Thursday, January 31, 2008

The Hidden Headline

Notice the six silver dollars on the Newspaper. On the right you see the headline "Fed slices rate again amid push for relief." The word constipation comes to mind.

You only need three of those silver dollars to fill your gas tank. Remember back to when gas was 25 cents a gallon? It's even cheaper if you use "Yesterday's" money! Those six silver dollars represent a hundred dollar bill in today's world.

This gives you some idea of what FDR's new deal programs like Social Security have done to the Country. The government can't cover all of its operating expenses so we print the rest.

The name of the game is inflation; a very slow and despicable disease. It's a tax on people who save. Gas is cheaper now, than it was in 1960. The real headline is "Wake-up America!"

Reality can be a cruel mistress. It's kind of like going to a casino that advertises High returns, Hot slots and Hell of a lot in action, and you walk out broke. If you have ever looked at an enema hand book, the instructions read; High, Hot and Hell of a lot. Either way, you get it in the end. Let's hope everything comes out alright.

Copyright 2008 All rights reserved


zgirl said...

Hi, Jim, I'm curious why you blame Social Security for inflation? Hasn't SS been running a surplus that's been funding the general deficit?

Which do you think is worse, inflation or deflation? Seems like inflation is destroying the middle class, but it's a chronic disease. Inflation doesn't reach the fever pitch that makes voters demand change, unless it's hyperinflation. Deflation throws companies out of business, people lose their jobs, homes are lost and debts defaulted. The pain is bad, the fear is worse. It only lasts a few years - but they're painful years.

Jim in San Marcos said...

Hi Z

I was really blaming FDR's New Deal of Social Security, Fanny Mae and Freddie Mac. There wasn't much to them when they were started and now they are all monsters. The think that irritates me, is that FDR is praised for these measures not blamed for them.

The Social Security tax you and your employer pay is just income tax, forget the retirement part. Congress has that and more spent in the year it is received.

Right now government entitlements are approaching 60% of the budget. Inflation is bad for retirees; their hard earned money saved over 40 years is worth less. It rewards borrowers; hard earned money is paid back with inflated dollars.

If you look at that picture of the six silver dollars another way, the hundred dollars you worked hard for in 1960 has lost 94 percent of its purchasing power in 45 years. The price of gasoline hasn’t gone up you can still buy a gallon for a quarter, a real silver quarter.

It doesn’t cost our government one dime to give every family $1,200. After we spend it and the price of gas goes up another dollar, everyone will want to declare war on the Arabs and the oil companies. The real culprit is Congress

The general public has some concept of hyperinflation. Bubbles mimmic it quite well. Buy a house today because it will double tomorrow. The trouble is when prices double in a day, why sell today when you can get double tomorrow? At that point you pay off your mortgage with worthless currency and hold on to the house.

Jim in San Marcos said...

Hi Z

I didn't quite answer your question. I blame Congress for inflation. If they only spent what they collected, there would be no problem.

As for which is worse, it doesn't really matter. The only difference is that hyperinflation destroys the middle class and then you begin deflation. You need the helping hand of government for hyperinflation.

The Real Deal said...

Uh, Freddie Mac came into being in 1970 while Richard Nixon was President.

zgirl said...

Hi, Jim, Thanks for your reply. I worry that the government will "solve" the housing problem by inflation; home debt and government debt can both be shrunk through inflation, and short-bus voters won't notice the difference. Except that inflation tanks the dollar, raising the cost of oil, making necessities very expensive.

I was too young to understand what was going on in the 70s, but didn't Carter lose the election because Volker finally decided that the only solution to stagflation was raising rates until it hurt? It isn't "politically expedient" to take our lumps today so tomorrow can be better.

It is somewhat unfair for me to say "just suck it up and let the recession happen" since I am incredibly fortunate to be able to weather a downturn. If I were living paycheck to paycheck, I might favor inflation over homelessness. Still, it seems like inflation would whomp the most vulnerable - elderly, disabled, anybody who can't work or relies on a fixed income, plus people whose salaries don't rise with gas prices and food prices.

Government deficits scare me in terms of devaluing the dollar, but also because we don't have much borrowing power left to launch WPA-type programs if things get too ugly for too long. I think tax rates are virtually guaranteed to rise; the 401k tax deferral might turn out to be a bad deal in the end. But in the near term, I’m more concerned with economic dislocation, social instability, rising crime.

