Friday, August 13, 2010
Savings, Investing & Inflation: The Holy Trinity?
A 2% annual inflation rate over a period of 50 years would be twice as good as the actual inflation rate since 1960 to 2010. For those that started saving in 1960, their savings for each dollar saved in 1960, would have to have grown to $7.37 because the annualized inflation rate over that 50 year period, calculated by the Bureau of Labor Statistics and based on the Consumer Price Index (CPI) was 4.07%. Over the last 5 years, 2005-2010, $1.12 would maintain the purchasing power of $1.00 in 2005. A little less than 1/8 of a dollar to make up for. But as you trace our inflation back to 1960, the spread widens. 2000-2010 $1.27; 1990-2010 $1.67; 1980-2010 $2.65; 1970-2010 $5.62 and 1960-2010 $7.37!
I am not advocating for deflation, nor am I advocating for zero inflation, but inflation eats away at savings and is a deterrent from saving money. Many people realize, as do large pension funds, foundations, endowments and other large pools of money, that savings accounts over a long period of time will not maintain the purchasing power of the dollar to meet their obligations. As a result, these large pools of cash turn to the capital markets to invest. So far so good.
But, I have a problem with the game after those dollars are put to work in the capital markets. The SEC has been weakened to the point that abuses of the laws governing the investment industry become all to common. Madoff was just one example of a system that needs repair badly. Personally, I don't understand why the public pension funds around the country have not put more pressure upon Congress and the SEC to level the playing field as millions of people's pensions are affected by the crimes that are committed on Wall Street.