So through the night rode Paul Revere;
And so through the night went his cry of alarm
To every Middlesex village and farm,—
A cry of defiance, and not of fear,
A voice in the darkness, a knock at the door,
And a word that shall echo for evermore!
For, borne on the night-wind of the Past,
Through all our history, to the last,
In the hour of darkness and peril and need,
The people will waken and listen to hear
The hurrying hoof-beats of that steed,
And the midnight message of Paul Revere.
–Henry Wadsworth Longfellow
How would history be different if, when Paul Revere rode through every Middlesex village and farm yelling, "The British are coming, the British are coming!" if all of his friends and neighbors called him an alarmist, a warmonger, or a guy just trying to hawk sales for his ammunition company?
What if they all said, "Go back to bed. He's just another guy trying to peddle his product."
In my book Retirement Reboot, I shouted an equally serious warning: "Inflation is coming! Inflation is coming!" I’ve been trying to warn my friends and neighbors to take precautions and defend themselves. But I've been frustrated, feeling like I'm doing a poor job.
Why don't they seem to see the danger that I see so clearly?
When the first issue of Miller's Money Forever hit the web, I was at my summer home in Illinois. While I'm in the Midwest, I have a regular Tuesday breakfast with the ROMEO (Retired Old Men Eating Out) club, and my new project was quickly distributed among my friends.
Less than two weeks later, an email hit my inbox that was originally from a neighbor across the street. I had never spoken to this neighbor before, but I would casually wave "hello" when he drove by in his new Mercedes.
The message was a copy of an email my neighbor had sent to my ROMEO friends, but not to me. Apparently he had shown my material to his money manager, and he proceeded to blister me with harsh remarks. He thought I was just another fearmonger, trying to sell fear to hawk our product.
Of course it bothered me, and my first inclination was to defend my motives.
To his credit, within a week of distributing that email, I got a very kind, sincere apology from him. He said that his email was inappropriate, and he certainly would not want anyone doing something like that to him.
I never did get the whole story. I suspect that some of my ROMEO friends who know me well might have spoken with him. To this day he and I have exchanged a couple of emails, but we have never spoken. He does have a good reputation in the neighborhood.
My real concern today, however, is not a spat with my neighbor. Rather, it's the very personal effect his scathing email had on me. God forbid anyone call me a fearmonger! I found myself writing a bit more timidly, toning down my language and tempering my opinions.
Instead of using words like "hyperinflation" – a problem I am damn concerned about – I wrote "inflation or possibly even high inflation."
I wonder what would have happened if Paul Revere had said:
"Sorry to wake you. You know the British are a tad peeved about us throwing their tea in the pond. We see some ship movement in the harbor; not sure what it is. I just wanted to share this with you. Oh yeah, I also wanted to mention, we cast musket balls down at the shop."
I will confess: for the last several months, I've been tiptoeing around a huge issue facing seniors and savers. I have skirted the issue, only focusing on part of the problem.
Why Ask Why?
The Federal Reserve recently announced that it is going to continue to clamp down on interest rates until at least 2015. I have been warning folks of the effects this will have on retirement plans for some time.
The most recent data from the US Census Bureau indicate that a person with a total net worth of $856,000 (including their home) is in the top 7% of the population. If you estimate that home is worth $356,000, the person would have a portfolio to invest of $500,000. In 2007, before the government decided to clamp down on interest rates, you could invest that money in 6% CDs and earn $30,000 in interest. For decades almost all financial planning tools used 6% as a retirement benchmark.
Now, the best rate for a 5-year CD is 1.2% interest. The same CDs would earn $6,000 in interest. The interest does not even cover the government-reported 2% inflation. Add that $6,000 to your Social Security check and that is what you have to live on… if you’re in the top 7% in net worth.
I shudder to think about the other 93%. For an investor to earn that same $30,000 today, he would have to have $2,500,000 in CDs; that would likely put him in the top 1% of the population.
While I want to stick to the facts, I was beating around the bush when it came to the inflation figure. In the vernacular of my grandchildren, "Grandpa's copping out!"
At the risk of being called a fearmonger, I want to share some additional data with you – data everyone needs to see and understand. If you think I'm a fearmonger, I'm sorry. Take a look and decide for yourself.
That Lurking Feeling
For the last year or so, I've had a very uncomfortable feeling. The stock market has rebounded from the 2008 crash, the government is reassuring us that inflation is under control, and my brokerage account is doing fine. Where is this feeling coming from?
