Sunday, July 22, 2007

A Great Article On The Inflation No One Is Talking About


The World’s Most Expensive $85 Motel Room

July 20, 2007
Mary Beth Carter is a 41-year-old mother of three, whose West Virginia high school diploma coveys an educational pedigree in stark contrast to the natural ability and raw intelligence of its proud owner.
Like many from that forgotten world, high school was the pinnacle of Mary Beth’s formal education. She, like her mother and grandmother before her, took to the labor force, diploma in hand, almost before she even had time to remove her graduation cap and gown.
She took a job with the local florist, a lady whose husband bought the business to give his wife an afternoon activity…a creative outlet of sorts, nothing more. For Mary Beth, the small shop’s humble paycheck joined forces with her husband’s factory salary to sustain a soon-to-be typical West Virginia family of five.
Unfortunately for Mary Beth, and many others in that rural Appalachian town, they overlooked the major papers back in 1983 when the Bureau of Labor Statistics (or BLS) declared that “owners equivalent rent,” a figure that makes up 28.4% of the CPI (Consumer Price Index), would replace the actual price change of the tangible asset itself. (In this case, the house Mary Beth and her husband Tom were saving to buy.)
Fate dealt this family another blow a dozen years later when the United States Senate assembled the Boskin Commission to assess the possibility that inflation was, of all things, overstated. (Note: If the CPI were measured by the same standards used in the 1970s, today’s inflation rate would be about 8%.)
To no one’s surprise, and to Mary Beth’s detriment, the commission discovered exactly what they were appointed to find! Consequently, it recommended price reductions for quality improvements in ordinary, run-of-the-mill items such as cars, computers and televisions.

The commission directed the BLS to assert the right to declare a quality improvement of a certain good offset a tangible rise in that good’s price. So even if the price of your Ford minivan increases 5% in a given year, its effects on the inflation rate would be nullified if the BLS deemed the improvements to your new car justified the price appreciation. It’s called a hedonic adjustment. But either way, you’re still paying more!
You see… This method keeps “statistical prices” artificially low. These “adjustments” now account for roughly 46% of CPI components.
I believe these changes have ushered in an a golden era of “silent inflation.”
Most Americans have been numb to this trend for several reasons. They’ve paid more at the expense of saving less. They fueled their consumption by borrowing from — of all things — the very roofs that cover their heads. They’ve been convinced the golden train of American prosperity hasn’t passed them by. They believe this myth despite the strikingly negligible increase in real median weekly earnings over the past 25 years.
The changes to the CPI calculations certainly served Washington’s best interests. The inflation rate is used to index the annual payment increases in government entitlement programs such as Social Security. These are the very same programs Mary Beth and millions of Americans like her will soon depend upon in ways even the creative florist, the banker and the career politician will never know. But these entitlement programs will be the primary drivers behind federal spending in the near future. Consequently, higher inflation means even higher deficits and national debt.
So someone has to lose.
See, like many Americans, the Carters entrusted our servants in Washington to protect the value of our beloved greenback. They assumed the minds inside the Beltway understood the economics outside the realm of four-lane freeways and three-bedroom townhouses selling for nothing less than $800k.
But for many Americans living on blue-collar incomes, reality is catching up.
You see, last fall Tom and Mary Beth took their oldest daughter Katherine (or Katie as the family calls her) off to college. This was a proud moment for many reasons. Katie capitalized on the smarts she inherited from her mother. She used that acumen to earn a full scholarship to a small liberal arts university just five hours north of the family home in the Greenbrier Valley.

Katie was the first of her entire family to ever attend a single day of college. But move-in day was short lived. Her parents couldn’t afford the $85-a-night motel. Finances these days were just too tight… Their family, much like the average American consumer, can’t keep up. Those sparse, ever depreciating dollars are saved for the once-a-week trip to Wal-Mart and used for replacement parts on an aging Ford minivan that is in similar shape to the company that built it.
For many Americans like the Carters, stretching the hard-earned dollar is becoming the rule, rather than the exception.
A curb in household spending serves as the first step. A broad slowdown in spending leads to a slowdown in corporate earnings… And pretty soon, weaker earnings lead to fewer jobs. And fewer jobs will foster less growth… Finally, the “R” word, the albatross we call recession, will pop up its ugly head and dwell among us once again.
As an investor, finding the “recession-resistant” stocks, safe-havens to protect your assets will require a combination of patience and moderate expectations. But for families like the Carters, investing becomes an unthinkable luxury, much like a motel room in a rural West Virginia town… It’s something they simply can’t afford!

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