Archive for the 'Inflation' Category

Taxes are Inflationary

Published at March 24, 2008 in Inflation. 0 Comments

I am a big proponent for lower taxes for a variety of reasons, but one of the main reasons I don’t like them is because taxes are inflationary. All of the current political candidates answer to our current problems is to raise taxes. The economy is going south, we have massive deficits and we have a large under funded social security program — and the proposed solution that we keep on getting from our current candidates is that they want to take out even more money out of our hands through taxes.

If this does not sound ludicrous to you, think of this analogy. If a parent gave his teenage child 100$ to last him for a week but came back with a credit card bill for 1,000$ one week later, would you be inclined to give that child more or less money? Pretty obvious answer isn’t it? So how is it any different from what we face with our government today?

If the government were run as a business: people would get fired, costs would get reduced, debts would get paid and fiscal sanity would become the norm but not so with these current candidates.Through higher taxes- the cost of producing things goes up. These year-to-year increase in taxes come in the form of excise duties and sales taxes, both of which add to the price of goods. On top of the federal taxes, states and cities also charge taxes. The main ones cities charge are property taxes which have been getting out of control even though real estate prices have been falling. In addition we are hit with hidden taxes everywhere we go for example we pay taxes on the following: airline travel, car rentals, housing, hotels, parking, water, etc, the list is endless.

These taxes feed inflation through government spending which than adds to deficit spending. Taxes are always passed on to the end user, so as we are taxed we also are getting higher inflation. So taxes are like double whammy: the individual is now paying more money out of pocket and on top of that the money that the taxpayer has left in his pocket buys less things.

The best advice I can give is to always vote with your wallet-it tends to keep the politicians more honest. They can’t get spend or steal what they don’t have. If you don’t believe me look at this latest stat: “The full tax burden of the American citizen including state, local, and sales tax as a percent of income, hit an all-time high of 32.69% in 2007.”

Inflation

Published at February 4, 2008 in Inflation. 0 Comments

Do you believe the government accurately reports inflation numbers?

In the 1980’s the government decided to remove housing price increases from the inflation index. If the government were to accurately report housing prices and more accurate numbers of inflation, the government would have been reporting inflation numbers closer to 9% rather than the 2% they have been reporting over the last few years.

It does not take much to figure the price of everything has gone up over the last 10 years. Ask anybody who has a family, goes to a grocery store, send kids to school or buys a house and you would be hard pressed to find anybody who says that prices have either stayed the same or come down. How is it possible that the government continues on with the farce that they say that inflation is benign?

The dollar has roughly declined 40% over the last few years which coincides with the cumulative effect of the US understating inflation. So on average if the government has been understating inflation by 4% for the last 10 years that would equate to the 40% decline. Hence the market has been telling you what the government won’t. In addition with the continued easing policy- inflation will begin to heat up again.

Ron Paul Versus Bernake

Published at November 13, 2007 in Inflation. 0 Comments

During Bernake’s testimony last week at Congress,Bernake was grilled by Ron Paul (the congressman running for President.) He is a libertarian who is fundamentally opposed to all the government intervention in our economy and all the damage that the Fed has done through its free money policy.

Here is a synopsis of his testimony:

“We [need to] get down to the bottom of this and define what inflation is, and not look at only prices. Beware, [the central banks] will increase money supply, but they will make you concentrate on prices. And they will give you CPIs and PPIs and fudge those figures.”

“We ignore the fundamental flaw, and that is not only have we had a subprime market in housing, the whole economic system is subprime in that we have artificially low interest rates. This has been going on for 10 years or longer, and now we are bearing the fruits of that policy.

“Instead of looking at consumer prices, which nobody in this country really believes, we need to talk about the distortion, the malinvestment, the misdirection, the bad information that is gotten from artificially low interest rates. In many ways, people refer to you as a price fixer. You fix interest rates. When the Fed fixes interest rates at 1%, that is price fixing.

“The real deception is when we distort the value of money, when we create money out of thin air.

“We have to get back to the very fundamentals of where this problem [bubbles] comes from. And the bubbles occur when we have mal-investment and the creation of new money.

“So my question boils down to this: How in the world can we expect to solve the problems of inflation — that is the increase in the supply of money — with more inflation?”

