Cost of Living Measurement

The US government publishes data on Consumer Price Index (CPI) and calculates annual inflation.  The purpose of calculating annual inflation is to provide a measurement of cost of living adjustments required annually to keep up living standards.

The concept is sound, and reasonable.   Everyone knows prices change over time.  Some change due to technology and efficiency.  Some change due to resource scarcity, and yet some is currency valuations.  I am sure if you search the web, you can find some pretty interesting theories on drivers of basic living costs changes.

In truth, probably each one has some play in prices, the emphasis on weight of the contribution is really the debate.

But one thing that has come under hot debate is the measurement of cost of living changes.  To me its pretty simple.  Cost for food, energy, and shelter should be the core components, with a smaller component related to basics realities in a modern world that everyone must face to compete.  The smaller component I will ignore, since it is pretty much impossible to gain consensus.  (Example, must you have one of these: house phone, cell phone, or internet?  In my opinion yes to be gainfully employed in a job above minimum wage).


The economic aspect that concerns me the most is the Baby Boomers in the USA.  This demographic has dwarfed my entire life experience as I travel in their wake.   The inflation 70's, to gogo 80's, and the bubble 2000 can be traced back to their influence.  As they retire, its certain their economic impact will be staggering.

The government entities are painfully aware of the dwarfing economic challenges this presents.   Stand-up politicians who talk straight on these issues are not to be found, for those that do are un-electable.
Thats OK, its life.  People vote for the story they want, reality of trouble is not welcome.

But for my lifestyle, it is important to keep an eye on the dwarfing aspects of the baby boomer retirement ahead.   And one way the government can 'kick the can' a little is to play games with the CPI.

How? A continual slow under-reporting of CPI ensures that the baby boomers don't get the value out of their Social Security dollars.  To those getting benefits, no one 'cut' their promised entitlement.  They are getting what is promised in monthly checks.  But if the cost of living is higher than reported, the net is the baby boomers must live with less than what was promised decades ago.

This in a strange way, benefits me.  For I am not a baby boomer, and that generation gets less, which in turn means I have to pay less of my work contribution to sustain their living standards.

But this also hurts me potentially.  As the CPI is used to determine what is a fair annual raise, inflation-adjusted interest rates, and other gauges that will also curtail my own future living.

So what to do?  You can keep an eye on TRUE annual inflation to gauge your own living standards for your own future.

A web site called Shadow Government Statistics does this for you.  The site maintains a deluge of information bases on 'old government  metrics that were created at a time the goal was to actually accurately measure statistics.  These old standards when used to current situations gives an interesting gauge of current reporting vs older reporting.

One can argue, and there is truth to this, that the weight of economic changes shifts in importance as the living of USA citizens shift focus on different items.  For example if US Postage stamps had a part of CPI, in today's current world, it is immaterial.  When in the 1890's, it may have been more material to citizens.

In any event, I highly recommend looking at Shadow Government Stats inflation charts, if anything to give perspective.

Below is two graphs, first is 1990 CPI, second is 1980 CPI government computation methods.  Both compared against current computations.
The 1980 shows 10% annual inflation, while 1990 shows 6% inflation, compared to 2% today.
Keep in mind, the USA had the highest average gasoline prices on RECORD in 2012, yet inflation is 2%.
Fuel costs are passed into the entire supply chain, alternate fuels are not substantially inplace yet.
I happen to think inflation is BETWEEN 2% and below 6%.  I think there is truth to the changes made over the years.  I don't think the government as ahead of its time for changing process to match reality, so I am sure changes were needed.

But one thing is certain, if your a baby boomer, in 1979 when promised your future social security benefits, the CPI that was used when that promise was made is not nearly comprised of the same components of today.  And I suspect it will be modified again in the next 5 years even further.

US 30 year bond rate trend

Recently, the 30 year bond rates did break above the downtrend starting in 1987 to today. The rates are now falling. The key trend line now to watch is to see if the uptrend from 2008 can be reversed.

If rates do not resume downtrend, dare I say, inflation is here. So far, I can't make that call, and deflation is the word to use since 2008 primarily.

From WebSufinMurfs FinancialBlog2

Inflation, Deflation, and global currency wars

America is involved in many wars right now, lets list them shall we?

1. Iraq
2. Afghanistan
3. Libya (See War Powers Resolution, and how law is ignored. )
4. War on terrorism (Bin-laden...recent military action)
5. War on drugs ( Mexico's border is flaring up badly )
6. Currency War
7. Arguably, a global simmering trade war

Wow, thats quite a bit of wars! The first three are relatively easy to grasp by most people. The countries involved are "over there" and we send military to change a political situation.

