Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19
Gold Price Gann Angle Update - 10th July 19
Crude Oil Prices and the 2019 Hurricane Season - 10th July 19
Can Gold Recover from Friday’s Strong Payrolls Hit? - 10th July 19
Netflix’s Worst Nightmare Has Come True - 10th July 19
LIMITLESS - Improving Cognitive Function and Fighting Brain Ageing Right Now! - 10th July 19
US Dollar Strength Will Drive Markets Higher - 10th July 19
Government-Pumped Student Loan Bubble Sets Up Next Financial Crisis - 10th July 19
Stock Market SPX 3000 Dream is Pushed Away: Pullback of 5-10% is Coming - 10th July 19
July 2019 GBPUSD Market Update and Outlook - 10th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Why Purchasing Power is More Important than Investment Profits

Economics / Fiat Currency Nov 04, 2009 - 05:48 PM GMT

By: Dr_Jeff_Lewis

Economics

Best Financial Markets Analysis ArticleGrowing your money is not the most important element of wealth. In fact, growth should come secondary to the preservation of wealth and purchasing power. Too often do investors get distracted with nominal changes in their personal wealth only to find that the thousands of dollars they have collected is worth considerably less than it was when the initial investment was made.


Purchasing Power 101

Purchasing power is a calculation of how much you could buy with X amount of money. Although prices seem stagnant in the short term, and are even depreciating for some products, general increases in consumer prices are only a natural response to inflation. 

Purchasing power should be at the forefront of a proper investment plan. Does it really matter if your investments are on track to be worth $1 million in 20 years if a loaf of bread will cost $20 and a gallon of milk $50?

The Failures of Cash Investments

Many people falsely believe that by storing cash in an interest bearing savings account or certificate of deposit, they are hedging themselves against inflation. However, this is rarely the case. Because bid interest rates (those you receive for lending, or depositing, in a bank) often lag true inflation, the damage to purchasing power is done long before true inflation in prices arrives. 

CPI is Not an Inflation Measurement

Many banks and institutions sell “inflation-protected” debt instruments that are tied to the inflation rate. Usually, these investments pay a certain percentage per year with a bonus added to rival the inflation rate, thus guaranteeing that investors always earn more than the rate of inflation. 

This couldn't be more intellectually dishonest, as the Consumer Price Index fails to take into consideration the change of the money supply, but rather the change of prices of consumer goods. The CPI is calculated by finding the prices for a “basket” of consumer goods and charting the average change in price over a period of time.  Much of the “basket” is centered on consumer staples like groceries, gasoline, etc., as they make up the most basic elements of modern life.

Where the CPI Fails

One of the failures of the CPI index is that it only reflects the changes in the sticker price – and not the changes in the amount of the consumer goods. If you visited a grocery store in the past ten years, you have likely noticed that the sticker price of many goods has not changed, but the weight of the product has. For example, bags of sugar (one part of the CPI) were almost universally sold at $1 per 5 lb bag until five years ago. Today, you'd be hard-pressed to find a single 5-lb bag of sugar, as most companies have begun to sell 4 lb bags, but at the same price of $1 per bag.

Although the price did not change, the quantity did by 20%. However, this change went unnoticed by the CPI calculation.

How to Track True Inflation

The only way to track the true inflation rate, and thus protect your spending power, is to invest in hard assets (commodities, physical metals, etc.) that rise in value as the value of the dollar drops. 

Gold and silver especially track the change in the money supply with accuracy, as the amount of gold and silver at the surface of the earth proportional to the number of people remains consistent. In contrast, inflation increases the amount of dollars in circulation. When you have more paper money while the supply of precious metals stays consistent, this only leads to an increase in the value of the precious metals themselves. 

The only way to preserve your spending power and your wealth is to meet or exceed the true rate of inflation, not the rate of inflation as calculated by complicated (and often corrupted) economic models.

By Dr. Jeff Lewis

Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

Copyright © 2009 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules