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
