You are aged between 40 and 64 and like a great many middle-class Americans, you have worked your entire life. You have provided for your family and put your kids through school. By being frugal, by forgoing luxury vacations, and by spending your free time and weekends investing time in lawn, home, and car maintenance, you are even managing to invest enough money to be on track to retire at age 65 — you think. Surreptitiously, the U.S. government is throwing an unseen monkey wrench into any plans that you have about spending your golden years enjoying soft retirement. The monkey wrench has a name: inflation.

Most people think that “inflation” equates to rising prices, but economically speaking, that is not what inflation is. Inflation is the creation of new money or credit by the government. The rising prices of consumer goods is an effect of inflation.

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Inflation is easy to demonstrate by using a trade good other than money, such as diamonds. Diamonds are expensive for two main reasons — people desire them for their properties such as their glitter or their hardness, and they are fairly rare. If people would stop desiring diamonds, or if diamonds became as ever-present as common glass, the “value” of the diamonds would drop dramatically. Where I might now be able to trade a large diamond for a luxury car, if diamonds were as common as glass, I would be lucky to trade one for a Matchbox Car. So too with money. When the government prints large amounts of dollars or issues new credit, the “value” of the money — what it will purchase — declines.

It’s easy to see that the value of the dollar is already declining: it does not buy as much as it once did internationally. Tourist areas around the world will no longer take the dollar instead of local currency. NBC television’s WNDU.com reported: “India's tourism minister said today that the rapidly declining American dollar will no longer be accepted at the country's heritage tourist sites, which include the famed Taj Mahal. The dollar is at a nine-year low against India's rupee. For years, a dollar would buy 50 rupees, and Taj Mahal admission was about $5. Now it's approaching $20.”¹ Around the world, the dollar regularly hits new record lows compared to other currencies as well.

Worldwide people are moving away from the dollar. Even international crime syndicates are insisting on being paid in Euros, not dollars.² And U.S. business tycoons such as Warren Buffett and Bill Gates³ and politicians, including Vice President Dick Cheney, are investing heavily in the Euro and other investments that forecast the fall of the dollar. Kiplinger.com, a website devoted to happenings in the business world, reports, “The Vice-President, meanwhile, is making a big bet on a decline in the dollar and a pickup in inflation — just as he was in 2005 (See Are Dick Cheney's Money Managers Betting on Bad News?). He owns between $5 million and $25 million in American Century International Bond fund, which will benefit handsomely from a continued fall in the value of the greenback. What's more, 65% to 71% of the Vice-President's investments in stock funds are in foreign stock funds, which would also be helped by a further drop in the dollar. Another $2.5 million to $11 million is in Vanguard Inflation-Protected Securities fund, which invests in bonds whose returns are tied to the gains in consumer prices.”⁴

So those rising costs that you see on gasoline, food, cars, computers, shoes, and most anything else you buy, which are now blamed on gouging by greedy oil companies, are being influenced upward by inflation (though there are other factors helping drive prices up for many items). This can be seen in the price of gold, which while having limited industrial uses is often used as a hedge against inflation because its price tends to rise apace with real inflation, not the understated “price inflation” numbers reported by the government. In January of 2000, gold hovered under $300 an ounce. Now it holds above $900 an ounce.

Inflation is endangering your retirement because the government is printing money and issuing credit at a breakneck pace: the Federal Reserve has issued hundreds of billions of dollars in new credit just in December of 2007 and the first few months of this year.^{5, 6} For every new dollar the Fed creates, you are able to buy less and less with the money in your retirement accounts. The “value” of your retirement portfolios is dropping. The government is saddling you with a huge unseen tax — a tax that for various reasons tends to hurt the poor and middle-class far more than it hurts the rich. Say “thank you” to your politicians; it is mainly their doing. Their refusal to cut government spending is dooming your retirement plans. Even “good” spending is hurting you.

Take for instance the government’s spending on its “economic stimulus plan.” The primary component of the government’s plan is to give tax rebates to Americans. The assumption is that consumers will spend the money and spur the economy. While giving consumers back some of the money taken from them in taxes may indeed stimulate both the economy and job growth, this plan is best described as “criminally stupid” because the government has spent the tax money (and then some!) and therefore doesn’t have any money to give back to us. To pay for the stimulus package, it must either issue more credit and more money now (inflation), or borrow the money from other countries now and pay it back later.

