What is something worth? Sounds like a simple question, doesn’t it? How would you answer it?
Over the years, I have asked this very question to a number of my employees who were students. Most of the answers referred to checking price tags, or catalogs, menus, and the like. Only occasionally has a student given me the correct answer: something is worth what someone is willing to pay for it.
What something is worth is not objective. It is subjective. What that means is that every person makes their own judgment about value. An example: A merchant may put a specific price on a product, such as a gallon of unleaded gasoline. If a potential buyer judges this price to be too high in consideration of their circumstances and alternatives (how urgently do they need to buy gasoline, what prices might be available at other stations conveniently nearby, can they instead walk or take public transportation, and so forth), they will not purchase. If circumstances change such as having a nearly empty fuel tank, a buyer may then be willing to pay the set price.
When a transaction occurs, two value judgments are involved. The seller prefers to have the payment for the product or service meaning that they value the payment more than what they are giving up. The buyer, on the other side, values the product or services more than they do the payment they give up. So, even when a transaction occurs at a specific price, the two parties to the trade have differing judgments of the worth of the product or service that changes hands.
Further, the worth of an item is never fixed. Over time individuals revise their criteria of what represents value to them. Fads come and go. Sometimes intrinsic metal values change. An overall weak economy may lead to less demand for luxury items.
In a free market, frequently traded goods such as gasoline and groceries tend to reach a balance where prices approximately match supply and demand.
Objectively, an ounce of gold or silver today will be worth an ounce of gold or silver a year or a century from now. While such assets may have an unchanging value because the item doesn’t change, the value of them in relation to other things can and does vary.
Many assets are perishable, can depreciate in condition, or (as in the case of the US dollar) simply have a temporary value in relation to other assets. So, what is it that gives these assets value?
The US dollar is a fiat currency. That means that it is not redeemable by the issuer (the Federal Reserve) for any fixed asset that will not change. In fact, US government will simply redeem its outstanding coins and fiat currency for other US coins and fiat currency. To answer the question of what is the US dollar worth, you need to find out what other assets someone is willing to give up in exchange for them.
Perhaps the most commonly used reference for the worth of the US dollar is gold. Ten years ago, one US dollar was worth less than 1/300th of an ounce of gold. The dollar’s value relative to gold has fallen by 80% in the past decade, to around 1/1,500th of an ounce. The number one reason that the relative value of the US dollar has depreciated so much is that the Federal Reserve has increased the supply of fiat current far above the increase in the available supplies of gold, gasoline, milk, cell phones, baby diapers, televisions, and so forth.
In absolute terms, the US dollar is worth what someone is willing to pay for it. In a free market, one gauge of this value would be the interest rate that the US government had to pay to borrow money that would be paid back in future US dollars. Unfortunately, that is not an accurate guide now, as the US government is distorting the interest rates paid by having the Federal Reserve purchase about 85% of all long-term newly issued US Treasury debt.
Still, even though the US government is engaged in multiple blatant and behind-the-scenes tactics to prop up the value of the US dollar, it seems obvious to me that it will eventually trade at a much larger discount to gold, silver, and other assets. There is a significant risk that the US dollar may fail completely within the next few years. The dollar might fall faster except for the fact that all other fiat currencies are also depreciating against gold and silver. Gold and silver are among the few assets that have held their value over the past few thousand years without ever failing. That is perhaps the strongest reason to own fewer US dollars and other fiat currencies today and more precious metals.
Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes “Liberty’s Outlook,” a monthly newsletter covering rare coins and precious metals. Past issues can be found online at http://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online at http://numismaster.com/ under “News & Articles”. His bimonthly columns on collectibles can also be read at http://www.lansingbusinessmonthly.com under “Articles” and “Department Columns.”His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.