The quiet objective of the Federal Reserve, the US government, and Wall Street is a steady decrease of purchasing power of the dollar. By use of mechanisms such as financial repression, calculated financial leverage, artificially lowered interest rates, structured massive loads of public debt, making false future promises of social benefits to citizens and non-citizens, and systematically under-funding those promises, they make tons of money all throughout the process.
The consumer barely notices the difference, but each year over time they find that they are on a treadmill just trying to keep up. Income, inflation, deflation, rise in overall cost, corresponding reduction of purchasing power, pretax and after-tax calculations of net spendable income, may create an illusion that we are getting wealthier, and that our standard of living is going up, but in reality, it is not.
Most of this is because of the erosion of purchasing power, but part is because of consumer habit. In two classic books written by C. Northcote Parkinson in the mid 1950’S called “Parkinson’s Laws”, and “The Law and The Profits”, relating to expenses and income, this concept is well stated. Parkinson states, “expenses always rise to the level of the income.” In other words, in our culture, if you earn more you will spend it.
In 1903 consumers could have dinner at Johnny’s Place in Salt Lake City where 10 cents would buy dinner including meat, vegetables, bread, and a cup of tea or coffee. The average worker earned between $200 and $400 per year, 55 cents to $1.10 per day. A professional high-level accountant may have earned $2,000 per year or $5.48 per day.
During my childhood in the 1950’s, I would save up $1.00 and travel to the Pike Amusement Park, in down town Long Beach, CA. It cost 25 cents for the bus ride to and from. That would leave 50 cents to purchase a 15 cent hotdog, a 10 cent drink and leave enough for one 25 cent ride. Life was good! Youth was a beautiful thing, although I did not realize it at the time.
In junior high school, I earned 75 cents an hour as a maintenance mechanic at an amusement park called Tiny Town in Compton, California. I kept all the machinery running, installed new rides, rewired motors, fixed electrical malfunctions and in my spare time, operated the rides, and helped children on and off rides, such as the merry-go-round. An occasional cotton candy was a treat.
During my days in college, a roommate and I rented a nice apartment for $75.00 per month. I purchased a brand new red 1967 Volkswagen, fully loaded for $2,007.00. My car payment was $47.00 per month, full coverage insurance was $20.00 per month. My $5.35 per hour job as a grocery checker paid for my housing, auto, insurance, college tuition, books, and social life including fraternity membership. There were no college loans available for people who worked for a living. There were no welfare stipends, no college Pell grants, nor any other free stuff. Who does not like free stuff? I guess freedom to be self-sufficient, and self-reliant was a dominating motivator in my life from a very early age. Life was good! Youth, health and freedom were wonderful, even though I had no frame of reference to appreciate at the time. I was too busy budgeting my income to get by from one month to the next, and trying to keep up with college courses. I worked 35 hours per week, and attended school full time. Getting ahead in what I perceived as a capitalist system was on my mind!
There is an intended message in this article that the continued erosion of purchasing power of the dollar is the only way that the government can continue to function. It is fully aware that taxes do not cover expenses and unfunded future promises. It has been well planned, thought out, and lubricated to maximum effectiveness over time by the government, the federal reserve, and Wall Street.
An inflation calculation currently in use is the official US consumer price index. If we calculate the average rate of inflation from 1913 until 2016 we get 3.22%. In some decades inflation was much greater, and a couple were less. Prices doubled every 20 years. Note that 10 decades represents 5 times doubling. $10.00 doubled 5 times would mean 10 X 2=20 X 5= 100. This calculation assumes a fixed and static value, and not compounded, nor cumulative.
However, we not only have the cumulative effect, but we have the compounding cumulative effect. Just like compound interest can multiply your savings and investment income over many years, inflation works the same way. The real compound cumulative inflation rate from 1913 to 2016 is 2275%. You would now have to spend $2275.00 dollars for the same basket of goods and services that could be purchased for $1.00 in 1913.
Now, roll forward 100 years, and assume that you will have the same compounded inflation rate, and a corresponding reduction in purchasing power, $1.00 in 1913 = $2,275.00 today. $2,275.00 in 2016 would become $5,175,625.00 in 2116! To get real specific we may be required to hire a statistician, but the concept will be the same. Also, note that there are various formulas used to calculate dollar value decline of inflation over long time periods.
You or I may worry about 100 years from now. Well, now that you bring it up, there may well be inflation in heaven. I need to plan on the increased price of hamburgers and beer, along with all the valuable stuff that I may just find?
There is also the frame of reference issue for consumers. We are born and grow up in a certain time period, with certain value/price/earnings/inflation expectations, and we do not know any difference. I remember multiple years where inflation was 10% plus each year. As a struggling kid and consumer, my assumption was that was the way it had always been.
Let’s use an example of 2275% compounded inflation expected over the next 100 years.
A $10 hamburger will cost $22,750.00.
A night out with your family, mate or friend, that currently costs $300 will cost $682,500.00.
One gallon of gas that currently costs $3.00 using the same formula will cost $6,825.00 per gallon. No discussion here is provided about alternative sources of energy to drive a vehicle forward, Although I have some strong ones.
The average cost to raise child from birth to maturity with a college education which is currently expected to cost $250,000.00 will cost $568,750,000.00!
A 1 million-dollar house will cost you 2.375 billion dollars.
A $10-6 pack of beer or cola will cost $22,750.00.
A family that currently makes $100,000 per year will have to make $22,750,000.00 per year or $189,583.33 per month.
Let’s assume that the rate of inflation averages 6%, or sporadic periods of 10%, 20% or 100% per year, over the next 100 years. One can clearly discover the effects of hyper-inflation.
Now, why do you think that the government has engineered, or rigged a system that constantly erodes the value of the dollar. The government knows that it cannot ever make a dent in its future projected obligations, so it intentionally under-funds promised benefits to its’ citizens and non-citizens. Non-citizens get stuff too! So, what if we have 110,000,000 people or 35% of the population on welfare, 66,000,000 on non-means tested federal and state benefits, and 22,000,000 government employees or, in total, 60% of the population to support? This does not count the millions of foreign refugees many of whom become dependent on government handouts.
So, by eroding the dollar value of future debt a net present value can be determined, reflecting a dramatically lower value of the obligations.
The current estimate of unfunded and underfunded future financial obligations promised by federal and state governments is $220,000,000,000,000.00. The estimated annual under funding rate is about 7.33 trillion which also will compound in the future using the current 220 trillion as unfunded obligations is divided by about 30 years, the reasonable actuarial time for future payments to come due. That 7.33 trillion can be paid back by cheaper dollars over that time when the obligations come due.
Correspondingly, the US current Gross Domestic Product(GDP) per year is currently approximately $20 trillion. Using an average 3.22% inflationary factor average over the next 100 years, it will rise to (caution-calculation error). The GDP reflects the value of all the products, goods, and services sold in a calendar year. GDP will also compound. Does anyone know what denomination comes after 1,000 trillion? How about quadrillion?
The reason that the government created this rigged system is that they know that the more you earn, the more taxes you will pay. The higher prices you pay, the higher tax rates on income, use taxes, gas taxes, property taxes, death taxes, and all the hidden taxes that are also compounded through the manufacturing process, on the purchase of any product, good or service. You may even get some satisfaction by thinking that you are richer than before, but the tax boogie man is just around the corner, at every corner. It is the same with the devaluation of the dollar boogie man and inflationary boogie where everything cost more. There are well placed booby traps everywhere.
I am not sure that anyone can do much about this, but it is interesting enough to explore. Our political leaders on all sides of the spectrum are too busy taking advantage of this well lubricated system. The erosion of purchasing power and the corresponding increase in asset value, may make us feel richer but the government tax authorities, regulatory bureaucrats, and wall street are the primary beneficiaries, not the individual consumers.
A possible outcome, which should be mentioned, is that a country may lose control of its financial and socio-economic system through allowing the infiltration of socialist, communist, totalitarians, or the worst of all, theocratic totalitarians, in which the system of government is monopolized by a group or individual according to specific religious principles of the leader(s).
In other words, when your country is taken over by thugs, criminals or religious zealots, you may discover hyper or runaway inflation such as exists now in Venezuela. Do not be fooled into thinking that this could never happen in America. The 20th century has been the century of hyperinflation that has occurred as many as 55 times in countries such as China, Russia, Brazil, Germany, Argentina, Poland, Chili, Zimbabwe, and others, all resulting in currency collapse. There is a recovery process through drastic remedies, sort of a shock therapy to the economic system, a good discussion for another article.
The concept of monthly high inflation of 100%, or 1,200% annually has occurred in many countries in the past, and similarly is occurring now in Venezuela. Hyperinflation rapidly erodes the value of currency and makes the population desperate and poor. Venezuela’s cash becomes more worthless every day. In 2013 $20.00 = 629 Bolivars; in 2014 $20.00 = 1,521 Bolivars; in 2015 $20.00 = 13,648 Bolivars; in 2016 $20.00 = 20,216 Bolivars; in 2017 $20.00 = 195,755 Bolivars. State run banks limit the number of Bolivars that can be withdrawn, currently to 10,000 Bolivars (96 cents) daily. Privately run banks only allow the removal of 30,000 Bolivars ($2.88) per day. If you purchased $1,000.00 worth of Bolivars after the election of the socialist president, today they would be worth a little over $1.00.
Clearly noted here is that the Venezuelan consumer gets crushed because, by the time they retrieve their money the value may have eroded 100 times. They may be required to pay 100 times more for the same items. It is not uncommon to witness cost of an item needed to survive, such as flour, milk, beans, rice, sugar, and salt, going up in price 100-fold. Items necessary to survive are scarce. Hundreds of thousands are crossing the borders into Colombia in a desperate effort to purchase food, just to survive.
Venezuelans hunt for food in black markets, paying 20 to 100 times to state-controlled prices just to survive. Desperate people crowd around supermarket dumpsters to forage for old and spoiled food. They take it home, clean it up as much as possible, to avoid starvation.
The above concepts are not new, and should not cause immediate alarm. Beer has a limited storage shelf life. Do not let time go to waste.
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