Robert Shiller

David Scranton: Hello and welcome back to the Income Generation, I’m David Scranton your host. Each week we provide you with insights, thoughts and financial remedies to give you greater perspective on many of the challenges you face. Those challenges whether you’re in or approaching retirement and even more importantly we present workable solutions. Today’s show we’ll focus on one of the greater challenges we all face in retirement and that is the erosion of buying power. The timing is perfect because on today’s show we have a Nobel laureate and now perhaps the most renowned name in the field of asset, prices and inflation. If you haven’t already guessed I’m talking about economist Robert Shiller I’m looking forward to going one on one with Shiller later in the show. As we both discussed the driving forces that affect prices. You know every time the price you pay for something goes up, you can view it as the value of your money instead going down, think about it. How much did you pay for your first house? Do you remember? Well if you bought it in nineteen sixty the median house price back then was eleven thousand nine hundred dollars. However, if you bought it five years later in nineteen sixty-five you found the price to have grown to twenty thousand dollars that is a sixty-eight percent increase in five years. During that time of generally low inflation housing inflation average ten point nine four percent over that five year period, one of things we’ll address today is that during that same period the government’s figures show that inflation overall averaged only one point three percent. Ten point nine four versus one point three housing inflation was almost ten times the general inflation rate during that five year period. Here’s another example, in nineteen sixty the average new car cost two thousand six hundred dollars well you have to cough up nine thousand four hundred dollars for the average car ten years later in nineteen seventy. That’s a two hundred and sixty-one percent increase, now during those same ten years the government’s inflation numbers reported an average increase of just one point eight percent per year. That’s an enormous difference, now the basket of goods and services that the government uses to measure inflation will never exactly match what you and I are buying. But we all know that shelter and transportation are indeed big ticket items on almost everyone’s list and almost all of us will have to buy another car some point during the period in which we’re tired. What’s more medical costs are also a budget item that most retirees simply cannot afford and those are rising rapidly, much higher than the overall inflation rate my point is simple. if your cost of living increases are tied to the government’s measure of inflation, the CPI index but your actual increase costs are based upon the real world you may have trouble after just a few short years in retirement and that is what today’s show addresses. Here’s something to think about, earlier were you able to remember what you paid for your first house? I bet it seemed like a lot of money at the time but now think about what you paid for your last car, I’m willing to bet that the car cost much, much more than the first house. That is real world inflation in the real world one dollar would purchase sixty-two percent of a big mac burger back in nineteen eighty-six. The same dollar today will only buy twenty-three percent of a big mac burger that’s almost one third of the food for your hard earned dollars, that’s what’s happening in the real world. Rather than the government controlled world of numbers. The average person hopes to be retired for at least thirty years yet their buying power can be crippled during this time, it’s possible that in the next ten years our dollar may only buy seventy-five cents or even fifty cents worth of goods or services. They also know they’re going to need a good inflation hedge so I’m glad you’re with us today because ignoring this potential problem is the worst way to deal with it. Today you’re going to be learning what served as an inflation hedge and what doesn’t, most retiree’s know you have to earn enough interest or dividends to satisfy today’s income needs. But the question becomes how much extra do you need for inflation? And do you invest in things for growth for the future or do you just try to earn enough extra interest and dividends so that you can satisfy inflation that way? The problem is that most assets simply are not good inflation hedges during periods of high inflation so don’t automatically assume that stocks for example are a better inflation hedge than bonds. In fact in many periods throughout history bonds have actually proven to be a better inflation hedge than stocks. We’ll also talk about income from sources that may seem to be protected, income from sources like social security or a pension with the cost of living benefits. I found in my own investment advisory practice that social security raises when they do occur are often eaten up by the rising cost of Medicare Part B. And cost of living increases are not ironclad or guaranteed in the traditional defined benefit pension plans either so the problem is simple, even if you’ve invested so that some of your income sources more than allow for inflation. If you don’t have an inflation hedge effectively on pensions or social security then the burden on those investments is much, much higher than you can imagine. Why? Because not only do those investments have to provide inflation hedge on themselves but also on some of these other fixed income sources. The good news is today we’ll have answers for you as I mentioned today’s guest Robert Shiller, won a Nobel Prize in Economics two years ago he’s a sterling professor of economics at Yale. And he’s most celebrated for his work which centers on asset pricing including the effects of rational and irrational markets and intentional manipulation of demand in competition. You’ve no doubt heard of the Case Shiller real estate indices which were founded with Karl Case and Robert Shiller, they are the leading measure of U.S. residential real estate prices. They tracked changes in U.S. residential real estate on a regular basis, his work on pricing has gained the respect of many in this field. Many who at first were a little bit less impressed with his unconventional theories well, his work related to asset prices and has over time become the standard of thought. I take personal pride in welcoming the first Nobel laureate to joining me on the Income Generation. Then during the second half of the show, I get to sit down with Marty Johnson. Together we’ll uncover solutions that you can use to help protect the buying power of your savings now and in retirement. This of course is a topic that will always be of high importance to you the Income Generation.

