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The Dollar 87% less than before
Cat : Euro/ Dollar
Date : 2005-05-24 08:59:04                      Reader : 478
example 1: a postage stamp in the 1950s cost 3 cents; today's cost is 37 cents - 1,233% inflation;
example 2: a gallon of full-service gasoline cost 18 cents before; today it is $2.28 for self-service - 1,267 % inflation;
example 3: a new house in 1959 averaged $14,900; today it's $282,300 - 1,795% inflation (+1,510% if quality-adjusted);
example 4: a dental crown used to cost $40; today it's $740 - 1,750% inflation;
example 5: an ice cream cone used to cost 5 cents; today its $2.50 - 4,900% inflation;
example 6: monthly Medicare insurance premiums paid by seniors was $5.30 in 1970; its now $78.20 - 1,475% inflation;
example: 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.
nflation 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
8 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.
  1. Why do we pass on to young families and youth a currency which has lost 87% of its value in the past 50 years?
  2. 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?
  3. 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?
  4. 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 paying extra taxes to provide that protection for others do not have such guaranteed protection for themselves?
  5. Should we be proud today's families pay a higher share of their incomes on all taxes than before - another form of inflation?
  6. Should we be proud that inflation in housing prices has caused the highest percentage debt load on families in history?
  7. Should families be proud to take the 'buying power hit' caused by the fact today each individual must support 3 times more state & local government employees than before, in addition to supporting more seniors per capita?
  8. 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?
  9. 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?
  10. 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.'
  11. In 2004 only 15% of San Diego households could afford a median priced-home due to huge property inflation.
  12. 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.
87% Decline of Dollar Value
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. But, compound 4% over 52 years and the 1950 dollar is worth but 13 cents today - - as seen in the chart.
(Compound it out another 50 years into the future to 2052, 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?
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, 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 absence of a gold standard (since 1933) to restrain the Federal Reserve allowed the 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, New York City 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 chart above.
"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
Taxes: we know in 2000 the federal government raked in more tax revenue (as a share of the economy) in peace-time history. Additionally, the Social Security Report shows today's working people are paying five (5) times higher social security & Medicare tax rates than did most of today's retired people during their working days. Some don't think higher taxes are a form of inflation, but this author does.
How many private sector families were guaranteed automatic cost of living adjustments by law during this period? However, government employees and others receiving incomes from government receive COLAs, including seniors.
Who lost? Answer: those who were saving and those who were working without guaranteed inflation protection for their earnings and for their increased tax rates to federal, state & local governments. Children also lost, as 2 ½ decades of inflation-adjusted family income stagnation forced more mothers to the work-force and away from full-time up-bringing of their children which, due to the marriage tax penalty, further increased government revenue. And, household debt exploded and savings plunged.
International: Inflation performance since 1970 has caused declines of up to 70% in our foreign purchasing power, and America became the largest debtor on earth with ballooning negative trade balances.
Another item: as inflation camouflaged government growth, the issuance of regulations exploded to consume 16% of the economy, productivity declined, and more non-teaching employees and social mandates were added to schools resulting in a 71% decline in the quality/price index, further driving inflation. We have heard about 'grade inflation' in public schools, yet U.S. high school seniors come in last of all nations on The International Math and Science Tests. And, in addition to supporting more seniors per person, each individual must support 3 times more state & local government employees than before. And total government spending has grown faster than the economy for a long time. All this drives inflation.
To make it more difficult for us to understand inflation, major changes in measurement criteria have been made - to make us 'feel' better. This decline follows the same trend as the decline in the share of our economy represented by the private sector, which was caused by the fact that combined federal and state & local government spending increased faster than the economy, and therefore made a greater and greater portion of the economic pie dependent upon and controlled by government.
Today it is reported that inflation is "under control" if annual inflation rates are less than 4%. Why do we accept such a lowering of standards from the 1% or lower ratio achieved in the past?
The chart's black plot line shows the inflation rate each year since 1952, as measured by the Consumer Price Index. (using the same measurement method employed prior to 1995. The red curve represents govt.'s revised method, discussed below.)
The first thing to look for in this chart is that the inflation rate in recent years was the highest in 10 years - and well above the 1952-1965 period. Why did media and government officials say inflation is 'dead', and say it the 'lowest in our life time'? Many citizens were misled by such erroneous statements and their investments suffered.