The next two are a bit more complex, as it is arguably everywhere in the world. The shape and form however to bubble to the forefront when clashes occur. It could be in the form of the bad guys killing people, or a counter attack by the good guys (USA). Again, within reason, graspable.

The last two are very subtle wars, Currency and Trade wars. Each take their own form and shape of political maneuvering, like a very big chess game. Spectators watching may not easily grasp all the various possible moves and 10 moves ahead the players are planning for.

The USA made some very shrewed policy changes in it's day, one of the least recognized is what Nixon was able to do. At that time, the US dollar was the defacto standard for currencies. However, the US dollar was convertible to gold. America had started accelerating it's budget imbalances, and other countries were asking the US for larger and larger gold conversions.

Nixon's administration assessed the situation and realized the world would have no choice, but to support the dollar even if it became a pure fiat currency. At that time, America was a manufacturing and military powerhouse. The shackles of money tied to shiny rocks was eliminated, and America could do what it wishes with it's currency.

The chess play here is simply this. Say, other countries want to trade with America. And lets say that America gives US dollars in exchange for goods at a rate that is "unfair" to the other country. Let's assume America isn't providing valuable goods back to the same country and the deficit is basically IOU's in the form of dollars.

Countries COULD turn around and dump the US dollars, in exchange for other goods and services from other countries. It could even invest that money back into the USA by purchasing assets. But if they did so, that would apply pressure on THEIR FIAT currencies to rise, as their currency would gain strength relative to the over-printing of US dollars.

This you would think is a good thing, and in many ways it is. But the net effect would be that countries exports would go up in cost relative to any other country that is prices relative to US dollars. Over time, as the US deficits spends more, their currency would rise high enough to cripple exports.

What to do? Simple, keep US Treasuries or cash and sit on it. Each year allow your holdings of US dollars to build. Since the global currency system is based on fiat currencies, each currency floats RELATIVE to each other. And since historically (since WW2) the trading patterns have been dependent on US dollars, the world has been forced, and WILL CONTINUE to be forced to finance the US over-consumption and lack of production.

Fast forward to today, and the US is deficit spending 1.5 trillion per year in ADDITION to the revolving bond debt that matures on the outstanding 14 trillion of debt.

Now, lets turn to China!

China's currency does not float, and China aggressively locks their currency to a very specific level to US dollars. So while other countries may somewhat try to keep their currency stable to US dollar trade, they do allow a bit of flexing to help ease economic imbalances. (think Euro hitting all time highs against USD).

China however does not. So what possible effect could this have? China's command economy dictates that politicians set policy to maintain the currency imbalance with respect to the USA. This has the unfortunate side effect of excessive credit and currency in their own country, resulting in inflation.

Inflation in China is high right now, and China has been fighting hard to keep prices stable for it's exports, including to the USA. This relationship has been maintained since Reagan, and is partially responsible for the US corporation exodus to China.

Well today, I see a crack in this relationship. China is allowing electric costs to rise. That will in turn force manufactures to charge more. That will result in prices from China to rise. (think Walmart, or Apple) Apple btw, to their credit is heading this off by diversifying suppliers. And despite the US economy being in a fragile state, we may see prices rise in stores, beyond the recent food and gas price surges.

The situation is of course, unsustainable. But that won't stop everyone from keep on doing what they are doing know. The US will continue to deficit spend high amounts. China will continue to try to keep it's currency stable vs the USA. But once rising prices start snowballing out of china, this game will change in shape, form, size, and velocity.

The global economy will take a turn for the worse as China tries to redirect rising prices back out to America and the world.

We live in interesting times.

Deflationary collapses, how quickly we forget!

WAY back in 2008, we had a market collapse followed by an economic collapse. In August of 2008, oil was spiking to 145 a barrel. All systems where go for a global economy on fire.

Then just 4 months later, oil was hitting 40 bucks a barrel. Amazing.

But what caused the collapse? The mass media did an utterly piss poor job explaining it.

Was it the fall of Lehman Brothers? Bear Sterns? Banks?

And how could a few companies failing be responsible for what turned into a global economic collapse? If they where to blame, holly hell, what where government regulators doing since 2001?

I'll ignore the corruption, the outright lies, and other main contributors for getting America to that fragile state.

The issue was simply LEVERAGE! If the US Financial system had no fractional reserve lending policy, it would in effect have no systematic leverage. What would happen is for every dollar a bank lent....a dollar must exist! Then if a dollar was lost, the existing dollar would pay for the bad loan.

In such a world, its hard to get into trouble, since, there is deposits that could pay off bad loans. Further, even when loans go bad, a percent does, not all loans do. So a 10% haircut may be painful, but a company would easily be able to survive based on it's remaining assets.