Market Breakdown:

David Scranton: So where are we right now with inflation in the United States? Well if you follow what happened in December when the Federal Reserve finally raised short term interest rate up from zero. You’ll know the current inflation rate is low, in fact, it’s very low just about a half percent and this is according to the latest government figures. In fact, that’s one reason the Fed gave for not setting short term interest rates higher right now. Low inflation is one sign that the economy may still be struggling, Fed chairman Janet Yellen said she’d like to see inflation rise to at least two percent per year by the end of two thousand and seventeen. Personally I have some doubts about that which I’ll talk about a bit later in the show right now though, I want to talk more about just how the government calculates inflation. Averages and percentages are important when it comes to setting economic policies but they also can be very deceiving. They can also be manipulated in fact, that’s one of the reasons they often seem out of whack with reality as consumers, and we’ve all felt that way about the reported inflation rate for quite some time. And the older you get the more out of whack you can see. Retirees and people nearing retirement feel the effects of inflation more acutely than younger consumers. Many of you already know this but that’s due in part to the ever increasing costs of medical care which people over age sixty-two tend to consume double the average for all consumers overall. As most people know the Bureau of Labor Statistics measures inflation and they said earlier using the C.P.I. index what’s called the Consumer Price Index. Since nineteen eighty-two inflation for the United States based upon the C.P.I. is risen by an average of two point nine percent a year. But does that really seem accurate? We’ve already discussed the higher inflation rate in cars and homes during certain portions of this period. But think about this, even a loaf of bread in nineteen eighty-two cost fifty-three cents on average, today the average is two dollars and thirty cents that’s a four point four percent increase. The point is as you pay for food and medicine, clothing, housing and everything else you need each and every day reality can feel way out of whack with the Labor Department’s numbers. The effects of inflation can feel like they’re eating into your income and your savings to the tune of a lot more than two point nine percent. And if you take the time to do your own calculations your numbers will probably even bear that out now, there are several reasons for this I’d like to focus on one in particular because it’s something a lot of people probably don’t think about. As you’re probably aware the U.S. government is the country’s biggest provider of the old fashioned type pensions known as defined benefit pension plans. What’s more every January the government provides people taking Social Security with a cost of living adjustment or what’s called a COLA increase. The stated goal for Social Security is to ensure that the purchasing power of Social Security benefits is not eroded by inflation. The percentage of the COLA, the cost of living adjustment each year just like the increase on guaranteed COLA’s and government pensions is based upon that C.P.I. In other words, it’s apparent to me that the government has an axe to grind when it comes to reporting the CPI. You see, if they publish a really, really high number then all those pension and Social Security checks need to be increased by that amount of money. That would really add up over time as an added expense to a government that has already have record amounts of debt. So my saying the government purposely fudges the inflation numbers in order to weasel out of its obligation to retirees. No, but I am saying that percentages and averages can be calculated and spun in a lot of different ways as the saying goes, figures don’t lie but liars figure. And I’m saying the government does have what appears to be a motive for reporting an inflation rate that’s on the low side. Actually you could argue they have another motive for doing that and this is called tips, these are treasury inflation protected securities. Like regular government bonds tips pay interest twice a year based upon a fixed rate. But what makes them different and attractive to some investors is that their principal value adjust up and down based upon the Consumer Price Index, the CPI. The payment you receive at the end is based upon this adjusted principal amount as well as the payments of interest over time. The goal for this is to give investors who buy these tips and inflation hedge. In a way though, this is like me loaning a friend a lot of money and letting him decide how much interest to pay back on top of the principal, odds are he’d set a very low interest rate for himself. And when the government reports my bonds value has increased by point five percent in accordance with their latest inflation figures. You could argue that that’s a similar situation, the bottom line is that we all know when the government says the inflation is two point nine percent over the past three decades or more. The reality