Inflation is a wild ride that most people do not understand, and because of this many people wrongly believe that the stock market’s current upward trend is a positive thing. In reality it’s a giant façade.
Consumer prices have gone up 160% since 2001. So what is eating away at our purchasing power and how did we get here?
Inflation is defined as a “general increase in prices and a fall in the purchasing value of money.” Have you noticed any increased prices? I have a healthy appetite so I notice price increases most at restaurants. The government believes that when a consumer sees increased prices they will adjust their lifestyle to meet the new standard. This sounds like a bully mentality. In restaurants where the prices are not going up I’ve observed that their food quality has often declined. And remember, the government does not include food costs in its official inflation measure.
In 2008 and for several years following so many dollars were pumped into the U.S. economy that the mind has trouble comprehending just how much money it was, trillions upon trillions. Naturally with more of anything the value decreases. You won’t find many financial professionals telling you this because I’m essentially saying the government has lied to you. And Momma said, “If you don’t have anything nice to say, don’t say anything at all.”
Mark Twain said it best, “It’s easier to fool people than to convince them that they have been fooled.” This is exactly what is being done with the stock market. The below ten-year graph of the Dow Jones Industrial Average shows that the Dow was around 11,000 at the beginning of 2007. During the crash it went as low at 6,500 points in 2008. Of course our clients lost zero dollars during this crash but that’s another topic. Today the Dow is flirting with 19,000. So how has the stock market recovered so well but the economy in general is sluggish? President Obama is the first president to not see a single year of 3%Gross Domestic Production.
Last week the Drudge Report ran an article stating that this is the worst recovery since 1949. The gauge of how many people are employed, the Labor Force Participation Rate, is at all-time lows. Approximately 31.5% of peoplewho could work or want to work are not working. So what’s driving the stock market up to record highs?
The dollar’s loss of purchasing power has driven the stock market up. It takes more dollars to buy fewer products. This is not a win for your 401k plan, because when you realize these gains they will be meaningless, because your earnings will buy less than they used to be able to. The Federal Reserve pumped more money into the market to give it a false surge up, and now we are paying the bill. We are paying for it at restaurants, with higher housing costs, and with higher prices for everyday expenses. Inflation is the tax that is not ethical because it is a tax increase that was never debated amongst the public.
Inflation spikes during war times then went back down prior to its permanent introduction by the Federal Reserve in 1913. Since it has taken increasingly more money to make it from day to day, the breadwinner family structure had stopped working by the 1960s. Since then, one household has needed two adults working full-time to be sustainable.
I’ve had a stockbroker tell me that we in a deflation cycle… Just look at the price of gas, he stated. First, as we explained last week the government does not include the cost of gas in its official measure, Second the price of gas hitting record lows felt good when I filled my tank for less than twenty dollars last week, but the oil glut is killing the oil industry. Further, banks are in dire straits due to many badly performing oil company debts on their books. We’ve written in the past about the millions that banks are writing off in bad debt. This is further destabilizing the banks and pushing them further towards the inevitable bank bail-ins.
At TreeceCo Financial we emphasize strongly that the return OF your principal is more important than the return ON your principal because with inflation working against you it makes it even more important that you not lose money. You cannot afford to lose money by stock market speculations when inflation is substantially increasing. Sadly, we have not even seen the worst of the inflation cycle either. It has never been more important to have a financial tool that guarantees your rate of return. The banks, stock market, and mutual funds cannot guarantee you anything, but we know something that can. Hesitation leads to despair.
For further information watch this video