By Marilyn Barnewall
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We are beginning to see inflation creep into our day-to-day lives.??I hate to make it sound like an infection or the flu… but it may make us just as sick as the expected 2004 flu for which there is too little vaccine.
Inflation is an increase in the price of goods (or, cost of living).? It is the loss of consistent value of our currency, the dollar.? That, in turn, requires people to spend more money that is worth less to buy the same products we could buy with less – but more valuable — money yesterday.?
The word “consistent” is important in this context.? It means we must be able to determine the value of our currency and evaluate the worth of our economic health.? We need historic perspective.
For example, in the year I was born (1937), the value of our currency let me pay $100 for the same things that today would cost me $1,269.24.? Is that inflation?? Yes, though more accurately it is the result of the Federal Reserve increasing the money supply too much, too fast.? It caused dollar devaluation.? It is “deflation of the dollar.”
The Bureau of Labor Statistics (BLS) recently admitted that consumer inflation has been “slightly” higher than officially reported.? They blame it on a calculating “glitch.”
The Consumer Price Index calculates the cost of living by evaluating what it costs to buy a “fixed” basket of goods and services.? About 95,000 items from 22,000 stores are surveyed.? So, too, are 35,000 rental units.? Here are the components and the weight factor BLS gives each:
Housing – 41.4%
Food and Beverages – 17.4%
Clothing – 6.0%
Medical Care – 6.9%
Entertainment – 4.4%
Other – 6.9%
Housing costs are determined by rents, not home ownership or the inflationary increase in homes for sale.? It does not include the ever-increasing property taxes paid for homes.? Food and housing account for 58 percent of the CPI calculations.?
Since we pay more in taxes than we do for food and housing, it seems right to me that taxes be included in the cost of living.? I won’t be prosecuted by the government if I don’t buy groceries, but if I do not pay my taxes, I will.
Even more important, by saying inflation is only 1.3 percent rather than 2.5 percent, government keeps the cost of Social Security, veteran’s benefits, etc., down – things tied to the annual rate of inflation.
Americans are now at the lowest level of personal savings in history.? During the Reagan era, we saved 12 percent.? Today, we save less than one percent.? Individual Americans are more in debt in 2004 than ever in our history… personal bankruptcies are at an all time high.
We need to create 150,000 jobs a month just to stay even with population growth.? At this point in our economic cycle, it cannot be done.? Most jobs being created do not pay as well as lost manufacturing jobs.? Most jobs require skills workers from the manufacturing era do not possess (so register for one of the technology schools… it’s not going to get better).? Some jobs require people to read beyond the 8th grade level.? Those who graduate from public schools may have difficulty.? It is a dilemma.?
John Mauldin points out in the October 16th issue of Thoughts from the Front Line, that there are five phases of innovation.? 1)? Innovation; 2) Growth boom; 3) Shakeout (weak companies fail); 4) Maturity boom; and 5) Economic peak.
We are currently going through the shakeout phase of our information and technology-driven economy.? We moved from an economy driven by manufacturing and industry through the 1960s to an economy now driven by information and technology.?
Skills required are different.? Some technology and information companies fail.? Older companies must make massive adjustments.? The cost of adjusting takes money away from new jobs and expansion.?
Some time around 2010 (my projection), we will enter the Maturity boom cycle and everyone can go back to spending more money than they have on things they don’t really need.? Until then, it is hunker down time… just in case you hadn’t noticed.
In truth, we should have had a much more serious recession than the one we are living through because of the economic base change cycle.? The huge increase in the money supply could bring the dollar to its knees – or, save us from depression.? Equally important was the Bush tax cuts that helped stimulate the economy.
If politicians from both political parties were more fiscally responsible, we would come out of the Shakeout cycle faster.? Maybe we should take up a collection and send them to Lourdes… it would take a miracle.
Marilyn Barnewall, in 1978, was the first female to be named vice president in charge of a major loan and deposit portfolio at Denver’s largest bank. She started the nation’s first private bank, resigned to start her own firm and consulted for banks of all sizes in America and other countries. In June 1992, Forbes dubbed Barnewall “the dean of American private banking.” Author of several banking texts, she has written extensively for the American Banker, Bank Marketing Magazine, and was U.S. consulting editor for Private Banker International (Lafferty Publications, London/Dublin). Article originally appeared in the Grand Junction Free Press. Marilyn can be reached at [email protected].
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