Inflation…

I think most Americans probably do a major eye-roll whenever they hear news reports about the latest meeting of the [tag]Federal Reserve Board[/tag]. Discussions about questions of whether or not the Fed is going to raise or lower the prime rate that banks borrow money from the Fed at most likely leaves most of you feeling like you’re having a bad dream where you’re surrounded by nerds who are discussing stuff that’s way over your head.

Fair enough. Not everyone needs to understand these things. I guess.

Oh who am I kidding. YOU need to understand these things. Why? Because it impacts your pocketbook.

The essential mission of the Fed here is to try to keep the economy from either cooling down too much or overheating. The main gauge of this they use is the rate of inflation. The conventional wisdom is that former Fed Chairman, [tag]Alan Greenspan[/tag], was a genius at this stuff and that it’s he and not Bill Clinton who should get the credit for the sustained economic boom that occurred from 1994 to 2001 and also for preventing an all-out [tag]recession[/tag] when the dot com bubble burst, quickly followed by wingnuts flying planes into the World Trade Center in 2001.

The thing is, if you start running the numbers in a serious way it looks like the main way that Greenspan “grew” the economy and prevented a recession was by letting inflation, in fact, get near completely out of hand. Conservative pundits claim that [tag]inflation[/tag] has remained negligible, but they base that conclusion on looking at a set up numbers that are mostly irrelevant to the vast majority of working people. They look at the cost of goods sold to major manufacturers, durable goods and major purchases, like automobiles. They don’t look at simple stuff like the cost of buying food to feed a family of four, the price of gasoline (in fact, the price of gasoline is deliberately excluded from all government indexes used to track inflation) or the cost of electricity to light and heat your home.

If you do look at these run-of-the-mill expenses that impact working families at a very basic level then inflation is very clearly out of control. According to statistics compiled by the [tag]Center for American Progress[/tag] the cost of a basic dinner for a family of four has risen over 39% in the past ten years. The price of electricity has risen 25% and [tag]the cost of gasoline[/tag] an astronomical 135%.

One wonders at how anyone could look someone in the eye and say “inflation is not a major factor in today’s economy” when any single basic necessity in the modern economy can have a price jump in ten years of 135%. This is, in fact, the answer to the question I hear from so many people today – where is all my money going? It’s depreciating in value rapidly.

If you use gasoline prices as a barometer of the value of a dollar, then a dollar in 2007 is worth 13.5 cents in 1997 money. Obviously the total value of the dollar hasn’t crashed that drastically. But even if we use the price of electricity as our barometer then that 2007 dollar is only worth 75 cents in 1997 money. That’s a massive loss of value.

But why doesn’t anyone seem to care? Simple. Because what the monetary policies of the US government in the past 10 years have done is effectively set up one economy for business and one for schlubs like you and me. In the business economy everything is cool. Or at least it was until the current credit crisis threatened to make it impossible for big businesses to borrow money. Interestingly enough, the credit crisis was created by everyday schlubs being forced to borrow well outside their means, using ethically questionable mortgages, in order to attempt to own their own homes. That’s a crisis that wouldn’t have occurred if the value of money hadn’t disintegrated for the average American worker over the past ten years.

Housing costs are another barometer of inflation. The house across the street from where I live was sold in 1997 for $353,000. It is currently valued at $917,000. That’s over 250% increase in a ten year period. It’s not reasonable to assume that a house that has not increased in size or been significantly altered would increase in value by that margin in such a short period of time. But most folks have been blindly unquestioning of the so-called real estate boom of the past several years. Not me. If we assume that the price of electricity is a good measure of the average rate of inflation over the past ten years then my neighbor’s house is actually only worth about $690,000. That still puts the house at an appreciation of about 100%. Not too shabby. But if we take the rate of inflation to be closer to what the price of dinner for a family of four has risen at over the past ten years, then my neighbor’s house is really only worth about $550,000, which would mean it’s only grown in value by about 50%, which is altogether more reasonable (and in my neighborhood would fit in with rates of appreciation over the past 30 years).

Heaven help you though if you adjust the value of your home or your investments assuming that the price of gasoline reflects the true rate of the past ten years of inflation at 135%. If you do that, then my neighbor’s house is worth $229,000 less than it was worth in 1997. That’s a loss in value of more than a third. Ouch.

The real number is somewhere inbetween all of these, but that still makes it terrible. So, the next time you hear someone praising Alan Greenspan or his successor, [tag]Ben Bernanke[/tag], for keeping inflation under control, tell them to blow it out their nether parts. We, as in you and me, are getting screwed.

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