Loss of Purchaseing Power (LOP)

Loss of Purchasing Power



The Calculations Don’t Work

The purchasing power of the US Dollar is being destroyed. Savers and wage
earners work harder and harder and fall farther and farther behind. The official
unemployment and inflation statistics are wrong. Debt
with interest is an exponential function.

Are we being set up to fail?

This is the story of my journey as I discovered that what the government,
higher education, media, and the financial industry was telling me about
investments and economics was WRONG.

The calculations they use don’t work.

Feverishly Treading Water, Going Down Once…

In 2004, I got the feeling that something wasn’t right. I had not recovered
my 401k losses from
the 2001 crash. I was frustrated that I paid someone fees every year to lose my
money (I figured I could do that by myself for free). My income was rising, but
even though I had no new bills, my income was quickly closing in on my expenses.
I did some research on the last decade of my bills and realized that they had
quintupled in price, even though I lived in the same house and drove the same
distance to work.

I started realizing that even if my living expenses just doubled every ten
years, I would be hard-pressed to find an investment that would keep up
long-term after taxes. I started questioning whether I could actually retire in
20 years like I wanted to. How could I sustain my savings enough after
retirement when I wasn’t adding to it every year? The calculations weren’t
working.

I figured there had to be a better way. I set out to find it.

US Dollar

Later that year, I discovered the first calculation that didn’t work: the
purchasing power of the dollar.

Most people assume that higher living expenses are solely the result of inflation in prices as a result of increased demand.
That can be the case. But in a fiat money system, prices can rise because the
currency that they are valued in is actually losing purchasing power. That can
be called inflation or it can be called the devaluation of the currency. The US
Dollar has been slowly losing purchasing power since 1913, but it has been
losing a lot of purchasing power since 2001. In fact it has lost 35.5% since
2001, when it traded above 1.21 and today is trading around .78.

Link to chart. Play around with the historical data. It is
enlightening.

That means that my investments would have to appreciate at least 35.5% just
to stay even. More after taxes are factored in.

So my next question was: can stock investments make up for the short-fall in the currency? I discovered
the inflation-adjusted DOW chart. This chart was a big revelation for me. I
realized that even though the DOW had reached a high in 2007 in dollars, it
actually had been in a down-trend cycle since 1999!

Link to
chart.

So, if I had my money in stocks since 1999, I was fighting a down-trend cycle.
From 1999 to 2007 (and we all know what happened after 2007), it was a just big
U on the chart. I was strictly treading water even if my investments were good
and meeting the market.

Disclaimer: yes, you can earn money in stocks in a down market, but you
have to pay very close attention on a weekly, sometimes daily, basis to your
investments. You also need a formula that well exceeds the median market price
and follow it to the letter over a long period of time. I don’t have that kind
of time or interest right now. If you do, more power to you.

And if I had just cash sitting the bank CD or maybe a money market fund earning 2-5%,
I was actually losing at least 30% after taxes. Yikes!

I learned that fiat currency can work for you or against you. I want it to
work for me, like a surfer on a big wave. Less work, more fun.

The Real Inflation Rate

So, the discovery of the loss of purchasing power brought me to another
calculation that didn’t work: the official inflation rate. During the period
that my bills were rising exponentially and the dollar was deflating, the US
official inflation rate didn’t go over 4% per year. How could this be? The
numbers weren’t adding up correctly at all.

I discover shadowstats.com

John Williams of shadowstats.com figures the inflation rate as one would
before the government changed the formulas for calculating the CPI or what is
known as the official inflation rate. I hear you saying, “They changed the
formula?” Yes, twice, in the last 30 years.

If you use the CPI index government formula prior to 1980, the current annual
inflation rate would be a little over 10%. Link to charts: 1980-version is the second chart. The official
inflation rate is 3%. Finally, I understood why I was fighting a losing battle
between my income and expenses. My income didn’t go up 10% per year and I didn’t
see that happening in the near future.

Check out the rest of John’s website, the government jacked with the
unemployment formula, as well. Hint: it is not under 9%.

To review. Think of the loss of purchasing power of the dollar as affecting
the amount of “stuff” your income can buy. And think of the real inflation rate as the rise in cost of that stuff. A part
of these economic factors overlaps, but some of it just puts financial pressure
on Americans from both angles.

Too Much Debt

Debt is the next calculation that isn’t working. There is more and more debt.
In fact, in some investments, such as the US housing market, investments reached
a tipping point in 2007 where the underlying asset was not worth enough to cover
the debt. This is a balance sheet problem where the assets are worth less than
the debts.

As soon as home-owners missed mortgage payments or defaulted on their loans, the entities that held these loans (or a
derivative of these loans) loss the income from the interest. Now, the income
statement is effected. Less income means banks can’t meet their debt
obligations. Now, we have a major system-wide solvency problem requiring
government bailouts and interventions.