But thats not the world we live in. The world we live in is 100 deposited dollars can be leveraged to create a total of 457 of deposits, with 357 in loans, and a bank requirement to keep 89 dollars in reserve. (click for Wikipedia details)

So as you can see, if a loan goes bad, the "reserve" can be used quite quickly, leaving no reserve for remaining outstanding loans.

This my friend, is at the heart of a deflationary collapse. Once started, it can snowball into a cascade collapse. Banks and other institutions must dump assets to gain cash to maintain reserves. The system makes for some GREAT bull market runs and makes it easy for private institutions to fund growth. So when things are going good, the marketplace and business world is flush with liquidity (money) to finance business.

But if a tipping point of selling occurs, usually because of bad loans, a cascade failure can happen.

In 2008, the Federal Reserve, to its credit (its rare I complement them), acted quickly to stop the chain reaction to prevent a full all out collapse.

Unfortunately, the lesson learned was, lets do it again, but this time, lets press harder and involve the federal government directly. With governments involved, what could POSSIBLY go wrong?

For an example, lets take a look at Greece. That countries debts and financial situation is at a point of implosion. Greece will likely be the first country to be asked to leave the euro, and it won't be the last. (Spain, Portugal, Ireland) Once any country is asked to leave, it will make it easier to ask for others.

The question is, why is the European Union fighting so hard to prevent this from happening? Do the Germans, French, and other European nations love Greece for its art, food, and vacation spots? Is it they are really nice and like to lend money to others in a time of need?

I am of the belief that the European banking system is about to experience what America already endured, a deflationary collapse due to bad loans, fractional reserve lending.

Don't believe me? Lets see what a former European Central Bank Economist has to say about Greece.

“I’m skeptical about Greece,” said Former ECB Chief Economist Otmar Issing, who joined the ECB a year before the euro’s inception in 1999 and stayed there until 2006. “Greece is not just illiquid, it’s insolvent.”

This statement comes after many of the blogs I read have painfully detailed out that Greece is insolvent, while the European Banking system says otherwise. Mish has a great post of the quote above, and full detail of the pending Greece implosion.

In 2008, America took the hit as directly causing the financial collapse. 2011 will mark the rest of the world causing the next leg down. The European Union, and very likely, China. America's financial markets will get hit, and you can be sure that companies like Goldman Sachs will get caught in the "credit default swap" market losses it was a party to in Europe.

For since 2008, Credit Default Swaps which dwarf global output, ranging in the 55 trillion dollar liability range, with near zero regulation still!

So those looking for hyperinflation, think again, a little country like Greece may be the start of the great unraveling, and that is a deflationary event.

The currency debasement I fear will come AFTER this event. I still think currency debasement with hyperinflation is possible, that years off at earliest 2015-2017.

Inflation, Deflation, What's going on?

I really hate people trying to categorize our global economic system state and USA's economic situation as buzz words like inflation and deflation.

Oversimplifying complex situations creates false impressions of the reality that faces all of us.

I started a series of posts to explore money, and inflation and deflation topics. If you haven't read it, you can do so by starting with the first post "what is money".

For this post, I WILL oversimplify and focus on what people do tend to notice, and that is rising costs to consumers. We have recently seen some decent spikes in commodities, especially some foods such as corn. Other obvious price rises is gold hitting all-time highs, and oil rising.

At the bottom is a video from Walmart CEO starting to see cost increase creep. Welcome aboard! I have been stating this since 2008 as a result of our poor economic and political decisions. Its pretty much at the stage of destiny, but I try to leave some hope.

Some other notable recent articles, from ZeroHedge.com

Goldman Sachs raises corn price forecast by 30%

Inflation expectations 2010-2011

Philly Federal Reserve president's speech "inflation may require aggressive policy action".

Brent Oil hits 119 a barrel

Wal-Mart US CEO To America: "keeping eye on Inflation"

Zero Hedge Roundup

The blog Zero Hedge can sometimes be a bit....extreme in some of its posts.

But I found a few good articles recently worth sharing.

Citi Recommends Buying Irish CDS In Advance Of "Nightmare On Kildare Street" - Basically Irish debt is going parabolic which equals, another government collapse. We'll see what Europe does.

Chris Martenson Straight Talk With John Rubino: The Damage Is Already Done - I don't highlight Mr. Martenson much on the blog, but I do feature in my "new reader" link his videos and link to his web site. Interesting read, highly recommend it.

JPMorgan: "The Likelihood That The Portuguese Government Will Fall This Week Looks High" - Hopefully if we have enough governments collapse, eventually the USD will reverse and gain value! Come on Libya, Ireland. Portugal, Greece, and a dozen more. Get busy failing!. The question is, once all the small players fail.....what then for the USD?

