Inflation - the hidden tax

With inflation at 8% and banks paying 2% interest, your saving is shrinking by 6% a year.  This is because of the hidden tax called inflation.   We can expect inflation for a long time to come because:

1.    It is politically impossible to make large decreases in government spending.

2.    It is mathematically impossible to avoid inflation without large decreases in government spending.

Inflation happens when governments print money to pay its bills.  It is a certain law of supply and demand, increasing the supply of anything, including currency, will decrease its value.  Cutting expenses is not really an option because no one wants to be responsible for cutting off food to poor people, or reducing the pension that retired workers were promised, or cutting social security to someone who paid into it their whole life.  The government was borrowing money to pay bills, but other countries have finally realized there is no way we can pay it all back, so now we are printing money to pay the bills.

We are not the first country to be in this boat, history shows it is very common.   By printing money, the government can make sure all programs continue, and it can meet all its obligations.  Our money is no longer backed by silver or gold, we can print as much as we want.

The bad news….. the currency will lose value, and history shows a currency can lose all its value.   Everyone has heard the stories about a wheel barrow full of money needed to buy a loaf of bread in Germany during their days of hyperinflation.   People saved their entire lives for retirement, and found they could buy almost nothing with their life’s savings.  In reality, inflation is far worse than regular taxes because it cannot be controlled.  A retired person on a fixed income may get tax breaks, but there is no such thing as an inflation break.

As a nation, there is nothing we can do to alter our course, but as individuals, we can learn from history and be prepared.  If you agree with the two statements in the first paragraph, read on.

Since inflation decreases the value of the currency, history shows you can avoid some of the pain by NOT keeping your savings tied up in currency.  If you do a little research, and see what people have done in the past to fight inflation, you will get lots of suggestions on things that maintained their value, farmland, gold, silver, and any kind of universally needed goods.  It is interesting to note the price of gold, silver and farmland have increased about 400% in the last 10 years.  It is easy to print money, but very difficult to make more farmland or precious metals, so the laws of supply and demand take over and the value of the currency goes down, relative to more stable assets.

Your living expenses can increase a lot and the government can still report low inflation.  The government has changed the way it calculates inflation, and has removed the most critical things we need to survive (food and energy) from the calculations.  If interested, you can find many sources on the web that will show inflation calculated by old methods, to give you an idea of how much living expenses are really increasing each year.  I recommend shadowstats.com.  Currently the government reports almost no inflation, but it would be about 8.5%, if they used the same methods they used 20 years ago.

Will the stock market protect you from inflation?  We recently had a 10 year span with an average return of zero.  If you add inflation to the equation, that makes it almost impossible for an adult to make money in their lifetime.

Believe it or not, there are some people out there (many in public office) who really believe there is no harm in the government printing money to pay bills.  Maybe they are much smarter than me.  If that is the case, then let us do away with all forms of taxation, print lots of money for everyone, and we will live in a wonderful utopia where everyone is rich!

Written by Jim Shures

Places to Find Good Financial Data

As with many folks, I like to track and chart financial data trends.  Spreadsheets are fun!  Over the years I have found many good places to get solid data.

Here are some of the trends I track:

• Federal Budget (inlays, outlays)
• Consumer Price Index
• Bureau of Labor & Statistics
• ShadowStats
• Federal Debt:
• Historical
• Current
• DOW Jones Industrial Average
• Federal Reserve Notes (m1, m2)
• Gold & Silver
• iShares Gold (IAU)
• Ruger (RGR)
• iShares Silver (SLV)

You can see the trends I produce by visiting the opening page of kietzman.org.  The tool is capable of forecasting trends by analyzing past data.  Future rates are determined using average annual rates over a given historical period.  The determined future rate is then used to forecast future trends via the following formula:

F=P*(1+(R))^Y

F:  future amount

P:  principal amount

R:  annual rate

Y:  number of years

Using this kind of data and the trends they produce, you can estimate how your investments will perform over the long run even against inflation.

A Close Look at Personal Finances

The aim of this article is to provide usable advice on how to prepare for the future with regard to personal finances.  I follow three basic steps:  build a buffer, pay off debt, and invest in your future.  You will learn about each of these in detail.

Steps to Obtaining Financial Stability

1. Keep a buffer of liquid assets equivalent to at least six months of essential expenses.  A full year's worth would be preferable.
• Essential expenses would include:  auto (gas, insurance, maintenance, payments), food, home (electric, heat, insurance, maintenance, payments, taxes), phone, tithes/offerings.
• Liquid assets are things convertible into cash on short notice and could include:  cash, checking/savings account, gold/silver.
• Liquid assets would not include:  CDs, 401K, IRA, property.
• Never consider your primary residence an asset unless you are willing to downsize to obtain the difference.
2. Pay off all outstanding debt.  You should start with the highest interest debt and work your way down.  This includes paying off cars and houses.
3. Live well below your means.  Single income households should be able to live off half their income. Double income households should be able to live off half the larger income or completely off the smaller income.
4. Spend some time researching the economy in order to determine what kinds of investments make the most sense for you.  Regardless of the investments you choose, your aim is to retain your purchasing power by overcoming the annual rate of inflation.