Look to the left end of the chart. For the period 1952-1965 the inflation rate averaged about 1% or less per year (the dashed red line). This low-inflation period produced strong inflation-adjusted family income growth. Therefore, we set the 1% level as our target - - noted by the dashed-red line on the chart. In the mid-1960's inflation rates began a dramatic rise, for the next 2 decades. Once inflation rates exceeded about 3% real family incomes and savings rates ceased to grow, as seen in the Family Income Report - - just as today's incomes are not growing while family savings plummet. The Reagan Era of the early1980's started excessive rates downward toward the 2% level. Since then, inflation rates were much higher than the 1% rate average 1950 to 1964.
Computer price impact: Another item to keep in mind is the impact on the total CPI of rapidly declining computer prices. From 1987 to 1993 computer prices tracked the CPI, but then computer prices dropped much faster than did the over-all CPI. If you look at the CPI, excluding the computer component of the CPI, the non-computer CPI in 1997 was higher than in 1993 - 40% higher. To provide some numbers: in 1997 the CPI excluding computers was about 3.8%, or 1.5% above the total CPI for that year. So, huge declines in prices for computers, imported oil and other metals in the those 4 years effectively camouflaged the true underlying rate of inflation. But, these price declines cannot forever mask core inflation.
Additional concern regarding late 1990s data: It's a fact that government changed how they measure inflation to make recent rates appear less threatening, and thereafter invented the song that 'inflation is dead' and claimed that this, together with productivity, improved U.S. competitiveness. That is a myth, since the trade deficit exploded and private sector debt exploded to new records in the last 7 years, indicating we have become increasingly less competitive, and we owe more and more to foreigners and other creditors?
May 2002 . the Wall Street Journal stated that Pat Jackman, an economist at the Bureau of Labor Statistics, admits that the CPI Index may understate actual year-over-year price increases.
Additionally . The so-called slowing of inflation rates measured by traditional methods were not just due to changing how they measure the cost of living index in recent years. The unprecedented explosion of new debt creation, brought on by manipulated interest rates to historic lows, helped fuel something outside the cost of living index - - exploding asset bubbles in stocks and real estate. Of course these bubbles will not be sustained, just as the stock bubble is rapidly deflating. Therefore, in recent years explosive debt creation has not all gone into prices of goods and services which are captured by the CPI, but much went into creating asset bubbles that cannot be sustained and are not so captured. As economist Steven Roach said Sept. 2002, "The transition from tight to easy money unleashed a massive asset bubble and concomitant excesses in the real economy - - that must be purged."
When someone says inflation is dead, ask them "compared to what?"
- because they are changing how they measure -
The STATISTICAL REVISIONISM AND WIZARDRY Report documents numerous changes in measurement criteria during the mid-1990s. When some say today's inflation is low, you have to ask 'compared to what' - since they now measure CPI in 'oranges' and then compare to 'apples' in the past. Changes are always in one direction - - which is to pump-up the data to make citizens 'feel better.'
Watch it - CPI measuring criteria has changed: The short red line at the right of the chart since 1995 reflects a new government measurement method now in process, which lowered the historical method up to 3/4%. For 1995 3.1% inflation was effectively reduced to 2.8% by the new method, for 1996 from 3.4% to 3%, for 1997 from 2.8% to 2.3% for 1998 from 2.2% to 1.6%, for 1999 from 3% to 2.2%, and for 2003 from 3.1% to 2.3%. (the new changes are per Business Week, 10/4/97, pg. 30: 'Since the start of 1995, Labor Dept. statisticians have 'quietly' modified their treatment of rents, hospital prices, drugs, and altered other sampling methods. This has lowered the published rate of consumer inflation by 0.2 to 0.5 of a percentage point - and, a change of 0.63 points will be applied in 1998 and 0.75 in 1999 and forward. But, the govt. is not going back to fix historic data in the same way (so reviewing today's quoted inflation rates vs. the past must be with care to develop historic comparisons). Therefore, part of the apparent lower inflation rate numbers reported today compared to the past are from changing the yardstick of measurement.' That's like moving in the baseball field fence and then declaring 'from now on our home-run performance will be better.