US Inflation On Track To Hit 8.3% In 2011 - To all retire's, fat chance you'll see an increase in your social security check to adjust standard of living. Get used to it.

OPEC Says Perfectly Happy With $120 Oil, Does Not Think It Will Impair Growth - Funny how 120 dollar oil was panic time in 2008...but now, eh, its fine! What has changed? Are global citizens more wealthy can can spend more for fuel (and all things that need fuel)? Or maybe...just maybe...Peak oil is real. Nah, common folk are clearly richer than spring 2008, so 5 bucks a gallon gas here we come. Alternately, maybe this is the first crack of OPEC with using USD as a benchmark, and expects US to continue to pay higher prices.

Inflation, HA! People misunderstanding the forces at work

Everywhere I read, bloggers are saying that Ben Bernanke is creating inflation through massive US dollar printing. While I completely agree Ben Bernanke is creating a situation that may eventually bring the US to it's fiscal knees, in conjunction with congress, I am not, and have not, blamed the primary cause of rising resources on good old Ben.

As I stated back in 2008, and now we get to see it play out in real time, that China and India with increasing wealth is going to drive resources through the roof! What Mr. Bernanke is doing is ensuring fixed income rates are depressed, and ensuring that your income cannot keep up with rising food, energy, and natural resource costs.

Today we have a sneak peak on what is in store. China has announced it's intention to import 9 million tons of corn in 2011-2012. Why is this a problem? The US department of agriculture estimated 1 Million tons!.

My god, that is a striking mis-estimate! No wonder Corn, Rice, Wheat, and other foods are going through the roof. Many gold bugs point to rising food costs as proof Mr. Bernanke is causing food prices to rise. I say hogwash. The China and India importing machines is starting to rev up and they will soak every last ounce of resources from the world as they try to attain a better living standard.

Combine this with pressure on fuel costs as China also soaks up every last barrel of oil, we have a real firestorm a brewing.

Mr. Bernanke is helping ensure Americans get a full, hard, punch in the face by ensuring they cannot save in fixed income to keep up with the rising costs ahead. This is exactly why I am not in favor of 100% in fixed income. For rising resources is not in control of the Federal Reserve Bank. Sure, we can have another market collapse to help cool off growth.

But east's hunger has awaken, and may only take naps, before it starts to eat again.

Mr. Bernanke has saved insolvent banks from declaring bankruptcies, and actively pursued suppressing interest rates, to ensure those who do not have enough savings to invest in natural resources, cannot keep up with the rising costs ahead.

What shows me that Ben is destroying the USD and causing rising resources? Why escalating interest rates breaking out of the 30 year bond market bull trend, or USD valuation falling compared to other currencies. Anything else is smoke and mirrors, keep an eye on China and India.

Ben Bernanke is wrong at every turn

The Federal Reserve Bank, a private institution, is lead by the Federal Reserve Board of Governors. The leader of the board is Ben Bernanke.

He follows in the footsteps of his predecessor, Allan Greenspan.

Mr. Bernanke's opinion and approach to finances was well documented by himself, in a college thesis paper. In that paper he described how the Federal Reserve could have minimized the Great Depression through additional actions they failed to take.

What we have been witsnessing since 2002 is Mr. Bernanke following his own playbook he started when he was in college. The problem I have with this approach is, he somehow knows better than the rest of the world, and has a "Secret sauce" to save the world economy.

Mish has a post that is exceptional reading (click). Mish starts with looking at Mr. Bernanke's own words issued in 2002 on how he would minimize the deflationary forces.

I do take one noteable issue with Mish's generalist view he presents of deflation will win over inflation. The US is tied to China like it or not. China's economy, although full of asset bubbles, is generally acknowledged to be growing. And assuming China will continue to grow over the next decade, it will surpass the US as the economic powerhouse.

What is perplexing is Mish acknowledges this as a possible outcome, in this post here. So I am at a loss on how he presents a world where deflation across the board "wins". So while I agree with Mish about Greenspan, and deflationary forces, I am in disagreement that his typical post view does not illustrate the resource calamity we all face from China's growth.

What it will be is USD devaluation, and should not be confused with economic inflation, with respect to natural resources and Asian currencies. American's (and all western countries) will face is a lowering of standard of living even more, as most wages remain depressed, but costs increase.

I hope Mish is right and I am wrong, but I am hedging my bets.

Mish has a great post explaining all the differing sources of information and opinions he either draws from, or disagrees with titled Straight Talk" with Economic Bloggers. I encourage people to read it and seek other perspectives.

Election done, next up FOMC

Today marks the REAL news that matters for the US economy, not the US election results, but rather the Federal Reserve Banks fiscal policy.

There are many opinions of the result of what will happen today. For the record, Gary of the smart money tracker believes the market may pullback initially, but the rally will continue for many months afterwards.