Such spending above and beyond what the government receives in tax receipts is especially hurtful because other countries know that the United States has $50 trillion in unfunded Medicare, Medicaid, and Social Security liabilities coming due in a few years and that our country is not preparing for the fiscal crunch by cutting spending.⁷ Countries already know that the United States will likely print more money to pay for our social welfare programs — and for the tax rebates — causing the dollar to have less and less buying power, so the countries are beginning to get rid of their dollars. They are buying infrastructure while the money is still worth something.⁸ U.S. dollars will soon begin flooding markets and many dollars will be chasing the available goods, sending prices soaring.

This situation is especially troublesome because the U.S. dollar has been the reserve currency of the world for ages. Everyone kept some on hand. The government printed money and the world took it as if it were gold. We could create vast amounts of money (inflation), yet the buying power of the dollar only slowly went down — slowly because the money was being held by others, not circulated in the market. Now foreign governments are creating “sovereign wealth funds” — government-owned funds meant to be used to buy business entities — to spend their U.S. dollars, funds that are growing almost exponentially.

Those economists and politicians who still hail the strength of our economy often repeat the refrain that after our country’s current “minor” recession, the soon-to-be-growing U.S. business economy will carry us out of economic woes, but this is unlikely to happen — mainly because our economy is not now strong, nor has it been for some time. Our economy only seems to have been strong because we’ve been living on credit.⁹ It’s a situation similar to a family that’s issued virtually unlimited credit for years. They appear wealthy and the businesses they patronize grow and prosper – until the credit is cut off.

A “strong economy” is a years’ old misconception. Back when the dot-com bubble burst — which was largely caused by the Federal Reserve’s easy credit and lending practices that encouraged speculation (essentially gambling) by investors — the Fed and U.S. policymakers looked to create a building boom to stave off a market correction and recession. To generate such a boom, policymakers built on the 1977 Community Reinvestment Act, which mandated that lending institutions lend to “homebuyers” who had little or no money for a down payment.⁵ FannieMae, a government creation, arranged loans for the same people,¹⁰ and banks created new investment vehicles to spread the risk. The Fed helped by keeping interest rates artificially low. House prices jumped. People bought properties as investments, causing prices to further balloon. Believing an economic recovery was underway, consumers borrowed against the increased value of their homes (non-mortgage consumer debt grew to $2.5 trillion — up from $1.5 trillion — ^{11, 12, 13} for items such as vacations, cars, and Christmas gifts). Loans flowed to those who formerly would have been deemed poor credit risks.

As Americans overextended their credit, America appeared prosperous, but it wasn’t.¹⁴ People were fooled into thinking the American economy was improving because some economists and government gurus kept telling us about the “economic indicators” that showed a strong economy. We were told that unemployment rates had dropped dramatically. We weren’t told that well-paying manufacturing jobs were being replaced by low-paid service jobs ^{15, 16, 17} or that American workers were replaced by foreign workers ^{15, 18, 19} or that when people ran out of unemployment benefits they were no longer considered “unemployed.”²⁰

We were told not to worry about our national debt because our country actually owed less now as a percentage of our Gross Domestic Product than after WWII. Overlooked was the fact that after WWII, the U.S. was a manufacturing powerhouse and that we now have less manufacturing than in 1950, but we have double the population.²¹ Also after WWII, the United States was the breadbasket of the world and was self-reliant for energy; now we’ve become a net importer of food²² and we import $145 billion a year in oil.²¹

Finally, the happy thinkers lauded the Clinton presidency, claiming it showed the United States could spend what it desired and still balance the budget. They forget that our economy was boosted temporarily by a U.S.-led computer boom. They don’t understand that the U.S. government doesn’t follow Generally Accepted Accounting Principles.²³ If the United States did, it would have kept track of future obligations that the government was incurring during Clinton’s reign, which should have added about $1 trillion per year to our debt. Enron executives would be envious.^{24, 25}

Is there a solution to our country’s fiscal mess — to salvage the retirements of the middle class? Yes. And the first step that must be taken is to dramatically cut federal spending. After cutting federal spending, we can move to remove trade disparities, fiat (unbacked) money, intrusive and expensive government regulations, and other anchors on our economy.

