Posted on 09/10/2012 10:25:30 PM PDT by blam
When, Not If, Inflation Returns
By Jeff Clark
September 10, 2012
The cheek of it! They raised the price of my favorite ice cream.
Actually, they didn’t increase the price; they reduced the container size.
I can now only get three servings for the same amount of money that used to give me four, so I’m buying ice cream more often.
Raising prices is one thing. I understand raw-ingredient price rises will be passed on.
But underhandedly reducing the amount they give you…that’s another thing entirely. It just doesn’t feel…honest.
You’ve noticed, I’m sure, how much gasoline is going up.
Food costs too are edging up.
My kids’ college expenses, up.
Car prices, insurance premiums, household items — a list of necessities I can’t go without. Regardless of one’s income level or how tough life might get at times, one has to keep spending money on the basics. (This includes ice cream for only some people.)
According to the government, we’re supposedly in a low-inflation environment. What happens if price inflation really takes off, reaching high levels — or worse, spirals out of control?
That’s not a rhetorical question. Have you considered how you’ll deal with rising costs? Are you sure your future income will even keep up with rising inflation?
If price inflation someday takes off — an outcome we honestly see no way around — nobody’s current standard of living can be maintained without an extremely effective plan for keeping up with inflation.
It’s not that people won’t get raises or cost of living adjustments at work, nor that they will all neglect to accumulate savings.
It’s that the value of the dollars those things are in will be losing purchasing power at increasingly rapid rates. It will take more and more currency units to buy the same amount of gas and groceries and tuition. And ice cream.
I’m not talking science fiction here.
When the consequences of runaway debt, out-of-control deficit spending, and money-printing schemes come home to roost, it’s not exactly a stretch to believe that high inflation will result.
We need a way to diffuse the impact this will have on our purchasing power. We need a strategy to protect our standard of living.
How will we accomplish this?
I suspect you know my answer, but here’s a good example. You’ve undoubtedly heard about the drought in the Midwest and how it’s impacted the corn crop. The price of corn has surged 50% in the past two months alone.
Commodity analysts say the price could rise another 20% or more as the drought continues.
Every corn-based product on the grocery shelf will soon take a lot more dimes and dollars to buy. But wait — what if I used gold to buy corn?
While the price of gold constantly fluctuates, you would have experienced, on average, no inflation over the last 30 years if you’d used gold to purchase corn. Actually, right now, it’d be on the cheap side.
When you extrapolate this to other food items — and virtually everything else you buy — it’s very liberating. Think about it: gold continues its safe-haven role as a reliable hedge against rising inflation.
I believe that those who save in gold will experience, on average, no cost increases in the things they buy and the services they use.
Their standard of living would not be impacted.
I think this kind of thinking is especially critical to adopt when you consider that supply and demand trends for gas and food dictate that prices will likely rise for a long time, and perhaps dramatically.
So how much will you need to make it through the upcoming inflation storm and come out unscathed?
Like all projections, assumptions abound. Here are mine for the following table. I’m assuming that:
• The price of gold, on average and at a minimum, tracks the loss in purchasing power of whatever currency you use, and that it does so from current prices. Given gold’s history, this is an easy assumption to make.
• Gold sales, over time, capture the gain in gold and silver so that your purchasing power is preserved. (This doesn’t mean I expect to sell at the top of the market; I expect we’ll be selling gold as needed — if gold has not itself become a widely accepted currency again.)
• We pay taxes on the gain. This will decrease our net gain, but there should still be gains. In the famous Weimar Germany hyperinflation, gold rose faster than the rate of hyperinflation.
To calculate how much we’ll need, I looked at two components, the first being average monthly expenses. What would we use our gold and silver for? From corn to a house payment, it could be used for any good or service. After all, virtually nothing will escape rising inflation. Here are some of my items: groceries, gas, oil changes and other car maintenance, household items, eating out, pool service, pest service, groceries and gas again, eating out again, vitamins, movie tickets, doctor appointments, haircuts, pet grooming, kids who need some cash, gifts, and groceries and gas yet again. Groceries include ice cream, in my case. How many ounces of gold would cover these monthly expenses today?