I do believe Gary is likely correct, but if he is, me buying after the move is obvious rather than before to me is more prudent. I'll miss out on profits, but I'll also miss out on major stress. Unfortunately, if Gary is correct on the continued advancement of gold and commodities as a result of the FOMC actions, everyone will get poorer as our daily cost of living will start to skyrocket in the year(s) to come.

If interested, check back and click this link after 2:15pm today:

FOMC meeting notes

Misrepresenting Economic and Financial Data

I am happy to get back to my monetary post series starting with What is Money, Creating Money and Credit, Economic and Monetary Inflation and Deflation.

Next up is misrepresenting economic and financial data.

As described in the series, Money, in an ideal state would have the same worth for work today, for work tomorrow. But because of various monetary policies, the value of money may vary significantly over time. Most people believe that it is inherent in paper currencies that they devalue over time. For example, in 1939, a gallon of gas may have cost 10 cents, now it costs 4 bucks.

But currencies do NOT have to devalue over time. This is a result of the fiat currency, fractional reserve lending, and the Federal Reserve bank. All of which America did NOT have until 1913, when the Federal Reserve Bank was created. Before this event, a person could take a US dollar bill, bury it, and 100 years later it would have the same purchasing power. As a matter of fact, if you bury 100 dollars in 1800, in 1900 it would have MORE purchasing power! (Click here, try 100 bucks from 1800 to 1900, then try 1800 to 1922, and continue into the future)
The old monetary system also had issues, specifically it was linked to gold directly, which resulted in periods of uncontrollable deflation. But the net result over time was a stable currency value system across generations.

Think about that for a second, "A dollar saved is a dollar earned" actually would be true. Now flash forward to today. $100 us dollars in 1808 saved would have purchasing power of $157.39 in 1908, and purchasing power of $7.16 in 2008!!!

What people don't realize is this hidden inflation changes, or secretly alters, the view of all economics. When people look at stock charts for example, typically it is viewed from an absolute view, when in reality, all stock charts should be adjusted for inflation. This is why I quote the S&P 500 valued in terms of Gold, to help give a different perspective on US stock market valuation in more absolute terms. Gold is an object that has value across all world currencies and other physical assets in a more neutral view than US dollars. By no way is this the perfect way to compute value, but it is more accurate than US dollars over the last 10 years.

In summary, inflation allows to skew, or mis-represent data in terms of money over time.

Next is skewing economic data measurements.
After the last Great Depression, some of the reforms that came out of that period was to have the US government act as a neutral party to present data on the economy so all investors could make decisions on a more level playing field.

There are 100's of metrics that grew out of the government for measuring the economy including unemployment, monetary base, Gross Domestic Product (GDP), import/exports, inflation, etc.

All of these metrics where semi-straight forward when created. For example, if you where once employed, and you became unemployed, you where counted as....unemployed. But now there are dozens of sub-categorization of what is unemployed. For example, if you are unemployed for a long duration, you are re-categorized as no longer in the work force. If you are receiving unemployment checks beyond the normal duration, but are in the "emergency extended benefits" category, you are no longer considered receiving unemployment benefits.

I can go on and on. But there is something very nefarious about changing what it means to be unemployed. The history books showing the percent of Americans unemployed in 1982, or 1935, are NOT adjusted using the latest metrics. The result is you will have people look at the history of unemployment numbers and make statements like "US is at 10% unemployment, not seen since 1982".
When in reality, if in 1982 the same methodology used today was used in 1982, perhaps unemployment then would be 8%, not 10%, and therefore you may need to go back to 1930 with the adjusted methodology to find a time matching today's experiences.

Changing of metrics, without retro-changing the history of previously published data, is a severe distortion of reality. This is yet another way to mis-represent the reality of the economy to put the individual investor at a disadvantage.

This is an issue on all levels of critical metrics the US government publishes. One particularly disturbing skewing of reality is on measuring inflation. By mis-measuring inflation, all inflation adjusted metrics are also skewed, distorting even trying to determine what 1 US dollar is worth today as compared to 10 years ago. This has deep distortion effects across all measurements of value and wealth over time.

And when a metric cannot be skewed, or distorted, the solution has been to eliminate the measurement. For example, the Federal Reserve Bank on 10 November 2005 announced that as of 23 March 2006, it would cease publication of a money supply metric called M3. (ShadowStats continues to try to estimate M3) This was deemed as no longer needed metric. If you click on the shadow stats link, notice M3 exploded right after reporting it stopped. I am sure that is just a coincidence.

