But of course, the government must cloak its true intentions, so it obfuscates the situation by publicly stating the myth that if we don't have "healthy" inflation, prices will decline. According to these "experts", such price declines will then lead to debilitating deflation, a greater risk to our economic prosperity than even inflation. After all, they say, we see how deflation can destroy an economy, pointing to the economic contraction of the 1930s. That the contraction was in fact the inevitable result of inflationary policies of the 1920s as well as restrictive trade policies, debilitating
price controls and a generally anti-business economic environment is not often discussed.
Even stable consumer prices - that is approximately 0%, are not appropriate in the eyes of the Federal Reserve. In early 2009 San Francisco Federal Reserve head Janet Yellen said the Federal Reserve would not let inflation fall below 1%, stating, "We need to make it clear that (inflation less than 1%) would be unwelcome and we would fight it." I'm sure the average American who has real bills to pay would find it difficult to understand why steady consumer prices would
be a bad thing and something to "fight".
Thus, for the past two years, the Treasury and the Federal Reserve has been on an all out war to defeat the enemy of stable prices. For leaders at our Treasury and Federal Reserve, the only real treatment they know in response to an economic downturn is money printing. Recently the U.S. Treasury has been printed hundreds of billions of dollars out of thin air which it is using to buy bonds from our own government, as well as shaky mortgage debt that other financial institutions are staying away from. Thus far, various government institutions have guaranteed more than ten trillion dollars to shore up weak companies and bad debts. With these trillions of dollars of extra debts they've taken on, the government is even more committed to creating inflation, to help
reduce the greater debts they now hold.
The problem with this money creation is that every dollar printed reduces the value of Americans' money. Just like any with anything, if you make more of something, its value is proportionately reduced. The reason that diamonds and gold are so valuable is because the amount (supply) is so limited. Every day the government prints more dollars and increases the money supply, it decreases the value of every dollar out there. The holders of U.S. dollars, American consumers as well as investors in U.S. bonds, are daily seeing the value of their money continue to decline in value. For example, in 1971 the U.S. government abandoned the gold standard allowing them to print money at will. In the 38 years since then the dollar has lost more than 80% of its value, even based on its own (often considered understated) levels of inflation. Put another way, something that cost $100 back in 1971, will now require more than $500 for the same product or service.
Since we can expect the government to continue their inflationary efforts, we will continue to see our dollars become less and less valuable, and the products we buy become more and more expensive. Every effort our government is currently employing to increase inflation will further impoverish American consumers. Again, the point should be clear: while the government benefits from inflation, ordinary Americans are the ones who suffer.
Given the realities of continual and increasing inflation, what can you do to protect yourself? Unfortunately, one of the distortions that the Federal Reserve is engaged in is manipulating interest rates to very low levels. This takes away the incentive for individuals to save and invest, who are then often tricked into spending more. While the government likes this, since it helps to keep a short-term stimulus to the economy, in the long-run it is a recipe for below-average growth for the economy as a whole, and results in millions of families who over-extend themselves and wind up with severe debt problems, foreclosures and bankruptcies. Another result of these interest manipulations is that they increase speculation, often in areas of the economy that are not appropriate, resulting in misallocation of our resources.
We saw this in the late 1990s with the dot.com bubble and again in the mid 2000s with the real estate bubble. It is incredulous that the Federal Reserve, who has acknowledged that ultra-low interest rates helped to fuel these bubbles, is now trying to reflate another bubble, further distorting the economy, which will again lead to an economic bust down the road.
As far as saving money in a low-interest rate environment, it's always a good time to save. If you don't like keeping money in a checking or savings account that earns almost nothing, you can look at higher-rate CDs (look at bankrate.com). These are very safe, liquid and will generally be insured up to $250,000 (check with the institution). With a little more risk, you can look at individual bonds and bond mutual funds (generally safer than individual bonds). There is a lot of variability among bond funds so do your research or find a capable advisor who can help you understand the risks.
Given that inflation seems destined to be with us for some time to come, owning equity (stock) investments will be appropriate for many individuals. We can see that over time, a few investments generally keep up with inflation over the long-term. These include company stocks, real estate, gold and other commodities. The caveat here is that, like anything, these investments will generally keep up with inflation over the long-term, but in the short-term will be volatile. Also, the attractiveness of these investments is dependent upon not buying these when they're overvalued, which all investments occasionally are.
If you consider stock investments, don't ignore international stocks (or international stock funds). It is nearly a certainty that many areas of the world will experience higher economic growth compared to the U.S. in the years ahead. The massive debt overhang in the U.S. will weigh on economic growth for years to come and will likely get worse as baby boomers retire and further strain our debt-laden economic system. Therefore, quality stocks in stable foreign economies should be a part of any American's stock portfolio.In addition, if our dollar depreciates because of misguided economic policy, the value of these international stocks will rise, when priced in our dollars.
Inflation is a reality in the life of Americans. While the government may pretend it isn't significant, everyday consumers know better. If you have long-term goals, at least some of your money should be invested in a way that will keep up with inflation. If you're retiring in 25 years, you will have to deal with an economy in which prices aren't where they are now, but perhaps three, four, or five times that amount. That is the reality of an inflationary economy. One should save and invest accordingly.