There Is No Such Thing As Harmless Price Inflation

Econophile's picture

This article originally appeared in the Daily Capitalist.

A "little" inflation will destroy capital, rob you of your savings, disrupt all of your long-term financial planning, create market instability, and leave you unprepared for retirement. You can protect yourself and you must.

Price Inflation

The Bureau of Labor Statistics released their official Consumer Price Index for February on Friday (up 0.4% MoM; up 2.9% YoY):

We also have the BLS seasonally the so-called "core" measure of prices ex. food and energy (up 0.1% MoM; up 2.2% YoY):


According to most economists including the Fed, this "inflation" is modest and acceptable, if not desirable. The 2.9% annual rate is more or less within the Fed's target for "inflation." 

There is much criticism about the CPI indicators. But, you can pick other measures. In fact inflation can be whatever you want it to be.

For example, if you are wary of the BLS measures, then there is John Williams of Shadowstats who has two measures. One is based on the same methodology that the BLS used in 1990 (up 6.2% YoY):

Or, if you prefer, there is his version of the BLS's 1980 base year methodology (up 10.2% YoY):

Or you can use the MIT Billion Price Project annual index which is up 2.8% as of February 1:

Another way to look at it is this way, the devaluation of the dollar since the creation of the Fed:

Today the value of the dollar is about 3¢ as measure from1913 when the Fed became our central bank.

Understand that there is a lot of criticism of each of these measures of prices. What each one is trying to tell us is how much our dollars have depreciated from month-to-month and year-to-year. 

I don't know which of the above is the correct measure. In fact I don't think there is a correct measure because it is a very complex problem to measure prices over time and everyone spends differently. I think the better measure is more related to money supply, but that is a different topic. In general I personally believe that prices are higher than what the BLS reports, but I'm not a statistician. 

I think the most important thing for us to know is (1) whether or not prices are constantly increasing at whichever method you choose, and (2) how fast the monthly and annual rates change. Steady price inflation will kill you over the longer term. Rapid changes in the rates of change can wipe you out.

I don't mean to state the obvious here, but we all need to protect ourselves from the dollar's devaluation or we will become poorer and poorer over time. I bring this up because I don't think most people understand what a "little inflation" can do to one's long-term financial plans. If prices rise a steady 3% per year, for example, I know my $1,000 savings is going to have to be $1,344 in ten years just to stay even (i.e., it's worth 34% less).  

And if you think assets and wages always keep up with prices, the past two recessions should dissuade you from that thought. Right now we have a situation where the dollar is continuing to devalue and workers wages are actually going down. Here is Friday's report on real (i.e., inflation adjusted) earnings (down 0.3%):

If the Fed keeps on creating these booms and busts which first lead people down a path of wealth destruction (what's your house worth now?) and then they devalue the dollar (i.e., "print" money) in order to try to stimulate a recovery but which further destroys capital, how can one get ahead? From the data, it seems that most people aren't getting ahead. In fact the system is now geared more toward the One Percenters who thrive on the financialization of the economy. 

The Fed knows exactly what it is doing. While the official line is that the U.S. wants a "strong" dollar, the Fed and the federal government are doing everything they can to devalue it. Chairman Bernanke believes that a little bit of inflation is an acceptable trade-off because it spurs economic growth. Why he thinks the destruction of wealth is the road to wealth is not a mystery: it is the foundation of contemporary economics of which he is an advocate. He understands that printing money causes prices to go up, and thus he is consciously devaluing the dollar. 

If printing money were the elixir of prosperity, bankers would have made us all rich long ago. It is too bad that Chairman Bernanke does not understand that Federal Notes are not wealth, but economic nanobots that consume and destroy that scarce resource, savings. Only the savings from the profits of production can create wealth.

What Do I Do?

"What do I do?" is the question I am asked most often. It depends on your level of wealth, but ... It is likely that the longer-term will see higher price inflation than what we are now experiencing so this is a serious question.

I'm not trying to avoid the issue on how to protect your wealth, but we don't give investment advice here. DoctoRx who follows markets at the Daily Capitalist has an excellent track record on investments, so I urge you to pay attention to him. 

I will give you some categories of investment that anyone seeking to protect themselves from price inflation should consider:

Gold. You can buy physical gold or shares in companies that hold gold. The Doc has recommended PHYS in the past. The point is that gold is money, and is a refuge against instability.

Oil and Gas. This product will be in demand until cold fusion or the perfect sun-powered battery is invented. I like the idea of actually owning production and there are reputable drilling programs one can invest in.

Agricultural production. Food will always be in demand in an unstable world. This usually means investing in ag land, but there are farming partnerships one can invest in if one isn't a farmer. 

Stocks and bonds. I'm not a big believer in buy and hold, so you've got to know what you are doing, or you've got to invest in someone who does. I personally follow DoctoRx. There are many others, but you've got to do the research. Be wary of "track records." There are still more Madoffs out there. The irony is that anyone with a fabulous track record (hedge funds and investment advisers) can require millions to hundreds of millions to get in. Most of the rest who invite you in eventually go to the mean (at best) or blow up (worst case).

