even want to maintain traditional banking practices; clear down to eliminating checking accounts. No, no, investment banking is what they all want to do, and nothing but, because the game they have rigged here is you pay them to deposit your money with them. How much sexier is that!!!? Say Grandma & Grandpa have accumulated a nest egg of $500,000. Now as they cross over the threshold of 70 years of age or so they decide they want to start drawing some of this down each year to support themselves in their retirement. So the money gets parked in some investment fund, conservatively managed (purportedly); so the return is not high, but the risk is correspondingly low. The primary purpose of the fund, of course, is to support Grandma & Grandpa through their retirement years, which at some point we all know will conclude. Let us say for our example that inflation is at 3%. So a year later Grandma & Grandpa have had their $500,000 reduced in value to $.9709 on the dollar, thus that base year $500,000 is one year later worth ($500,000 x .9709) $485,450. The average fee charged is 1.5%, or $7500 on $500,000 ($485,450 - $7500 = $477,950) for them to use your money (and be assured they are using your money for their benefit, not yours), thus before you even begin trading the value of the nest egg has declined $22,050. Before consideration of transaction fees (or taxes, which may or may not be at issue contingent upon circumstances), which clearly require an even greater return, just to break even Grandma & Grandpa’s nest egg would have to return 4.41% on investment, which in contemporary terms is already moving beyond conservative investing. And that is just to maintain a constant relative value in the account; no gain in value at all. Where Grandma & Grandpa in the past used to transfer wealth from generation to generation by passing it on to their children or grandchildren, a considerable amount of generational wealth transfer today is being diverted to third parties. You just don’t notice it because they nick you in driblets, but every time they make a penny or a nickel on transactions that occur literally billions of times, these folks are cleaning up. (Never forget Richard Pryor’s character in the movie Superman II; all he did was divert all the partial pennies out of everyone’s accounts every day; the wealthiest man in the world.) While Grandma & Grandpa are being fleeced, to flat cleaned out, we pay you in what used to be termed “cheaper dollars.” Remember, Hitler did this crap overnight, and the locals still took quite some time to realize how thoroughly they were being cleaned out. Inflation is insidious, like the torture of a thousand little cuts, and as each decade has gone by here recently wages particularly in the private sector have been falling farther and farther behind. Now you know how all those CEOs are raking in all that dough; they are stealing it from you. The microcosm that is Ketchikan, Alaska, presents in some ways even more bizarre aspects of the time value of money. “Ketchikan is a dying town,” the man said, “and I have pretty much moved all of my kids out of this town already.” This from a man whose family has been here for five or six generations. The regrettable fact is he is essentially correct. Anyone under 40 years old needs to seriously evaluate what they are doing here. To compare the local economy today with the economy of 1970, the revenue numbers in 2014 need to be divided by 6; that is the actual buying power of your 2014 dollar when matched against the 1970 dollar. What has happened since in Alaska is prices have continued to escalate throughout this period, frequently at a rate exceeding the annual national inflation rate, but wages have stagnated to the point where Alaskans are being paid one-half to one-sixth of the buying power of 1970 wages. Nor was the $12.50 an hour I was earning in 1970 in any way anomalous. Another long-term resident and friend was at that time earning $3.50 an hour as an able seaman sailing out of California; Bob Watt signed him off the dock onto the ferries for $14.34 an hour. $14.34 x 6 is $86.04 an hour, or $172,080 in annual salary in 2014 in order to have the equivalent buying power of that 1970 $14.34 an hour. No able seaman on the ferries today earns $172,000 a year, but that is what an ordinary seaman should be earning in order to have the equivalent buying power of his 1970 salary of $14.34 an hour. Government has had better control of this situation than the private sector, so government wages have not experienced the downscale slide to the degree of wages in the private sector, where the devaluation is, frankly, staggering. But in order to maintain its status government locally has gotten quite comfortable with fleecing the private sector basically any which way it can. The closer you are to government here in Ketchikan, despite all this nonsense I hear about the local right wing not being socialists, the better off you are. Government salaries have not declined at the rate of private sector salaries, though they, too, have declined precipitately since 1970 relative to the time value of money. Generally, the decline in value for government employees has been one-third to one-half, but the slide in the private sector is much worse than that. Today there are a fair number of $80,000 salaries on the ferries, as well as some well over $100,000, but the average ferry worker is still in the range of $40,000 to $60,000 a year. Two years ago there were a reported 21 local government employees earning more than $100,000 a year. A few jobs at the shipyard lately have approached or exceeded $100,000 a year in salaries, but the shipyard remains