• a postage stamp in the 1950s cost 3 cents; today's cost is 39 cents - 1,300% inflation;

• a gallon of full-service gasoline cost 18 cents before; today it is $2.28 for self-service - 1,267 % inflation;

• a new house in 1959 averaged $14,900; today it's $282,300 - 1,795% inflation (+1,510% if quality-adjusted);

• a dental crown used to cost $40; today it's $740 - 1,750% inflation;

• an ice cream cone in 1950 cost 5 cents; today its $2.50 - 4,900% inflation;

• monthly government Medicare insurance premiums paid by seniors was $5.30 in 1970; its now $88.50 - 1,664% inflation;

• several generations ago a person worked 1.4 months per year to pay for government; he now works 5 months.

• and in the past, one wage-earner families lived well and built savings with minimal debt, many paying off their home and college-educating children without loans. How about today?

Few citizens know that a few years ago government changed how they measure and report inflation, as if that would stop it - - but families know better when they pay their bills for food, medical costs, energy, property taxes, insurance and try to buy a house.

Is inflation a threat to society, beside the prices we pay and the fact fewer children have a full-time mother at home? Consider this famous quote:

"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
Lord John Maynard Keynes (1883-1946), renowned British economist.

DEFINITION OF INFLATION:
Inflation is the loss of a constant purchasing value of the dollar,
caused by an increase out of 'thin air' of the supply of money and debt creation by the financial system

10 graphic pictures help tell the story
(a picture is worth a thousand words)

This Inflation Report is a chapter of the Grandfather Economic Report series, showing serious economic and education trends facing today's families and youth, compared to prior generations. Go to the full Inflation Report for more tell-all data graphics at http://mwhodges.home.att.net/inflation.htm

QUESTIONS:

1. For 150 years America experienced relatively stable consumer prices, but in the last 50+ years prices have soared. What happened?
2. Why do we pass on to young families and youth a currency which has lost 87% of its value in the past 50 years?
3. Should we not provide annual rates of inflation of less than 1% as was achieved in the past, when family incomes consistently zoomed upward with one wage-earner per family - - and more mothers had a real choice to stay home and raise the kids?
4. Should we accept statements that inflation is "under control" when nothing basic has changed to restrain the banking system from creating money and debt out of thin air, meaning the dollar's internal value may drop another 58% before our infants are out of college - and decrease by 87% before they reach retirement age?
5. Why do we have a government mandating inflation protection via cost of living adjustments for the incomes and medical insurance of government employees (federal & state/local), seniors and welfare recipients - - while many, many families pay extra taxes to provide that protection for others with no such guaranteed protection for themselves?
6. Should we be proud today's families pay a higher share of their incomes on all taxes than before - another form of inflation?
7. Should we be proud that inflation in housing prices has caused the highest percentage debt load on families in history?
8. Should families be proud to take the 'buying power hit' caused by the fact today each working person must now support 3 times more state & local government employees than before, in addition to supporting more seniors per capita?
9. Should we feel good about future prospects when the nations money supply has been driven up at rates 2-3 times faster than economic growth and much faster than that of our major trading partners, meaning more and more debt creation and more trade deficits are needed to support a dollar of growth?
10. Should we 'feel safe' accepting official cost of living index reports when we know measurement criteria were dramatically revised during the 1990s to minimize same, plus recognizing that the CPI does not include cost impacts of government and taxes - - the largest spending component in the entire economy - - and does not reflect manipulated asset bubbles in stocks and real estate, or home prices?
11. U.S. oil production peaked in 1970 and world production is expected to peak in the next 5-15 years. We now import over 60% our needs. Energy inflation appears as a 'ticking time-bomb.'
12. In 2004 only 15% of San Diego households could afford a median priced-home due to huge property inflation.
13. U.S. inflation rates are higher than competitor nations, as U.S. trade deficits have soared to new records each year indicating declining international competitiveness, causing us to become the world's greatest debtor.

INFLATION HISTORY

Stable consumer prices for 125 years.
And then, prices soar up, up and away.

This chart shows the Consumer Price Index (CPI-U) from 1800 to today, a period of more than 200 years.

For the first two-thirds of this chart the consumer price index oscillated at or below the 50 point price index mark, indicating relatively stable consumer prices for nearly a century and a half.

Thus, 125+ years of near nil inflation.