Bloggers have pieced together true inflation together with M3 from other data to yield reported inflation from true inflation. Currently as of 12/15/09, inflation reported is about 2%, when real inflation is about 7%. So if your savings is not yielding over 7%, your savings is in effect losing value in terms of US dollar. And this DOESN'T include the fact the US dollar plunged from 90 to 74 in 2009, a 17% drop in terms of world valuation. (US dollar currently rising, back to 77ish)

Inflation not being reflected in economic data, changing of economic metrics without retro changing past data, dropping reported data such as M3 monetary policy, currency devaluation, all have the effect of misrepresenting reality and putting the common investor at a disadvantage.

Please keep in mind, this was not a significant problem 40 years ago, all of this has been a continual morphing of the US government to skewing data to hide the reality of the economic data. In effect each political administration contributes to the distortion so on their watch, the claim can be made that the economy is better than the reality. I am not a conspiracy nut, there is no world order behind this distortion. What is at hand here is human nature, easier to "cheat" by changing the grade on a report card, than buckle down and study harder.

Unfortunately, the decades of accumulation of these changes has yielded much of the reported data so skewed, its hard to judge where the economy, and value of savings, stands.

In Summary

• Fiat Currencies as they change in value over time, are not reflected in most economic historical data, like stock charts. Not auto-adjusting all economic data based on inflation distorts economic information.
• Inflation itself is distorted, which in effect makes it even harder to actually compare financial and economic data over time in more absolute terms.
• All other metrics of economic data are also changed over time, without retro-changing past values to put proper perspective on data.
• All of these distortions create an environment where stored wealth is near impossible to assess if keeping up with devaluation over time, and a view of economic health to make informed decisions on money allocation.
• These distortions are not a reflection of a world conspiracy, but a reflection on human nature to change the test, rather than work harder to have a better grade.

Inflation vs Deflation continued

On Wednesday I posted that I am listening to great audio series of prominent inflationists and deflationists to understand US Dollar issues. (Sept 5th through Oct 3rd) No matter what you think of the economy direction, the policy of the US printing large sums of money, and the huge destruction of credit, are at the heart of the future of the US dollar.

Much smarter people than myself on this series are making compelling arguments for either camp. Mish(Video), Robert Precter, Mark Faber(Video), Peter Schiff (Video), Daniel R. Amerman, and Harry Dent.

For me to make sense of this, I need to break down the components, building a case of my thoughts of each topic, to culminate into a view I can make sense of. In the end, NOBODY can know the outcome, since, the outcome is dependent on what people do in the future. However, it is possible to make an educated guess based on the typical decision making pattern of the big powers involved.

My first post in this long series of Inflation vs Deflation, will be what is Money. The outcome of inflation or deflation, which is a fancy way of saying the US dollar retains/appreciates value vs moves towards being worthless, is critical to ensuring keeping wealth.

The Financial Sense News Hour posted their conclusions from both sides on October 3rd, which I will get to listen to this week. I am going to sketch out my thoughts before listening to their conclusions, then revise for my posts. I encourage you to listen to all the information presented in this series, the valuation of the USD is the elephant in the room during this crisis.

What is Inflation and Deflation, and what wins?

After doing this blog for over a year, it has been interesting to me to see how my own viewpoint changes on what is the "big issue" the US faces. By correctly identifying the US's most major risk, the idea is, you can minimize risk by recognizing and reacting to the US financial landscape changing.

What everything boils down to is US Government credibility. And US government credibility is reflected in the valuation of US dollars and interest rates foreign entities are willing to lend money to the USA.

Let me explain how I can make such a bold statement. The US has many "priorities" it is trying to address, but the bottom line is the US needs financing to operate, just like any government, corporation, or person. If the US citizen profile resembled Japan, the US could finance any issues using their own people's savings as collateral.

But the US is a debtor nation, with about 12 trillion in outstanding debt, trillions more in "implicit" debt from the US backing other companies, and yet over 60 trillion more with promises to pay Social Security or Medicaide benefits. With GDP at 13-15 trillion, the US debt has serious consequences.

The most serious is, at some point of debt, the US creditors will demand more interest to lend to finance all the spending.

With large borrowing, and spending, combined with the Federal Reserve and US Treasury creating "large amounts of money out of thin air", people are concerned how will this change the value of money.

There are two camps, people for an INFLATION result and those with a DEFLATION result. Some people go as far as to see the USD total collapse, and replaced with a new currency.

A reader, Ryan Swan, gave me yet another useful link from a podcast that is running a great series on inflation & Deflation arguments. I am in the middle of listening to this series, and plan to post a series of blog entries to explain my thoughts.

In the mean time, you can listen to this series on the blog site called "Financial Sense Newshour"m and start from September 5th, and listen to current. For those who use itunes, you can subscribe at Financial Sense Newshour itunes podcast.

