Inflation – The Long Term View

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Only with a long term view can one appreciate the destructive effects of inflation. This may be one of the few advantages of growing older.

I migrated to Canada in 1966. Married with two small children, I lost no time in setting about looking for work. I soon found a job paying $7,000 a year. This was not a bad income at the time. The rent of our three bedroom townhouse was $150 a month. Bread cost 20c a loaf. A new detached house could be had for $20,000.

In addition to my salary, the automobile dealership that employed me provided me with a new Mercury as a tax-free benefit. It cost a lot to run, about $5 a week for gas, but with two children I felt it was worth it to have the comfort of a larger car.

My father-in-law was Canadian. He was an executive with a large insurance company and told me, “My boy, if you can earn $10,000 a year in Canada you’ve got it made.”

Being a family man I did all the prudent things like buying life insurance. I also wanted to be well-provided for in my eventual retirement and set a goal of accumulating $250,000 over the next thirty years. This, I figured, should be enough to retire on in comfort. Why, even if it only paid 4%, without touching the capital it would bring in $10,000 a year — an exceptional income at the time for a well-to-do family man, let alone a retiree.

Of course I was too young to appreciate just how government manipulation of the currency could insidiously destroy even the best-laid plans.

In 2006 I realized that most things cost roughly ten times as much as they had cost in 1966. I remembered when in the late 1960s the price of a pack of Lifesavers abruptly went up from 5c to 10c. “That’s it for me,” I said at the time. “A hundred percent increase is ridiculous. No more Lifesavers!” (Little did I know that one day I’d pay $1 a pack, plus the new Goods and Services tax, and not even think twice about it because the value of a dollar would have become so small).

Cars, neckties, bread, dry-cleaning, Lifesavers, all were about ten times the price they had been in 1966. New houses now cost more than ten times as much as they had then, mostly because of favorable tax treatment; some things such as long distance phone calls cost less, but ten times the price was a good rule of thumb for most items.

So had I stuck to my original plan, my $250,000 at, not even 4% now, but only 2% in a conservative investment, would bring me a princely $5,000 a year. This is a far cry from the $100,000 a year (the present equivalent of the $10,000 a year with which I would have “had it made”) I had originally planned on.

I am part of what is probably a small minority who understand that the reason prices rise is not because of evil businessmen “ripping off” the public. No, the only reason is that the government either prints or borrows a surfeit of paper money, increasing the supply disproportionately to the supply of goods. Prices then rise and the sellers get the blame. When gold and silver were money, and when all paper currency was backed by gold and/or silver, the money supply could only be increased by laborious mining and so prices stayed relatively stable over the years. A retirement plan for forty years away could be counted on. But because governments do not what is right, but what is expedient, all long-term planning is unreliable. Then, when people find themselves in financial trouble the government is only too happy to blame “big business," “greedy oil companies," etc. and start talking about an “excess profits tax” and so on to divert the public’s attention from the truth.

My father told me once that he remembered as a small boy in Scotland in around 1900 having bought two raisin buns for a farthing. For those unfamiliar with historic British currency it should be said that there were four farthings to a penny, and 240 pennies to the British pound, which was, at that time, literally as good as gold. There were thus 960 farthings to the pound, and a pound would at that time therefore have purchased 1,920 raisin buns (and more with a quantity discount). Today you can only buy about four raisin buns for a British pound. Unlike most of the public, I know that raisin buns haven’t gone up in price. The pound has gone down in value!

At my age I have the advantage of 20/20 hindsight. I can see what has happened over the years, how much things have changed. But the young ones starting out — they have no idea. To them a house costs $400,000 and is an opportunity to make money by flipping it. They can’t see that the very reason money can be made on such a transaction guarantees that the money it makes will become increasingly valueless.

Fortunately I changed my investment strategy as the years went by. A higher income enabled me to invest more, and I made sure that part of my portfolio was in gold. While gold may not pay interest at least governments can’t print it. This has ensured its scarcity and thus its continuing value over thousands of years — if we take the really long term view.

Bill Trench [send him mail] is a writer and cogitator who enjoys watching and commenting on the passing show.

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