Inflation is eroding your standard of living

[rkd24]

Do you rely on fixed income for retirement and are hurt by rising prices? Tell your congressional representatives. Inflation is caused by the creation of excess money by the Federal Reserve Bank. Since the Federal Reserve receives its mandates from Congress, Congress can stop inflation.

The Federal Reserve thinks that an inflation rate of 2% per year is okay. However, at that inflation rate, a pension payment that a retiree starts receiving at age 65 will suffer a 33% purchasing power loss over his/her life expectancy (20 years). The inflation rate needs to be under 0.25% per year, since at 0.25%, the loss of purchasing power is 5%.

Right now, the Federal Reserve is creating enormous amounts of extra money to combat a severe recession and to rescue Wall Street financial firms, the very same firms that triggered the recession in the first place. As a result, interest rates are abnormally low, reducing interest income to practically nothing while enabling banks to earn big profits. Our government is rescuing Wall Street at the expense of retirees. Retirees are being hit by low interest on their savings and reduced purchasing power, all at the same time.

[Bryn Mawr]

Originally Posted by rkd24

Do you rely on fixed income for retirement and are hurt by rising prices? Tell your congressional representatives. Inflation is caused by the creation of excess money by the Federal Reserve Bank. Since the Federal Reserve receives its mandates from Congress, Congress can stop inflation.

The Federal Reserve thinks that an inflation rate of 2% per year is okay. However, at that inflation rate, a pension payment that a retiree starts receiving at age 65 will suffer a 33% purchasing power loss over his/her life expectancy (20 years). The inflation rate needs to be under 0.25% per year, since at 0.25%, the loss of purchasing power is 5%.

Right now, the Federal Reserve is creating enormous amounts of extra money to combat a severe recession and to rescue Wall Street financial firms, the very same firms that triggered the recession in the first place. As a result, interest rates are abnormally low, reducing interest income to practically nothing while enabling banks to earn big profits. Our government is rescuing Wall Street at the expense of retirees. Retirees are being hit by low interest on their savings and reduced purchasing power, all at the same time.

That's a very simplistic view of the world.

Firstly, inflation is not solely caused by the creation of excess money by the Fed - if it were so life would be so much easier - and is not totally under their control. Indeed, their biggest fear is not high inflation but deflation and, even worse, stagflation which, once started cannot be controlled, only endured. Your inflation rate is currently running at -0.23% and you are complaining about high inflation? The danger is the exact opposite.

Secondly, the group of people on fixed incomes with zero capital reserves (pensioners with zero savings) are not the only people the Fed have to look after. For those with homes and those with savings zero interest (and given that interest is fairly tightly linked to inflation you can read that as zero inflation) is a bad thing as it is for most companies. 2% has been set as a target (almost worldwide, not just by the Fed) as it is a good compromise and an achievable stable equilibrium in the economy.

[gmc]

As someone who remembers inflation in double digits and interest rates at 15% can't say the present levels of inflation worry me unduly.

posted by rkd24

Tell your congressional representatives. Inflation is caused by the creation of excess money by the Federal Reserve Bank.

we are in this mess because of the widespread adoption of monetarism and the insane idea that controlling the money supply controlled the economy and that was all that mattered completely forgetting the basics of capitalism-you have to have things to sell and money is a medium of exchange not actually something can generate wealth of itself which is why we have the bubbles that have just burst. You can't generate wealth out of nothing and selling money to buy more money is insane.

[rkd24]

Originally Posted by Bryn Mawr

That's a very simplistic view of the world.

Firstly, inflation is not solely caused by the creation of excess money by the Fed - if it were so life would be so much easier - and is not totally under their control. Indeed, their biggest fear is not high inflation but deflation and, even worse, stagflation which, once started cannot be controlled, only endured. Your inflation rate is currently running at -0.23% and you are complaining about high inflation? The danger is the exact opposite.

Secondly, the group of people on fixed incomes with zero capital reserves (pensioners with zero savings) are not the only people the Fed have to look after. For those with homes and those with savings zero interest (and given that interest is fairly tightly linked to inflation you can read that as zero inflation) is a bad thing as it is for most companies. 2% has been set as a target (almost worldwide, not just by the Fed) as it is a good compromise and an achievable stable equilibrium in the economy.