I'll elaborate more on inflation, deflation in future posts

Welcome new reader

This blog entry will be updated as needed, to revise my view of the US economy and the world economy. You will see text colored (blue). Click on these words to see a blog post or other material to provide detail of the basis of my view. This blog entry will be linked at the top of my blog for future new readers. If you are new to my blog, this post will help get you up to speed to better follow my current entries.

Welcome to my blog, my name is Mike Murphy, a Computer Consultant/Programmer turned arm-chair financial blogger, with help from other bloggers and friends (John Chinnock). The goal of this blog is to serve two purposes, one is to help me continually focus and articulate current thoughts of the Financial Market & US economy for my own trading. A second is to hopefully help those who know me to safeguard their savings from buy and hold mentality in this historic economic problems the US faces.

Recommended Economic Primers

My View of Economic forces
I am writing a series of articles on Monetary and Economic terms and views, click here to read this series to gain my perspective of economic concepts, starting with "What is Money?".

Video of various economic forces the world faces
This video series gives a great synopsis of many global and US economic issues. It is a MUST for anyone new to this blog. This video was created by Chris Martenson, a pay-for-blogger. CLICK HERE TO WATCH THIS GREAT VIDEO SERIES.

Short take
The US Stock market and the US economy will see substantial pressure from a massive deflationary collapse that will not end until the US government enforces honest accounting and loses by US banks are realized. Current target for S&P500 and DJIA for a "bottom" is 550/5000 respectively or lower. The US economy will be in a recession/depression that will span 5 to 10 years from the initial downturn in Dec 2007.

During the economic turmoil storage of wealth in stocks, bonds, cash, real estate, or natural resources (gold) all involve risk. In my opinion, physical gold/silver or natural resource based companies such as gold/silver miners are "safer" investments than most others in the time frame between 2009-2012+. A MUST read for new users is this blog entry (click) on buy and hold as a bad strategy.

Therefore I strongly advise against keeping money in general stock funds, better off in US short term treasury notes (cash), and/or natural resource based investments. There will come a time where US cash will have turmoil (devaluation). However this is likely to happen after 2010, but it could be triggered at any moment due to US government actions. Please read the next section, my verbose view, to better support this view.

7/26/09 - Please read this entry from friend "John Chinnock"

Verbose View

My journey
In August 2006, while talking to a friend, John Chinnock (AKA Happy John), I came to realize the world was facing a financial collapse of historic proportions. At that time I bought 1 stock a year, and my 401K was in who the heck knows funds. I tried to warn others, and to personally get more involved in my own investing. In January 2008, and I emailed friends/family on a rather accurate long term market investment indicator that screamed "get out of the stock market". In August 2008, I started this blog to "shout from the rooftops" of what seemed to be a pending market collapse, using this blog for friends/family communication. Starting in November 2008, I shifted away from shorting financial companies into heavier concentration into natural resource companies, specifically gold/silver miners. My new goal is wealth preservation (gold/silver miner plays) with secondary investments in higher risk items, such as my series on stock plays, and lottery tickets. The primary (but not all) of my stock plays can be found by clicking on a link on the right WebSurfinMurfs Stock plays.

7/26/09 - Please read this entry from friend John Chinnock

Where US (and the world) went wrong
What we are witnessing unfold before our eyes is the deleveraging of INSANE amount of money/investment leverage that was allowed during the last 10+ years.
The leveraging was done at all levels, citizen, corporations, states, and the US with debt represented as an asset. (Click for good video on current leveraging as of 7/18/09)
Much of the over-leveraging was "pulling forward" demand (demand today, pay tomorrow) for profit taking today.
Over leveraging accelerated with the repeal of Glass-Steagall act from 1930, designed specifically to prevent banks from taking part in high risk investments. Unfortunately, America created a new "investment vehicle" called Mortgage Backed Securities. Normal investments are valued at what others pay for it, called Mark to Market accounting. For example, a 2 year old Honda Element car may be valued at $9,500 because that is what people will pay to purchase it. Mortgage Backed Securities are NOT valued by what they are worth on the open market. They are valued by a "computer model". Basically, the banks can state their worth without proving it. This worked until the MBS where losing money instead of gaining, uncovering the reality behind the curtain. To this day (7/18/09) the US and the world refuses to value MBS and other securities according to their true value.
This has created distrust and prevents normal lending. The problem ISN'T banks won't lend as much as they used to back in 2007. The problem is that banks can't tell WHO is fiscally sound to lend to or they actually now have some standards (where they didn't before). Politicians are trying to force the banks to lend, which will only repeat the act of debt faulting and causing more banks to fail. This fraudulent accounting was expanded, in April 2009 existing FASB rules on Mark to Market accounting where SUSPENDED, expanding the fiscal fantasy beyond MBS to the entire banking system, creating a second equity bubble starting immediately.

