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Watch Out For the Real Inflation Rate of Seven Percent

By Perry Rod, Published: September 17th, 2014 8:02 PM CDT

Today, the United States Federal Reserve decided to continue its strategy of aggressive money printing, now in its sixth year after the market meltdown. The government today notes that inflation is low and under control. But here's the fundamental economic reality:

The value of cash has been going down by an average of about seven percent per year. Compounded over time, seven percent is a very large number.

Here's the analysis:

In 55 years, the total money supply rose roughly 39X; Gold rose roughly 37X; S&P rose roughly 36X; Oil rose roughly 33X

In 20 years, the total money supply rose roughly 3.5X; Gold rose roughly 3.5X; S&P rose roughly 4.5X; Oil rose roughly 6X

These numbers are relatively close and average out to around a seven percent compound annual increase in the price of gold, which mimics the growing overall money supply. But the S&P number does not account for dividend yields of around 2-3% in those time periods, meaning that the market has outperformed gold and taken a higher portion of the increasing money supply. That of course suggests the rich are getting richer, but you already knew that. Perhaps these outperforming companies are creating efficiencies over time that have lessened the costs of many basic goods and services for the middle class, creating a lower (and somewhat misleading) compound annual inflation number of about 3-4%. But the bottom line is not 3-4%, it's a 7% increase in the money supply (and gold).

So here's the deal: if your cash doesn't rise seven percent a year on average, you are actually losing value relative to the overall economy. That's the way it works, and it's pretty frightening to consider how few people are anywhere near that rate of return on their annual investments. It means that more cash is being concentrated in fewer hands, until (or unless) the government is forced to step in and reign in on the titans of wealth. No matter your politics on these matters, the lesson is that cash is meant to be used, not stored away. And it is meant to compound at a seven percent annual rate if you intend to just keep up with the rapidly increasing money supply.

Related: BAC

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