But in the past 75+ years, especially after World War II, the consumer price index in this chart took off - - inflating prices more than 1,000 times higher.

Note: prior to 1913, a period of relatively stable prices, there was no Federal Reserve Bank. This chart calls into question the stated purpose of creating a Federal Reserve in 1913 to assure price stability, when thereafter prices soared instead of becoming more stable. This chart appears to shout that > > the Federal Reserve was created for the purpose of generating inflation.

The data source for this chart is from estimates made by the Minneapolis Federal Reserve Bank, incl. data from the U.S. Bureau of Labor Statistics (link #10)

With those soaring prices, let us now look at what happened to the purchasing power of a single dollar - - from 1950 to today > >

87% Decline of a Dollar's Purchasing Value since 1950

This chart shows an 87% reduction in the value of a dollar (its internal purchasing power) since 1950, where a dollar of 1950 is worth but 12.6 cents today - based on the consumer price index.

Note in the chart: The accelerated fall of the domestic purchasing power of the dollar from 1965 to 1980 was due to higher annual inflation rates, which was a period when government social spending ratios were rising much faster than general economic growth.

As the chart shows, starting about 1981 and The Reagan Era, the decline of the purchasing power of a dollar started slowing dramatically - a significant rate of change in inflation compared to the prior several decades.

Now look to the right side of the chart, which shows an apparent slow-down in recent years. Actually this curve should point down faster after 1995, since in 1995 the federal government changed the way their people measure the cost of living index by a cumulative 4.8% - - which otherwise would have placed the today's value of a 1950 dollar at 9 cents using the old criteria, not the 13 cents shown via the new criteria. (this is discussed further down this page).

For this chart, the average annual inflation rate since 1950 was about 4%. To some people 4% doesn't sound like a big number. However, compound 4% over 50+ years and the 1950 dollar is worth but 12.6 cents today - - as seen in the chart.

(Compound it out another 50 years into the future to 2055, when today's 15-year old will retire, and the value of today's dollar will be worth just 13 - - another 87% plunge - - bringing it to a value of just 2 cents when compared to the 1950 dollar.)

It takes $10,000 cash today to purchase that which $1,360 would purchase in 1950. And with higher combined federal & state/local tax rates today compared to then, it takes even more. Typical example: you need 37 cents as of  June 2002 to purchase the same stamp that cost just 3 cents in 1950 - - a 1,233 price increase - - with no quality improvement.

Had annual rates not exceeded the approx. 1% average inflation rate of 1950-65 (see chart below) for the entire period shown it would take just $2,200 today (not $10,000) to be equivalent to the $1,360 of 1950 - meaning 78% fewer dollars to have the same buying power. No wonder many mothers were forced into the work-place to help make ends meet, as shown in the Family Income Report. If most of the men and women are today in the work-force to make ends meet, who else can a family send into the work-force during the next decades? Their children? And/or, just open up the southern borders even wider?

Who benefits from this performance? Answer: governments at all levels (and proponents of big government over families), as revenue streams are accelerated by both tax bracket creep, extending the caps for social security taxes, property taxes, and sales taxes. This camouflaged government growth, as it expanded to consume and control a larger share of the economy.

And, government spending is mostly consumptive spending that adds inflation via increased demand of its employees and transfer recipients, without compensating productivity. Few deny that government is significantly less efficient and productive than the private sector. As it expanded its relative size, and as credit/debt soared, such contributed to more national inefficiency and therefore to inflation.

Big Question:
What is the reason for this horrendous erosion of the purchasing power of a dollar?

Answer: The chart at the top of this page argues that the cause is due to the creation of the Federal Reserve (in 1913), followed by the absence of a gold standard (since 1933) to restrain this Federal Reserve, allowing the Federal Reserve's banking system to create piles of new dollars and debt out of thin air. For proof of this answer, see the following statements of Federal Reserve chairman Alan Greenspan >

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. The abandonment of the gold standard made it possible for welfare statists to use the banking system as a means to an unlimited expansion of credit (debt creation)" - Alan Greenspan (#8), 1966