Offshore assets. This is a bit of a snake pit, but investing in fast growing companies in friendly economies is a way to diversify out of the U.S. You can't hide assets from your Uncle Sam, but ... you can get good returns.

These suggestions aren't new and many advisers who follow the Daily Capitalist or sites like it (are there any?) say the same things. So I am not telling you anything new. 

This is a serious game. It is no secret that most Boomers don't have enough assets to allow themselves to retire. I fear that most retirees will be reliant on the government to take care of them (Social Security and Medicare). If you have saved, but stuck the assets in a CD, you are getting poorer and poorer as those nanobots destroy your savings. It's not an easy task and you can thank the Fed and the federal government for that. 

Here are my basic rules:

  1. You've got to have a plan and you must save. You must not spend all of your income. This seems so simple, yet few people really do it. There are many books on the topic of planning for retirement and how much you need to save. There are retirement counselors who can help you devise a plan. Just be careful of what they are selling. 

  2. You've got to do your own research and do not accept anything on the basis of a word or promise.

  3. You must check advisers out. Don't accept a demonstration portfolio, rather ask to talk to other clients and see their real-time results. If they can't provide the information, go elsewhere.

  4. Don't give anyone your money to invest without keeping it in a segregated account. I understand that there are partnership deals and mutual funds where this isn't possible. Investment advisers can have discretionary authority, but the money should remain in your name.

  5. Does the person or firm giving advice have deep pockets? Are they audited by a prominent company?

  6. Don't pay attention to those who sell fear. We've all seen the ads on the Web about the certainty of imminent collapse. I'm not exactly an optimist about the economy, but fear as a sales tool has a false ring. 

  7. Generally those who have been around a long time have some credibility and staying power. Of course Madoff was a Wall Street fixture, but there is a good example of accepting his word on faith.

  8. Stock brokers sell what their company tells them to sell. If they were really good, they would be running their own investment firm. As we have seen even the "great" companies such as Goldman Sachs can fail to serve their clients' interests.

  9. Pay attention to the business cycle. This is one of the things we try to analyze here at the Daily Capitalist. Where you are in the cycle is one of the most important thing an investor can know. Buying a home in 2008 would have been a bad move. Buying before the Dotcom crash would have been a bad move.

  10. If it's too good to be true, it isn't. Of course this is the Ponzi scheme hook. My theory is that boom-bust business cycles have created a meme of constant speculation in our society. People think that "the Big Guys" always have the inside scoop and that's why they get rich (but see Lehman Bros.). They lose out on one cycle and when the next one starts and making money seems easy, they want in. This leads to susceptibility to Ponzi artists and advisers who confuse their boom phase success with intelligence (they quickly blow up in the bust). 

This is hard work. But remember that we are all in the same boat. 

Good luck.

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thurstjo63's picture

Cher Econophile, Unfortunately you have latched on to the modern fallacy of believing that inflation is about a general increase in prices. This is incorrect. Inflation is the increase in the money supply. Why is a matter best answered by thinking about the origins of inflation and asking yourself what is consistent throughout all of each situation. Whether it is the debasing of the coin with less gold or silver by weight than there was previously (i.e. inflation of coins), or an increase in gold receipts which the later receipts are not backed by gold (i.e. inflation of receipts by private banks) or the modern version where paper money is not backed by anything is increased (i.e. inflation of the paper money supply by central banks), what is common in all cases they use the "money" in order to exchange it for real good. In all cases, they manage to get something (a tangible good or service) for nothing. In the modern case, it is the ones who first get the money (i.e. the banks or the government) who benefit at the expense of everyone else. No one can predict what will happen with prices since no one can predict how the money will flow through the economy. That's why looking at the general increase in prices is useless. In each case, they lead ultimately to the business cycle of boom bust. The modern economist idea of inflation being defined as a general increase in prices is an invention of government to obfuscate their crime of robbing the population of their hard earned cash! 

Hope this helps.

Econophile's picture

Not at all. I understand the causation and I refer to it often. And you will notice I refer to "price inflation" rather than "inflation" (mostly). I follow Austrian economic theory.

socalbeach's picture

The graph showing the devaluation of the dollar would have been better if the Y axis used a log scale.  As is, it looks like the dollar's depreciation is slowing down, but it's really not.

mt paul's picture

inflatable muppets 

lotsoffun's picture

john kenneth galbraith - 'a short history of financial euphoria' - anytime you see large amounts of money being made where there was nothin before - be weary.


Shizzmoney's picture

And if you think assets and wages always keep up with prices, the past two recessions should dissuade you from that thought. Right now we have a situation where the dollar is continuing to devalue and workers wages are actually going down.

Hence why everyone you encounter seems a little ticked off as of late!

Imagine the younger people, who literally cannot save, or even play around in the stock market.  Every single dollar we make, gets sucked away by the system in taxes, rent, debt bills, health insurance, and of course, family bills. 

