You may not think you need to worry about a little inflation, but you should.Even a little inflation adds up over the years, and can make a real dent in your wealth if you haven't prepared with investments that will not only match, but outpace, its ravages. Our average historical inflation rate, going back to 1913, is an innocuous looking 3.42%. But that "tolerable" rate adds up to total of more than 2,000% inflation! Or to put it another way, a dollar today is only worth 4.8 cents in 1913 dollars. What happened to the value of our money? Inflation has eaten away at our buying power. The government took our money by stealth, in small increments, by the secret tax that inflation enacts on all our savings. The more money government "creates," the less valuable our existing money becomes. The current inflation rate is 4.18% (on an annualized basis), based on the Consumer Price Index figures released in mid-June. That's actually below the nearly 6% inflation rate that alarmed President Nixon enough to institute disastrous wage and price controls on Aug. 15, 1971.
Inflation and Your Retirement Plans Tim McMahon of InflationData.com keeps track of these historical inflation statistics, with an amazing array of online charts and calculators. One calculator lets you figure out the total rate of price inflation between any two dates from 1914 to the present. Perhaps the most useful feature of the site is a retirement inflation calculator. It allows you to calculate the impact of inflation on the spending power of your retirement dollars over the years. Suppose you retired with $1 million at age 60 this year. Assuming that amount, conservatively invested, earned 5% annually, you would think it would be plenty to support you for the rest of your life. Think again. Just 25 years later, your assets would be worth only $359,245.36 in buying power. And since you could be depleting those assets over your lifetime, you might very well find yourself with little or no buying power as you live longer, and inflation continues, or increases as markets are now predicting. We live in dollars, shop in dollars, invest in dollars, and retire in dollars. But we very rarely think about hedging our dollar bets -- something the rest of the world is doing in a dramatic way. They'd rather have euros, or gold, or corn and soybeans than hold on to U.S. dollars. The U.S. Dollar and Global Prices Foreigners recognize that the U.S. continues to go into debt, continues to create more "liquidity," and now is penalizing dollar-holders by keeping interest rates low, as the Federal Reserve struggles to keep the financial services sector alive and the economy from falling deeper into recession.
If you were a foreign central bank, or a producer of a commodity such as oil, wouldn't you be skeptical of the future value of the dollar? Would you continue to hold dollars you collect from selling products, especially at the low interest rates being paid on the dollar? Or would you demand higher prices for your goods, and try to get rid of your dollars as quickly as possible?
That's why the world markets have determined that a barrel of oil should cost more than $60 or $70. In fact, to get the world's producers to part with one barrel, we now have to fork over nearly $140 U.S. paper dollars. We've actually had a relative bargain in oil prices until recently. It wasn't until the average monthly price exceeded $106.43 per barrel that the inflation-adjusted price of oil in dollars exceeded the comparable average monthly price of $38 per barrel hit in 1979, according to InflationData.com. Now that the world is on to our game of "creating" more dollars to keep our economy going, combined with the demand for commodities brought on by growing economies in Asia, it's likely that dollar prices of these raw materials will move higher. And it's less likely that they'll keep lending us back our money at low interest rates to finance our deficits. Inflation and Politics Politicians of both parties seem to be hoping that Americans won't catch on to this looming inflation disaster until after the November presidential election. After all, how could they continue to make their promises to "help" us if we knew the real cost? Could they promise to give checks to worthy recipients from distressed homeowners to disaster-stricken regions? Could they promise loan forgiveness to graduates, or rebates to encourage savings? Could they promise tax-cuts to various constituents, or subsidies to deserving energy industries? Could they continue to make all those promises about spending dollars they don't have, if we all understood the consequences and the reality that the government must either create ("print") that money, or borrow it? The rest of the world is watching this shell game, determined not to be conned, even if American voters are blinded to the true costs of promises being made on both sides of the aisle. The only question is whether American voters will wake up in time to demand real answers to our very real problems. Or whether we'll just continue to inflate them away. And that's The Savage Truth.