If you’ve lived in a country like the U.S. with a pretty stable currency, you probably think about how much things “cost” in seemingly absolute terms — of the currency. Things getting more expensive or less expensive comes down to whether it requires more of your currency or less of your currency. Gas got more expensive in 1980! Milk hasn’t really changed in a decade!
But — and this is not nearly as much fun or nearly as complex as the theory of relativity in physics — everything is relative.
Take the example of housing prices in the Bay Area. In the last decade, the median home price of $1.3M in Palo Alto has popped to $3.1M. If you look at prices as a function of the “gravity distorting” effects of technology stocks, however, it turns out housing has gotten much cheaper… that is, IF your base unit of currency is an index of tech stocks.
Why? When more dollars are “created” — through quantitative easing (aka “printing money”; amusing primer here) or surging valuation of stocks liquidated for dollars — the net result is that scarce assets become more expensive in relative terms, ceteris paribus. All other things being equal, it’s all relative.
This, by the way, is one of the causes of wealth inequality: Those with assets benefit when the quantity of currency rises. Those paid in the base currency — in regular wages, without being able to park savings in assets — do not.
That’s why fostering more ownership of assets is good for everyone. See the below for an interesting tracker that shows this, along with how correlated seemingly different assets are. There are no absolutes!
Notes on index methodology:
Thanks to Andrew Smith for his research help.
Charts provided herein are for informational purposes only, and should not be relied upon when making any investment decision. Past performance is not indicative of future results.