This is in response to this article you posted a link to The Fed and Baby Boomers. The Federal Reserve is trying its best to solve the incoming budget crisis as the baby boomers near retirement age. Soon a relatively low number of workers will be paying taxes to support a high number of retirees. Really unsustainable numbers are involved. So how do you solve it? Well, either you tell yourself that the youth will pay for it because they have no choice (which would be a bad assumption), or you find a way to make the money paid to be too less valuable than it appears, but deniably so. Like the 1980s, its all about plausible deniability. Evidence of government sponsored inflation? Why yes! I do have some.
1) The Fed stopped reporting M3 on March 15th [of 2006]. This (M3) is the amount of money in circulation, including printed currency and electronic money. There is an actual total. And until March 15th of 2006, they reported this amount every quarter. Now they don’t. How much money is there? Good question. Only The Fed knows.
2) Disengage economic ties to debtor and lender nations. The USA used to be a lender nation, but things reversed after 9/11 to pay for the war. The Chinese are devaluating the dollar, which has caused a worldwide devaluation of our currency, though not as much as you’d think. Some folks think that the reason the dollar hasn’t crashed is because OPEC buys and sells oil using Dollars, the currency is basically backed by Oil so the world can’t afford to dump dollars without dire economic consequences. If oil starts trading in Euros or Yuan, then that’s another story.
3) Logical reasoning. If the government generates inflation, goods cost more. If they also stop counting the costs of those goods in inflation calculations, as Clinton ordered back when he was still in office, then there’s no reason for a CPI Cost of Living Adjustment to Social Security payments. If you don’t increase the payments, you’re paying less all the time to these retirees. You’re also paying lower wages to US workers, so raises are paper-only, and usually fall behind inflation. Retirees aren’t stupid, but they currently lack the power and will to point this out legally. Workers are mostly naive and don’t realize they’re earning less every year. If they did, there would be dire consequences to the economy, so maybe they’re on-board with making the poorer boomers much poorer in retirement in order to remove some of the tax burden from their kids, Gen Y and Gen X. If the government were honest about the cost of Social Security, which it tried for more than 15 years now, it would be fired for incompetence. Like Bush Sr and Clinton were, and “W” will be.
Inflation solves the problems of debt because fixed rate loans devaluate and ARMs inflate a little less than they would if the truth were known. It also is an acceptable way to deal with the housing bubble. Instead of a home taking a huge dive in paper value, it takes a small drop and still says it costs $425,000 or whatever instead of $500,000. The fact that that money is now worth 60% of its prior value so its only really worth $290,000 now is more palatable if the public and the government continue to pretend that inflation is still 2.6% instead of its real current rate of around 10%. Don’t believe me? Check your receipts for food from a year ago. Most banks have electronic records of ATM payments, and paper checks get sent back to you. Look at your records. Look what you paid then, and what you pay now. Its gone up at least 10%. And then there’s fuel. Even with the dip, its still way more than you paid a year ago. Its like 1979 all over again. And Yes, I’m old enough to remember inflation then.
The big downside for the government is that inflation destroys savings for the few people (like me) who have them. It also destroys investment and retirement funds, if they don’t earn faster than inflation destroys, and few legitimate funds do. Why allow that? Isn’t it making the rich poorer? Well, better poorer than dead, as a fast and well reported collapse would cause civil uprising. Besides, the rich can invest in EU funds and move their money to less destructible and inflation affected properties.
At this point, the government seems to be actively working to make the rich richer and the poor poorer and the middle class poor. All that separates the middle class from the poor are good neighborhoods in the suburbs, better morals (in many cases, not all), and savings for emergencies. With inflation those savings go away, the ARMs take the house, and peak oil makes the suburbs more expensive to travel to and from work in the cities so the cost of living is even higher than the poor ghettos near the city center. A housing inversion is coming, oddly enough, as the wealthier middle class sell their homes in the burbs and move to smaller and recently cleaned up neighborhoods near public transit in the city hubs. (“Location, location, location” has long been the watchword of real estate.)
That’s even more true in Peak Oil, which overthrows 100 years of development truisms. The urban poor either sell for a profit, get driven out by ARM adjustments and financial collapse, or take the offer and move to the burbs, which will soon be the bad neighborhoods of the near future (3-6 years, starting with oil hitting $130+/bbl.) The suburban lower middle class will either watch their neighborhoods get worse or move somewhere cheaper, possibly rural, possibly urban in the less well converted neighborhoods. It will soon become hard to be middle class, very hard. Watch the markets closely and keep your eyes open for those real estate signs. If the new people moving in bring crime with them and housing values drop, thus dropping taxes and budgets, how much crime prevention can your town pay for? If your quiet suburban neighborhood starts to turn into The Hood (like Los Angeles), consider moving out.
One thing is certain: everybody will suffer in the coming economic collapse. Its a matter of degree and how able you are to react to the situation, and how well you can weather it financially and physically. It is possible that the burbs will resemble Argentina in 10 years. Or maybe the transition will be slower and streetcars will remove the downsides of the burbs so the housing inversion is to the exurbs instead. If you live near a rural exurb, expect real trouble there as the price of gasoline passes $4/gallon Its only $2.50 now but time wounds all heels.
Terms:
Lake Inversion: what happens to a lake after a significant temperature drop. Warmer water rises to meet the cold air, stirring up the lake bottom mud. This usually signals the end of fishing season.
Housing Inversion: what happens when previously impoverished real estate becomes valuable due to proximity to mass transit and city hubs following the Peak Oil price spike phenomenon. Poor people suddenly can’t afford to stay close to the city and find themselves living where land is cheap, often places with very expensive transit costs. – InyoKern