Jim in San Marcos said...

Hi Real Deal

Looks like I made another oops. Naturally I will sneak into the blog and change it.

Thanks for pointing it out.

Jim in San Marcos said...

Hi Z

The inflation that Carter got blamed for started back in the late 60’s with the Viet Nam war. If you ever take an economics course they use the model guns and butter. You can buy all guns or all butter. The happy medium is half guns and half butter. During those 15 years the government bought them both to the max. Inflation is a tax. It’s kind of like how manufactures cut costs of cereal, the box size and the price are the same, there is just less in it. Inflation was at 20%. So if you used the rule of 72 and divided the interest rate into it, it took 3.6 years to double your money. Not bad, at todays 3% it takes 24 years, go figure!

I also was thinking that the Congress would spend its way out of the housing crisis and buy votes with this 150 billion dollar refund. The trouble is, I don’t think they have enough time.

It looks like Fannie Mae is going to need a big cash infusion before June, more on this tomorrow.

A lot of what I poke fun at with Congress, is the fixed costs we have to contend with and their blind eye towards the obvious inflationary nature of their actions. To them the word “responsibility” is not something that they can be held accountable to from a political perspective. The people that feel the most pain in this mess, are the savers who are approaching retirement.

Anonymous said...

The past few weeks have been stressful for my savings account.

When Benny Boy started slashing away at interest rates, I had to scramble to get my savings moved into CD's, or else risk earning 1% when the Fed is done. I was fortunate; I got into a CD at 4.8% before the banks slashed rates too (literally within hours).

How low can/will the Fed drive interest rates?

Jim in San Marcos said...

Hi Anon

I don't think that interest rates are the real concern right now, it's the inflation rate that is the killer. The real kicker is how long is your money tied up to get the higher rate? I'm getting about 3% on a 6 month CD. At that rate, it will take me 24 years to double my money. I'm just not that patient.

With an implied inflation rate of about 10%, there is very little incentive to save money in a bank. As rates go down, people will spend it now. The trouble is the game may be about to change again.

The housing bubble popped and stranded the speculators. I see the credit card bubble as next in line, so having some cash on hand leaves room to take advantage of possible future bargains. At present, keeping money in a savings account at these rates considering inflation for the long term, will eat you alive.

I would expect, with contraction of the money supply, interest rates would rise and they haven't. It could be a wrong assumption on my part that the money supply is contracting (if the printing presses are rolling).

This mess isn't going to wait for the election to be over, something will come unglued in the near future.

As for the Fed and the Treasury controlling the interest rates, they can't do that, but they do have a say in what the inflation rate is. So far the stock market loves it! Now that couldn't be a bubble, could it????

Frank said...


As someone who remembers the Carter administration all-too-clearly (I voted for him the first time, not the second), IMO Jim is right that Carter did get some blame for the inflation kicked off by Nixon (and Johnson's Guns-and-Butter, for that matter).

However, IMO no way was inflation the primary reason for his loss. His personal style (blaming the country for "malaise") combined with major international issues (admitted failure/surprise with Soviet invasion of Afghanistan, mentioning asking his daughter for foreign affairs advice, loss of Iram to theocracy, long, drawn out Iran hostage situation, failure of Desert One) -- all of these combined with the galloping inflation to exhaust US voters with him.

Agreed, though, that he pretty unfairly caught the blame for most of the economic considerations.

Jim in San Marcos said...

Hi Frank

Jimmy Carter never met my expectations as a strong president, but a Nobel Peace Prize is one hell of an accomplishment.

I do try to keep this blog out of the political arena, there can be no real winners.

Thank you for your comments

Mammoth said...

"Inflation is bad for retirees; their hard earned money saved over 40 years is worth less. It rewards borrowers; hard earned money is paid back with inflated dollars."
One only gets an advantage by paying back a loan in inflated if his wages have also inflated.

And wages are not inflating today.

Jim in San Marcos said...

Hi Mammoth

Your right it sucks twice as bad, without a pay raise to keep up with inflation.

You still pay off the loan in cheaper dollars, you just got an invisible pay cut.

Deflation is just around the corner. That's after you've lost your job, so be careful.

Thank you for your comments