It really is silly to think the stock rally can keep up within 2 years, nevermind 5.

hooligan2009's picture

I think your change in real average hourly earnings needs a little help. That shows down around 1.7% using some measure of inflation. I personally think the inflation measure has to be cohorted into staples like housing, food, utilities, council taxes for an average family, then (and I accept this gets trickier, but eat better be healthier etc etc) health, holidays and education (luxury goods). You don't need holidays or an education (though they help) health should come from eating "better" and taking care of yourself (teeth and fat content). Accident insurance may be a hygiene factor, so thats debatable. Cars, cell phones and i-pads are a luxury. 

Point is there are hygiene factors that are probably better reflected by another inflation measure. 15% of people (on food stamps) live in poverty and another swathe (probably 40-50%) just cover hygiene factors each month. Maybe shadowstats numbers reflect this, but if you show "hygiene inflation" or shadowstats numbers for the last five years against nominal wage growth for the bottom 50% cohort, you will see that (guessing) the bottom 50% have taken a cumulative wage cut of 20% in the last five years. Extend it back another five years (to the end of the TMT bust and the last time Fed Funds were at 1%) I reckon you could lop off another 10% in average hourly earnings. 

This might have led to companies hiring a bunch more people, but I think the majority of jobs available to the bottom half of the economy are shelf stacking or parking cars. The real jobs (those that are in the top half and excluding the ruling classes of the USA) have been "exported" to Brazil. The real cost to the economy of political decisions via NAFTA, China WTO entry and all the trade agreements drawn up by successive politicians and raised to loft levels in the Clinton era has to promote world peace and prosperity at the expense of the USA. 

Nobody voted for it and now we have welfare democracy where bread and circus poltics is the order of the day. 


Yes we can, means fining American companies who outsource production to international areas that could be sourced domestically. It is time to reverse the role of Americans being the sellers of other countries products within the US. 

Just saying.

seventree's picture

 You must check advisers out. Don't accept a demonstration portfolio, rather ask to talk to other clients and see their real-time results.

I can see the wisdom of this, but who is going to show me their personal finances? Not sure I would do that for anyone else.

Sudden Debt's picture

Don't worry! They cann still inflate the dollar 99% even if it's down 97% since 1913!
and after that....
They can inflate it down another 99%!!

tony bonn's picture

as always superb analysis....however, i would add the point that inflation actually benefits those at the top of the economic pyramid who have pricing power, while decimating those below the top decile who do not have such strength....again, the powerful run roughshod over the weak all so that they can enjoy their american dream while everyone else gets the nightmare....

Econophile's picture

Agreed. I think I referred to this as the "financialization" of the economy. Thanks, Tony.

DavidC's picture

Collapse is coming either way, whether by inflation or deflation. Of the two, deflation to me would be the preferable route.


Bartanist's picture

Yes, deflation seems to be the better route for everyone EXCEPT the banks. With deflation and the writing off of bad deb and then a recapitalization we can have a free restart AND those who saved for their retirement might be able to have a retirement.

... and deflation with a recapitalization won't be a 100% recapitalization of the government ... only the banks. The government will have to create money to pay the FDIC insurance on the deadbeat bankers who gambled and lost.

I am not sure how an inflationary end is resolved. Savers lose ... debts can be paid off with ultra-cheap money... if one can get money.

bank guy in Brussels's picture

The famous President Jimmy Carter speech in the 1970s, 'Inflation is Our Friend':

President Jimmy Carter:

« Good evening. ... Our economic system is screwed, blued and tatooed! We just have to face the fact that there is simply no way to fight inflation ... That’s why, tonight, I want you to try to look for in inflation, an entirely new word: Inflation is our friend.

For example, consider this: ... If current trends continue, the average blue-collar annual wage in this country will be $568,000. Think what this inflated world of the future will mean – most Americans will be millionaires. Everyone will feel like a bigshot. Wouldn’t you like to own a $4,000 suit, and smoke a $75 cigar, drive a $600,000 car? I know I would!

But what about people on fixed incomes? They have always been the true victims of inflation. That’s why I will present to Congress the 'Inflation Maintenance Program', whereby the U.S. Treasury will make up any inflation-caused losses to direct tax rebates to the public in cash.

Then you may say, "Won’t that cost a lot of money? Won’t that increase the deficit?" Sure it will! But so what? We’ll just print more money! We have the papers, we have the mints. I can just call up the Bureau of Engraving and say, "Hi! This is Jimmy. Roll out some of them twenties! Print up a couple thousand sheets of those Century Notes!" Sure, all these dollars will cause even more inflation, but who cares? Everyone will be a millionaire!

In my speech last week, I said that America would have to undergo an austerity program, but since this revolutionary new approach welcomes inflation, our economy will be free to grow, and we can spend, spend, spend! I believe the watchwords ... should be 'Let’s Party!' »

- President Jimmy Carter, as played by Dan Ackroyd on 'Saturday Night Live', episode 4, season 4

Econophile's picture

Perfect! Better than "Whip Inflation Now!" by Gerry Ford.