Rules for Buying a House

If you are unable or unwilling to purchase a house outright, then you must give careful thought to the following items:  length of loan, monthly payment, total interest.

• Length of Loan:  You should try buying a house with the shortest loan you can manage.  Normal choices are 10, 15, 20 and 30 year loans.  I recommend buying a house that can be paid off in 5 to 15 years.
• Monthly Payment:  You should aim for a monthly payment that is half of what you think you will actually pay.  That way you have some breathing room if you get in a jam.
• Total Interest:  You should keep your total interest to a level you find reasonable.  I recommend trying to keep the total interest under 20% of the loan amount.

Mortgage Interest Formulas

• Given L,R,Y:  I=(R/12+((R/12)/((1+(R/12))^(Y*12)-1)))*L*Y*12-L
• Given L,P,R:  I=P*log[ base (1+(R/12)) of (P/(P-L*(R/12))) ]-L
• I = interest
• L = loan amount
• P = monthly payment
• R = annual percentage rate
• Y = number of years for loan

Types of Investments

• 401K, IRA, Money Market, Roth IRA:  Stock market investments.
• Certificate of Deposit (CD):  Flat rate bank investment that is locked in for a given period of time.
• Gold/Silver:  Alternate currency that hedges against fiat monetary inflation.
• Farm Land:  Purchase farm land and rent out to farmers.  Rent should cover any payments you are making.
• Rental Property:  Purchase houses/apartments and rent out.  Rent should cover any payments you are making.
• Treasury Bonds:  Purchasing government debt that promises a return on investment.

How to Approach Investing

I recommend paying off your debts before focusing on investing.  As for investments, I recommend investing around 30% of your gross income if possible.  Your main goal with investing is to save money for a desired purpose like a house or more importantly retirement.  However, this is difficult since we use fiat currency and live in an inflationary economy.  Fiat currencies are those not backed by anything real like gold or silver.  Our fiat currency is a very recent experiment.  For most of our country's history the U.S. dollar was maintained by the U.S. Treasury and backed by gold.  Then we took a devastating turn.  In 1913 the U.S. Treasury handed responsibility of the money supply over to a conglomerate of banks known as the Federal Reserve.  Then in 1933 the government confiscated all privately owned gold from citizens and removed their ability to convert their money into gold.  The final blow came in 1971 when the government completely removed the gold standard by no longer allowing foreign countries to convert dollars into gold.  At that point our money was no longer backed by anything real like gold or silver.  Instead our money is now literally created out of thin air.

You must understand inflation in order to beat it.  Inflation is simply the loss of purchasing power due to an increasing money supply.  The federal government produces what's known as the CPI-U inflation rate and has added multiple layers of calculated manipulation over the years in order to keep it artificially low.  A group called Shadow Stats produces an alternate figure known as the SGS Alternate CPI which uses the same CPI data yet excludes the various manipulations.  You can find both inflation rates side-by-side at Shadow Stats:  http://www.shadowstats.com/alternate_data/inflation-charts.  I recommend the SGS Alternate CPI over the CPI-U.

The key to investing is to beat the rate of inflation over the long term.  This can be done by tracking all your long term investments based off the overall average rates of return starting from 1971.  That year is important because it is the year we went off the gold standard and started inflating the money supply.  Since 1971 our money supply has been inflating an average of 7.76% per year.  This is the percentage you need to beat when investing.

Here are some average annual rates of return on some common investments based off data going back to 1971:

• Gold:  11.75%
• Silver:  12.18%
• Stocks (DOW):  7.54%

Most people think it natural to save for retirement by investing in the stock market via 401K or IRA accounts.  These accounts are usually based on underlying mutual funds that typically carry an annual rate of return somewhat near the DOW average.  As you can see, the DOW stays about equal with the rate of inflation.  That means the stock market is not really making gains, but is just breaking even.  If you are one who wants to invest in the stock market, I would recommend researching individual stocks that have a historical precedent of beating inflation.

Due to the instability of our monetary system I would not recommend the stock market as your primary investment.  Instead I would recommend investing primarily in gold and silver since they are natural hedges against inflation.  History shows that fiat currencies come and go in rather short order and I don't expect the U.S. dollar to defy history.  The U.S. dollar will either collapse or be re-backed under a gold standard.  I expect this to happen in the next 5 to 20 years.

You should plan where you live, how you live and your investments according to what kind of future you expect in the years ahead.  Consider scenarios like natural disaster, hyperinflation, increased taxation, government regulations and even economic upheaval.  Judge for yourself the probability of these events and then prepare accordingly.  As the former V.P. of Pfizer, Chris Martenson, says in his Crash Course video series, "the next 20 years are going to be completely unlike the last 20 years."