Bill Goss of PIMCO stated in October 2004, "The CPI as calculated is definitely a con job foisted on an unwitting public by government officials. The government says that if the quality of a product got better over the last 12 months that it didn’t really go up in price and in fact it may have actually gone down! In 1998 the methodology was adopted for computers – surely the biggest step backward in realistic inflation calculations. Since then, the BLS has expanded the concept to include audio equipment, video equipment, washers/dryers, DVDs, refrigerators, and of all things, college textbooks! (see poor quality textbooks). Today no less than 46% of the weight of the U.S. CPI comes from products subject to hedonic adjustments. PIMCO calculates that without them, and similarly disinflating substitution biases, Greenspan’s favorite inflation measure, the PCE, would be between 0.5% and 1.1% higher each year since 1987. If the CPI is so low and therefore real wages in the black, tell me why U.S. consumers are resorting to hundreds of billions in home equity takeouts to keep consumption above the line." (see America's Total Debt Report for trend data graphics on exploding household debt ratio). "If real GDP growth is so high, tell me why this economy hasn’t created any jobs over the past four years. High productivity? Nonsense, in part – statistical, hedonically created nonsense." (see Productivity Report)."My sense is that the CPI is really 1% higher than official figures and that real GDP is 1% less than stated." 'Con Job' at
(It should be pointed out that an over-stated CPI of 1% per year compounded for say 15 years produces a GDP that is 16% over-stated and Social Security monthly income 16% less to seniors than it should be. - calculation: M. Hodges)
Why did they do this? Answer: One could say if you don't like what you are paying then change the way you measure. In this light, the Clinton administration and some congressional leaders decided to change how inflation is measured in order to reduce the annual cost-of-living adjustment pay-outs to recipients of social security and other programs, without saying that was their objective. Some might call this government fraud and theft in disguise.
This chart shows how much social security recipients would have lost in earnings if the CPI had been revised for 1984-1996, producing a gap of $100 per month by 1996. That was one of their motivations to make the change, and thereby also produce more surpluses in the trust funds to support more spending on non pension stuff. Now, project those lines on the chart from 1996 forward into the future, and look how much future pensioners will be penalized via the change that was finally introduced in 1996. If that 'savings' would be put into the trust fund to shore it up for future retirees then some might better justify the reason for changing inflation measurement criteria. But it was not saved for the future, it was siphoned-off and spent.
Additionally, when one hears on T-V about inflation rates one needs to understand that much of the touted 'lower inflation' is masked by computer, China import and commodity prices, and also by the fact the criteria for measuring the CPI is being revised each year - - without historical perspective. This does not take into account inflation in housing and stocks. Hopefully, the above charts and discussion provide some perspective.
For more on this 'changing the rules' in measuring inflation, the impact on social security recipients, and what makes up the CPI - see the Cost of Living Debate article from the Washington Post (
On this new, adjusted basis, our 1% target on the chart should be reduced to perhaps 0.5%. So, if one day you hear inflation rates are averaging below 0.5% annually without again manipulating how they measure, then you might say "OK, that's more like that experienced by my grandfather in the 1950s when only one wage-earner per family was required to rapidly expand living standards and savings, with minimal debt - - and when most mothers could stay at home to give full-time attention to their children and their schools."
WHAT IS THE CPI (Cost of Living Index)?
Here's what IS included in the official CPI.
The left chart shows the components of the official consumer cost of living index, and the percentage each represents of the total CPI.
Note food and housing account for 58% of the total.
However, it must be pointed out that the housing component shown in this chart significantly understates housing, since this is based on rental price changes - - and does not account for the huge inflation in new and existing home prices, as discussed below.
And, we have all heard it reported we pay more in taxes than we do for food and housing - - yet taxes are NOT included in the official CPI. Why not, you should ask.
We know property taxes have not gone down, nor our sales taxes, nor federal taxes, nor social security payroll taxes, nor excise taxes, nor _ _ _ .

Have you ever heard of a tax going down, and staying down?
If they go up, which they do, or if they add more taxes at federal, state, or local government levels, which they do - - that is inflation that should be in the CPI, so individuals and families better understand total inflation - - not just a manipulated inflation index.
Yet - - taxes are not included in the CPI computation, yet the cost of government is the largest component (43%) of the economy. Question: Why Not? This Inflation Report WILL NOT IGNORE that biggie!!
Notice the large housing component of the CPI in this chart. As mentioned above, this component is understated and significantly distorts the CPI reported to the public. Right? Well, some years ago, the way the housing component is measured was changed. It no longer tracks the inflation in housing prices (note below charts showing huge increases in house price inflation). This component now only tracks what it calls the rental value of owner-occupied housing which moves much slower - - especially recently as record low interest rates manipulated by the Federal Reserve have driven more renters to become home owners which lowered rental prices due to lower rental demand as it also drove up house price inflation. This altered measure of housing has nothing to do with housing inflation, so the CPI housing component significantly understates true inflation. Why would government wish to understate the CPI? One reason is to fool workers and social security recipients into accepting lower cost of living adjustments. Another is to fool investors into thinking the economy is better than it is and to allow the government to pay lower interest rates on its mounting debt. Should such manipulation be allowed ??
