GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

It's Not Cool to Lie... About CPI: Worth Less, But Not Yet Worthless

August 06, 2013 | About:
Few readers of this column were alive before the 1914 creation of the Federal Reserve Bank. In the three and a half decades preceding that event, the purchasing power of the dollar had actually increased. Since the Fed started minding the store, though, it has been an almost non-stop ride to a greater than 95% decline in the value of America’s currency.

1257482425.jpg

The Great Depression of the 1930s briefly triggered some deflationary action. President Roosevelt made sure that didn’t continue when he abandoned the gold standard in 1933. Executive Order #6102, A.K.A. the Gold Confiscation Act, made it illegal for normal citizens to hold gold.

1338264949.jpg

gold-confiscation-act-of-1933

President Nixon closed the door on silver and gold-backed currency in 1971. Dollar bills stopped carrying the label "silver certificates" and started bearing the term "Federal Reserve Notes."

714793515.jpg

Why does our Federal Reserve Bank want inflation when it destroys the true value of the U.S. dollar? Inflation benefits debtors. They can pay back borrowed money with lower-valued paper. Who is the largest debtor in the history of the world? Our government is, with almost $17 trillion in debt plus incalculable trillions in unfunded promises for Social Security, Medicare and pension obligations.

The officially remaining buying power of those pre-Fed dollars is overstated. After the double-digit inflation of the late 1970s – early 1980s our Bureau of Labor Statistics (BLS) changed the rules used in calculating the Consumer Price Index (CPI).

These changes worked to lower the reported inflation rate. Hoodwinked citizens sometimes actually feel better being lied to. Politicians smile as they save billions in cost of living adjustments (COLA) that would otherwise have been due to workers and retirees.

What does all this mean for investors today?

Most obviously, don’t buy or hold TIPS, the Treasury Department’s version of inflation-protected bonds. The interest rates earned on these key off the less-than-trustworthy CPI data, always skewed to understate true inflation. TIPS have failed to accomplish their stated goal. TIPS’ ability to offset loss of purchasing power is an illusion.

Cash remains a necessary evil. We need it to pay bills and taxes. There is no suitable substitute except for barter. Keep one to two years of money liquid simply to deal with day-to-day requirements even though it will gradually lose purchasing power.

Inflation favors borrowers at the expense of savers. Bernanke’s Zero Interest Rate Policies (ZIRP) and his push for higher prices have removed any chance to profit from delayed consumption. Bank CDs and fixed income bonds are virtually guaranteed to be huge losers over the long term when measured in future buying power.

History tells us that the only real hope to preserve wealth will come from owning real, income-producing assets. That would includes rental real estate and profitable businesses that have the pricing power to pass along the effects of a weakening currency.

Unless you personally own a company that meets this standard, stocks represent the best way to play. Equities are liquid, often pay dividends and can adjust to future conditions. No matter what befalls our nation people will still need to get up, go to work, eat, seek shelter and even be entertained.

Present-day Japan gives us a clue to what happens when government officials set out to undermine their own currency. Last November’s election was won on exactly that platform. Over the 12-months through mid-July Japanese savers saw the Yen drop by 21.07% against the dollar and most other currencies. Everything imported into Japan now costs much more.

168713931.jpg

Smart savers got their money out of Yen and into stocks, which could be marked up as the fiat-based currency was marked down. Citizens couldn’t stop the actions of insane politicians. They could take steps to protect their life savings.

Over that same time period the Nikkei-225 index rose more than 70%. Those who were unwilling to "take stock market risk" were hurt badly. Owners of equities are actually ahead of the game.

354956666.jpg

American equity markets have been hitting new records even as QE programs are diluting away the value of the U.S. dollar. When the SHTF for real here at home you will want to be holding appreciating assets, not fiat-based garbage.

Hold some emergency cash. Avoid any fixed income but very ultra-short term bonds or CDs. Buy stocks. Prepare for a wild ride.


See my ideas on value investing here http://marketshadows.com/value-investing

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 3.2/5 (9 votes)

Comments

LwC
LwC - 11 months ago
The sky is falling!

Chicken Little

By Merri Beth Stephens

http://www.uuman.org/pdf/ChickenLittle.pdf

Dr. Paul Price
Dr. Paul Price premium member - 11 months ago


LwC,

Perhaps you missed the recent events in Cyprus, Spain, Ireland, Greece, Stockton (Ca.) and Detroit (Mi.).

Citizens in those locales do not think the problems were imaginary.

AlbertaSunwapta
AlbertaSunwapta - 11 months ago
Maybe Chicken Liitle just misread the signs. The falling leaf or acorn may not have been a sign that the sky was falling but it may have been a sign of something happening. Maybe a signal of winter's impending arrival. A subtle near imperceptible warning.

Here's one for you folks. I have to give credit to an accountant for this one. CPI looks at price changes on a basket of goods and services. To pay those increasing prices your income has to rise. Ah, but first you have to pay income taxes you say. Very perceptive. So with MTRs what has to happen to your income in relation to CPI to stay even? ;-)

Inflation indexing of tax brackets takes care of it. Well,...

By the way, it may be no coincidence that that accountant's family came from Austria. :-)


At least most serious investors look at real returns of R1 and R2 to adjust for inflation - and taxes.
batbeer2
Batbeer2 premium member - 11 months ago
Maybe it's just me but I spend most of my income on my home.

Houses get a bit cheaper and that buys me a lot of groceries.

Simply by looking at my personal expenditure, there hasn't been any inflation in the past decade. In my neck of the woods, a home and the mortgage that it comes with are cheaper now than they were in 2003. I guess that would be true in most places in the US as well.

In short, by my reckoning, there haven't been 14 decades of inflation.
batbeer2
Batbeer2 premium member - 11 months ago
Come to think of it, my granddad probably spent at least 30% of his income on groceries for his family. He certainly didn't own a house. 80 years ago, he did own a car. Few people back then did. He was relatively wealthy.

I spend less than 10% of my income on groceries and I do own a house. I own two cars which doesn't earn me any bragging rights.

I don't think I'm smarter and I know I'm not more assiduous than my grandpa.

That points to eight decades of deflation doesn't it?

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Email Hide