I pulled a dollar out of my wallet yesterday. For reasons I can’t explain, I found myself staring at it in wonderment. I liked the way it smelled. It was crisp to the touch. It was beautiful and powerful in its design. I liked George Washington’s hairdo!
I thought about the economic tumbles this dollar bill has experienced since its inception, certainly during my lifetime. I knew the purchasing power of this dollar had declined – a lot. How much I wondered?
I went to Google and came across an article written by Kimberly Amadeo, President of WorldMoneyWatch.com. She is an economic analyst. According to her, here’s the purchasing power of my dollar over the past 50 years:
1960 – $7.76
1970 – $5.92
1980 – $2.79
1990 – $1.76
2000 – $1.33
2010 – $1.05
Wow! My one dollar bill bought over $7 worth of stuff when I was in college. I know the United States came off the Gold standard about 40 years ago, but I’m not smart enough to understand that impact on the dollar.
But, when we talk about the current value of something – say, our home – are we really accurate in saying that our home has a market value of “x” amount of dollars? Or, is it more accurate to say that we need way more dollars today to buy this home than we did at some point in the past? How about a house bought in 1970 for $100,000? Does it really have a value of $500,000 today? Or, has the dollar plunged so much in purchasing power that we really need $500,000 dollars today instead of $100,000? Maybe the home’s “value” hasn’t really changed that much.
Who cares? And, what does this have to do with the note business?
If an experienced, established note buyer buys a note for his portfolio with the intention of keeping that note till maturity, the monthly payment received every month – in dollars – will buy less and less as each year goes by. If the note extends 20 years or more, you can see from the table above how the dollar will deteriorate. The note buyer knows this. The seller may never give it a thought.
Discounting the note – paying less for it today – in dollars – than its current principal balance – is not an exercise intended to profit at the expense of the seller. It’s a judicious practice for the note buyer to evaluate all the risks associated with that particular note. Future purchasing power is one of those risks.