Because the US housing market runs on mortgage-creation and little debt is
available from a very-stressed banking system, we can conclude that housing has
much further to fall. Keep this in mind if you are planning on building, buying
or selling a house in the next 20 years. Think about how you can invest in homes
and systems to break even on living expenses or create passive income, not
create capital gains when you sell.

But it isn’t just mortgages and banks. Here is a list of some other debt
issues.

• Global paper investments are 100 to 1000 times the underlying asset. This
  must contract.
  
• The European debt crisis is similar to scale of the US Housing Market
  collapse in 2008. Requiring trillions in bailout funds just to keep it from
  collapsing.
  
• A slowing global economy freezes new debt creation.
  
• No new debt means the paper investments must contract to a level appropriate
  for the underlying asset and the lower economic level.
  
• The banks will not give up their paper assets, they will not take a loss or
  they will have to admit that they are bankrupt.
  
• Governments can only buy so many paper investments as they are trying to
  peddle their own debt.
  
• MF Global bankruptcy is the blue print for how banks will be first
  and pension funds, hedge funds, and investors will be last, when the paper
  investments DISAPPEAR.
  
• Current investors do not understand this change in paper investment risk,
  because as long as they have lived, paper investments have gone up, because new
  debt has always been created. That is no longer the case.
  

The entire global economy as a system not only leveraged on debt but it is
sustained by debt. It doesn’t just need debt for growth. Any hope for real
growth is long gone. Any loss of credit availability anywhere on the globe and
the system starts to collapse like a house of cards. Globalization has a darker
side.

US Government Debt

Next, we look at US government debt, which just hit another new high of $15
trillion plus. The last trillion was racked up in a record 8 months. This
calculation really doesn’t work. (In addition, every other Western
Economy is in the same position as the US.)

Many people believe we can meet our present and future debt obligations by
taxing more and shrinking government. Aside from the fact that the devaluation
of the US dollar is already an invisible 35% tax on everyone, who are
we going to tax more?

Of the 310 million people in the US, only 65 million actually produce an
income separate from recycled government money programs (that’s about 20%). How
can 20% of the population support the other 80%? They can’t, we have been
selling US debt to investors for cash to cover the short fall for years.

So, let’s raise taxes on the rich, and sales taxes, income taxes on
everyone.

First, there will be no rich in the US. They already have or are in the
process of moving as much money as possible outside of the US and away from the
IRS. They understand what is coming.

Second, there will be no middle class. Their assets will shrink in value
and/or produce no return for the IRS to tax. We are already seeing this.

Third, unemployment (and underemployment) will continue to rise whether the
government formally admits it or not.

Unemployed people do not pay taxes and they don’t buy stuff.

Fourth, at some point, the IRS will turn its focus to corporate taxes and
payroll taxes. This will produce two things, more jobs move overseas and fewer
jobs for US citizens. Even if the US announces some incentive for companies to
keep jobs in the US, it will be a net effect at best. Government
incentives go to pay higher payroll taxes for existing (not new) employees. That
process is a circular flow of government money, not actual new taxes.

Fifth, any new taxes on middle class or lower classes will only lower
national GDP as it currently consists of 70% consumer spending.


People who pay more taxes, spend less on consumables.

Sixth, government as a whole must contract, it is unsustainable. Government
employees will be laid off.

Unemployed people do not pay taxes and they don’t buy stuff.

Seventh, an aging population doesn’t work; they don’t have an opportunity to
earn “extra” money.

Underemployed people do not pay taxes and they don’t buy more
stuff.

Higher taxes will not work. Shrinking government will help expenses, but it
will also have the consequence of putting more people out of work. Shrinking
government money programs will help with expenses, but it will also put more
stresses on those relying on government money. Right now, that’s a whopping 40%
of the population.

Part of the reason that the government likes a lower US dollar is because it
allows them to pay old debt obligations back at a lower price in present
dollars. But that little game, started aggressively in 2000, is coming to an
end. More and more of the debt borrowed is just to pay interest on the
outstanding debt. It isn’t even used for running government programs, we borrow
more for that. Sovereign debt investors understand this exponential
function and its endgame. At some point, there will be a no-bid US bond auction.
The US government must “default” (though it will never be called a
default) on at least part of its debt at some point in the future. This will
severely limit its ability to obtain new debt for normal government business.
This is just what is happening to Greece right now.

For more information on how US debt affects the cost of energy and the
economy and how the exponential function (or hockey stick) works against us,
Chris Martenson has an excellent 45-min video called The Crash Course
on the subject.

Link to Crash Course.

Thus, by “default”, taxes will rise and government will shrink one way or
another in the future.

Are you depressed yet?

By this time, you probably want me to change my name to gloomygirlfriday.
Stay with me.

