The Money Illusion

[Note: I had a Libra call yesterday, but I wasn’t happy with my presentation, so I’m not putting it online.]

We often hear that inflation is evil. Look how it destroys the value of your money! Then we are shown some version of this famous illustration:

inflation shopping cart.jpg

You go to a movie theater or get a ski lift ticket, and you say “Geez, I remember when this same ticket cost half this amount.” But you’re forgetting that your take-home pay was even less than half the amount you’re getting today.

That’s the money illusion.

The money illusion is the idea that you can compare today’s dollars with yesterday’s dollars without taking inflation into account. And when you take inflation into account, you must include the fact that your salary has gone up by even more than the amount by which prices have risen.

But then you hear: “Really? Is that true?” Did you know, David Siegel, that Real wages haven’t changed for Americans in decades?”

I have to admit I was worried about this as well. But now we learn that people who say this are also not comparing apples to apples.

Don Boudreau has a short piece on this, and he explains it for us in this video: