Inflation and Your Paycheck
By Rod Van Mechelen
The Power of Compound Interest...In Reverse!
2013 Olympia, WA - Few Americans realize how much they have lost to inflation. The federal government reports an inflation rate (CPI) of about 2%, that doesn't sound like much. But just as the power of compound interest can turn a small amount of cash into a big nest egg, inflation can reduce what looks like a lot of money into a pittance.
For example, during the past 10 years (2002 through 2012) the CPI has averaged a little over 2%. If you made $50,000 in 2012, your earnings would have the same buying power as $41,000 in 2002. In other words, inflation has eaten up almost 20% of your buying power in just 10 years.
But the CPI is a lie. The real inflation rate is much higher. According to John Williams' Shadow Government Statistics site, inflation as measured before Alan Greenspan was Fed Chairman has averaged closer to 8% during the past 10 years. By that measure, if you earned $50,000 in 2012, it had the same buying power as $23,200 in 2002.
It's the power of compound interest working against you!
See For Yourself
You can see this for yourself using an online inflation calculator. The federal government has their own BLS Inflation Calculator. The numbers from it don't look as bad. That's because it uses the official CPI.
Remember, the official CPI is a lie. It's kept artificially low. Plus the official CPI used for this calculation moves up and down. They do not want you to see how bad it really is!
The Calculator Pro Inflation Calculator gives a more honest reading:
Get this Widget
Here's how to use it.
To figure out the buying power of your 2012 income in terms of 2002 dollars, you're going to have to do a little hunting because it calculates numbers for future dates. So you have to go back in time and plug in different dollar amounts until you get the result that equals what you made in 2012.
So if you made $50,000 in 2012, just to get started put in 25,000 (without the comma) into the Amount Today ($) field. For an inflation rate let's be very conservative and use 6% instead of 8%, so put 6 in the "Inflation Rate" field. For number of years, enter 10.
The result is $44,771. Through trying different amounts we find that at an average inflation rate of 6%, the sum of about $28,000 in 2002 would have the buying power as $50,000 today.
That's it! Now you know that the $50,000 you made in 2012 has the buying power of about $28,000 in terms of 2002 dollars.
The trick is simply to change the number in the Amount Today ($) field until the result comes close to today's amount.
This is a rough estimate. There are "experts" who will say I'm doing it wrong. That this does not work because inflation goes up and down by fractions of a percent each month, or that the rate is not as high as John Williams says, or that it doesn't matter because our salaries will be adjusted.
I hope they're right! Because if they do nothing to prepare and it turns out they're wrong, when the time comes all they will be able to do is join the mobs of other angry people who did nothing to prepare.
Which would you rather be? Prepared and not have to use it, or unprepared and desperately need it? Like the Boy Scout motto says, "Be Prepared!"
It's Going to Get Worse
As bad as it has been looking back, it's going to get even worse.
Again according to John Williams' Shadow Government Statistics website, the current real rate of inflation, as measured before Alan Greenspan was Fed Chairman, is almost 10%. As measured the way it was during the Clinton Administration, it is almost 6%. Either way it's worse than the almost 2% currently being reported.
And John Williams forecasts that we will see bouts of hyperinflation by 2015. Hyperinflation could be hundreds of percent increase. Hyperinflation is worse than 20% or even 100%. Much worse. But 20% is bad enough. So let's see what would happen if we averaged 20% inflation over the next 5 years.
In our example, put 50,000 into the Amount Today ($) field, 20 into the Inflation Rate field, and 5 into the Number of Years field. The result: You would have to earn $124,416 five years from now to have the same buying power as $50,000 today.
Do you expect your pay to go up by that much? No? Are you getting mad, yet?
Inflation Is An Addiction
Inflation is like an addiction. Inflation allows nations to go into debt, live far beyond their means, and then inflate away the value of their money (devalue their money) so they can pay off their loans in dollars that are worth less than the dollars they borrowed.
That may be a good deal for the government, but it rips off the people who buy the government bonds, and it destroys the savings and salaries of ordinary citizens by chipping away at their buying power with inflation.
So while your wages or salaries may stay the same, go up a little bit, or even decline, the prices of stuff will go up and up and up, and because you will be able to buy less with your dollars, your standard of living will go down and you will have to cut back.
For example, if you've already cut back and are eating fewer steaks and more hamburger, now you will have to eat less hamburger and more eggs, chicken, or even skip eating meat several days per month altogether. Your paycheck might look bigger, but it will buy less.
Why Aren't We Seeing Much Higher Rates Already?
Through Qauntitative Easing, Fed Chairman Ben Bernanke is inflating the money supply at a horrific rate. This usually results in higher rates of price inflation. But we are not seeing that, yet. Why not?
Quantitative Easing is giving free money to the too-big-to-fail banks. For those dollars to turn into price inflation, the banks have to get them into circulation by lending them out. But they are not doing that. Instead, they are using those funds to increase their reserves. So for now price inflation is relatively low (if you consider a rate of 9.5+% to be low). But at some point they will begin to lennd that money to consumers. Once they start, high price inflation will be soon to follow.
Are you getting angry, yet?
As prices begin to rise higher and higher and higher, the number of people going hungry and homeless will increase. But remember that under Obamacare you will now be required to buy healthcare, so while you give your dollars that are worth less and less to insurance companies, you may no longer be able to afford to eat or rent a home, but at least you will have health insurance.
The number of people on foodstamps will skyrocket. The number of people needing housing assistance will increase. Applications for emergency assistance will explode. Social unrest will ensue.
What Can You Do About It?
The best thing would be for the politicians to say no to anymore inflation, allow citizens to choose what they want to use for money--Ron Paul's idea of competing currencies (including commodities like silver and gold bullion coins)--and implement drastic cuts to government spending. This would plunge the nation (and much of the world) into a painful but short economic depression.
That's not going to happen. So all people can do is prepare. Becoming a prepper is probably the best thing you can do. (Sounds like a commercial for a soft drink! Wouldn't you like to be a Prepper, too?) Stock up on items you will need before prices shoot through the roof. Everything from toilet paper and toothpaste to canned goods, coffee and prescriptions.
A lot of preppers are buying gold (expensive!) or silver (the "poor man's gold"). Right now a silver dime (Roosevelt or Mercury) costs less than a latte. The price in dollars of silver is expected to skyrocket when price inflation hits hard. Silver can be used to buy essentials, or sold for dollars that you can use to pay off debts.
Whatever you do, the time to begin is now. If you wait too long there will be no time, and then all you can do is get mad and join the mobs of other angry people.
Rod Van Mechelen
Rod Van Mechelen is the author of What Everyone Should Know about Feminist Issues: The Male-Positive Perspective (the page now includes several articles by other authors), and the publisher of The Backlash! @ Backlash.com and Cowlitz Country News. He is a member of the Cowlitz Indian Tribe and served for 9-1/2 years on the Cowlitz Indian Tribal Council.