Ron Paul has it correct. The latest move to cut interest rates is the exact opposite of what we need. We have an inflation problem and the Fed’s response has been to cut interest rates. Buy Gold!

The Dollar is Sinking

Published at October 3, 2007 in Inflation. 0 Comments

Don’t know how many of you saw this but the dollar hit an all time low against the euro. Gold prices have not been this high in over 25 years, and the dollar has never bought so little oil.

For this we have the Fed to thank for the latest cuts in rates. Banks will be able to access lower lending rates but I find it hard to believe that these lower rates will be passed on to the consumer. The banks know the consumer is in trouble and hence will not extend the easy credit.

At the same time with the lowering of the rates the fed has the put the dollar into a tailspin. So at the time when the consumer needs access to credit, the value of his dollars are declining- or another way to put it everything has gotten more expensive.

The best way to define inflation is: too much money chasing too few goods. When the fed lowers rates, all it is doing is creating more money. The fed use to publish M3 ( which shows how many money was in circulation), but no more. The feds have stopped reporting M3 – hoping that the markets won’t notice.

The one benefit that we now have because of a cheap dollar is that our housing looks cheap to foreigners. Miami, New York and Las Vegas might be able to survive the housing rout, but somehow I don’t see foreigners buying up real estate in US cities they have never visited.

Best advise for now: pay down your debts and buy some gold.

Libor and your Wallet

Published at September 10, 2007 in Inflation. 0 Comments

The Libor rate is the rate in which banks will lend to each other. The rate is set through an auction process so it is much better barometer of the banks willingness to lend. 6 month USD libor today was trading at over 5.47.

In contrast the Fed sets the price through its open market operations. (The effective rate, currently, is 4.86%, suggesting a cut from the target rate of 5.25% will be made at the next Federal Reserve Board meeting.)

The difference between the two is this- Libor is set where banks want to lend while the Fed is set through government policy.

As it stands, the banks are telling you that they are more concerned about lending money than the FED. Because the Fed is responsible for providing a stable market and because there is a large diffence between the two rates 5.47 and 4.86, the Fed is going to have to lend more money into the financial system to stabilize prices.

In a nutshell: Libor is where the Banks have come to an agreement to lend money- and the numbers point to them being more nervous than the governemnt.

Lower rates is not necessarily a good thing- as the Fed continues to lower rates and add an ever increasing amounts of liquidity the value of the US Dollar will continue to go down. If you ever look around and wonder why things have gotten so expensive, it’s because they have. As more dollars circulate- prices of goods go up. Your dollar is now worth less. The government by providing more dollars to the banking system is making everybody’s dollar worth less.

If you don’t think this is true just take a look at the price of Gold which now sits above 700$ an ounce or for that matter your food bill. The best way to protect your wallet is buy owning some Gold.

The Fed Cut?

Published at September 6, 2007 in Inflation. 0 Comments

The market is nervously expecting the next rate cut to come on September 18th. (Fed funds currently stand at 5.25%)The futures market has assigned it a probability of 172% that the fed will cut rates-with a lot of the market participants expecting a 50 basis point cut. The credit markets have remained under pressure for quite some time and they are looking for the Fed for relief. The credit markets have grown enormously over the last few years primarily through the use of leverage and the pains the market is feeling is due to the contraction of credit. The market is contracting for a healthy reason- there was too much free money out there. Why would the Fed go into the market and provide more liquidity- it would be like adding gasoline to the fire.

Discount Rate Cut

Published at August 17, 2007 in Inflation. 0 Comments

If you have not been following upheaval in the markets, the Federal Reserve lowered the interest rate it charges to banks today from 6.25% to 5.75%. This rate is the rate that the Federal Reserve bank lends to banks. This was cut in order to add more liquidity to the system. The Fed acknowledged for the first time today that an extraordinary policy shift is needed to contain the sub prime-mortgage collapse that has been devastating the world’s financial markets. The fact is that the Fed is now less concerned less with inflation and more with economic growth. It also implies that the Fed will cut rates at the next meeting. This massive injection of liquidity will cause inflation will continue to reap its ugly head. Be sure to have some gold.