Cheat Sheet Q & A:
Would you please explain how, with low inflation, the value of our currency has declined 21% over the last two years?
Bottom Line: The question asked today was brought on by my recent analysis of the Federal Reserve’s impact on the US dollar. The timeline cited by the gentleman who asked the question is a bit off of what I presented (a period of more than three years) but it’s a good question that I’ll break down.
We often hear that inflation is low. And according to several metrics that’s true. The number that’s used by the Government to judge inflation is the core inflation number. This excludes food and energy cost. The justification for leaving out the cost of food and energy is the volatility of those items. The average core inflation rate since QE began has only been about 1.8% per year. That number is far lower than the historic average of greater than 3%. That accounts for the premise of the gentleman’s question. Now I’ll breakdown the “hidden inflation” or perhaps more aptly put, the reduction in buying power of the US dollar.
By know we’ve all heard of the concept of QE or quantitative easing. It’s the practice of creating additional currency. Some call it money printing, which isn’t literally correct. It’s all done digitally these days but the principal is correct. For every dollar additional dollar created by the Federal Reserve it waters down the implied value of each existing dollar.
In reviewing the amount of additional
So the total amount of created
When QE started:
Oil was: $49 per barrel Today: $98 per barrel
Gold was: $760 per ounce Today: $1250 per ounce
Silver was: $10 per ounce Today: $19 per ounce
Corn was: $164 per unit Today: $662 per unit
These are just a few examples of different commodity values that impact our society. The inflation of these commodities is clearly way above 1.8% per year compounded. Most commodities tell similar stories. Demand for commodities plays a major role in how these are valued but the strength of the dollar is the other factor.
We’ve been somewhat fortunate by other central banks around the world also watering down their currency but the impact of your dollar being worth less shows up in many different non-core inflation related ways and has worked to undermine the buying power of Americans.
It can be argued that the economic benefit of QE (as it’s certainly benefited the stock and housing market) out weighs the negative but that’s for a different time.
If you have a topic or question you’d like me to address email me: firstname.lastname@example.org
If you’re frustrated by over the top
Bottom Line: With all annual reports from publically traded companies for 2012 now in we now know the following about average
As a Cheat Sheeter you likely know that I’m an unapologetic capitalist but that I’m also analytical in my approach. I’m not as interested in addressing the total salary, of $15 million, in this entry. In an American society that pays actors, athletes and other celebrities tens of millions for their craft, a lofty salary may be justified for top execs at large companies. What I do have an issue with is the rate of increase.
Average income growth was about 2% in the
Most people don’t realize they have a voice through their investments. If you own individual stocks you have voting rights that include voting for or against executive compensation plans and attending annual meetings to make your voice heard. While attending meetings isn’t often an option, every investor should take the time to review investment materials that include your voting rights. If you don’t vote the recommendations of the executive team carry the vote. Over the past decade I’ve voted against most of the comp plans that I’ve had presented in materials. While the outcome may or may not change based on your vote it’s important that dissent is known if it does exist.
Big round of principal reduction starting this week:
Bottom Line: So many home owners who have been seeking a modification or principal reduction have been severely disappointed and discouraged over the past few years. This time should be different if you qualify for a new streamlined modification program that’s starting up this week. Here are basic eligibility requirements:
Starting this week the program will begin to move forward. There are an estimated 1.1 million home owners who may be eligible. If this is you click the link below (from the original release in May).
What most Americans are missing when planning for their future?:
Bottom Line: In evaluating areas that are catching Americans by surprise financially, there are two key areas that we’re not preparing for properly… You’ll guess the first… Healthcare is number one. But what about the second biggest mistake? It’s not planning for inflation.
That average inflation rate is 3-4% historically. So often when we are saving and planning financially we take a look at the going cost of something and save towards today’s number. If it’s retirement we may try to hit a certain number. But what is your plan to grow your savings by a minimum of 3-4% per year while using resources to live in retirement?
This is a critical consideration. Life progressively becomes more expensive. This is a key reason that I don’t believe that a retirement plan should include principal reduction unless one is of great means. Whether you’re saving for the home ad-on in two years or retirement in twenty you need to account for inflation in the process.
For example with average inflation a $1000 today will likely only retain the buying power of $600 in ten years.