I would argue that long-term underlying inflation is solely caused by the Federal Reserve. Regardless of the source of the money, foreign or domestic, the Federal Reserve oversees all the money in our financial system. It controls how easily it flows and its creation and destruction. It also has the tools to effectively control inflation. The reason it does a poor job of controlling inflation is because it has two sometimes conflicting objectives: economic growth and price stability.
Economic growth always receives the priority.

What inflation measure did you use for the -0.23% current inflation quote? The best measure of underlying inflation is the core year-over-year Consumer Price Index (CPI) rate since it eliminates seasonality and excludes volatile food and energy prices. As of November 2009, the core year-over-year rate was 1.7% per year. At this rate, a fixed pension payment received at age 65 will suffer a 29% purchasing power loss over the senior's life expectancy.

A 2% inflation rate is not a good compromise since it is not a fair compromise. It benefits homeowners and hurts fixed incomers. A 0% rate is the fairest compromise. In inflation, homeowners get asset price appreciation and lower mortgage payments. Fixed incomers suffer purchasing power loss. Savers, depending upon interest rates and income tax rates, more or less tread water. Company profits are inflated. In deflation, fixed incomers and savers gain more purchasing power. Homeowners suffer asset price depreciation and higher mortgage payments. Company profits are deflated. With a 0% rate, there is no inflation or deflation and nobody artificially gains or loses.

I disagree that targeting a 2% inflation rate is stabilizing. We had two huge financial bubbles in the past decade. Our currency is fundamental to our economy and is involved in every aspect of it. If you corrupt the currency, you corrupt the economy. I think fiscal measures such as stimulus spending in distressed areas, unemployment benefits, and job training programs are more stabilizing.

The proper level of inflation for the overall economy; whether or not the Fed is the sole cause of inflation; and whether or not the Fed can effectively control inflation may all be subject to debate, but one thing is certain. Even a little bit of inflation hurts a very vulnerable part of our society, seniors who depend heavily on fixed incomes. They cannot recover from a loss of purchasing power. Their job opportunities are very limited and many are not healthy enough to work. Inflation has driven many seniors into poverty. It is true that Social Security Benefits are adjusted for inflation. However, most seniors cannot live on Social Security alone.

There probably are many financially well-off seniors who are not hurt by inflation, but for those who are hurt, the government needs to consider their plight when formulating economic policy.

[spot]

Originally Posted by rkd24

I would argue that long-term underlying inflation is solely caused by the Federal Reserve.

I live in England. We English have long-term underlying inflation too. We don't have a Federal Reserve. What we have are wages inflation, retail price inflation, housing pressures, currency fluctuations and bloody inept short-term politicians.

Long-term underlying inflation has brought me in about as much, in current purchasing power, as my entire lifetime income from employment. Some generations win out, others see their savings evaporate. It pretty much destroyed the life-style of the little old ladies relying on the gilt edged funds they'd inherited when they were 25 and to be honest I thought there was a fair degree of social justice in that.

Maybe you should have bought gold bullion when it was $50 an ounce instead of a Wall Street based pension fund with all the inbuilt fixed annual charges.

[Lon]

As a retiree for the past 17 years I receive two fixed pensions. One from Social Security and the other a private corporate pension. Both have provisions for COLA (Cost of living adjustment), however neither will have a COLA for 2010. Our Washington legislators will be receiving a nice pay increase for 2010 interestingly enough.
Thus far inflation has not affected me adversely as I am fortunate to have other resources to draw from. The problem of all retiree's is to try and not outlive your resources.

[spot]

Originally Posted by Lon

The problem of all retiree's is to try and not outlive your resources.

Whitewater rafting, Lon! Go for it!

[Lon]

Originally Posted by spot

Whitewater rafting, Lon! Go for it!

Did a bit of that in New Zealand on a force 4 river---------whaddaride

[Bryn Mawr]

Originally Posted by rkd24

I would argue that long-term underlying inflation is solely caused by the Federal Reserve. Regardless of the source of the money, foreign or domestic, the Federal Reserve oversees all the money in our financial system. It controls how easily it flows and its creation and destruction. It also has the tools to effectively control inflation. The reason it does a poor job of controlling inflation is because it has two sometimes conflicting objectives: economic growth and price stability.
Economic growth always receives the priority.