The next chart adds what is NOT included in the official CPI. a missing element - government spending impacts shown by the red slice, and adjusts the ratio of each of the original components accordingly.
First, we notice from the chart that the red slice of the pie, 43% of the total pie, is represented by that required to support all federal, state, and local government spending.

Government is a real cost to each of us, just as food and housing are real costs to each of us. Many will say one needs food & housing more than government - - especially more than large government.
This 43% figure is from
The Government Growth Report.
This 43% for government spending (% net national income), you will notice, is more than the sum of the food, housing and clothing components which total 37% - - just as we have heard before.
Since we know government's taxes and regulations impact inflation, just as any other item faced by individuals and families, many continue to ask why is this not included in the official CPI calculation - -
especially since we know government tax revenue at all levels has been increasing at a faster rate than both GDP and personal incomes. And, from where does that revenue originate?
Answer: It all comes from individuals and families, because they pay all costs of government, in one way or another, both direct and indirect. - - as reported in the
Tax Report.
and, we know federal government spending has increased faster than general CPI inflation and even faster than growth of the entire economy. See the Federal Government Spending Report.
and, we know state and local government continues to increase their employee headcount faster than growth of the general population - - as shown in the State & Local Government Spending Report.
What percentage of households have experienced a reduction each year in their property taxes? Answer: that's not on anyone's radar screen. How many have seen their property taxes rise? Everyone! That's inflation, and must be included in the CPI. As reported in the Tax Report and according to, since 1995 property taxes nationwide have jumped 48%, that’s 30% higher than inflation.
and, we know government employees write more regulations each year, which increases compliance costs to consumers (although much is 'hidden'), as shown in the Regulation Compliance Cost Report.
This regulation cost component is not shown in the 43% red slice of the above pie chart, but if it were shown it would add as much as 14% to the above government slice of the pie (since all compliance costs are not shown in say food costs), bringing that red slice to as much as 57% of the total pie - - and thereby reduce the remaining component slices (approximately) accordingly - - meaning, housing would become as low as 19% of the total, food 8%, etc.
In any case, the impact of complying with increased government regulations does impact inflation to consumers in a way that is not easily measured - - in fact government does not even budget compliance cost impacts before approving regulations, as such are in effect un-funded mandates imposed on the private sector.
NOW YOU KNOW - - at least a bit better - - that in addition to the 1990s' revision of the criteria for measuring the official CPI inflation rate, such as to minimize same as discussed in above articles, the official CPI does not even include the impact of government - - the largest cost item in the economy.
GUESS WHAT? - the above chart proves that the best way to reduce TOTAL inflation is to reduce the share of the economy controlled by government at all levels
INTERNATIONAL NOTE: U.S. future international competitiveness and living standards depend not just on our internal inflation rate, but how it compares to our major international competitors. The Exchange Report shows the long-term trends of the U.S. dollar, and the Trade Report shows trends in balance of trade and current accounts. Much of this depends on the relative inflation rates in the U.S. vs. other nations.
The left chart is according to data from the international Organization for Economic Cooperation & Development (OECD). The black line represents consumer price inflation in the USA - compared to several other nations. The USA continues to experience inflation rates higher than the others, despite revising its measuring methods in 1995. In 2004 the U.S. inflation rate was 3.9% by the old measuring method and 3% by the new method which was still much higher than the others (they were using the old method), which had rates of 0.8% (Japan), 2% (Germany) - per the Economist 2/21/05.
These nations consistently had lower rates than the U.S. during the past 2 decades, and continue to do so. According to The Economist above, U.S. producer prices for 2004 were up 5.1%, compared to Germany at 3.8%, Japan 2% - - meaning U.S. costs are rising faster than these tough competitors - yet these nations, with smaller populations than the US, are running strong positive balances of payments (combined of +$325 billion) whereas the US reached a historic high negative balance of $654 billion (Trade Report) - - a whopping $979 billion U.S. negative difference.