Let me start by explaining how government policy has affected the value of your personal retirement savings. Since 2002, the S&P 500 Index – a basket of stocks that Wall Street folks use as a proxy to tell you how most people's mutual funds are doing – is up a hefty 60% after recovering from 2008 losses.
It's not a pretty picture, but 60% gains over a decade aren't awful. And most folks have recovered their losses, right?
Then how come things just don't feel that good? You all know what I'm talking about: despite the headlines about record highs for stocks, your savings probably feel much more paltry now than they did 10 years ago. I know mine do.
That's because inflation is running rampant.
Surely you've read that inflation is only 2%. But anyone who fills up their tank with gas, buys a loaf of bread, or tries to finish their Christmas shopping knows that is complete baloney. You know it the same way you know that 8% unemployment is not even close to the real level.
The simple, inconvenient truth that everyone knows is this: the government manipulates the statistics it publishes for its own interests. But the cost of this manipulation is affecting us all, right now.
Thankfully, a really brilliant statistician named John Williams has made it his personal crusade to keep all of us informed. At Shadow Government Statistics, Williams digs into the raw data published by banks, universities, and government agencies and applies time-tested formulas that the government once used to report all this data to track the real rate of inflation, unemployment, and other key economic indicators.
I've been a Shadow Government Statistics subscriber for quite some time, and each new report I read confirms the conflict between the government-reported data and the truth. Williams is constantly warning that hyperinflation is on the horizon, and he gives some doggone good reasons why.
At the risk of being called a fearmonger, this data should be a wake-up call to everyone. If Williams is right and hyperinflation becomes a reality, there will be so much panicked selling throughout the world that nearly everyone with even a modest portfolio will take a terrible hit before they have time to react.
Our stocks, in real dollars – or "purchasing power parity" (PPP), to dip into economist-speak – are actually worth 40% less than they were 10 years ago. If you adjust the value of the S&P 500 using your ability to buy real goods like food, then the picture is a lot less pretty.
That blue line up there: that's the value of your portfolio over the past ten years if you've been following Wall Street's prescription. According to the government's official inflation statistics, it's the red line, which shows the increases in the S&P 500 adjusted by the government-published inflation figures.
Oh, and the green line? That is the real value of your portfolio when you adjust for a more realistic rate of inflation. It's no wonder that so many folks feel uncomfortable. The government estimates for inflation are a joke.
It's easy to overlook that when you don't see the impact on your monthly statements – that's what the government is banking on. But in reality, it's costing you a chance at achieving your retirement dreams.
In a paper on wealth trends published earlier this year, New York University professor Edward N. Wolff wrote: " Between 2007 and 2010, median wealth plunged by a staggering 47 percent! Indeed, median wealth was actually lower in 2010 than in 1969 (in real terms)."
When the first TARP bill was passed to bail out the banks, polls showed that 90% of Americans opposed it, but the government did it anyway. Everyone knew it was wrong, but it still happened.
Now we have QE programs ad infinitum. We were told that these bailouts would solve our problems, but things continue to get worse. So if all this quantitative easing is making us poorer, why does the government lie about it?
It does so because it is in its own best interest; the federal government has much to lose if the population learns the truth.
Think back to the Tea Party Taxpayer March on Washington, DC, when a few hundred thousand people from all over the country marched on Washington. Some participants used "T.E.A." to stand for "Taxed Enough Already!" It was a peaceful tax revolt, but both political parties and the media set out to destroy the message and credibility. "The Tea Party" now has the distinction of being the most negative phrase in US politics.
God forbid that anyone revolt against taxes. I can just hear the politicians chuckling to themselves:
"The last time the bloody people had a tax revolt they fired the king, threw out the entire government, and had the silly notion to govern themselves. When are they going to learn they are better off with government controlling every aspect of their lives? If we lie to them, it is for their own good."
The government doesn't manipulate these numbers to suppress the value of your stocks. Wealthy politicians (the average net worth of a congressman is $7.3 million) suffer just as much when that happens, which is why they rush to prop up the market every chance they get.
Despite popular belief, they don't do it just to paint a rosier picture in order to help their chances of reelection. Sure, that's part of it, but it's not the biggest part.
Mostly, they do it to continue fueling their spending binges... at the expense of your retirement. That spending, of course, has no other purpose than to get politicians reelected and to keep their massive corporate donors happy. The surest vote is the one you buy. Most politicians don't think about things far enough ahead to be concerned about their constituents' retirement goals and plans.
