Is Inflation Robbing You Blind?

Back in 1933 when an ounce of gold was trading at only $20 per ounce, the median income for the average American household in manufacturing was about $1,000 a year.1 So, as you can well imagine, $20 back then could go a very long way. You could essentially go to the most expensive store in Beverly Hills and buy the most expensive suit for $20 and upon discovering this careless spending, your family and friends would think you were insane to have spent $20 on a single suit.

Now imagine you had two $20 bills in 1933 and you put one of them under your mattress and used the other one to buy an ounce of gold. Fast forward to today, 88 years later. The $20 under your mattress can buy you a couple of burgers and some fries — and if you are lucky, you might get some change back. However, the ounce of gold you had purchased, if you sold it at today’s spot price of $1,770 (as of this writing in April 2021) would enable you to go back to that same store in Beverly Hills, buy that same suit and never hear the end of it from your family and friends on the insanity of having spent that much money on a single suit.

The purpose of this example is to demonstrate how much the value of your dollars has dropped over the years and how gold could have prevented that loss in your purchasing power almost a century later. Now imagine that instead of just one $20 bill, a portion of a family’s net worth was converted into gold and discovered today. How would that change the lives of the generations that followed?

There is a term for this kind of currency devaluation: inflation. Most people think of inflation as just the price of goods and services going higher, but that is just a symptom of the larger disease. The utility of goods has not changed. A dozen eggs is still a dozen eggs. It still feeds the same number of people. It took no more effort for a chicken farmer in Iowa in 1933 to get a dozen eggs which sold at $0.18 cents back then than today when that farmer’s grandson sells that same dozen eggs for approximately $2.00.2 And yet, that farmer wants 10 times more money to sell that same dozen eggs. The value of the currency has declined, so he has to make up that loss by demanding more dollars to offset the loss.

The late Wall Street legend Richard Russell once explained the value of the US dollar in terms of the stock market.3 This is paraphrased, but he essentially said this: If you purchased 100 shares of a company’s stocks, and year after year, you saw the value of those shares drop, how long would you hold on to it before you finally throw in the towel and dump it? A year, five years? How about 10 or 20 years? Even the most patient and optimistic investors would probably give up by the 2nd or 3rd year, cut their losses, dump the stock and move on to something more productive. So ask yourself this question, if the US dollar was a stock, would you buy it?

Russell asked this provocative question to underscore that investors buy stocks in the hopes that they gain, or at the very least, maintain their value. Few would purchase a stock with a terrible history of decline in value, yet that has been the case with the US dollar. To be sure, every civilized nation must have a monetary exchange system in place, with which its citizens can pay and be paid for goods and services. However, we need to pay attention to what happens to the value of that money over time, because it has been said that time is your money’s worst enemy.

As you can see in the chart below, the purchasing power of the US dollar has largely been in decline since early 1900 and has lost over 98% of its buying power.4

U.S. Dollar Purchasing Power

The Big Inflation Myth: Everything Is Fine

The #1 myth about inflation is that it isn’t there, or that it’s at a very low, manageable level. Official numbers say inflation is well within the target range and so there is nothing to worry about — that the Federal Reserve is doing a good job keeping a handle on our nation’s money supply. If that’s true, why does it feel like you have your own little personal cloud of inflation following you around? Are prices going up — just for you? Is it only YOUR dollars that don’t seem to stretch as far?

It is not just you, and yes, it IS real. The latest official inflation rate is at a very reasonable 2.6%.5 How can that be? Well, Mark Twain is famously quoted as having said there are three kinds of lies: lies, damned lies, and statistics.

Businesses use inflation figures and other metrics to make business plans and projections. One businessman, John Williams, noticed that wasn’t working out so well and explored an alternative method for the sake of his own business planning. The result is the highly contested Shadow Government Statistics or www.shadowstats.com, a website Williams created to demonstrate what he has noticed — that the Bureau of Labor Statistics keeps changing the metric in measuring inflation every decade or so.

Where the Fed claims 2% inflation, Williams uses the 1980 methodology, resulting in an inflation rate closer to 10%. Which figure feels more correct in your day-to-day purchases? Is this an attempt to fit the existing inflation inside the Fed’s narrative? He claims in a report6 on the Consumer Price Index that:

  • The Consumer Price Index has been reconfigured since the early-1980s, arguably to understate inflation.
  • The CPI no longer measures the cost of maintaining a constant standard of living.
  • The CPI no longer measures full inflation for out-of-pocket expenditure.
  • Underreporting of official inflation allows for cuts to annual cost-of-living adjustments to Social Security
  • The use of the CPI to adjust retirement benefits, private income or to set investment goals impairs the ability of retirees, income earners, and investors to stay ahead of inflation.
  • Understated inflation used in estimating inflation-adjusted growth has created the illusion of recovery in reported GDP.

Why Wouldn’t Washington Love Inflation?

Inflation is a monetary phenomenon that happens when the money supply is expanded, and dollars become less rare. When there are more dollars in circulation chasing the same number of goods, you get higher prices. Inflating the money supply is one way to pay down public debt with cheaper dollars. It is a source of money that doesn’t have to be explicitly taxed, which typically angers the voting public. But every dollar they add subtracts purchasing power from dollars already in existence. It’s a stealth tax.

