Many target of money illusion as they forget how inflation works
Many people have fallen for the “money illusion.” It's where an individual doesn't comprehend monetary inflation, so when one hears about how “houses increase in price over time,” that is the cash illusion at work.
A lot of people struggle with illusion
CBS Moneywatch had an article from Erik Sherman who was making fun of his co-workers who made comments about the total value of Apple incorrectly.
One rookie mistake being made by reporters is when they say that Apple is the most valuable company of all time. They are looking only at dollar amount. When adjusted for inflation, Apple is really second to the 1990s when Microsoft was in the lead. It is terrible that reporters cannot figure these things out before they report on them.
The “money illusion” is not something that people should overlook about when reporting on these things.
Finding out real worth
The term “money illusion,” as Sherman points out, was coined in 1928 by legendary economist Irving Fisher. It has to do with the effects of inflation. The illusion is where people confuse a number of dollars with the value, or amount of goods and services it can buy, it symbolizes.
The more common something is, the lower its value. That is why the value of money goes down with inflation. The cost of things increases when more money is added to the country.
The effect of inflation is that the number of dollars a thing is worth, or the nominal value, may increase, but the real value it symbolizes, the amount of goods and services that amount buys, also called purchasing power, declines. When a person thinks numerous dollars in one period is the same as another, that's the cash illusion.
Money illusion everywhere
Ever hear somebody say “back in my day, you got a loaf of bread for two pennies and for a full day's work you only got two bits,” or “housing values go up over time” as a justification for buying a house? That's the money illusion at work. One dollar in 1934 is not one dollar in 2012; according to the Agency of Labor Statistics' inflation calculator, it is $17.10, an increase of more than 1,700 percent.
According to CNN, in 2011, gold prices hit a high of $1,920. That seems like a high until you realize that in 1980, gold hit $873 per ounce, or about $2,287 in the current dollars.
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