Imagine it’s 1971, and you’ve volunteered for a science experiment: you’re going to be frozen alive for five years in a test case for future space travel to planets light years away. The experiment is dangerous, and as a result, you’re paid $25,000 for “volunteering.” You sign a waiver indemnifying the government in the case of any mishaps, and you go to the bank to deposit your $25,000 check.
On the way there, you run into your friend, Jim, who is also taking part in the experiment. You tell him you’re going to buy a Certificate of Deposit and earn 5.75% interest. “It will be great,” you say. “I’ll go to sleep, and when I wake up, I’ll have like thirty-three grand waiting for me!”
But Jim isn’t impressed. He’s going to buy gold with his $25,000 and keep it on him in the cryogenic chamber. He’s a conspiracy nut, and he doesn’t trust the banks. “What a fool,” you say to yourself as Jim walks away. “Gold doesn’t earn any interest. He might as well just bury his money in a coffee can.”
The next day, you lay down next to Jim and prepare to be frozen. You think happy thoughts of the $33,062.97 you’ll receive when you wake up. Jim is happy too, clutching a heavy bag of 714 one-ounce gold coins he bought for $35 each. What a sucker, you think. “See you in five years,” you say to him, and then everything goes black.
The next thing you know, you’re awakened in a strange place. You feel fine, but something just isn’t quite right.
“There was a problem with the experiment,” a man with an odd hairstyle and funny glasses says to you.
Jim wakes up and clutches his bag of coins. “What happened?”
“We were unable to revive you in 1976. Our calculations were wrong and it was too dangerous. Then, over the years, the project lost political favor. It was only recently that we were able to re-open the project—”
“Cut to the chase,” you demand. “What year is it?”
“It’s 2008,” the odd man says. “You’ve been asleep for thirty-six years.”
After adjusting to the fact that your friends and family have aged—and died—in your absence, your thoughts immediately go to your CD. “Thirty-three grand is enough to buy a house!” you say to yourself. Or at least it was in 1971.
Your small local bank is still exactly where it was—though its name has changed a few dozen times in the last 36 years. “Here you are sir,” the friendly teller says to you, and she hands you a check for $82,437.51.
“Wow!” you say. “I thought I was only going to get $33,000!”
The teller explains to you that when you did not cash in the CD, the bank established a savings account for you which had averaged 2.5% annual interest ever since.
“Being frozen for thirty-six years is the best thing that’s ever happened to me,” you say. You’re rich! Or so you think.
You soon find out that your $82,000 in 2008 dollars does not buy nearly as much as it would have back in 1971. In fact, it doesn’t buy as much as $33,000 would have back then! The Bureau of Labor Statistics says that it would take $175,000 in 2008 to equal $33,000 worth of purchasing power in 1971. This means your $82,000 is worth less than half of what $33,000 would have been worth back when you were frozen. Even as your wealth has nearly tripled in nominal dollars, it has been reduced to less than half in purchasing power. Bummer!
Making things worse, you soon run into Jim. He’s cashed in his 714 ounces of gold—purchased for $25,000 back in 1971—for $630,000. The price of gold has gone from $35 an ounce, where it was fixed in 1971, to $890 an ounce.
“They took the dollar off the gold standard,” Jim explains. “It’s no longer backed by gold, so there’s nothing to stop them from printing more and more paper dollars.”
“But I received interest!” you scream.
“Your interest didn’t even come close to keeping up with inflation,” Jim says with a sly wink. “You see, when we got our checks for $25,000, the dollar was still convertible into gold at $35 an ounce. I converted mine. You didn’t. Now the government’s reneged on its promise.”
“I always thought you were crazy,” you confess.
“I know you did,” Jim says with a huge smile on his face. A saying he overheard kids using on his way to the gold exchange comes to mind. “Sucks to be you!”
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