With my father out of town, my mother, on a mission, surprised Dad with a welcome-home present. She had placed a contract on a four-bedroom, three-bath, 3500-square-foot home. It was 1969 and the price of her gift was $39,500!
"We will never be able to afford this house!" I heard my father scream with certainty.
Mom, shaken by his disdain, should have retorted, "Oh yeah, you will probably spend more for a car in your lifetime than we will spend on this house!"
But she didn't...thus securing the home.
Today, I received my electricity bill-it was $236, slightly less than my parents' monthly mortgage payment of $244.
When I was growing up, my father, now 86, would often tell me that when he was a young adult, going to the movies was 50 cents, dinner at the Chinese Restaurant down the street was a dollar, gas was ...... Finally dawning on me, after years of hearing the same story, I asked, "How much were you earning a week?"
"Sixteen dollars," he replied.
I stared at him with open hands gesturing, "Ok, I've made my point." The discussion had forever ended.
Out of curiosity, over the decades, I questioned our dollar's purchasing power -- which led me to a stat from U.S. Bureau of Labor Statistics indicating that the average employee in America today, when adjusted for inflation, is being paid the same wage as they were in 1983.
It was the slow ravages of inflation that bailed my parents out. For them, saving little over their lifetime, the house, once sold, provided them with an appreciated asset, which they no longer lived in but lived off.
Inflation, depending on your perspective or current needs, tends to make things look better or worse over time. If you are homeowner, you hope that inflation will make your house worth more in the future. If you are the U.S. government, then you know that inflation, like my parents, will bail them out, making the U.S.budget deficit appear smaller over time. When you discard the rhetoric and look closely at our federal budget, 84% is for entitlements, defense, homeland security, or interest on the debt. Any effort to achieve a reduction in spending by focusing on the remaining 16% is unlikely to be effective. For example, according to The Brookings Institute, a 1% cut in nominal non-security discretionary spending for one year reduces total spending by only 0.17%. Over five years, it reduces total spending by 0.89%.
So, what is the answer? Our government can't cut enough expenses to have a meaningful impact. David Walker, the ex-comptroller general of the United States said, "If you think we can grow our way out of this mess, you wouldn't pass math class." We can't tax our way out--corporate taxes are already the highest in the industrialized world. The solution: inflate your way out. For those of you watching the currency market, you certainly have noticed that the dollar struggles as it continues to decline against all other major currencies. A declining dollar is inflation's first step.
One can only hope that the erosion of our dollar's purchasing power is slow, appearing tame over time. Our fear is that by printing too many dollars too quickly, we will erode its purchasing power rapidly, making it more noticeable to the unsuspecting public, very much like the hyperinflation experienced in Germany in the early 1920s, Brazil in the mid 80s, and Zimbabwe as recently as 2008. Each of these countries' experience with inflation began when its government printed too many paper notes without anything, like gold, to back it.
Which will it be? The slow steady erosion of our dollar's purchasing power or the rapid increase of prices, like at the gas pump, which is noticeable daily? We don't know for sure, but with regards to purchasing power, I do know this--over my son's lifetime, he will probably spend as much for a car as I did for my house.