may be that it’s more like five percent, so when financial experts talk about the importance of having an inflation hedge in your retirement plan obviously, you need to take that seriously. A little later Marty and I will be talking about what does and doesn’t constitute a good inflation hedge for retiree’s today. In fact, there’s a lot of confusion and debate about that so we’ll break down some of the options and see how they stack up. What’s important to keep in mind overall though is this. If inflation has realistically speaking increased by five percent or so per year over the last thirty years then you need to count on it increasing by at least that much over the next thirty years. As we’ve talked about on our last show one of the major ways that retirement planning has changed over the years has to do with longevity rates, people living longer and longer. According to a major insurance company speaking with their actuaries people retiring in their mid-sixties have a twenty-five to fifty percent chance of living all the way into their ninety’s. Simply put people today are living longer than ever before and the thirty plus year retirement today is fairly common. What does that mean in terms of inflation? Well, when you do the math it means that if inflation increases only add another five percent per year in the coming decades. After thirty years you will need four times the amount of income, you have the first year of retirement in the last year of retirement to maintain the same lifestyle. If inflation should increase a little to seven percent per year then you will need eight times the income of your last day of retirement compared to your first. So whatever your inflation hedge is, it needs to take into account these figures if it doesn’t there’s a chance inflation could erode your portfolio so badly that you can run out of income. What are the odds of that happening? Well, that depends on a lot of factors of course, but a few years ago a major mutual fund family came out with a tool based on something called Monte Carlo analysis. This is something that I and other financial advisors will often use with their clients. What it does it calculates the probability that you’d be able to fund a twenty-five or thirty or even thirty-five year retirement without running out of income… The factors depend upon your stock to bond mix in your portfolio as well as your income needs and it’s all done through back testing, historical track records for stocks and bonds. Or for example, the thirty year chart shows that with a forty to sixty mix of stock to bonds forty stocks, sixty bonds which is generally considered to be really conservative. You actually have an eighty percent chance of not running out of money in that thirty year period, when taking a four percent income stream per year. So if you have a million dollars that’s forty thousand dollars a year now on the surface that may sound pretty good. Eighty percent chance of success but keep in mind that it’s also based on the government’s official estimated inflation rate of about three percent. Bump back to five or seven and obviously the odds go down. But perhaps even a more important point that I always make is this, even if your odds of running out of income are relatively small. Such as twenty percent in this example would you be willing to take the risk considering how bad the consequences might be? In other words, it’s not enough to ask what are the odds it could happen you also have to consider how bad would it be if it did. Would you find yourself financially wiped out in your late eighties? Think of it as Russian roulette even with just one bullet in a six round chamber meaning you only had a sixteen percent chance of shooting yourself. Would you pull the trigger? Would you play that game? Of course, you wouldn’t why? Because the consequences of that sixteen percent probability pans out are so severe. Keep in mind that at twenty percent your odds of running out of money are even greater so considering the magnitude of the consequences, the potential consequences do you really want to play that game? Obviously, most people don’t most people don’t like taking risks that have a huge potential downside if they fail and offer a little reward if they succeeded that’s just common sense. Ultimately, wouldn’t you rather have an inflation hedge and an overall strategy that gives you more like a ninety-eight to one hundred percent chance of not outliving your income rather than only seventy or eighty percent. Of course you wouldn’t, so stay tuned. Today we’d like to welcome Robert Shiller co-author of Phishing for Fools, his new book about Wall Street that the Income Generation will find particularly interesting. Professor Shiller, you don’t really know about this but I actually have a bone to pick with Yale. They were the only school I applied to when I was going to get my undergraduate degree who wouldn’t give me a single penny of financial aid and as a result I couldn’t go there. Now, I know you’re not from that department but if in later life if I decided I want to go back to Yale for a graduate degree do you think maybe you could pull some strings with the financial aid department for me?

