Inflation vs Outcomes

If I told everyone that inflation is possible without increasing prices and without increasing the money supply, they could and would question my sanity. Yet, a large portion of the world's population is experiencing just that. In fact, the concept of inflation that I will shortly reveal to you is in many instances far more damaging and far more insidious than the normal type that we identify with.

Bear with me as I explain. The purpose of this short essay is not to appear clever with words, but to alert everyone to a different measure of inflation which can be tailored to individual households for ascertaining the true damage of the recession on their consumption and savings and hence their retirement.

But let me illustrate the point I wish to make.

The current economic climate has led to people becoming unemployed, having their hours reduced or their rate of pay reduced. When half of a household's income disappears due to unemployment, they can only consume half of what they could consume before. The result in other words is the equivalent of a 100% increase in prices.

Governments can therefore wax lyrical about the very low rate of inflation, but this only attempts to deceive the general populace which is faced with the reality of a lighter shopping bag and a half empty stomach. Each household therefore must calculate its own inflation rate by the reduction in consumption due to any drops in income. I repeat, a 50% drop in pay equates to a 100% increase in prices. A 25% drop in pay is the equivalent of a 33% increase in prices.

Beyond the effect on everyday living, one must ask "what is the effect of such income reductions on repayment of mortgages and retirement?" The answer is "the same if not worse." Retirement day arrives and finds us older, less able to work yet still saddled with a mortgage and very little if any savings with which to augment social security handouts. In some instances retirement will be delayed and possibly never even attained.

Between now and then however, the lower consumption does not only mean less bread on the table. It also means that people are less able to fund their children's education which in turn will give us fewer scientists and more hamburger flippers. In other words less income and even less consumption and savings. And finally the day arrives when we oldies move on. Gone will be the days of a mortgage free house being left to the kids. Now the house (if there is one) will come with a mortgage. Hopefully the house will not be underwater due to the size of the mortgage and the diminished value of the house. One should therefore not be overcome by the ingenuity and compassion of the interest only home loan deals currently being done. This type of plastic surgery only delays and worsens the day of reckoning.

So next time you see the inflation figures and the core inflation rate, the increases/decreases in retail sales for the quarter, and the unemployment figures, pay no attention. Do your own calculations and forget about the talking heads and the lying lips. At the end of the day it is not about the rate of inflation…..it is about outcomes.

Just as importantly, if the citizens of a nation cannot provide for their own decent retirement, what hope does the government ever have of meeting its obligations, balancing the budget, repaying the debt and upholding the rule of law and the integrity of its currency? The answer is "zero."

Increasingly, governments will print and continue to print money to maintain a façade of solvency and liquidity in the eyes of the masses. Now you know where the dollar and other paper currencies are headed. You also know where gold and silver will be headed. Be warned!