Thursday, November 14, 2013

The Cost of a Day in London--1971 vs. 2013



My wife and I lived in England from 1971 to 1975, when I was in the Air Force.  I was stationed at RAF Upper Heyford, just north of Oxford.  We lived in an apartment in Oxford.  About three or four times a year we would treat ourselves to a day in London.  This would be a special day for us, not something that we would do on a whim, because 42 years ago this would be an "expensive" day for us. 

There were four major costs to our day: round trip train fare from Oxford to London's Paddington Station, lunch usually at the Hard Rock Cafe (that chain's first restaurant and the only place in London where an American could get a real hamburger, fries, and a milk shake), a matinee performance at any London theater, and dinner at the Columbia Club on Bayswater Road, the US military's officers' club in London.

The cost of each of these four parts was approximately one pound per person, at a time when the British pound cost $2.50.  Therefore, our total cost was $20.00 (8 parts times $2.50).  The meal at the officers' club probably was subsidized to some extent, so we will assume that its cost to us was one half of the market price, boosting the real cost of an evening meal to $5.00 per person rather than $2.50.  Our new total cost of a day in London circa 1971 would be about $25.00.

Let's compare that cost of a day in London 1971 to the cost today.  I looked up specific prices on the internet for Saturday, November 9th, 2013.  Below is what it would cost the two of us today.

·         Round trip train ticket from Oxford to London for November 9th was $25.00. 

·         The ticket price to see the matinee of Billy Elliot for November 9th was 86 pounds per ticket or $137.60 at today's exchange rate of $1.60 per pound.

·         Meal prices are more difficult.  The Hard Rock Café website shows the menu but not prices.  My wife and I go to London almost every year, most recently this past May.  We are confident that the cost of a burger, fries, milk shake, tax, and tip at the Hard Rock Cafe would be not less than 15 pounds or $24.00.
 
·         A dinner of the quality of the old Officers' Club on Bayswater Road would cost double that, I'm sure.  (I remember that our cost include a drink, too.)  So we estimate that a nice evening meal of that quality would cost at least $48 per person.

So, grand total:  $25 for the train; $137.60 for the play; $24 for lunch; $48 for evening meal. The total cost of a day in London for one person on November 9, 2013 would be $235 or $470 per couple.  Therefore, the cost of a day in London is around 19 times as expensive in 2013 as it was 42 years ago in 1971.

The disaster of de-linking the dollar from gold

What significant event occurred in 1971 that would explain such price inflation?  Just kidding.  We all know that President Nixon took the US off the gold exchange standard on August 15, 1971.

For decades the US had been inflating the dollar in violation of the 1944 Breton Woods Agreement by which the US vowed to deliver gold specie to its trading partners' central banks at $35 per ounce.  When it became obvious that the US was printing dollars to fund its guns and butter policy of fighting the Viet Nam War while implementing Lyndon Johnson's Great Society welfare programs, our trading partners started asking for gold at the promised price.  When our gold stocks started shrinking dramatically, President Nixon, backed into a corner, took the US completely off the gold standard rather than devalue the dollar to some new dollar-to-gold ratio and accept monetary discipline henceforth.

Two things followed:

1.  We entered into a New Age of Floating Exchange Rates among different fiat monies,

and

2.  We embraced a permanent policy of Planned Inflation, which means continuous debasement of our currency, with no end in sight.

Thus, there was no longer any pretense that the US would maintain monetary discipline.  Every crisis became an excuse to print more money.  Over four decades this increase in money has caused prices to rise magnificently, as our "expensive" day in London in 1971 compares to today.

Gold Coverage Price: 1971 vs. 2013

One way to quantify the tsunami of monetary profligacy is to calculate the gold coverage price for the two periods.  The gold coverage price is what the Fed would have to charge a customer to redeem an ounce of gold without running out of gold before all dollar claims had been extinguished.  The gold coverage price can be determined by dividing M2 (the largest measure of money, which includes cash outside bank vaults and all demand and near demand savings accounts at banks) by the Fed's stock of gold.

Here are the facts:

·         The Fed's gold stock has remained unchanged from 1971 to 2013 at 261.5 million ounces.

·         M2  stood at $700 billion in December 1971.  This means that the gold coverage price--the true price per ounce of gold--was really $2,677 in 1971 instead of the official $35 per ounce.  No wonder the Fed was running out of gold!  Foreign central banks, especially the French, clearly saw and understood this.
 
Now by contrast, today:

·         M2 on September 2013 was $10.8 Trillion.  (Note the "T"!)  This means that the gold coverage price in September 2013 was $41,300.

Let's take a deep breath...

So, the Fed has inflated M2 by a factor of 15 since the last link to gold was broken in 1971.  This goes a long way to explaining why a day in London costs 19 times as much today.  With this planned inflation policy in place, can you guess what an "expensive" day in London will cost 42 years from now?  Answer: Every Day is becoming an "Expensive" Day.

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