"It was the case that the price level in 1929 was not much different, on net, from what it had been in 1800. But, in the two decades following the abandonment of the gold standard in 1933, the consumer price index in the United States nearly doubled. And, in the four decades after that, prices quintupled. Monetary policy, unleashed from the constraint of domestic gold convertibility, has allowed a persistent over issuance of money. As recently as a decade ago, central bankers, having witnessed more than a half-century of chronic inflation, appeared to confirm that a fiat currency was inherently subject to excess." - Chairman Alan Greenspan Before the Economic Club of New York, December 19, 2002 "Issues for Monetary Policy"

Read that last quote again. It states there was zero inflation for 129 years from 1800 to 1929. But, once the gold standard was abandoned there was no restraint on the creation of money and debt out of thin air by the banking system - - and inflation soared, as shown by the charts above. Additionally, as the first chart shows, there was next to zero inflation for 113 years from 1800 to 1913 before the Federal Reserve was created. It appears government and the financial sector wanted inflation to replace stable prices (zero inflation), and the Federal Reserve was created and soon after the gold standard was eliminated to accomplish same.

"The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. Both are the refuge of political and economic opportunists." - Ernest Hemingway

MONEY SUPPLY UP, UP AND AWAY
DRIVES INFLATION ALL THE WAY

A warning - MONEY SUPPLY explosion
creating loss of purchasing power of each dollar, plus exploding debt

"Inflation is always and everywhere a monetary phenomenon. To control inflation, you need to control the money supply." Milton Friedman, Nobel Laureate in Economics.

As money supply exploded 3,000% - -

The dollar's purchasing power collapsed 85%,

- - as proven by this chart.

The left chart compares growth of the broad money supply M3 (red curve) with the the shrinking value of a a 1950 dollar as determined by the cost of living index (cpi-all items) - blue curve.

The rising red curve shows growth of the money supply since 1959, the value of which is shown on the left axis in billions of dollars - from $302 billion in 1959 to $9.5 trillion in 2004. ( M3 data: economagic.com).

(the 'broad' money supply is defined by economists as the 'M3' of money, being the sum of all cash, checking and savings accounts, small and large time deposits and money market funds).

The declining blue curve (taken from the chart at the top of this page) represents the falling buying value of a 1950 dollar, per the right axis shrinking from a value of 83 cents in 1959 to 12.7 cents in 2004 - representing 85% loss in purchasing power since 1959. (based on cpi data: table B-60, 2004 President's Economic Report).

This chart certainly appears to validate Dr. Friedman's above statement > "Inflation is always and everywhere a monetary phenomenon. To control inflation, you need to control the money supply."

Where has this taken us?
What are we leaving our children and grandchildren?

How about soaring debt ratios in all sectors, including the household sector, to new records each year (as proven by America Total Debt Report), to exploding federal debt (as proven by the Federal Govt. Debt Report), to soaring record trade deficits with surging asset transfers to foreign entities because America borrows to consume more than it produces (as proven by the International Trade Report), to plunging savings rates to historic lows (as proven by the savings chart), to long term stagnant inflation-adjusted median family incomes including declining real incomes of single household workers (as proven by the Family Income Report), to a 60% drop in the U.S. manufacturing base and its high salaries and benefits (as proven by the Manufacturing Report) causing more dependence on foreign entities, to a 74% loss in the foreign exchange value of the dollar (as proven by the Exchange Rate Report), to a loss of energy independence (as proven by the Energy Report), to the ticking time bomb for senior citizens regarding pensions and medical care (as proven by the Social Security Report), and, again, to an 85% loss of the internal purchasing power of the dollar due to generated inflation (as proven by the chart above). We can add to this ominous list the sagging quality of our education system and its lagging performance relative to foreign students and to our own past, including its own price inflation (as proven by the Education Report), our lagging life expectancy and health system quality at higher cost relative to other nations (as proven by the Health Care Report), and each year each worker must support more state & local government employees than ever before (as proven by the State & Local Government Spending Report), and finally - - the larger share of the economy consumed by government spending and the diminished share left to the private sector compared to the past (as proven by the Government Growth Report), including its impact on national security.

Everyone is invited to study the above and make their own list of impacts and consequences.

© 2005 Michael W. Hodges
Editorial Archive

 This Inflation Report is a chapter of the Grandfather Economic Report series, showing serious economic and education trends facing today's families and youth, compared to prior generations. Go to the full Inflation Report for more tell-all data graphics at http://mwhodges.home.att.net/inflation.htm

Michael W. Hodges
Grandfather Economic Report
Email Mr. Hodges