If you hurry and take a peek at Kitco.com, on the right-hand side you’ll see today’s closing price for gold: $666 an ounce. Rush out and get some extra food storage, some duct tape, and a can of WD-40. Then lock your doors. 666 may be here – and this time it’s not just Elvis.
Of course, if you’re smart enough to own some precious metals, this may strike you as good news.
The erosion of the dollar and the depressing instability of the stock market raises serious questions about preparing yourself financially for the future. Real inflation is much greater than the “official” low numbers we are fed. Even if you are beating the market in your 401k, you are probably still ending up with less purchasing power year after year because of real inflation. So what does one do? Well, I think you need to include investments that will still have value if the dollar drops a lot. And don’t forget a hearty food storage program – and please don’t forget the duct tape.
“Real inflation is much greater than the “official” low numbers we are fed.”
Why do you believe this? What do you think is amiss with the official numbers?
The “core” inflation numbers we are fed by the Fed exclude the costs of being fed, and we ought to be fed up with that. No joke: food and energy costs, two of the biggest factors affecting our pocket books, are excluded from the core inflation numbers – but they aren’t excluded from your rising expenses. The feel-good “core” inflation numbers also downplay other rising costs by arguing that some are due to improved quality and not inflation.
The relilable M3 measure of the expansion of the money supply is being buried by the Fed, who will no longer report that embarrassing number which shows that inflation (in terms of an inflating money supply) is growing roughly twice as fast as the sugar-coated numbers being released.
M3 has grown about 8% annually from 1959 to 2005. And the rate of money supply expansion is picking up. Next year the money you save today may be worth 10% less than it is today. In fact, there are good reasons for thinking that the dollar will drop in valoue by 30% within the next couple of years, adding to the problem.
Some reading material:
http://www.house.gov/paul/press/press2006/pr021506.htm
http://en.wikipedia.org/wiki/Inflation
http://therealreturns.blogspot.com/2005/09/inflation-and-house-prices-correlation.html
http://www.financialsense.com/fsu/editorials/robertson/2006/0516.html
http://www.kitco.com/ind/Daughty/jul122006.html
The most common “official” inflation number that is used for most purposes is the Consumer Price Index, produced by the Bureau of Labor Statistics (not the Fed). The “core inflation” numbers are used by the Fed for macroeconomic forecasting, but it is misleading to call them the “official” inflation numbers.
Do you think the CPI is understated too? Why do you think this? The links you cite don’t explain why you would think that.
The size money supply (whether M3 or any other aggregate) is simply not what economists mean when they say inflation…inflaction refers to a rise in overall price levels. So that is beside the point, unless you’re using your own private definition of the word.
Jeff,
As you can see, I’ve been preparing for just such an event here (see page 23, first post):
http://www.glocktalk.com/showthread.php?s=2864018305fb558d07fe7a5b2718d690&postid=6528594#post6528594
On a more serious note, you have captured my interest in silver coins (gold is out of my price range.) Can you tell me the best way to start collecting pre-’64 US coins? I’d like to focus on dimes and quarters…
Ebay is an easy way to get silver coins – be sure the seller has a 99%+ positive feedback rating and has a score over, say, 100 or so. For larger purchases, nwtmint.com is a good source. Beware the glitzy ads you see in some magazines – they can be rip offs.
Core CPI is the core number I was referrring to. It excludes energy and food. See http://en.wikipedia.org/wiki/Consumer_Price_Index.
But even without the absurdity of eliminating energy and food to get to the “core,” the basic CPI itself has been adjusted in several ways in recent years to downplay inflation. I refer to including new weightings and factors such as hedonics and substitution to tweak the number down. For example, see http://www.financialsense.com/stormwatch/2005/0624.html.
So why are you so confident that these adjustments to the CPI have made it “wrong?” Isn’t it possible that they made it more “correct?”
The issues these adjustments seek to address (such as increasing quality of some goods) are certainly real problems that one faces in trying to construct a meaningful price index.
By the way, I totally agree with you that leaving food and energy out of inflation would be ridiculous for the purposes of understanding changes in standards of living. But this is simply not what “core” inflation numbers are used for, so that point is irrelevant.
Look, if you are happy with inflation-based salary increases and cost of living adjustments (COLA) in your Social Security benefits that don’t come close to reflecting the true increases in your cost of living, that’s fine. If you’re happy with 4% returns on your savings when your dollar buys 8% less each year, that’s cool. No one say you have to worry about these things or do anything about them.
And if you’re willing to trust the numbers the Fed and the US Department of Labor give, and don’t think they have any reason to dress the numbers up to make things look much better than they are, then that’s entirely your right.
Jeff, you haven’t provided a single argument or any evidence(or even web link) to support your claims that the CPI understates the rate at which your dollar buys less each year. You just keep saying it over and over as if it’s obviously true.
I have actually worked at the Bureau of Labor Statistics, although not in the prices group. It is a typical government bureaucracy, so not everything they do is efficient or sensible. However, from what I could see they are actually very insulated from political pressure. They have neither the motives nor the competence to skew the numbers in the way you’re implying. Furthermore, the “adjustments” that you think are some sort of evil plot are well founded in the theory of index numbers (which is a surprisingly complex problem).
It’s actually very obvious that relative, quality adjusted, prices for some goods (computers, TV sets, food) have been falling, while some others (housing) are rising. How to convert these into a single index is an interesting issue, which I’m not sure you’ve really thought about.
You’re assertion that “your dollar buys 8% less each year” is completely unfounded. Do you have any evidence that that is the case?
Even if the money supply grows 8% per year, if the economy does so along with it, that yields no inflation. (Unless you’re a member of the Austrian school of economics.) Money supply != inflation.
Also, what other inflation numbers are available besides the “core” data? If there are other numbers being used to calculate cost of living, there’s no problem. Core inflation rates shouldn’t include such highly volatile prices as energy, so there’s no problem with leaving that out. Further, as prices rise, consumers find it more worthwhile to try to save money, so their costs may not rise as fast as inflation would indicate.
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Most people seem to misunderstand what the number of the beast, 666, means. The best article I have ever seen about this is called: “Nuclear Beasts of Revelation 13”, and can be found at
http://sites.google.com/site/newinterpretations/Home/revelation-13