Saturday, December 5, 2009

The True Cost Of Inflation

In several columns I have been touting the advantages of beginning to save pre-1982 copper pennies, as a way to take advantage - on a small basis - of the expected across-the-board commodities price gains as high inflation increasingly manifests itself. Inflation is increasingly defined - as a result of misusage - as simply a rise in prices. Originally, inflation was defined as an increase in the money supply which in turn leads to higher nominal price levels.

Wikipedia states that the Austrian School of economic theory specifies that as units of currency (i.e. means of exchange) are increased, this effects rising prices of the cost of goods, as the real value of each monetary unit is eroded, loses purchasing power and thus buys fewer assets and goods and services. However, language evolves through usage - whether correct or imprecise - and in modern day parlance, inflation is defined as a general increase in price levels.

This emphasis of interpreting inflation thus has blunted its original meaning, and in the process obscures the cause of rising prices. The current administration is promulgating nearly limitless monetary expansion, as a devalued currency makes it easier to service the egregious national debt. The FED is readily assisting this misguided policy. This is an invisible form of taxation, as every fiat dollar held by consumers is diluted in value and is eroded in purchasing power.

Such a tsunami of currency creation will result in huge hikes in cost, of virtually everything we need for daily life. It will result in eventual hyperinflation, to the great detriment of all. But rather than point out the adverse consequences, politicos - like magicians - use what is essentially propaganda to misdirect constituents ire. Instead of admitting that they are the cause of rising prices by increasing the money supply, they will point at the price of a barrel of crude.

Since the creation of the FED in 1913, the dollar has lost 95% of it's purchasing power. This is based on the numbers the government provides, and may in fact be worse than that. The CPI -the Consumer Price Index - is a measure of the cost of goods purchased by an average household in the United States. Calculated by the U.S. government's Bureau of Labor Statistics, it is heralded as an accurate means to measure inflation (i.e rising prices).

But the CPI is replete with flaws which result in a product which intentionally understates true inflation. During the Clinton administration, the methodology used to examine inflation began to rapidly mutate, transforming into a system which bears small resemblance to the original. John Williams of states "the problem lies in biased and often-manipulated government reporting." He provides proof that annual inflation is understated by roughly 7%.

This understatement of inflation, which began during the late Carter and early Reagan administrations, works to the benefit of the government. Cost of living adjustments to government pensioners, and social security benefits to all who receive them, have been gutted. Like a Saracen wielding a scimitar against some hapless Crusader, payments have been cut in half from what they should be. GDP is artificially higher. Blame is dodged by those responsible for faulty fiscal policies.

So now we understand that inflation has been intentionally misconstrued over the last several dissembling administrations, but to what effect? It is all well and good to provide numbers, but we need a reference point to make them more real. Consider this. If you are among the older generation of Baby Boomers, you will recall that - in the Fifties and Sixties - Dad went to work and Mom stayed home. As a direct result of ever-increasing inflation that is no longer the norm.

In 2002, only 7 percent of all U.S. households consisted of married couples with children in which only the husband worked. That statistic is sure to have decreased in the ensuing years. Families no longer have the luxury of a spouse choosing to work to provide extra income, that additional subsidy is now required merely for survival. And two-income families are much more likely to face financial hardship; they become dependent on both incomes, but are twice as likely to lose one of the jobs.

Housing prices have risen seventy times faster than men's income. We are - after the effects of inflation have been calculated - worse off now than our parent's generation. As one who has been in the workforce throughout the duration can attest, our net pay - after being shoved into higher-withholding tax brackets - and discretionary income remaining is less now than it was in the Seventies, in spite of huge nominal increases of as much as triple our annual income.

You tripled your income and you're worse off? Yes, because inflation has outpaced your salary increases. We learn from a CPI adjusted Inflation Calculator (remember, true inflation could be 50% worse) at that in order to be the equivalent of a $25,000 annual income in 1970, that wage earner would now have to be bringing home $132,125.75! And this calculator does not include increases subsequent to 2007!

How many individuals do you know whose income has increased 428% in those intervening years? Very few, I would surmise. And even the two-income families are facing a daunting challenge trying to keep up with inflation. No wonder we all feel the impact of rising prices in the form of a declining standard of living. Consumers are forced to save. Spending falls. Businesses suffer. Layoffs occur. Spending drops. Businesses close. Joblessness ensues. Payments default. Foreclosures explode. Bankruptcies result.

This is the true cost of inflation, and it is directly caused by a gigantic fraud perpetrated by our government. Their immense Ponzi scheme is one that puts to shame the fifty billion dollar Bernie Madoff scandal that resulted in his incarceration. If how heinous a criminal act is deemed to be were based on the number of its victims, then inflation would be the Crime of the Century. An entire nation is at its mercy, and inflation is ruthless towards those on fixed incomes.

The Administration, Congress, and the FED are all complicit in this crime. Profligate spending dates back to the Johnson Administration and the funding of the War in VietNam, so in fairness the blame for the resultant fiscal carnage should rightfully be divided. Current politicians - and those who preceded them - and Fed Chairmen Bernanke and Greenspan, all share in culpability. Inflation will not end as long as we have a fiat currency unbacked by silver or gold, and that cannot happen unless we abolish the FED.

Buy Silver. Buy Gold. Save Copper. Start Now.

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