A dollar a day was the typical wage when the railroads were being built. Today the minimum wage is $58 per day with discussions to raise it to $120. According Milton Friedman, this is the result, not the cause, of inflation. Dr. Friedman researched inflation back to the Romans and concluded the reason for inflation is the government printing of money. He referred to inflation as “taxation without representation.”
The resent 9% inflation spike experienced in June of 2022 is permanent. There are no plans to deflate or reduce that 9% going forward. There appears to be only plans attempting to reduce, but not eliminate, budget deficits in the future. Budget deficits cause more printing of money, and therefore continued inflation. The projected 2024 deficit is $1.8 trillion, which is 26% of the entire proposed federal budget.
Since the formation of the CPI index, the long-term average inflation rate is only 3%. However, at that rate a dollar still depreciates to 74 cents in a decade, and to 22 cents in 50 years. The dollar has lost over 96% of its value since the Federal Reserve was founded in 1913. By all indications, all past and future losses from inflation will be permanent. The cure is less government spending which is Kryptonite to politicians who would risk being voted out of office. There are no plans to reduce spending in order to balance the budget.
With the recent rise in interest rates, the bond market may offer an opportunity to break even with inflation. However, if the interest earned is taxed and spent, there is no inflation hedge. Growing companies with product pricing power may enable the equity markets to overcome the downward pressure, although stock volatility is historically higher than bonds. A well-structured investment approach is imperative to counterbalance the permanently diminishing value of the dollar.
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