So - while its interesting to hear some 'brag' about today's lower inflation rates and making statements that 'inflation is dead', one must always respond with the question: "Compared to What?" To this observer it appears clear from these graphics that the USA needs much firmer action regarding inflation, as we need to be in the 0.5% range (incl. new housing prices) and with less inflation than international competitors - - instead of changing the measurement criteria to camouflage reality.
As recently as 1950 the U.S. was producing half the world's oil. Forty-eight years later, we don't produce half our own oil. Domestic production peaked in 1970, 30 years ago, and today we produce just 40% of the crude we consume. It is reported that within the next 5-15 years world oil production will peak, then decline. Perhaps international producers will prefer to maintain higher and higher prices to protect their diminishing supplies, even more so that the tripling of oil prices - - already impacting inflation 6 months later. (what are the energy implications for inflation, real family living standards, and national security looking forward, compared to past generations?). Energy-dependence - The Energy Report graphically shows declining oil production and reserves, and rapidly rising consumption of both oil and gas, as the U.S. has become more dependent on foreign oil and gas than ever before - - which has both economic, inflation, and national security implications.
creating exploding debt
This chart records 19 years of  the growth rate in the broad measure of U.S. money supply creation. (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). (2004 plot is Dec 13 year-to-date, annualized)
Although some claim the M3 money supply measure has less meaning in the late 1990s and 2000s since money is now 'created' by non-bank entities, such as the GSEs (Fannie Mae and Freddie Mac), it is included here for interested visitors.
Note its fall from 1986 to 1992, which reduced previously very high inflation rates.
But, money supply exploded in the 1990s - as if 'powers-to-be' decided the best way to increase economic growth (at least for the short term) was to surge money (debt) creation, instead of real investment in infrastructure and manufacturing - - indicating trouble down stream.
However, as mentioned above, non-bank entities such as the GSEs started creating money which may not slow up here.
It is this author's view that debt is the item to watch, not M3 money supply - - and that is the reason such an extensive chapter was created, called America's Total Debt Report (sum of private sector and government debt) - - which shows that each dollar increase in total debt (now $40 trillion) is producing a diminishing change in national income - - and the debt of households exploded to the highest ratios in history. This means that in order to sustain national income growth (for the time being) more and more debt must be created than ever before. Sooner or later the 'chickens must come home to roost' regarding huge debt levels in all sectors of the economy.
The reader needs to understand that increases in the money supply are largely brought about by either printing more dollar bills, or by increases in more debt money injected into the economy, or a combination of both. Both eventually result in a combination of more imbalances in the economy, leading to inflation and/or economic contraction.
  • What Does This Indicate? Clearly the steady reduction in money supply up to 1992 had a significant impact of dramatic reductions in inflation rates shown in first chart top of page.
  • BUT, what happened after 1992 as money supply rates surged up? Such occurred at a time personal rates of savings plummeted to historic lows (see Savings Trend Chart) - meaning the above money supply growth certainly was not caused by savings, but instead was caused by the Federal Reserve pumping money (debt) into the economy as seen by unprecedented private sector debt growing faster than the economy to historic high ratios. Since prior to 1992 inflation rates had been decreased so rapidly the BIG QUESTION is why was this course reversed so dramatically to the upside of exploding money creation after 1992? Some might sense political motives to drive economic good times by expanding the money supply and debt creation in the private sector. However,
  • 'In 1998 the broad measure of money again dramatically increased above the prior year. So far this excess liquidity has mainly fueled the surge in share prices; unchecked will eventually leak into consumer spending and prices." The Economist 2/98, updated 1/23/99. Perhaps 'fear' of the Asian crisis led to further pumping up the money supply in 1997-8, and then there was the excuse in late 1999 to surge more money supply to 'ward off the expected computer glitch of January 2000 (which never occurred)? Clearly this surge in money supply cannot continue forever to camouflage underlying imbalances which will impact the future, as more credit (meaning debt) is injected into the economy making it more and more debt-dependent.
  • The above was a clear warning as witnessed by the financial markets in 2000-01, especially since just a slight slow-down in the rate of money creation in 1999 & 2000 (yet still way above prior years) dramatically impacted financial markets, which proves these markets are more influenced by money (debt) creation than by underlying fundamentals. In the year to June 2001 the U.S. again surging money supply, and creating debt (money supply growth) at a rate of 100-200% faster than our major trading partners. As a result, the chart just above this one shows the U.S. in experiencing higher inflation rates than these trading partners.. This signals a stronger warning regarding the U.S. dollar (see Foreign Exchange Report

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