FOOTNOTES

1. “U.S. dollars no longer accepted at Indian tourists sites.” WNDU.com. Accessed April 17, 2008. Online @ www.wndu.com/consumernews/headlines/13041417.html

2. Burnett, Victoria. “Euro becomes currency of choice for cocaine traffickers.” International Herald Tribune. May 10, 2007. Online @ http://www.iht.com/articles/2007/05/10/america/dea.php

3. Brijbassi, Adrian. “Impact of a Declining Dollar.” Galt Global Review. August 29, 2007. Online @ http://www.galtglobalreview.com/business/dollar_decline.htm

4. Goldberg, Steven. “Bush and Cheney: Cautious to a Fault As Investors?” Kiplinger.com. June 5, 2007. Online @ http://www.kiplinger.com/columns/value/archive/2007/va0605.htm

5. Scalinger, Charles. “The Subprime Crisis.” The New American. January 21, 2008.

6. Scalinger, Charles. “The Money Trust’s Next Move.” The New American. April 28, 2008.

7. “Walker: Economic Mess Awaits Unless Action Is Taken.” CNN.com. March 29, 2007. Online @ www.cnn.com/2007/US/03/27/pysk.walker/index.html

8. Weisman, Steven R. “Concern about 'sovereign wealth funds' spreads to Washington.” International Herald Tribune. August 20, 2007. Online @ http://www.iht.com/articles/2007/08/20/business/wealth.php

9. Roberts, Paul Craig. “No Escape From War and Unemployment.” Counterpunch. January 11, 2008. Online @ http://www.counterpunch.org/roberts01112008.html

10. “About Fannie Mae.” Fannie Mae. Accessed February 27, 2008. Online @ www.fanniemae.com/aboutfm/index.jhtml?p=About+Fannie+Mae

11. “Consumers Owe $2.5 Trillion in Non-mortgage Debt.” Accessed February 27, 2008. Think & Ask non-profit news. Online @ www.thinkandask.com/2006/100607-creditcard.html

12. Hill, Patricia. “$5 Trillion Mortgage Debt – Brief Article.” InSight on the News. September 17, 2007. Online @ http://findarticles.com/p/articles/mi_m1571_/is_35_17/ai_78682357

13. Durkin, Thomas A. and Nicole Price. “Credit Cards: Use and Consumer Attitudes, 1970 – 2000 — Statistical Data Included.” BNET. September 2000. Online @ http://findarticles.com/p/articles/mi_m4126/is_9_86/ai_76515991

14. Jelvah, Zubin. “Consumer Debt and Poverty.” Conde Nast Portfolio.com. January 29, 2008. Online @ www.portfolio.com/views/blogs/odd-numbers/2008/01/29/consumer-debt-and-poverty

15. Buchanan, Patrick J. “Our Hollow Prosperity.” WorldNetDaily. February 15, 2006. Online @ http://www.wnd.com/news/article.asp?ARTICLE_ID=48837

16. Roberts, Paul Craig. “Nuking the Economy.” Counterpunch. February 11, 2006. Online @ http://www.counterpunch.org/roberts02112006.html

17. DeSilver, Drew. “One Thing Missing in Jobs Boom: High Pay.” The Seattle Times. August 5, 2007. Online @ http://seattletimes.nwsource.com/html/businesstechnology/2003822411_jobspay05.html

18. Camarota, Steven A. “A Jobless Recovery? Immigrant Gains and Native Losses.” Center for Immigration Studies. October 2004. Online @ www.cis.org/articles/2004/back1104.html

19. Rubenstein, Edwin S. “WSJ Edit Page Contradicts Self on Immigration, Minimum Wage.” VDare.com. April 27, 2006. Online @ http://www.vdare.com/rubenstein/060427_nd.htm

20. Roberts, Paul Craig. “Job Disinformation From the New York Times.” VDare.com. February 3, 2006. Online @ http://www.vdare.com/roberts/060203_jobs.htm

21. Roberts, Paul Craig. “A Stimulus to What? Delusions Prevail in Washington.” Information Clearing House. January 21, 2008. http://www.informationclearinghouse.info/article19125.htm

22. Guebert, Alan. “White House can't explain lurking trade imbalance.” Peoria Journal Star. December 7, 2004. Online @ http://www.fromthewilderness.com/free/ww3/121304_food_imbalance.shtml

23. Kotlikoff, Laurence J. “Federal Deficit.” The Concise Encyclopedia of Economics.” 1993. Online @ http://www.econlib.org/Library/Enc/FederalDeficit.html

24. Munnell, Alicia H. “Social Security’s Financial Outlook: The 2006 Update in Perspective.” Center for Retirement Research at Boston College. May 2006, Number 46. page 6.

25. North, Gary. Accounts Overdrawn: The Bankruptcy of the Social Security/Medicare System.” Specific Answers. Accessed on February 29, 2008. Online @ http://www.garynorth.com/public/804.cfm

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