Inflation will be devastating in the next decade. Part of the problem is that inflation is hard to explain and it is difficult to measure the damage it can cause to Americans’ purchasing power. Many analysts are already predicting six or seven percent inflation as early as 2013 and low double-digit inflation by the middle of the decade.
Inflation’s two requirements
First, with all the money our government has printed, why has our inflation rate only risen to its current 3.9%? Inflation has two requirements: first, you have to print the money. Second, and this is important, inflation requires velocity. The money has to circulate in the economy to increase inflation. What did the banks do? They held the money. When that money is finally circulated into our economy we will have serious inflation.
Rules of 72 and 115
How can we easily explain the damage inflation causes? Use the Rules of 72 or 115. The Rule of 72 is an accounting rule where you divide the inflation rate into 72 and it tells you how long before you need twice as much money to live on. The Rule of 115 is how long before you need three times as much money to live on.
- For ease of illustration I will round the current 3.9% inflation rate to 4%. Now divide 4 into 72 and it tells you that in 18 years you will need twice as much money to live on as you do right now. So in 9 years you will require 50% more income to live at the same standard of living. Two thirds of America lives on $50,000 or less. They will need $75,000 per year by 2020 to be able to buy and pay for all the things they do now. How will they get to that higher income if average incomes are decreasing?
- If inflation increases to 7% (and it is likely that it will), by 2021 you would need $100,000 per year of income to maintain your current standard of living. It will be almost impossible for most Americans to achieve this increase. Our standard of living will drop dramatically; that is why inflation is so destructive.
To help families be successful we must first help them understand the serious challenges of inflation. Next, we must develop strategies to not be hurt by inflation. Only then can you actually take advantage of the opportunities inflation provides. Do it NOW!
Don’t just take our word for it:
Inflation logs biggest increase since ’08 (Chicago Tribune, October 20,2011: section 2, page 3)
The Atomic Bomb that is about to explode at the Federal Reserve (Economic Policy Journal, October 11, 2011)
Millions hit by inflation (Financial Times, October 21, 2011)
Kelly O’Connor – firstname.lastname@example.org