Printing money is easy, but the insidious fix for governments. Every dollar created erodes the power of dollars you’ve already earned and saved. Over 23% of all dollars in existence were printed just last year alone.7

What motives might Washington have to want official numbers to show that inflation is low? One big reason is Social Security. These entitlement payments are already unsustainable. Yet, by law, they have to give out adjustments for inflation every year. 

The Cost of Living Adjustment (COLA) must compensate social security recipients for price inflation — as determined by the Bureau of Labor Statistics. Therein lies the rub. If the government admits there is inflation, they must pay for it.

Is the US Brewing the Perfect Storm for Inflation? 

Every time the government spends money it hasn’t extracted from the economy through taxation, they are using various instruments to “print” more dollars and expand the money supply. Government overspending is often inflationary, and the US dollar is fighting a losing battle for value retention and international relevance. 

Why does our government behave this way, printing money at will and allowing zero-interest debt? They do this because they can get away with it. As long as the dollar serves as the dominant currency within the global economy, it seems the US can do anything it wants. But are forces on the horizon signaling trouble?

Is the World De-Dollarizing?

The dollar is the currency of oil; therefore, it is the currency of global business. What are the potential impacts in the US if the rest of the world backs away from the dollar? Are countries doing this? These are questions worth examining in light of recent events. 

The truth is, every dollar the government spends that it hasn’t extracted from the economy in taxes must be created or borrowed. Historically, this has collapsed economies and relegated currencies to the dustbin of history.8 Perhaps the only reason it hasn’t happened to the dollar is because the dollar serves as the premier world reserve currency and the fact that oil contracts are settled in dollars. This gives the US nearly unlimited power to export our excess dollars — our inflation — overseas. We are able to spread the devaluation of the dollar out across the global economy, so we don’t have to experience the full effect of our monetary policies.

There has been insatiable demand for oil and, thus, insatiable demand for dollars. Our government and our politicians have been spoiled by this dynamic. There have been no consequences to the officeholders making the spending decisions and so they continue and accelerate. But is that changing?

The latest challenge comes from China. Petro-yuan contracts are now actively traded. Russia, Iran, Iraq, and even India have challenged dollar supremacy by trading oil for something other than dollars. It remains to be seen if China is a big enough player to break the dollar’s stranglehold on the global oil trade. If China is successful, this would significantly reduce the dollar’s dominance, potentially leading to waves of inflation.

A recent report in Global Times9 reveals that many emerging economies are getting spooked by our spending. Namely, the accommodations we are making to monetary policy to ease the economic impact from lockdowns, like stimulus bills and near-zero interest rates. Many countries are making moves away from the dollar to protect themselves from our self-destructive policies. The dollar has plunged to just 59% of world reserve currency holdings, which is the lowest in 25 years.10

What could all of this mean for you? De-dollarization means less ability for our politicians to spread out the effects of our inflationary monetary policy to other countries. If they aren’t accumulating and saving in dollars anymore, then we potentially have a major problem here at home. We would have a huge increase of dollars in the US chasing the same — or reduced — amounts of goods in US stores, combined with supply chain shocks. It’s anyone’s guess what a roll of toilet paper or a gallon of milk could cost in the future.

If Not US Dollars, What are Central Banks Holding? 

Central Banks around the world are increasing their gold holdings where possible, and they are also bringing the physical metal back home. From the UK publication The Conversation, we learn that Central banks added 650 tons to their reserves in 2019, the second-highest shift in 50 years. Examples noted in the article: “Between 2012 and 2017, Germany repatriated most of its massive reserve from Paris and New York to Frankfurt. The Netherlands did likewise in 2014, followed by Austria. Then came Eastern Europe. In 2018, Hungary announced it would repatriate nearly 3 tons of gold from London, while greatly boosting its reserves. Poland repatriated 100 tons from London a year later, about half of its national reserve.”11

Central Banks net Purchases of Gold

According to a Moneyweek.com article, Chinese mining companies have also been accumulating mining properties worldwide — in Africa, South America and Asia — to increase their production capacity. China has mined about 6,500 tons of gold since 2000 and keeps it within its borders — exporting it or selling it abroad is actually illegal. 12 China has encouraged its citizens to own gold and Chinese citizens have complied — individual ownership of gold in China is registered and tracked, so the government knows where its privately-owned domestic supply is held, just in case…

All of these things cast doubt on the officially reported 1,948 tons of gold figure that China says they own. Nick Laird of www.goldchartsrus.com estimates as much as a cumulative 28,911 tons of gold are in China, with maybe half of that owned by the government and the central bank.12 This puts China far ahead of the US in terms of gold holdings, and it has been said that whoever owns the most gold wins, economically speaking. Central banks are not stupid. Their job is to see the writing on the wall.

When the world is getting nervous about dollars and central banks are buying up gold, perhaps you should think about the diversity in your portfolio as well. Precious metals have intrinsic value and have held up their purchasing power over centuries. Let’s look at how metals stack up against the long-term effects of inflation.