Again, a very simplistic view of the world. The Fed have very limited tools to affect the economy and very little direct control over it. The control the base lending rate but they do not control the bank rates. In exceptional circumstances (such as now) they have the ability to directly control the amount of money in circulation but they cannot directly affect the availability of money supply. The do not have any control over consumer confidence and hence retail spend which makes up 70% of your economy. They cannot control the import or export markets and thus the balance of trade. They have no direct control over the employment market or household income.

Put simply, it does not have the level of control you are ascribing to it.

Originally Posted by rkd24

What inflation measure did you use for the -0.23% current inflation quote? The best measure of underlying inflation is the core year-over-year Consumer Price Index (CPI) rate since it eliminates seasonality and excludes volatile food and energy prices. As of November 2009, the core year-over-year rate was 1.7% per year. At this rate, a fixed pension payment received at age 65 will suffer a 29% purchasing power loss over the senior's life expectancy.

Interesting, the figure I was quoting was the core year on year CPI rate :-

<http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?symbol=USD>

Originally Posted by rkd24

A 2% inflation rate is not a good compromise since it is not a fair compromise. It benefits homeowners and hurts fixed incomers. A 0% rate is the fairest compromise. In inflation, homeowners get asset price appreciation and lower mortgage payments. Fixed incomers suffer purchasing power loss. Savers, depending upon interest rates and income tax rates, more or less tread water. Company profits are inflated. In deflation, fixed incomers and savers gain more purchasing power. Homeowners suffer asset price depreciation and higher mortgage payments. Company profits are deflated. With a 0% rate, there is no inflation or deflation and nobody artificially gains or loses.

A 0% inflation rate is not a compromise it is walking on the edge of disaster. You say that fixed incomers gain from deflation but, in truth, everyone looses. During periods of deflation everyone (companies and individuals) defers spend and the economy collapses - just look at Japan in the 1990s if you want an example. What started as a downturn became ten years of economic ruin.

Originally Posted by rkd24

I disagree that targeting a 2% inflation rate is stabilizing. We had two huge financial bubbles in the past decade. Our currency is fundamental to our economy and is involved in every aspect of it. If you corrupt the currency, you corrupt the economy. I think fiscal measures such as stimulus spending in distressed areas, unemployment benefits, and job training programs are more stabilizing.

What was the inflation rate during the financial bubbles and what was the cause of the bubble in the first place? In neither case is the answer 2%.

Originally Posted by rkd24

The proper level of inflation for the overall economy; whether or not the Fed is the sole cause of inflation; and whether or not the Fed can effectively control inflation may all be subject to debate, but one thing is certain. Even a little bit of inflation hurts a very vulnerable part of our society, seniors who depend heavily on fixed incomes. They cannot recover from a loss of purchasing power. Their job opportunities are very limited and many are not healthy enough to work. Inflation has driven many seniors into poverty. It is true that Social Security Benefits are adjusted for inflation. However, most seniors cannot live on Social Security alone.

There probably are many financially well-off seniors who are not hurt by inflation, but for those who are hurt, the government needs to consider their plight when formulating economic policy.

You cannot run the entire economy for the benefit of one small part of it. The Fed has a responsibility to manage it in the round for the benefit of all and that requires, amongst other things, high levels of employment and a thriving manufacturing base. You will not get that by targeting your entire fiscal policy on the wellbeing of those who are no longer in employment and are on fixed incomes. Whilst consideration must be, and is, given to their welfare it is not the be all and end all of the Feds requirements.

[rkd24]

Originally Posted by Bryn Mawr

Again, a very simplistic view of the world. The Fed have very limited tools to affect the economy and very little direct control over it. The control the base lending rate but they do not control the bank rates. In exceptional circumstances (such as now) they have the ability to directly control the amount of money in circulation but they cannot directly affect the availability of money supply. The do not have any control over consumer confidence and hence retail spend which makes up 70% of your economy. They cannot control the import or export markets and thus the balance of trade. They have no direct control over the employment market or household income.

