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Why does it cost so much money to pay for the basics of a normal life, let alone a middle class lifestyle?
The answer involves deadly dull numbers, a tiptoe through the tulips of political rationalization, and a date with inexorable financial destiny.
Our tiptoe begins with the fact that today’s dollar does not buy what a dollar used to buy. This loss of buying power is called “inflation.”
Inflation means that money stored in a bank, a CD or a treasury note loses buying power every day it does not earn enough interest to offset the loss due to inflation.
Different things have different inflation rates. The price of beets goes up slower than the price of gold.
So how does anyone know what is the “overall” inflation rate?
Well, inflation also means the dollar is weakening year to year. To find out how much, you could look at the price of gold. Gold cost $1,535 per ounce on April 28, 2011. A year earlier, gold cost $1,170. Five years ago, it cost about $650. And 10 years ago, an ounce cost $280.
Simple math tells us the “overall” inflation rate, or loss of buying power of your paper dollars, has been 31 percent since April 28, 2010. You get this figure, the one year inflation rate, by dividing $365 (the increase in gold cost) by 11.7, which is 1 percent of last year’s gold price.
It gets worse.
The inflation rate over five years, as measured by gold’s free market price rise, was 135 percent. That equals a 27 percent inflation rate per year. When you look back 10 years, to April 28, 2001, the cumulative inflation rate was 447 percent, or 44.7 percent/year.
In short, the price of gold has more than doubled in five years, and has quadrupled over 10 years.
Now, the “official” inflation rate is set by the Consumer Price Index, issued by the U.S. Bureau of Labor Statistics. The BLS website states that the inflation rate from March 2010 to March 2011 was just 2.7 percent, before any “seasonal adjustment” was applied.
When the feds apply these adjustments, “official inflation” is less than 1 percent in a year.
That is why Social Security recipients have not gotten a cost of living adjustment on their retirement checks.
In short, the official inflation rate is as “rigged” as the official unemployment rate is understated.
So, real inflation has nibbled away at your saved dollars much more than politicians admit.
But what caused this loss of “buying power?”
Many economists say the loss is due to several bad U.S. behaviors.
•The government is running up the national credit card by selling “we promise to pay you” treasury notes to China, Japan and India so the feds can spend more money than comes in each year from taxes, fees and investments.
At present, 40 percent of last year’s federal budget was paid for with borrowed money.
•To pay for those treasury note promises, the Federal Reserve prints more paper money each year. More money in circulation means that each paper dollar has less “buying power” than it did before the feds printed more money.
•The feds have failed to tell the voting public that it needs to raise taxes on everyone, kill tax code loopholes and cut costs in order to reduce its reliance on foreign borrowed money.
In sum, either the U.S. government greatly reduces its borrowing or — as the “buying power” of the dollar continues to decline — the nation faces an inexorable financial collapse like that associated with “banana republics.”
While the feds fiddle, what can citizens do to preserve their dollar “buying power?”
Well, people can buy gold bullion coins, like the Krugerrand, Maple Leaf, Philharmonic or Golden Eagle coins, from online dealers like Monex.com, Goldprice.org or the U.S. Mint at usmint.gov.
You can also buy coins from local dealers like Premier Precious Metals in Santa Fe.
You could also buy land, houses, stocks and bonds--but none of them is likely to increase in value by 27 percent a year, as gold has done.
So, be cautious — but do protect the “buying power” of your paper money.