August 2007

What is the dollar really worth? Not what you think

By Hans Baumann

If we believe our government, then we only experienced a rather benign inflation rate of 2.67 % per year, on average, during the past five years, or a total of 14.2%. 

This then makes the 2001 dollar worth about 88 cents. Yet looking at our actual out-of-pocket expenses, especially for gasoline and local taxes, we have a nagging feeling this might not be the true story. 

This suspicion might well be justified, since the Consumer Price Index (CPI) is, politically, a very sensitive figure because it affects wages, social security payments, and the like. 

Governments can and do exclude price sensitive items from the basket of goods determining the CPI.

What then is the real U.S. inflation rate? 

Well, according to my research, the inflation rate may relate to the increase in the U.S. public debt. Most people may not be aware, but the total public debt, or obligations payable by our government, has increased from $5.8 trillion in 2001 to a staggering $8.5 trillion in 2006. 

This is an increase of 47%. This debt represents about 75% of our current Gross Domestic Product (GDP). Now let's compare this debt increase over the past five years to the most inflation sensitive indicators, namely commodities and the stock market. 

Here the Dow Jones Commodity Index increased again close to the 46.5 % debt increase. In addition, the S&P 500 Stock Market Index showed a similar increase. 

Looking at oil, we find a close agreement between the increase in the price of oil and the rate of debt increase until the middle of 2005, when the hurricane damage caused a spike in oil prices.

Another indicator of interest is the rate of increase in the European euro vis-à-vis the dollar. Here again, the euro appreciated in lockstep with our national debt over the past five years.
All this points to the realization that the true five-year average U.S. rate of inflation was close to about 7.9 %, in agreement with the yearly increase in the U.S. public debt rate. Based on this reasoning, the true value of the dollar at the end of 2006 is now only about 68 cents.

Unfortunately, the current rate of inflation will not diminish in the near future since there are no serious efforts to reduce the trade deficit ($820 billion in 2007) or the budget deficit ($285 billion).  We therefore can expect the U.S. public debt (and therefore the apparent inflation rate) will increase by at least another 7% per year, at least to the next election. 

This implies there will be a similar increase in the price of commodities and in the value of the U.S. stock market, in addition to probably another 7% appreciation of the euro. 

You might ask why the Japanese yen does not increase in value. The answer is such an increase in value is not in line for the yen because the Japanese debt as a percentage of their GDP far exceeds that of the U.S.

Oil and gold prices are at present decoupled from the U.S. debt and show a higher increase. The price of oil increased faster than our debt, especially after the hurricane damage in 2005. 

The gold price, in contrast, seems more adjusted to market forces. Yet even here, there will be higher prices in the future if our debt keeps increasing.


Dr. Hans D. Baumann, P.E. ( is 'Mr. Valve' having designed over 30 valve lines, holding 154 patents, writing hundreds of papers and seven books on the subject, and being in possession of an endless litany of awards and citations. He has industrial engineering education and a Ph.D. in mechanical engineering. He is an ISA member and a member of Sigma Xi.