“We’ve had a taste of inflation today … Dollars are worth less and less, and ultimately less, bringing the ruination of nations. When Germans needed a wheelbarrow of currency to buy a loaf of bread, their frustration paved the way for Hitler.”
– Paul Harvey, May 17, 2005
When a highly respected radio commentator like Paul Harvey equates the social, political and economic threat posed by higher inflation to the rise of Hitler’s Third Reich, it’s time we understand what’s really going on and what, if anything, can be done to overcome it.
The true rate of inflation
For years, we’ve been told “inflation is no problem.” But let’s apply some plain, old common sense to discern the true rate of inflation. Just over the past year …
- Energy is up 45 percent
- Health care is up 22 percent,
- College tuition is up 18-30 percent
- Commodities are up 16 percent
- Housing is up 12 percent
Common sense tells us the true rate of inflation should be much higher than 2 to 3 percent – which is what government stats and most economic experts still maintain today. (What planet do these guys live on anyway?)
The “official” government wholesale inflation indicator (PPI) for July jolted the market last week, showing inflation at twice the rate expected by economists – a startling 12 percent annualized. Media pundits were quick to blame it all on the temporary oil price spike.
But using common sense, I calculate the true rate of inflation at between 6 to 7 percent – about double the “official” rate – which does not reflect real world cost of living increases. (See “In whose numbers do you trust?”)
The true cause of inflation
“‘There is no surer way of overturning a society, than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does so in such a manner than only one man in a million is able to diagnose it.’ Lenin was certainly right.”
– John Maynard Keynes, “The Economic Consequences of Peace”
Inflation is officially defined as a “sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase.” But is that the whole story? Is inflation just caused by greedy businessmen wanting more profit? Or, could it be the Federal Reserve, in concert with the U.S. government actually promotes the real engine of inflation – printing too much paper money?
The true source of inflation is the Federal Reserve, which creates more and more paper “dollars” to stimulate the economy, yet are simultaneously reducing the value of every dollar that every American has saved or invested. This monetary inflation begets asset inflation, which can be seen clearly in the “extremely overvalued” real estate market.
A deceptively low “official” inflation number hurts everyone, but especially those who rely on SSI and fixed retirement incomes. Cost-of-living income adjustments based on artificially low government CPI and PPI figures will never be able to keep pace with higher “real world” prices. No wonder our national saving rates recently hit zero again.
Inflation is the No. 1 enemy of your financial plans for the future and of the generations to come. My rule of thumb is: Take the official inflation rate and double it.
Overcoming inflation
“Inflation is like sin – every government denounces it and every government practices it.”
– Frederick Leith-Ross, The Observer
Monetary theft is not limited to governments – the stealing of money can be seen in such ancient practices as the clipping of coins and the abasing of metals. That is why coins with a milled rim became popular starting in 1685. These early types of inflation have been succeeded by “fiat” (false) money inflation.
Finding financial numbers you can trust can be as much of a struggle as finding a financial adviser you can trust. Discovering “real world” statistics involves stripping out the political-financial spin by cross-checking the numbers with multiple sources. This takes time and energy, but the alternative is to passively take a loss year after year.
My fear is when U.S. consumers finally wake up to the realities of inflation, they will suddenly find themselves too far behind the curve to do anything about it.
I suggest keeping an eye on gold prices, as another trustworthy indicator of real world inflation. Gold is up about 6 percent so far this year, so it’s safe to say inflation is at least 6 percent. Gold prices are now up 60 percent since 2001 – I consider that as inflation “proof.” Alan Greenspan has said, “If you want to know where interest rates are going … watch gold.”
As an interesting side note, the word “gold” in the Bible is often preceded by the word “pure.” Yet gold is not found in a state of purity. Instead, it must be refined before it’s fit for use. No wonder gold (and silver) coins have faithfully served as the world’s only inflation-proof money for over 6,000 years … they can’t be printed by any government!
For more tips on overcoming inflation, read my newest 10-page special report: “Real World Inflation Solutions.”