Median Income vs. Prices

The truth is many Americans probably don’t even notice how much they lose over time to inflation, or how demoralizing it is to those trying to save for the future. How much less will your money buy in goods and services in the next decade or so? Let’s look at how much the dollar has declined in value over the years.

2008 to 2020 Comparison Gold Price

Looking at the chart above(13) that compares 2008 to 2020, shouldn’t we all be amazed by the Federal Reserve’s repeated statements that our current inflation rate is around 2%? While a median income increase at 36% has kept up with some of the basic food and entertainment items, the largest ticket items are accelerating.

So, what will your money be worth in the next 10 years? Of course, past performance is never a promise of future returns and there are many variables to consider. But just in the past 12 months, from April 2020 through April 2021, the US Dollar Index has dropped from 99.95 to 91.55.14 That’s an astonishing drop for just a single year. It’s the equivalent of losing more than 8% of your savings account through no act or fault of your own.

At the May 1 shareholder meeting of Berkshire Hathaway, Warren Buffett noted “We are seeing very substantial inflation. It’s very interesting. We are raising prices. People are raising prices to us and it’s being accepted.” There is more inflation “than people would have anticipated six months ago,” he said.15

How Can You Protect Yourself From Rampant Inflation?

Clearly, the deck is stacked against us. With wages not keeping pace with the prices of all the things we buy, the future looks incredibly bleak. How can you possibly save enough of today’s dollars to pay for tomorrow’s inflation? Should we all take a lesson from central banks around the world and consider holding precious metals?

If you look at the table below, the median income in the US is currently near $68,000 a year, which can buy 38 ounces of gold at its current price (at the time of this writing).

Gold to Income Ratio table

In 2008, the median income could have purchased 57 ounces, and in 2000 when the annual median income was only $41,000, they could purchase 157 ounces. Note that in the past 20 years the median annual income has gone up by just 66% while the price of gold has jumped over 580%! In 2000, you could have purchased four times as much gold with the median income as you could buy with today’s median income. That’s how much your money has lost in value. WOW! 

There are 5,000 years of recorded history showing the role of gold as a valued currency. How will you build and preserve your hard-earned nest egg? You can sit back and let inflation erode your savings, or you can be proactive and invest a portion of your hard-earned money with a time-tested physical asset like gold.

Lear Capital is one of the highest-rated precious metals investment dealers and offers one of the largest selections of metals in the United States. Account representatives are available to help you learn the distinct advantages and limitations from an investment standpoint of the various types of metals. Lear Capital can answer questions you may have and provide you with more educational resources.

Disclaimer:

This article is contributed by Lear Capital. The views, opinions, findings, and conclusions or recommendations expressed in this article are strictly those of the author(s). They do not necessarily reflect the views and opinions of PissedConsumer.com.

Dave Engstrom

By Dave Engstrom
Dave is an author and media personality whose 25+ years in physical assets has cultivated his following in the commodities sector.

 

Sources:

1. https://www.jstor.org/stable/41815102?seq=1

2. https://fred.stlouisfed.org/series/APU0000708111

3. https://en.wikipedia.org/wiki/Richard_Russell_(Dow_Theory)

4. https://observationsandnotes.blogspot.com/2011/04/100-year-declining-value-of-us-dollar.html

5. https://www.usinflationcalculator.com/inflation/current-inflation-rates/

6. http://www.shadowstats.com/article/no-438-public-comment-on-inflation-measurement

7. https://mishtalk.com/economics/23-6-of-all-us-dollars-were-created-in-the-last-year

8. https://georgewashington2.blogspot.com/2011/08/average-life-expectancy-for-fiat.html

9. https://www.globaltimes.cn/page/202104/1220364.shtml

10. https://www.bloomberg.com/news/articles/2021-03-31/dollar-s-share-of-global-reserves-sinks-to-lowest-since-1995

11. https://theconversation.com/countries-went-on-a-gold-buying-spree-before-coronavirus-took-hold-heres-why-138173

12. https://moneyweek.com/investments/commodities/gold/603131/how-much-gold-china-owns-yuan-reserve-currency

13. Items in the chart:

https://fred.stlouisfed.org/series/CUSR0000SAF112

http://www.thepeoplehistory.com/pricebasket.html

https://fred.stlouisfed.org/series/MSPUS

https://fred.stlouisfed.org/series/DHLCRC1Q027SBEA

https://www.quandl.com/data/LBMA/GOLD-Gold-Price-London-Fixing

https://fred.stlouisfed.org/series/GFDEBTN

https://fred.stlouisfed.org/series/MEHOINUSA646N

14. https://1.bp.blogspot.com/-2TJGuU9h7XU/X7mUD6ctwwI/AAAAAAAACRQ/GMViNfbdshIt9wE5jX2_ptiS7cX19FRLwCLcBGAsYHQ/s507/U.S.%2BDollar%2BPurchasing%2BPower.jpg

15. https://www.americanhartfordgold.com/warren-buffett-warns-substantial-inflation/

16. https://dqydj.com/household-income-by-year/

17. https://goldprice.org/spot-gold.html