The Disastrous, Long-Reaching Consequences
When the value of the dollar goes down faster than the government-published inflation rate, it's not just the value of stocks that go down. The value of your Social Security and Medicare benefits drop, too.
Remember, our Social Security check is supposed to be indexed to inflation. I recently read that preliminary figures predict a 1-2% annual benefit increase in 2013, the lowest since automatic adjustments were adopted in 1975.
If you receive Social Security, you also know that what the government giveth, it may also taketh away. It's no surprise that the bureaucrats in charge didn't announce next year's increase in deduction amounts for Medicare and drug coverage taken out of your Social Security check before the election. The most recent news I read on the subject is pretty clear:
"How much will Medicare Part B premiums be in 2013?
"Most people will pay $104.90 per month for Medicare Part B premiums, which is a $5 monthly increase from 2012's premiums. But high earners will pay more, as they have since 2007."
Now in the lowest bracket, that's only a $5/month increase. Those folks were paying $99.90 in 2012. That's about a 5% increase, more than double the so-called inflation rate that sets the increase in benefits. Savers who have managed to build up a nest egg will note that their increase is much more significant.
I asked our research team to build a graph to show the effects of inflation on our Social Security check. It's a little scary.
Officially, theoretically, your Social Security checks keep up with inflation. I got my first Social Security check in 2002. To keep the math simple, imagine it was $1,000. Today, that check would be $1,270, due to the automatic cost of living adjustment (blue line). The red line represents the "official" cost of living inflation numbers as reported by the government. The $1,270, according to the government's "official" statistics, will buy the same amount of goods that $1,000 did in 2002.
The green line uses the Shadow Government Statistics inflation numbers and factors in the government increases. Even with the government's automatic cost of living adjustments, my $1,000 check would only buy $477 worth of goods today. Ouch!
John Mauldin recently interviewed David Krone, chief of staff for the Senate Majority Leader Harry Reid, and Rob Lehman, chief of staff for Senator Rob Portman. As they discussed current interest rates, Lehman remarked: "A 1% increase in the rate of interest adds $130 billion to the deficit."
Krone added that he "saw no problem with interest rates going lower; perhaps we should even charge people for holding their money for them."
The result of QE, QEII, QEIII, TARP, TALF, and all the other alphabet-soup policy changes of the last few years has already reduced the real value of your retirement savings by 40%. And it has already reduced your real Social Security benefits by about 52.3%.
What does that mean for retirees? Well, investment income from safe, interest-bearing investments is going to stay in the tank for at least the next decade. In the meantime, the cost of living is skyrocketing as the government keeps the printing press on high. Despite government promises, our Social Security checks are not going to keep up with true inflation, and our nest eggs are at risk.
This is the investment challenge retirees are facing. I don't need to use the word "hyperinflation" to make my point – just some historical data from the last decade.
I suspect that Paul Revere might have had a few folks pretty upset when he woke them up in the middle of the night. Today, as a relatively free American, I'd like to thank him.
Turn on the Night-light
There you have it! I have expressed my concerns, and they are based on real facts. Question my motives if you want, but know that I didn't ask for this job. I took it on as a personal challenge to help others in my peer group: retirees, seniors, and savers just trying to survive.
What would Paul Revere have said about his motives? He likely would have said that he simply wanted his friends to wake up!
The danger is imminent, and we need to take precautions to defend ourselves. Only this time, it is not the British: it is our own federal government. If you agree with me, take the necessary precautions. If you have already done so, good for you! Stay diligent. If you don't agree with me, please roll over and go back to sleep.
On the Lighter Side
As this is our last issue before Christmas, I want to share a couple of quick thoughts. First, thank you to all of our readers. This has been one of the most exciting years of my life. Our subscriber growth and feedback has been terrific, and I want everyone to know just how much I appreciate it.
Today's article is from my heart. We are in this together, and I want to help all seniors and savers survive and thrive.
Every Tuesday we have a conference call with the core players on our team: Alex, Ann, David, Lee, Vedran, and me. They asked me to convey on behalf of the entire team, our wish that everyone enjoy a wonderful holiday season in whatever manner you and your family choose to celebrate.
It is "Merry Christmas" in the Miller household. We will be feeding 17, with the first grandson arriving on the 20th and the entire family departing the 28th. Grandma Jo has the freezer stocked with cookies and fudge; she can't buy a turkey until the last minute because there is no room left for one. There is nothing better than being a grandpa surrounded by loving family.
Until next week…