What Can the Tooth Fairy Tell Us About Inflation
Earlier this week, I shared a story about my wife finding a bag of change in the attic of her grandparent’s old house that turned out to be worth over $2,000. The dimes, quarters and half-dollars in the bag were all minted before 1965. In other words, they were all made primarily of silver. The value of the metal in these so-called junk silver coins is now worth far more than their face value. This demonstrates just how much the Federal Reserve has devalued your money.
One way we measure this devaluation of money is by the inflation rate. Practically speaking, rising inflation simply means we are losing purchasing power. Our dollar buys less and less as time moves on. This puts the squeeze on all of us – even the Tooth Fairy.
Inflation is literally an expansion of the money supply. As you add dollars (or yen or euros) to an economy, the value of each individual dollar decreases. One symptom of inflation is rising prices. Imagine an economy with one apple and one dollar. Your apple is worth a dollar. If you add a new dollar to the system, but there is still just one apple, the value of the dollar is cut in half.
Back to the Tooth Fairy. I’ve got some bad news for kids today. You’re not getting as much for your lost teeth as your grandparents.
LendEDU – a credit company – analyzed Tooth Fairy giving since the 1960s. It found Baby Boomers (ages 54 and up) received an average of 69 cents per lost tooth. Contrast that with the current generation of kids losing teeth (Generation Z – ages 6 and up). They have been receiving an average of $3.25 per tooth. As you can see from the chart, the Tooth Fairy has apparently become increasingly generous with each generation.
This looks pretty good until you adjust for inflation. That’s when you realized kids today are getting hosed.
When you convert Baby Boomers’ Tooth Fairy haul to 2018 dollars, that generation received a healthy $5.77. That’s more than $2 more than kids get per-tooth today. In fact, each generation in the survey has received less from the Tooth Fairy in inflation-adjusted dollars.
When inflation is accounted for, the average amount of money received per lost tooth for millennials ($3.72) was closest to what generation Zers have been receiving ($3.25). The average Tooth Fairy gift for baby boomers of $0.69 would be $5.77 today, while generation Xers’ gift of $1.39 would be $5.54 today.”
This is an amusing little illustration, but it reveals an ugly truth about our monetary system. Inflation is eating away at our wealth. This is particularly relevant considering central bankers at the Fed have said they are “comfortable” with letting inflation rise above their mythical 2% target.
If you are saving money in dollars, you are experiencing the same phenomenon as these kids. It might appear that your wealth is increasing. You have more dollars every year. But it’s an illusion because those dollars aren’t worth as much. You have to earn a 2% (or more) return just to keep up.
Historically, gold and silver serve as a hedge against inflation. Typically, as the value of the dollar drops, the price of gold in dollars goes up – just like the price of bread, gasoline and teeth goes up. This is one reason it’s a good idea to consider including precious metals in your portfolio.
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