Robert Shiller: Well, you know I don’t know when you applied but the Yale portfolio managed by David Swenson has grown from less than a billion dollars to in the mid twenty billions. That makes it easier for Yale to give financial aid so I’ll bet if you were young today and did it again you’d get it.

David Scranton: Yeah, yeah. No, I’m just going to pretend for a minute that I didn’t hear you call me not young and we’ll get on with the show, but today’s show of course is about inflation and I want to talk about your book just a little bit later. But today there’s lots of rumblings about deflation vs inflation, even on December sixteenth Janet Yellen mentioned that although she raised rates by a quarter point the reality was that… She mentioned she’s struggling to get inflation up to where she’d like it to be tell us about your thoughts looking forward.

Robert Shiller: Well Janet Yellen has been influential in the idea that the ideal inflation rate is not zero but it’s something like two percent and part of the reason is that history shows that periods of deflation are economically weak. So let’s say they are comfortable two percentage points away from deflation unfortunately, we’re not there yet. She’s trying, I don’t think it’s perfectly possible they can do all these things.

David Scranton: No it isn’t, but that’s something I’ve wrestled with myself. I understand the theory behind two percent being a good inflation rate for a healthy economy. But I also know that for a good part of the history of our country there was no inflation but you believe for the most part that that two percent probably a pretty healthy number.

Robert Shiller: Well, I think this is really the influence of a historical economics, behavioral economics. Yeah, I mean it’s better to have a little cushion. Maybe it’s a kind of fish, maybe it’s kind just… people get confused by two percent inflation and they maybe make mistakes. But on balance it’s a good thing and we have to try to get there, I think Janet Yellen is right.

David Scranton: So tell us in your own words what our Income Generation viewers of course, are always hearing from me in terms of my thoughts. But tell us in your own words why you believe she’s had such a difficult time creating any inflation at all.

Robert Shiller: You know it’s… to me it mirrors exactly the reverse of the problem that Arthur Burns had as Fed chairman decades ago that inflation just kept creeping up and he just didn’t seem to have any ability to stop it. And he didn’t understand, I think he admitted he didn’t understand why that was happening so you know the price dynamics is a complicated theo… The low inflation now has something to do with our weak outlook and our sense of reduced optimism things like that and the Fed chairman can’t control those accurately.

David Scranton: Yeah and frankly the raising of short term interest rates if anything is not going to help create inflation because in essence we are just beginning to just a small extent to tighten while the rest of the world is is easing. So what do you think has to be done to try to create that two percent inflation rate?

Robert Shiller: Well, I think that rates are still low, that’s the important thing the economy… the unemployment rate is down to four point nine percent and historically you know Central banks would raise rates quite a bit in that situation. The small amount that they were raised is still leaving them low and it should still work.

David Scranton: Now Professor Shiller your new book talks about the intentional and unintentional reasons behind the manipulations of Wall Street and then that you and I actually have a lot in common about our concerns. Talk to us from your standpoint about that.

