The U.S. Has Cancer
The United States Has Cancer
By Jeffrey D. Voudrie, CFP
Inflation is like a cancer that eats away at our standard of living. And those most vulnerable to inflation are retirees and near-retirees. I believe we will experience a damaging level of inflation over the next 10-20 years. If that’s true, then action must be taken today to protect your way of life. Read on to see why.
Here in northeast Tennessee, the price of milk rocketed up 30% in just a few days. Imagine if you only had $10 to buy groceries each week and suddenly the price of milk went from $3.00 to $4.00. That is inflation. It takes more money to buy the same thing.
Now imagine if the price of all groceries went up 30% in a short period of time! Can you see how dramatically that could impact your way of life? The necessities of life now take much more of your fixed income than they used to, so you have to cut back.
I believe that we in America will see a prolonged period of inflation much like we did between 1966 and 1982. The rate of inflation may even be higher, much higher. It’s happened to Germany, it’s happened to many countries in Asia and South America. It occurred in Mexico. And it even happened in Great Britain.
In all of those countries, rampant inflation was the result of debt. A government basically has four choices for dealing with an unsustainable debt problem. It can default on its debt, raise taxes, cut spending, or inflate the debt out of existence. Those are the choices faced by our nation.
Default isn’t an option. We can raise taxes and cut spending, but both would have to be done so drastically that it would leave our economy in shambles. Even then it would take decades to pay down the debt. Or, we can inflate our way out.
Inflation makes debt easier to pay off. For instance, let’s say I earn $50,000 a year from my job and I buy a home with a mortgage payment of $1,000 a month ($12,000 per year). That means it takes 24% of my earnings just to pay my mortgage.
Five years later, working the same job, I’m getting paid $60,000. They call it a cost of living increase. Really, it’s inflation. Anyway, my mortgage payment remained the same. Since I have more income and the same mortgage payment, it’s easier to pay. Now it only takes 20% of my income, leaving me 4% to spend on something else.
That’s how a nation can inflate debt out of existence. They print more money. As consumers it affects us because the price of milk goes up. It gives the government more money, though, to pay their ‘mortgage’.
Think about how quickly our national debt is growing—it increased 9 times between 1990 and 2006. We’ve borrowed $3 trillion dollars over the last 10 years because we bought more from other nations than we sold. And that gap is still increasing. That $3 trillion will double to $6 trillion in just 4 years based on our current trade deficit!
Which of the four options will our government choose? I believe it will pursue a combination of raising taxes, cutting spending and spurring inflation.
There are many ways it can raise taxes. For instance, in the late 1990’s a law was passed creating Roth IRA’s. People were allowed to convert their traditional IRA to a Roth, but they would have to pay taxes on that money. The law allowed that tax to be spread over 5 years so a lot of people did it. That produced a huge amount of revenue because the government received taxes over 5 years that would have otherwise taken decades to collect.
The government can also cut spending. I believe it will do so by reneging on its promise to fully pay entitlements such as Social Security and Medicare. Think it can’t happen? At one time they said that they wouldn’t tax Social Security, now they do.
So what does this mean for investors? You can preserve wealth in an inflationary environment by investing in the right things. Hard assets and commodities should do well. So will assets owned in foreign currencies. That’s why I’ll address inflation’s impact on the dollar next week.
Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at http://www.guardingyourwealth.com/.
