Maybe the folks at the Wall Street Journal were aiming for humor with the headline last week that read, “To Save Money, Maybe You Should Skip Breakfast.”
The story was about “several breakfast staples” that are seeing sharp price increases, including “eggs, which posted their biggest annual price increase since 1973, and the category that includes frozen orange juice, which had its highest annual increase in over a decade.”
We’re not always sure what is intended to be humorous these days. But we’re pretty sure the writer of a Bloomberg article last year was serious in a piece about dealing with inflation by eating lentils instead of meat when she went on to suggest saving money by rethinking your family pet’s “costly medical needs.”
And we know the World Economic Forum is serious about recommending that we eat bugs. Seriously. It advises that “you can start small and work your way up.”
The Fed and Inflation
But for inflation, cost-saving tips wouldn’t be necessary. But inflation just keeps on coming despite the Federal Reserve’s policies. Here is USA Today‘s report on “stubborn inflation”:
Producer prices, or those charged by manufacturers, farmers and wholesalers, jumped 0.7% in January after dipping 0.2% in December. It was the largest gain since June and nearly double what economists had forecasted.
“Producer prices” are wholesale prices. Those cost increases are destined to show up in consumer prices.
Indeed, inflation is so “stubborn” that many are raising the white flag of surrender in the Fed’s campaign to drive inflation down to 2%. Among them is the widely followed analyst Mohamed El-Erian. “You need a higher stable inflation rate. Call it 3 to 4%,” El-Erian said on Bloomberg Television. “I don’t think they can get CPI to 2% without crushing the economy.”
What he is saying is this: The Fed has accustomed government, businesses, and individuals to lower-than-reality interest rates. It has created a dependency on suppressed interest rates.
Inflation’s Impact on the Dollar
The Fed says it is going to stop writing everyone prescriptions for monetary happy pills. But not quite yet. Soon. As anyone with experience knows, ending addiction isn’t cost-free. Withdrawals range between difficult and catastrophic.
That is why Fed policy interest rates still remain below the rate of inflation. It is afraid to go cold turkey because of its conviction that it would “crush” the economy, as El-Erian says.
So, talk is growing that the Fed should raise its target inflation rate. If they can’t hit the target, they’ll just move the target. “Two percent is unobtainable,” goes the clamor. “We can live with 3 or 4% inflation.”
But a 4% inflation rate will cut the purchasing power of the dollar in half in about 18 years. Who would save for retirement in a currency like that?
And that is if inflation actually came down to 4%. But as David Stockman points out, we are still way above that, and the currency destruction continues apace: “The December rate of increase meant that in 10 years, $1,000 of savings today would be worth $514. And at the January rate, the 10 years from now purchasing power would be worth $519.”
And that, says Stockman, is “inflation with a vengeance.”
Make no mistake. Even in the rosiest of scenarios, the dollar no longer proves to be a dependable means of wealth preservation.
A Case for Gold
To underscore the point of gold’s value in this inflationary era, we cite a calculation from Eurasia Review about where the gold price would be if all the U.S. currency were backed by gold:
The current outstanding value of U.S. currency (dollar bills and coins) is about $2.3 trillion. The U.S. government also owns 261.4 million ounces of gold. At the current price of $1,875 per ounce, U.S. gold reserves are worth approximately $490 billion.
In order to back all outstanding currency with gold reserves, the price of gold would have to reach $8,800 per ounce, roughly five times higher than it is today.
If gold were to cover all money created by the Federal Reserve (which is equal to its current liability of $8.4 trillion) the price of gold would have to be upwards of $32,000 per ounce (nearly eighteen times the current price of gold).
And that is where the Federal Reserve’s money-printing binge has gotten us. It looks to us like those who are counting on dollar savings for their retirement may have to skip a lot more than just breakfast! We think protecting yourself with gold is a better idea.
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The opinions, beliefs, and viewpoints expressed in this article do not necessarily reflect the opinions, beliefs, and viewpoints of Red Rock Secured LLC or the official policies of Red Rock Secured LLC. Red Rock Secured LLC is not a financial advisor, is not licensed to provide investment advice, and neither provides investment nor financial advice. Red Rock is a product specialist that can help evaluate your precious metals purchase options.