And don’t forget the big expenses — broken air conditioner, new vehicle, vacation… and I really don’t think my daughter will want to get married at the county rec hall. How many ounces of gold would I need to cover such likely events in the future?
The point here is that you’re probably going to need more ounces than you think. Look at your bank statement and assess how much you spend each month — and do it honestly.
The other part of the equation is how long we’ll need to use gold and silver to cover those expenses. The potential duration of high inflation will dictate how much physical bullion we need stashed away. This is also probably longer than you think; in Weimar Germany, high inflation lasted two years — and then hyperinflation hit and lasted another two. Four years of high inflation. That’s not kindling — that’s a wildfire roaring through your back yard.
So here’s how much gold you’ll need, depending on your monthly expenses and how long high inflation lasts.
If my monthly expenses are about $3,000/month, I need 45 ounces to cover two years of high inflation, and 90 if it lasts four years. Those already well off or who want to live like Doug Casey should use the bottom rows of the table. How much will you need?
Of course many of us own silver, too. Here’s how many ounces we’d need, if we saved in silver.
A $3,000 monthly budget needs 1,285 ounces to get through one year, or 3,857 ounces for three years.
I know these amounts probably sound like a lot. But here’s the thing: if you don’t save now in gold and silver, you’re going to spend a whole lot more later.
What I’ve outlined here is exactly what gold and silver are for: to protect your purchasing power, your standard of living.
It’s like having your own personal financial bomb shelter; the dollar will be blowing up all around you, but your finances are protected.
And the truth is, the amounts in the table are probably not enough. Unexpected expenses always come up. Or you may want a higher standard of living. And do you hope to leave some bullion to your heirs?
It’s sobering to realize, but it deserves emphasis: if we’re right about high inflation someday hitting our economy…
If you think the amount of precious metals you’ve accumulated might be lacking, I strongly encourage you to put a plan in motion to save enough to meet your family’s needs.
Whatever plan you adopt, my advice is to make sure you have a meaningful amount of bullion to withstand the firestorm that’s almost mathematically certain to occur at this point. And now you know exactly how much gold you’re going to need.
Gee, thanks for the “buy gold” commercial. I don’t see enough of them.
You most likely had to have 20% of the principle in cash before you were sold that mortgage, and could literally demonstrate you could afford the payments?
Hershey bar was 5 cents when I was a kid. And it was at least twice the size of the current $1.25 bar.
A 5c Hershey?!!
If high inflation hits us, and it just might, his scerio is flawed in that it’s a financial crisis and he’s hot likely to be buying ice cream, or chocolate bars. I don’t see how the average joe or josepine could currently afford to go out and buy 45 inflation insurance bars with the hopes for getting through two years of the crisis, for a mere 80K in present dollars without having his spouse file for divorce. I may be fooling myself, but the best I can do is prepare to last the first 6 months on raw basic needs. The first thing I’d do when the crisis hit is stop paying my mortgage. Then we ride it out the best we can and hope it’s over in six months time. Beyond that we likely join the rest of our country in poverty. I’ve been dirt poor before. It’s hard. But, God willing, me and my family will survive it. I’d like to think we could avoid the crash, but I do think it is the price we will have to pay for allowing our Governments to get out of control. Why is it the Government never seems to pay any price at all? Hmmm?
RETURNS? Been to a grocery store, gas station or seen a medical or utility bill lately?
If you had a fixed rate mortgage, it would be the height of folly to stop paying on it. You would be paying off the mortgage with cheaper dollars while increasing your equity in a fixed asset which also increases in value.
I understand your point. However, I am assuming the worst in terms of crisis. Inflation being only one component of the calamity he’s describing in the article, although he ignores all other implications. Lost job. No prospects for a new job. No income. High and fast growing prices. Bank holidays. Limited access to your own funds. And almost everyone else in the same boat. I am not sure how you see the asset increasing in value. My equity in that scenario is worthless. There is no market for my home. The situation would dictate survival measures, and whatever wealth and resources I have, in whatever form, would go toward that end alone. My gold coin (too bad I lost it in that tragic boating accident) nor my home will feed my family for very long.