Put simply, it does not have the level of control you are ascribing to it.

I did not say the Fed could control the economy. What I said is that the Fed can control the underlying core inflation rate and there is evidence that it has done so in the past. There is a URL from the U.S. Bureau of Labor Statistics that contains links to archived Consumer Price Index data going back to October 2000. This forum will not let me post it since I have not passed 15 posts, but you get to it by Googling "bls" and going to its link, clicking on "Inflation & Prices - Consumer Price Index", and then clicking on "Archived CPI Detailed Report Tables" located about 1/3 of the way down.
I extracted all the core year-over-year CPI rates since then. The average rate is 2.1%. Despite the fact that the Fed often abandons its price stability actions to work on its other objective, promoting economic growth, this is remarkably close to 2%, which is what is considered to be the Fed's de facto target. I completely agree that the Fed has little direct control over the economy. This is one of the reasons I believe the Fed should have price stability as its sole mandate.

Originally Posted by Bryn Mawr

Interesting, the figure I was quoting was the core year on year CPI rate :-

The figure you quoted is not the core year-over-year rate and the graph you supplied displays the total CPI. You can find the core year-over-year rate about 1/3 of the way down the web page you submitted as a reference.

Originally Posted by Bryn Mawr

A 0% inflation rate is not a compromise it is walking on the edge of disaster. You say that fixed incomers gain from deflation but, in truth, everyone looses. During periods of deflation everyone (companies and individuals) defers spend and the economy collapses - just look at Japan in the 1990s if you want an example. What started as a downturn became ten years of economic ruin.

There is a table of the Japanese unemployment rate since 1980. You can display it by Googling "Index Mundi" and going to its link, clicking on "Asia", clicking on "Japan", and clicking on "Unemployment Rate".
The highest rate is 5.4% in 2009, which can be explained by the fact that their large export sector is getting hammered by the global recession. They have been having higher than normal unemployment rates since about 1995. Although the rates are high by Japanese standards, this is hardly a country in ruins. What is clear is that, even though they had some deflation due to the bursting of their 1980's bubble, a deflationary spiral did not materialize. This disputes the notion that deflation must be avoided at all costs because it is certain to produce a deflationary spiral. If an economy is in a deflationary spiral, it is not because of deflation per se, but because it has serious economic problems. It is true that Japan has had many years of stagnant growth but that is understandable considering they are suffering from a massive debt burden whose creation was facilitated by their easy money policies.

Originally Posted by Bryn Mawr

What was the inflation rate during the financial bubbles and what was the cause of the bubble in the first place? In neither case is the answer 2%.

As mentioned above, the average core year-over-year inflation rate for the last nine years was 2.1%. I could not find CPI data prior to October 2000 so I cannot completely refute your assertion that the inflation rate was not 2% during both of the big financial bubbles. However, if the Fed was targeting 2% during the late 90's bubble, then the inflation rate was probably close to 2%.
I did not say that 2% inflation was the direct cause of the bubbles. I said that targeting a 2% inflation rate is not stabilizing and that the bubbles occurred
when the Fed was targeting 2%. By targeting 2%, the Fed creates a highly stimulative monetary environment that makes it easier for bubbles to form and grow.

Originally Posted by Bryn Mawr

You cannot run the entire economy for the benefit of one small part of it. The Fed has a responsibility to manage it in the round for the benefit of all and that requires, amongst other things, high levels of employment and a thriving manufacturing base. You will not get that by targeting your entire fiscal policy on the wellbeing of those who are no longer in employment and are on fixed incomes. Whilst consideration must be, and is, given to their welfare it is not the be all and end all of the Feds requirements.

I did not just say that fiscal policy should be for the unemployed and I did not avocate using it to help fixed incomers. I also said that fiscal policies such as stimulus spending should be used on distressed areas. If the whole country is distressed, then stimulus spending or other fiscal tools should be used to help the whole country. I also disagree with the assertion that consideration is given to fixed incomers. Consideration is given to those who make big political contributions, to powerful lobbyists, and to large influential organizations with many members. The only way fixed incomers will get any consideration is if a large bloc of them complain about getting hurt by inflation.