a government subsidized operation despite its private management. Heavy construction on bonded projects (again government) has also contributed a few $100,000 local salaries. The only private sector operation that is contributing a significant number of $100,000 a year salaries here lately is commercial fishing. There are way too many $20,000 or less private sector salaries. Last report I received local tour bus drivers are being paid $12 to $15 an hour. At $12 an hour that is less than I was getting paid in 1970, and the 2014 dollar is only worth one-sixth the 1970 dollar in terms of its buying power. In other words the relative buying power of a 2014 $12 an hour wage compared to a 1970 dollar is $2 an hour. Notice now what happens. Since 1970 prices have increased up here across the board at least 600%. In some instances the increase is much more than that, and particularly noticeable in that regard are gasoline and freight costs. In the meantime way too many people in the private sector are still earning $12 to $15 an hour or even less. At $12 an hour in 1970 it took 15 hours of labor to pay $180 a month in rent; at $12 an hour in 2014 it takes 100 hours to pay the average rent of $1200 a month for a two-bedroom apartment. In other words it takes 6.67 times more work time to pay the rent in 2014 over what it cost in 1970; that is a reduction in buying power of 667%. But if in fact your salary doubled in that period the advantage that gives you is that your reduction in buying power is only 333%; in other words your efforts have been degraded in value only three times over instead of six. Many local government salaries have essentially tripled since 1970, with a handful increasing fourfold or slightly better. If in fact your salary has tripled since 1970, the value of your work in terms of buying power has only been degraded by 222% relative to the cost of one month’s rent. It does not matter where on the totem pole you are, you are still being ripped off big time. Pervasively, year in and year out the value of your work is being degraded, and you get paid less and less. Our Gross National Product has not declined in this period, so guess what, someone else is getting rich beyond the wildest dreams of Midas because you are so absolutely ignorant about how money works over time, and they have been taking big-time advantage of it by to a greater or lesser degree exploiting every one of you. So this groveling by local government to maintain its financial status via tax increases and bond issues is as misdirected a deed as is conceivable. To try to recover part of your differential of 222% in lost buying power you are going to try to choke off folks who have been victimized to the extent of a 667% reduction in their buying power. What a bunch of guys!!! Where government needs to be working toward lowering costs, they just add fuel to the fire by increasing everyone else’s costs. When monopolists like our gasoline and freight providers gouge us even further, the silence of our so-called government leaders is so deafening you can hear a pin drop on the carpet. Do not trust or believe in your government leaders. If you are still young enough, move. The advantage of living in Alaska that existed in 1970 no longer exists. In 1970 you actually got paid a lot more money for working up here. The minimum wage down south at that time was about $2 an hour. I paid $60 a month down south for a nice garage apartment, $15 to $20 a month for utilities. Living on $200 to $300 a month was easy. When I finished school, I rented a two-bedroom, two-car garage single unit house for $115 a month. That two-bedroom equivalency rented for $180 a month in Ketchikan. You got paid as much as six times more to work up in Alaska, and overall costs were only two to three times as much; so long as you weren’t crazy, you ended up way ahead. Today the exact opposite is the case. In many instances you can get paid more down south to do the same job you are doing up here, and overall living costs are much lower down south. There is also something called “free enterprise” that actually happens down south, where being victimized by monopolies has become standard practice here. But in simpler terms the wages have not kept up with the costs, and many of those in the private sector have endured 500% to 600% reductions in their buying power since 1970. When, therefore, you hear some politician say he does not believe in the minimum wage, understand what that person is saying is he or she does not believe you have basic value at all in terms of your labor; that capital and management have the right to peonize you to the extent they see fit. For it is not their salary they are proposing to reduce; it is yours. For 40 years you have been lying down and taking it, and all the best of you can show for it is the value of your work has been degraded and diminished by 200% to 300%. That is not winning; that is losing badly. Based on these metrics, which are accurate and factual, a $2 minimum wage down south in 1970 should be at least $12 an hour now. The minimum wage in Alaska in 1975 was $5.25 an hour, and I think it was about $4.65 in 1970, thus $4.65 x 6 equals a minimum wage in Alaska today of $27.90 a hour, a salary of just under $56,000 a year. Those numbers are not laughable; they are representative of how much the value of your work (in terms of what you are paid for it) has been diminished and degraded over time. Any laughter you hear is the hollow laughter of the absolute clown. David G. Hanger
Received April, 2014 - Published May 13, 2014 Related Viewpoint: Viewpoints - Opinion Letters:
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