A cardinal rule in finance is to hold real assets in times of inflation and financial assets in times of deflation. Inflation in common terms means there is more money than goods or labor. In the west when the gold rush was in progress and gold was the medium of exchange in the mining camps eggs sold at a dollar a piece because few were producing eggs and many were producing gold. The same thing happened in Spain when Spain was indurated with gold from the new world.
Bear in mind I am sitting here in my comphy chair imagining the scenario of a total financial melt down. If we were discussing solely inflation, I might buy your logic. Let’s say I have a $1500/mo mortgage. (I wish) If I’ve suddenly got no income, I must pay that from savings. If my mortgage were my only cost of living, which it isn’t, I can last 16 months. If I have a gold coin or two, and not loose them in boating accidents, maybe I can last 20 months. I have enough dry and shelved goods to feed the family for 3 months. After that I either starve or stop paying the expense on a worthless (in crisis time) asset. If I stop paying 3 months earlier, I can feed the family for 16 more months before being totally broke, destitute, and homeless. So, stopping the payment when the crisis hits buys us 19 months. We might be homeless in 3 to 6 months, but, I’ll also own the Jeep. So we’ll be fine until we can’t buy food :) If I understand the author, he would say put all current savings into inflation insurance bars. By his own charts, that would only buy me one year, just paying the mortgage, or buying food. It might buy us a bit more time, but not much as far as I can see. Now if I had only bought 50 to 80 of those inflation bars back when I was 7 years old and they were still $20 each, THEN we’d have a solid plan and keep the house when the crisis comes ;)
We bought our first house in late ‘83, and I think our rate was 12% or 13% even then.
When we refinanced a few years later, the difference in interest rates allowed us to go to a 15 year note with almost no change in payment. Nothing like a few years of Reagan instead of Carter taking effect.
Most hyperinflationary episodes are not that longlasting. Germany’s 1923 hyperinflation lasted about nine to ten months. More recently Zimbabwe’s hyperinflation lasted about two years. It is interesting to note Zimbabwe’s inflation was to a great extent caused by the lost of production as a result breaking up white owned farms.
A few years ago someone probably could have bought the same home for 6-8 times what you paid in 1980, and may have even had a lower mortgage payment! But it turns out they never bought a home at all. They were just buying a mortgage -- which makes all the difference in the world.
This is why home prices should never be included in inflation calculations. Since a home price is dictated largely by the terms of the financial instrument behind the purchase, there's no correlation between the price of a home and a real rate of inflation.
Under normal circumstances Monocle is right, but there are now a number of peculiarities in our financial system that turn some of these conventional rules on their head. For one thing, this country has seen a lot of mortgage defaults for the simple reason that a mortgage is one of the easiest loans to walk away from (student debt and credit card debt cannot be discharged in bankruptcy right now). Secondly, we've seen quite a few cases in recent years where people have been permitted by their banks to stop making any mortgage payments at all -- as long as they are willing to pay the taxes on the home and keep it insured.
One reason for the latter case is that in the U.S. today, an awful lot of homes are no longer a "fixed asset that also increases in value."
A better case might be made that in a full-blown financial collapse, the best course of action might be to move into a smaller home as a renter, stop paying the mortgage on the other home, and rent it out to a couple of dozen illegal immigrants from Mexico and China. Best to get the cash while you can, eh?
It appears that home prices in many areas of the country have bottomed out and prices are improving. It should be noted that housing makes up about 41% of the CPI so that in the months ahead the CPI will start to head north.
I may be wrong about this, but I don't believe "home prices" are included in CPI calculations -- for the reasons I described a few posts up the thread. I believe rent costs or some equivalent measure is used instead. This is probably why "inflation" as measured by the U.S. government was very low even when home prices were skyrocketing. My own situation (I rent my home) indicates that my average increase in rental rates over the last ten years has been about 2%, with a high of around 5% and a low of 0% (several years in a row before a 0.7% increase this year).
Housing is included in the CPI. It might not be labeled “housing” but it is included. Actually housing is included as “Owners’ equivalent rent of residences”.
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