Ruminations Home

                                         Source: Shutterstock      In our last post we discussed two ugly realities that savers and investors must be  aware of if they hope to avoid retirement penury: Reality Number One: the insidious effects of price inflation, and Reality Number Two: the ongoing debasement of our currencies. To demonstrate their corrosive effects we included two graphs. We include them again. The first shows that an eventual reduction in the rate of inflation never returns us to pre-inflationary lower prices. That is because the effects of price inflation are  cumulative.  A new lower rate of inflation merely means that existing high prices will increase at a slower pace.  The first chart shows that prices (in blue) remain painfully high even after the rate of inflation falls from 8% to 2%.  So the Fed's trumpeted goal of returning the rate of inflation to 2% is no solution for these higher prices. 

                                            Source: Shutterstock      Many wags have noted that, "You can ignore  reality but you can't ignore the consequences of doing so." Or as James Kunstler recently put it,  Having lived through a reality-optional period of history, it will come as a shock to learn that the world requires us to pay attention to what is really happening and to act accordingly.

                                             Source: Shutterstock                                                                                                                                                     Hu Pill, chief economist at the Bank of England recently told Britons that they need to accept that they're worse off and stop trying to maintain their real spending power by asking for wage hikes. BOE governor Andrew Bailey seconded this message adding that salary increases will feed through to higher costs due to "second round effects" and workers' demands for higher wages are frustrating his efforts to combat rising costs. Brits are poorer due to price inflation's impact on food, energy, housing and nearly all other goods and services. At bottom, the bankers' view is that workers, who are the biggest victims of price inflation, should bear its cost and quit carping. Needless to say, that has not gone over well.

     Ray Dalio is the manager and co-chief investment officer of the world's biggest hedge fund, Bridgewater Associates. He has written extensively about economic cycles and has been outspoken in his warnings that the public always pays the price for their government's fiscal and monetary misadventures and are about to do so again. Here is a recent post.

                                         Source: CantonRep.com      They stand mute, shell-shocked and ashen-faced.  Finally, the central banker speaks up. I can't believe what's happened!! Who could have known that lowering real interest rates to below zero  for a decade following the sub-prime mortgage crisis - that we caused with low rates, excess liquidity and no regulatory oversight - could lead to high inflation? And who

"There is no art which a government learns sooner than that of draining money from the pockets of the people."  - Adam Smith 1723-1790     And there are those eager to facilitate that draining. Martin Wolf writes a column for the Financial Times newspaper. He is highly regarded - by those in government and academia. Larry Summers calls him "the world's preeminent financial journalist."  Mohamed A. El-Erian says he is "by far the most influential economist out there." Kenneth Rogoff calls him the "premier financial and economics writer in the world." Wolf recently penned an FT editorial, " The case for a land value tax is overwhelming ."  He wrote,

   So said Antonio in Shakespeare's  The Tempest,  to his co-conspirator Sebastian, to justify the murderous act they were about to commit. Today the phrase is used less ominously to mean that history sets the stage for what happens next. About that there can be little doubt. The present is necessarily built on the foundations of what has come before. This leads us to believe that our future will be an extension of the present. In the world of psychology, this is known as "recency bias." However, the future often plays out very differently than expected because we have misinterpreted what has actually happened and ignored obvious risks.  

                        Source: Shutterstock      Ray Dalio, CEO and former co-chief investment officer at hedge fund Bridgewater Associates, has  spent decades researching and writing about the political and financial cycles that have recurred throughout history. His book " The Changing World Order: Why Nations Succeed and Fail " is not just for historians. It is essential reading for investors. He finds that the rise and fall of major powers follow a predictable template. Armed with this knowledge, we can plot where we are in the current cycle.