In regard to the idea that no change in account balance is no change in wealth…

That may be a very imprecise presumption. Why? Because the purchasing power of every currency fluctuates- sometimes up and sometimes down.

I wrote recently to a client of mine (whose investments I manage) that in the time since I directed them to sell all positions in their IRA to move most of their investments to cash, the actual gain in purchasing power in the cash itself has been very large. For example, if you had traveled to Europe in mid-2014 and once again just a week ago, many prices for you (if you are from the US and thinking in terms of your US currency) would have dropped by about 20%. (I will also detail below a few change in the prices of several major commodities here in the US, including gasoline).

So, US Dollars have been doing very well as an investment for several months. However, that is  a distinct issue from whether now is or is not a great time to “exit from US Dollars for a safer position / a better position relative to potential for maintaining or increasing actual tangible purchasing power.”

Assuming that your budget and expenses have not changed (such as minimum payments on your auto loan  & rates for auto insurance or health insurance), then you may presume that the actual real value of US Dollars has not changed. That may be “wildly” false, as revealed in the chart below:

Inline image 4

So, what has actually happened lately with the purchasing power of the US Dollar? Since mid-2014, the US Dollar’s purchasing power (relative to a “basket” of several other global currencies) rose by over 25% (from under 80 to over 100).

You may PRESUME that “no change” in your account balance means “no change in purchasing power.” I understand that to be completely false (usually).

Why is gasoline way cheaper than 6 months ago in so much of the US? Almost no one thinks “because clearly the US Dollar has dramatically increased in purchasing power.” However, did the pattern across time of changing gasoline prices show something very unusual or something very similar to other prices?

We will look at isolated prices for gasoline and other fuels below.
First, here is a chart of commodity prices in the US (including gasoline). It shows a large decline since mid-2014 (which stretches all the way back to 2011 in fact).

Inline image 2

Note that the chart above is ROUGHLY the same as the one above (the US Dollar Index) except “flipped over.” Next are 1-year charts of 5 major fuel prices (priced in US Dollars / “USD”). Note that all 5 red lines are quite similar plus the total price change is a very tight range: between 37.7% and 40.39% in 4 out of the 5 cases (while crude oil prices fell much further than the others). The bottom chart shown is for gasoline.
Inline image 3

So, increasing dollar amounts in an investment account balance MIGHT be from a change in purchasing power of the currency (or might not). Most people know to call “a decline in the overall purchasing power for a currency” by the name “inflation.” For interest-bearing investments, like lending money to a bank (AKA a “savings account”), if you were getting interest of 10% a year (like would have been typical in 1980), that 10% interest rate could result in large taxable gains even without any actual increase in overall purchasing power of the account.

If you had a taxable account with any “capital gains” (across a single “tax year”), then that WOULD for *certain* create a taxable event…. even if it was ONLY due to inflationary “interest income.” However, that is not a major issue in any tax-sheltered account, such as an IRA account or an account for a tax-exempt charitable trust.

It is typical to presume that the purchasing power of all currencies is constant and stable with no increases or decreases. However, that is absolutely false. It is a convenient presumption (especially when it is close to being true), but also one that is reasonably easy to monitor in regard to exactly how accurate or inaccurate that presumption is.


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