Last month I said inflation destroys retirements. I want to expand on that statement. Inflation will be the biggest threat that Americans will face in 2010. All Americans, not just retirees, could be overwhelmed by inflation's consequences.
The Fed has expanded our money supply by 150 percent since the recession started. The monetary base increased from $800 billion to more than $2 trillion. This was mostly accomplished through outright purchases of mortgage-backed securities and the equivalent creation of base money.
If these securities can't be sold back to the private sector at the same purchase price, the Fed will have forced the government to make its implicit guarantee of these agency securities explicit without authorization from Congress. If any of the underlying securities default, the government will be forced to issue additional treasuries to retire these mortgage-backed securities held by the Federal Reserve. Money is being created out of nowhere with no equivalent asset backing. That is inflationary.
Creating understanding
Last month I recommended a cover article from Time Magazine: "Get it and use it!" Our clients do not understand inflation. This article helps create understanding. Clients can be shown how devastating inflation is to their buying power.
I want to repeat it again: Inflation is not understood by our prospects and clients. Therefore, what they disregard is a major obstacle to financial independence. Americans believe that what they can't see won't hurt them. They are wrong. Inflation is a stealth tax. It has a greater impact on their lives than many of the financial issues they do worry about. Inflation will very quickly lower all Americans' standard of living.
Longevity makes inflation even more dangerous. Planning for retirement will require income to age 100 for many of our prospects and clients. People over 80 are the fastest-growing segment of our society. It should be assumed that the cost of living will double at least once during retirement years for every retiree.
A rude awakening
With price inflation and monetary inflation impacting our economy, one thing will become very clear: Retirees and Americans saving for retirement are in for a rude awakening. They will not have enough income to live on. That will occur sooner than people realize.
Inflation usually takes hold 18 to 24 months after new money has been created. Sometime in 2010 our country will begin to feel the negative effects.
Discussions about inflation will help you stand out from all other advisors.
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