A secondary problem is "Credit Default Swaps". Credit Default swaps is basically Company A "insuring" Company B for potential risk (fiscal loss) for a premium. This is an INSURANCE POLICY. But banks have worked with politicians to classify CDS as NOT insurance polices. By doing so, CDS contracts can be written with NO regulation on risk taken, or even the ability to PAY if the policy becomes activated! This is what AIG faced, large losses from CDS contracts they wrote that required payment. Also, many companies still write HUGE CDS contracts "assuming" they won't fail, so they can take the premiums today as profit. If they are wrong, AIG is small time stuff compared to a CDS market collapse. The Bank for International Settlements estimates outstanding derivatives total $592 trillion, about 10 times global gross domestic product!

Both the above issues, combine with the issue that the US does not follow international accounting standards and is falsely representing valuations of corporations by not valuing "debt" properly. (level 3 assets) Until the US achieves honest accounting and proper valuation for debt, and enforces CDS contracts to follow similar risk-management as insurance policies, the world economy cannot return to normalcy.

Is the US in a Depression?
Click here for detailed article, but in a nutshell, the US economy has been in a downturn since 2000.

Housing and Real Estate
The housing market was pumped up through outright fraud through bank lending practices. The hyper-lending atmosphere where someone could get a $600,000 no money down loan, WITHOUT proving employment fueled the bubble. Unfortunately, fraudulent lending of mortgages continues in 2009, preventing housing from attaining a normal value, and further perpetuating the financial problems. Unfortunately, the news focused on sub-prime, and stated it would be contained, but they lied. The next wave, prime mortgages, is shaping up to be worse than subprime starting in 2009. The housing market will continue to decline for years, and should flat line in 3 years or so from now.

US Banks
Many large US Banks are taking losses from MBS investments, CDS, residential, and soon commercial real estate investments. Hundreds of US banks will
fail in 2009/2010, as of 7/16/09, about 120 US banks have imploded since 2007. ONLY 22 banks failed between 2001-2006!
Unfortunately, the FDIC does not have the money to cover bank accounts. However I believe the US government will cover "at any expense" personal accounts, so I am not panicking about safety of US bank accounts (under 250K per couple per bank). Further, banks refuse to sell foreclosed houses, since the price they would get would trigger write-offs. Therefore many banks are solvent on paper, but insolvent based on true value of assets.

MORE to come
This entry will take me days/weeks to complete all my thoughts. Other topics I will cover:
China/US and long term view (10+ year)
Natural Resources as an investment (wait for lower prices)
Risk of US dollar collapsing, due to US government monetizing of debt.
Buy and hold for stock market investing does not work!
Unemployment is much worse than reported, over 10 million out of work.
Blogs to read, Overall large market view (50+ year)
Inflation in terms of gold valuation vs stock market
General advice where to invest and risks associated.
What blogs to read for your own opinions to form.
What needs to be done to rectify the US financial problems.
Explanation of links on my blog located at the right of the page.
And I am sure a few more topics. :)

NOTE: I will post on my blog when this entry post is "done", to allow regular readers to check back. Please feel free to add your own comments to help improve this page.

Buy and Hold Equities

When reviewing my previous post, I noticed something interesting. Let's say you are a buy and hold equity investor, NEVER trying to time the market. Assuming your keeping the stock until it is a "forced sale", let's take a look historically at a "worst case" scenario.

If a person bought the US Stock index (and on "average" any US Stock) back in 1929, by 1960, your purchasing power would be restored. So 30 years to just get back to even. But wait, if your 20 in 1930, by 1960 you are only 50. By 1975 you would be 65, at that time I assume you would be forced to sell to cover living expenses. After all people didn't live as long in 1975 and 2009. So between 1975 and 1985 all sales of investments would be losers, selling at a "purchasing power" below the initial investment. At the ripe old age of 75, all sales would be for a modest profit moving forward.

From WebSurfinMurf's Financial Blog

So for a buy and hold strategy, using historical experience, which by the way is NO indicator of future events, buying and holding US stocks from 1929 would take 55 years before decent returns on investments occur. (Assuming zero market timing action taken)

Mind you, 1930 world and 2009 world are two different worlds. Things change MUCH quicker now, so this long period I doubt could ever be repeated again. For one thing, China/India/Brazil have awaken, and they should drive the next round of economics.

I don't know about you, but I don't want to wait 10+ years from October 2007 to wait for my return. And I assume neither does the US government considering all the debt the US has. This lends additional credence that in the face of a deflationary collapse, such as the last great depression, that the government will try very hard to create inflation. They know history, and they will probably try for a different outcome.

Buy resource stocks, such as gold miners, over the next year. :)