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.

Stay tuned.


LceeL said...

That 2% inflation number is th same target they hold to in the UK. And you're right. That policy, and those like it, favor 'Borrowers' - the people who HAVE money and like to play in those heady environments represented by "Commodities", and "Seats on the Exchange" and "Credit Default Swaps". They don't even play the game with their own money - they use "OPM" - other people's money (money they've borrowed)- to play their games. It's long past time to enforce and exert strong controls over who the financial games are played - and whose allowed to play in those environments. Either that or force the baking industry to pay interest on savings a quarter point higher than the current inflation rate.

winslow said...

Policy is now controlled by the big money in charge; not by the common citizen. I don't think we will ever see any meaningful changes to help the average person.

You and I can probably list 25 necessary and immediate changes that SHOULD be done. ....but the wonks in charge will never proceed forward. Obama was my hope for these changes but he has fallen flat.

moneythoughts said...

I still believe in change. My hope is that the change will come before people take matters into their own hands. From my readings of history, it is far too easy to destroy and far too hard to rebuild. I am hoping that there will be enough enlightened souls out there to realize that it is better to continue the investment game with a few big changes, than to risk the total destruction of the game as we know it. I may be all wrong on this one. I hope I am not wrong, but I agree, President Obama is listening to the wrong people. Larry Summers and Tim Geithner take their marching orders from a different crowd. As for the Fed, the big banks run the Fed through the appointed governors. They too need to take a look around and decide whether they risk betting the farm on bad monetary policy.

Robert said...

To add to the inflation issue, I read in a recent Bellingham Herald article that house values in Bellingham doubled between 2000 and 2006. Part of that is local circumstances and part of it is national issues.

I think the over all inflation rate boils everything down into one number which hides the fact that in certain sectors inflation is higher while in other sectors it's lower.

Housing and health care are two sectors that are thought of as necessities. These are sectors where inflation has been higher than in the overall economy.