Relax, these are scary facts about the bleakness ahead, but it is all just a
cycle. A contraction of the global debt cycle. You have no control over this
cycle, so it does little to worry about it. Acknowledge, yes. Worry, no. This
has happened before; people lived though it, you will too.

But when you experience a collapse in debt and the value of fiat currency,
you also have a gain somewhere else. The capital that is left moves from risky
debt-related investments to lower risk tangible investments. When a wave of
capital starts to move, you experience a long-term investment cycle. You do not
have to be a financial genius to keep and earn money in a long-term business
cycle.

Precious Metals

In 2005, I started looking at different business investment cycles. I was
looking for an investment cycle that could keep the purchasing power of my
original investment for a period of years.

Gold gained 64% during the same period I analyzed
earlier (1999-2007). Link to gold chart. It was keeping and exceeding the loss of
purchasing power of the currency it was denominated in. I realized that we were
in a long-term bull uptrend in precious metals.

At last, a calculation that worked! In 2005, I started buying to catch as
much of the wave as possible. Precious metal cycles tend to last 15-20 years.
So, if it started in 2001, it will last anywhere from 2016 to 2021. Yes, this
cycle will end too, but there will be another one to take its place.

One way to tell where we are in the precious metals cycle is to look at an
inflation-adjusted gold chart. This one goes back to the last gold bull cycle in
the 1970’s-80s. Link to chart.

Fortunately, the inflation-adjusted price of gold is constantly changing as the
powers-that-be create more and more debt to try and fight the collapse. Some of
the new debt goes into real things, like physical gold and silver, and they become more valuable. The chart above
uses the official-inflation rate to chart gold. But wait a minute, as we learned
from John Williams, they changed the formula, twice.

The good news is if we use the pre-1980 formula, the inflation-adjusted high
in gold (according to shadowstats.com) would be over $8,000 and silver would be
over $400. We have a ways to go in this precious metals bull market. It is
possible to exceed those numbers if a panic should occur or the US dollar should
completely collapse. There is every reason to believe that this gold cycle will
be more spectacular than the 1970’s, since more global investors (Asia) will be
involved.

What to do if you don’t have physical gold and
silver?

Here are some things that groovygirl is doing, you may be doing other things
or have additional ideas. The main point here is to take some sort of
action.

Holding cash to cover at least 6 months of living expenses. Some cash at home
in a secure safe and some divided across three different banks. If you have a
business, the same thing applies.

Food, water and essential prescriptions supply for at least 6 months.

20% of total worth in physical gold and silver held in several private
vaults, such as Brink’s. If you have a large amount of gold and silver, some
should be held outside of the US.

If you have stocks, hold the actual paper certificates issued in your name.
(For more information on the reasoning behind this statement, which is too
lengthy to go into here. Please check out those posts about the MF Global
bankruptcy. Click here.

Start investing in an infrastructure that is as self-sufficient as possible
in your present conditions, such as a geodesic dome, solar and wind energy at your present location. This is a starting place. This magazine
also has great ideas. And, of course, google.

If you are unhealthy or over-weight; get healthy. The less you spend on
health care and life-long meds, the cheaper your monthly expenses will be now
and during your retirement years. The healthier your body is; the better your
mind can handle any stressors.

Prepare your mind for the coming paradigm shift.

The First Step Is Admitting The Problem

I would be less pessimistic about the coming close to this long debt-creation
cycle, if I thought the powers-that-be, on all sides-of-the-aisles and in all
counties, actually acknowledged the global debt problem. The altered formulas,
flat-out lying, and continuing bailouts prove they do not. They are firmly
committed to continuing the status quo as long as possible without any regard
for the damage it might do in the end.

So, it will be up to individuals and communities to sustain themselves during
this paradigm shift and create new sustainable systems. The entire global
economy is based on debt. Any major contraction of debt means a complete
paradigm shift in everything we do as a society from growing food to creating
electricity to transacting business across seas…every modern system depends on
debt and the liquidity of money.

We have a once-in-a-century opportunity to create a structural social and
economic frame-work that Bucky Fuller would be proud of.

First, prepare yourself and your family; then together let’s start solving
for a calculation that does work!

Thank you for reading.
http://totallygroovygirlfriday.wordpress.com/the-calculations-dont-work/

What I get from this older article in the traditional sense of investing that LOP really means devaluing currency or Loss of Purchasing Power, which makes perfect sense for the US. This is why the Lopsters just do not get it.
Iraq has already lost their purchasing power with the dinar and I do not know where Iraq can find anymore devaluation in the dinar. The only thing they really can do is go up since the devaluation was artificial in the first place.
To LOP 3 zeros off a 25K note making it a 25 note makes no sense at all without an RV of some kind, because it would take a wheel barrow load of 25 IQD just to buy a coke!
In the sense of a LOP in Iraq simply means removing the 3 zero notes from circulation. That's it pure and simple! AJ