The Most Important Financial Question You Must Ask June 19, 2009
Posted by Jeff Nabers in : Money , add a comment
What is inflation?
I believe this is the most important financial question a person can ask. I am constantly on a trek to better understand money and wealth. Here is some of what I’ve learned thus far:
Per its original meaning:
- Inflation is not a rise in prices
- Inflation is a rise in the money supply
I have a 1920 Webster’s dictionary that says inflation is a rise in the money supply. I have a 2006 Webster’s dictionary that says inflation is a rise in consumer prices. From this point forward, I will use “inflation” for its original definition (an increase in the money supply) and I will use “price inflation” to refer to a general increase in prices.
How did this “Newspeak” happen?
Inflation is harmful because it leads to a rise in prices. When everyone’s expenses are rising faster than their incomes as a result of the actions of the government and banking system, it is like a tax on the American people.
With the harm being a rise in prices, the focus on the topic of “inflation” shifted from the cause (inflation) to the effect (rising prices). And so, over a period of decades, everyone (news media included) shifted into speaking about inflation as a rise in prices.
Why don’t inflation and price increases correlate directly anymore?
You can take simple economic examples and draw a direct correlation from increasing the money supply to a rise in prices not complemented by a rise in incomes. These are usually fictional stories of a group of people being stranded on an island and creating their own economy. They will illustrate with great clarity that increasing the money supply takes from the regular person and gives to the banker or his friends (such as the government).
Now apply those concepts to our current economy and you will be so confused, it will be easy to surrender to saying, “Gosh this stuff is for super-geeks to figure out and I’ll just go with whatever is reported to me.” Of course, we’ve learned that following the crowd and getting your information from normal reporting sources is a sure way to (more…)
CPI Explained – Part 2 – Substitution November 5, 2008
Posted by Jeff Nabers in : Hyperinflation, Money, Personal Enjoyment , add a comment
This picks up where a previous post left off. You may want to read that post first in order for this one make sense.
Looking at the picture above, I can only imagine that this is the way that the following idea was made into government policy. The second major way BLS’s CPI calculation policies were altered is through the concept of subsitution. In brief, this concept argues that as the price of an item rises, consumers start buying cheaper alternatives.
Consumer substitution is absolutely true. It’s a fact; we all do it. It’s a sign of inflation. We know there is significant inflation when prices of things we buy go up in price. Everything doesn’t go up equally all at the same time. As prices are rising, consumers will substitute goods to get the best deal. BLS uses this concept to reduce the mathematical weighting of items in their basket of goods that rise sharply in price. It is an assumption that (more…)
CPI Explained – Part 1 – Hedonics November 3, 2008
Posted by Jeff Nabers in : Hyperinflation, Money, Personal Enjoyment , 3comments
While the measurement of inflation varies wildly depending on which economist you talk to, here we will examine the official figures published by the Bureau of Labor Statistics (BLS): CPI or Consumer Price Index. The purpose of publishing CPI is to measure inflation and/or deflation, the decreased or increased buying power of the U.S. dollar. Awareness of inflation is essentially an awareness of how much our central banking system, the Federal Reserve, is printing or destroying money through “monetary policy.” This side of economics can get confusing, but it doesn’t have to be. This account will be an understandable explanation intended for accountants and laymen alike.
CPI is not calculated the same today as in the 70s & 80s
While remarkably high inflation is a key part of our memory of the 70s and 80s, if today’s CPI calculation methods were applied to the 70s & 80s, the CPI figures would be revised to show very low inflation – probably under 6%. Why? Two important concepts have (more…)
Lunch at the Fed August 22, 2008
Posted by Jeff Nabers in : Money, real estate, Self Directed IRA Solo 401k , add a comment
I recently attended a lunch discussion at the Fed building here in Denver hosted by the World Trade Center. The topic of discussion: The outlook for the U.S. Dollar.
First, a Federal Reserve senior economist gave us an overview of what Fed is and how it works. Surprisingly, he was quite direct and open about Fed’s control over increasing & decreasing the money supply by simply deciding to buy or sell “government securities” from or to its member banks. (If everyone would have grasped that statement fully, the “forecasting” of USD activity would have been unnecessary.)
The floor was then passed to Russ Root, ForEx advisor at Amegy Bank. He mentioned PPI (Producer Price Index), aka “pipeline inflation”, being around 9.2%. He made some comments about Fed chairman Bernanke currently asking Congress to consolidate & fortify Fed’s powers. I understand Fed’s job is essentially to attempt to rid America of the economic cycle, thus making all our lives recession/depression-free. Economically speaking, this is impossible when operating a system on fiat currency. So, each time a new Fed chairman gets appointed, he has failed at his task before starting it. For this reason, word of Bernanke asking for “more powers” is alarming. It’s like losing a game of blackjack and doubling your bet after each loss… throwing more money or power after a losing game is a silly thing.
Mr. Root described the situation with the dollar as “the race to the bottom”. To summarize his message, “we win”. We’ve won the race to the bottom, and his bet is on a stronger dollar over the next 18 months. Oddly enough, he didn’t explain why or how the dollar’s rebound will occur beyond the logic of “what goes down must come up”. It’s not a surprising prediction considering the venue.
Beyond my thirst for knowledge relating to fully understanding money, my reason for attending this meeting was to consider joining the World Trade Center. Contrary to common awareness, the WTC is more than just a pair of buildings that toppled in Manhattan. It’s actually an association of individuals and companies involved in international trade. This interests me because I believe there are countless strong investment opportunities outside our borders. Most of the attendees of this lunch meeting were WTC members.
One WTC member posed the question, “The 30 year bond should be at 13%. How long will these other countries keep propping us up?” His concern wasn’t exactly addressed. I mean whoever does know “how long these other countries will keep propping us up” is going to become a rich (or richer) man applying that knowledge and keeping quiet. Of course, this was really more of a comment about his concern that our financial circumstances are currently highly dependent on foreign countries. I haven’t yet decided whether to join WTC. I am primarily looking to connect with international real estate brokers who can facilitate transactions in South America and Asia. Suggestions in comments appreciated.
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