Misery: How Bad Will It Get?

By: Tom Cammack | Mon, Feb 16, 2009
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Deflation may be the current concern, but InflationFighter® believes you should be prepared for the very high likelihood that inflation, or hyperinflation, will make a comeback before long. Here is a quote from ShadowStats' John Williams January 2009 newsletter:

"As discussed in the Reporting/Market Focus, the U.S. government effectively is bankrupt. Yet, extreme fiscal stimulus appears to be likely early in the upcoming Obama Administration, along with a further sharp and immediate increase in U.S. Treasury funding needs. As U.S. and global investors increasingly shun investment in U.S. Treasuries, the Federal Reserve will be forced to monetize that debt, as the lender of last resort to the U.S. government. Accordingly, what likely will become in 2009 the worst U.S. consumer inflation in living memory, increasingly will have the potential to evolve into hyperinflation before the end of the New Year. The estimated timing for the onset of the hyperinflationary great depression discussed in the Hyperinflation Special Report of April 8, 2008 has been narrowed to a range of 2009 to 2014." http://www.shadowstats.com

Just in case you might need more convincing, please read this quote from James Quinn:

"With an annual trade deficit of $700 billion, a National Debt that will surpass $12 trillion next year, a banking system that will need $2 trillion of additional capital, foreigners owning $3 trillion of our debt, zero percent interest rates and a weakening currency, something has to give. The Federal Reserve will do anything to defeat deflation. Deflation is fatal to a debt ridden society. There will be many more stimulus packages after this one fails. Eventually, we will reach a tipping point where too much debt will result in a hyperinflationary crash. It may be in two years or ten years. I don't know. Ben Bernanke, Timothy Geithner, and Barrack Obama also don't know. It will catch us all off-guard, just like the current crisis caught them off-guard. Turning Japanese would be a best case scenario for the U.S." (source: Turning Japanese - The Audacity of Reality by James Quinn).

To the current total debt number, InflationFighter would add approximately $100 trillion of Unfunded Liabilities. Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas, made this statement in his speech entitled "Storms on the Horizon" in May 2008: "Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent." Storms on the Horizon - Richard Fisher Speeches - News & Events - FRB Dallas.htm

Key Fact: Just the Unfunded Liabilities of the federal government equates to $1.3 million per family of four - over 25X the average income for a family of four!

When you think about it, it's in the best interest of a number of groups to have debt inflated away: the federal government, over-extended consumers, the next generation(s), pension funds (pension liabilities), etc. InflationFighter is inclined to believe Ben Bernanke when he said:

By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. (Ben Bernanke," Speech, Bernanke --Deflation-- November 21, 2002

To understand the present situation, we must know history and educate ourselves about basic economic and monetary principles. InflationFighter®.com is designed to help you educate yourself and to bring investors together with those individuals and companies that provide investment opportunities and services.

It is InflationFighter's opinion that the following three conditions are unsustainable on a long-term basis:

The 'Real' Misery Index

The 'Misery Index' became popular back in the late 1970's. It is calculated by adding the inflation rate (Consumer Price Index -- CPI) and the unemployment rate. The following web link provides a historical reference point for the Misery Index going back to 1948 using government reported inflation and unemployment rates:

The United States Misery Index By Year

Using the government reported statistics, the Misery Index peaked at 20.76% in 1980 (the last year of Jimmy Carter's presidency and probably a big factor in Ronald Reagan's election). Since then, the Index has generally trended downward except for the spike upward in 2008.

Because of significant changes in the calculation methodology of both CPI and the unemployment rate, InflationFighter® believes it is a mistake to compare current CPI numbers with those of prior decades. There have been a number of significant revisions to the CPI calculation since 1980. Most recently, the Boskin Commission issued a report in 1996 entitled "Toward A More Accurate Measure Of The Cost Of Living." The Commission's report stated that they believed CPI was overstated by 1.3%/year for years prior to 1996 (see Boskin Commission - Wikipedia, the free encyclopedia.htm).

There is no question the revised calculation methodologies lowered the reported CPI rate. In addition, with the emphasis on "core" inflation (excludes food and energy costs), the reported CPI numbers came down significantly. Who was a primary beneficiary of low CPI numbers? The federal government, of course, because of Social Security and other payments tied to the CPI. Who is hurt the most if CPI is underreported? People on a fixed income, such as the elderly, trying to live on Social Security.

It should also be noted the unemployment rate methodology has also been revised a number of times over the years. For example, the reported unemployment rate excludes workers who have given up looking for a job.

To compare apples to apples, you may ask what the Misery Index would look like using the old calculation methodologies for CPI and the unemployment rate. InflationFighter has put together the chart below which we call the "Real Misery Index." Data for the Alternate Calculation was obtained from shadowstats.com. As you can see, the Alternate Calculation has been fluctuating in the 20-25% range since 2000 until it broke above 25% in 2008. It has come down recently because of the big drop in energy costs. Nevertheless, InflationFighter expects this line to resume its upward trend as the unemployment rate, and then CPI, increase significantly.

In light of present and possible future economic conditions, InflationFighter® strongly recommends the following course of action:

1) Education - Chris Martenson's 'Crash Course' is a MUST! (http://www.chrismartenson.com/crashcourse/).

The course takes a little over three hours total and is very well done (cost is free, donations are welcome).

Another excellent resource is Daniel Amerman's free minicourse "Turning Inflation into Wealth" - Turning Inflation Into Wealth Free Mini Course Including Reversing The Inflation Tax Here again, the material is outstanding and very helpful.

2) Self-Assessment - after educating yourself about the issues at hand, you will need to look at your own financial situation and determine what potential scenarios you want to be prepared for.

3) Develop & Execute - a Plan of Action that is in line with your objectives and risk tolerance.

To help you implement your investment strategy, InflationFighter.com will provide a directory of companies and individuals that offer investment alternatives in the following areas:

When evaluating investment results, it is important to think in inflation-adjusted terms. For example, if a stock portfolio that you hold goes up 50% but real inflation is running at a 60% annual rate, you have lost ground in reality.

 


 

Tom Cammack

Author: Tom Cammack

Tom Cammack, CFA, CPA
InflationFighter®

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