Inflation, as Milton Friedman, a renowned economist and Nobel laureate, famously stated, is “always and everywhere a monetary phenomenon.” He emphasized that inflation occurs when the money supply grows more rapidly than the production of goods and services that money can buy.
As more currency is introduced into the economy without a corresponding increase in the output of goods and services, the value of that money diminishes. Thus, price inflation isn’t merely about rising prices; it’s fundamentally about the erosion of purchasing power due to an expanding money supply.
Friedman’s insight was acute, but he also had an opportunistic perspective. He viewed monetary inflation as a potential catalyst for enhancing productivity and fostering economic growth. For Friedman, a stable money supply was insufficient; he advocated for managed monetary growth and inflation as a way to sustain economic stimulation. By instilling a mindset of rising prices, policymakers could nurture continuous consumer demand.
This inclination to control and benefit from inflation has permeated the beliefs of government economists since the early 1970s. Over the years, a consensus has emerged that a 2 percent inflation rate is the ideal target for achieving economic prosperity. The Federal Reserve even adjusts its federal funds rate to aim for this coveted 2 percent inflation threshold.
Shadow Stats
On Wednesday, the Bureau of Labor Statistics (BLS) released its Consumer Price Index (CPI) report for October. According to their calculations, consumer prices are rising at an annual rate of 2 percent. However, those living in the real world are well aware that prices are climbing at a much steeper pace.
Take John Williams of Shadow Government Statistics, for instance, who recalculates the CPI using methods from the early 1980s. His assessment reveals that the CPI is actually escalating at an annual rate of 9.8 percent.
Your belief in which inflation figure is accurate may vary. Are consumer prices rising at Williams’ suggested rate of 9.8 percent? Are they more likely around 5 percent? Or are they even declining?
The answer might hinge on individual circumstances—perhaps you’re purchasing a flannel shirt at Walmart or grappling with a utility bill. Yet, many people would concur that their daily experiences reflect price increases far exceeding 2 percent annually.
Assuming a 3 percent yearly inflation rate means that the purchasing power of your cash would diminish by 30 percent over 12 years. Consequently, if you retire at 62, your dollars would effectively decrease to just $0.70 by the age of 74. By age 86, they’d be worth only half as much.
In summary, a consistent 3 percent inflation rate compromises the value of each dollar to just $0.50 in less than 25 years. This represents a significant hit to your financial resources. Moreover, securing a reliable investment income to offset this loss in purchasing power can prove challenging. The government’s cost-of-living adjustments (COLA), linked to the CPI, are hardly reliable for sustaining your standard of living.
How Uncle Sam Inflates Away Your Life
The concept of price inflation eroding the value of the dollar likely isn’t new to you. After all, you experience its effects every day.
This quiet erosion of your wealth bears repeating: throughout your retirement, a significant portion of your life savings will be surreptitiously siphoned away. This is an unacceptable reality.
Your life savings represent precisely that: your life. It’s the accumulation of time and effort you’ve traded for financial security. It reflects your discipline and ability to save and invest over time rather than engage in excessive spending.
When Uncle Sam siphons off your savings through the inflation tax, it amounts to more than just financial loss; it signifies the diminishment of your life’s work. Your life is essentially eroded away—vanishing!
Considering federal and state income taxes, Social Security, Medicare, capital gains taxes, exorbitant health insurance bills, subsidies for luxury electric vehicles, and more, it’s astonishing that you’re able to keep any money at all. Sadly, whatever funds you manage to retain will likely be diminished by inflation long before they’re truly needed.
In conclusion, understanding the implications of inflation is vital for preserving your financial future. Without vigilant management of your finances, the purchasing power that you’ve worked hard to accumulate could dwindle away, leaving you vulnerable when it matters the most.
Sincerely,
MN Gordon
for Economic Prism
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