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The Insidious Nature of Inflation--The Debasement of the U.S. Dollar Continues

I recently helped some elderly cousins move from their two story home of many years into a smaller one story apartment in a retirement community. (They are having "mobility" problems.) Part of this move involved cleaning out a storage space that hadn't been touched in more than 40 years. The accumulation of household goods--mainly books--was not unusual or noteworthy. However, what was indeed notable was that many of the boxes had newspapers used as padding in the top. Pulling out these papers, which were mostly from 1958 was a real eye-opener for our kids. Here are some examples of the advertisement prices that our kids were reading aloud, with much laughter:

Beauty Salon: Ladies stylized haircut $1; Revlon manicure 75 cents; Shampoo and Set $1
Flooring store: Rubber tiles 12 cents each, Inlaid linoleum tile 5-1/2 cents, Vinyl tile 7-1/2 cents
Grocery Store: Leg of Lamb 65 cents/lb., Breast of Lamb 15 cents/lb., Picnic hams 29 cents/lb., Johnnie Walker Scotch $6.38/fifth, Hills Bros. Coffee 49 cents per lb.
Another grocery store: Ice cream 69 cents/half gallon, fresh peaches, 5 pounds for 49 cents; choice tomatoes 2 pounds for 29 cents; Ghirardelli chocolate 53 cents/lb.
Car Dealerships: Current model year Cadillac Convertible $4,395, 1957 Chevy (one year old) $2,195, 1950 Buick Sedan "Real Nice" $165, 1954 Ford Victoria V-8 $875
Classified Ads: 1951 Studebaker V-8 Coupe, new paint $245, 1951 Chevy sedan $145, Olds 1950 "Rocket 88" $140, German Shepard Pups, $25 to $35, Clerk -Typist "Ages 21 to 35" $295 per week, Colt Service .45 Auto [Model 1911] "good cond., with holster" $12.

The prices in these ads illustrate the slow but relentless debasement of our currency. Before 1965, our coinage was 90% silver, and paper money was still redeemable in silver. Granted, wages were proportionately smaller, but any savings held in dollars get relentlessly eaten away by inflation, year after year. It is no wonder that the savings rate in the U.S. recently went below zero. (Americans presently spend $1.06 for each dollar that they earn, piling up debt instead of savings.) The inflation of the money supply is gradual enough that it insidiously goes without raising public alarm. Because inflation is so relentless, I recommend investing in tangibles--things like productive farm land, gold, silver, guns, and common caliber ammunition. The dollar will surely continue to go down and down in value, but for the most part tangibles will hold their value.

Writing recently in The Daily Reckoning (a free e-mail newsletter) editor Bill Bonner (also the co-author of the book "Empire of Debt") summed up the current situation nicely: "We simplify for the benefit of readers with tight schedules or short attention spans: The United States puts out dollars - trillions of them. U.S. consumers use the dollars to overspend, by buying products from overseas, approximately $1.06 worth of buying for every dollar actually earned. Foreign governments want the spending to continue. Instead of sending the dollars back where they came from by buying American goods, they issue local currencies to buy them and put them in their central bank vaults. All this extra money is then magnified...2...3...10 times...as it is lent, re-lent and used as reserves for various financial instruments.
Meanwhile a whole new industry has risen up to help with the lending, mortgaging, gambling that goes along with this explosion of money. Derivatives now equal seven times world GDP and are growing five times as fast. The new 'liquidity' is floating up financial assets all over the world.
Traditionally, more money in the system caused consumer price inflation - which was seen as a threat to the well being of the rich as well as the masses. Central bankers knew they had to get it under control or they would be swamped by it. But this new liquidity is different. People love it. The lumps never get a chance to use it to buy toilet paper. Instead, it sloshes around the hedge funds, banks, financial houses and rich financiers'...in a 'wave of liquidity' upon which so many super-wealthy are now riding. In 1980, the ratio of financial assets to GDP stood at about 1.5 to 1. Now, it is about 4 to 1. Yes, dear reader, upon this ocean of liquidity rides a great Titanic of asset price inflation. It is why Picasso, Klimt and Pollack paintings sell for such absurd prices. It is why houses in Aspen, Greenwich and Kensington have reached such breathtaking prices. It is why Chinese stocks have doubled in the last year. And it is why the Dow is at an all-time high...and why Manhattan real estate is selling for such high prices that even the rats are having to pack up and move to New Jersey."

The debt merry-go-round that Bill Bonner described cannot go on forever. When the average consumer runs out of credit, when the U.S. Treasury itself is no longer considered credit worthy, and when the U.S. dollar itself is recognized for what it really is (nicely printed toilet paper), then things will get ugly. "The Piper must be paid." In this case the Pipers are foreign lending institutions. If you stop making the payments on your car, the banks send a repo man to tow your car away. And when entire nations go into default, it usually signals cataclysmic events. Be prepared.

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