Robert Shiller: Well our book is not just about Wall Street, this is my book with George Akerlof. We think that there is a need for to emphasize integrity in business and that we need business organizations that uphold integrity and we need government regulation. Akerlof and I love free markets, but we know that they can go awry and I guess that’s obvious but it’s not obvious in its entirety so the financial crisis that we saw that really started in two thousand and eight. I don’t think it was a result of mostly evil doers doing crimes that could put people in jail it was more of people selling things a little bit too you know… Not being completely forthcoming maybe in the fine print forthcoming, but that’s all so we saw you know mortgage securities over sold. People were oversold on the advantages of buying a home at the time, these are problems that catapulted us into a huge crisis not criminal problems generally. But problems that do challenge our integrity and the next step has to be more and better integrity in business.

David Scranton: And of course, you can’t legislate integrity, it seems like whenever you change the rules and the laws then somebody finds a way around those rules and laws. So it has to come from a different source and it seems like greed is a big part of it, is there anything else besides corporate greed would you say that causes this phenomena?

Robert Shiller: Well, I am a scholar of behavioral economics, right now we talk about more than just greed there’s a whole array of psychological principals but yeah. I mean selfishness is part of the story and I think that… you know if you go back to the nineteenth century remember Horatio Alger, he wrote all these popular books for boys about success in business. But I went back and read one of them just out of interest, it was not just about if you try hard you can be a success it was about integrity. And it was about business people who hold back and do the right thing, are much more likely in the long run to be… to prevail.

David Scranton: Thank you so much for being on the show today. I very, very much appreciate it as do all of our viewers and I’m looking forward to getting that new financial aid package in the mail as soon as I get back up North. So, with that in mind stay with us we have a commercial break and we’ll be right back.

Marti Johnson: It’s hard to believe but for most of this country’s history people didn’t give a thought to saving for retirement. In fact, the concept of retirement didn’t even exist, that only really started to change in the late eighteenth hundreds. The forces behind that change and what I’ll be talking about in today’s segment, I’ll also look at how retirement planning is still changing and evolving. If you remember your high school history you know America’s economy was based on agriculture until the late nineteenth century. For the most part, the farms that drove the economy were family based and men worked for as long as their health allowed. As they age they gradually handed over the reins literally and figuratively to their growing offspring, as late as eighteen-eighty half of the Americans still worked on farms and nearly eighty percent of all men worked past the age of sixty-five. Even though the average life expectancy was actually considerably lower than that but as the century ended factories began to take over. The country was starting to shift and shift quickly from an agricultural economy to a manufacturing economy, from the family based model to the company model. Suddenly older workers had no one they could gradually hand the reins to so as their jobs became more physically demanding as they got older. The idea of leaving the workforce at a certain age began to take hold, it was seen as practical not just from the workers perspective but from the employers as well. As a workers age increased, his production often declined soon the idea of providing financial security for aging workers caught on. It was the American Express Company that established the country’s first private pension plan with the goal of creating a stable, career oriented workforce. By eighteen ninety-nine there were thirteen private pension plans in the US and more being created every day, worker morale and retention were primary motivators of course. But one of the reasons companies didn’t mind providing pensions initially is that life expectancies were far shorter at the time. In nineteen hundred life expectancy for men and women was approximately forty-nine years at birth, people who reached the age of sixty could expect to live only an additional twelve years on average. Yet there were still no minimum or mandatory retirement age and most people continued to work as long as they were able. Well that combined with the growing prosperity of the manufacturing based economy meant that pensions weren’t a financial hardship for many growing companies. By nineteen-nineteen over three hundred private pension plans existed, covering about fifteen percent of the nation’s wage and salary workers as for the other eighty-five percent. Well they were still largely on their own until nineteen thirty-five when Social Security was enacted, importantly, it was established… it established sixty-five as the normal retirement age. At the time life expectancy was still only about sixty years from birth well that means that Social Security was also enacted with the belief that most workers wouldn’t live for very long after retirement. And therefore, they wouldn’t be a great burden on taxpayers, what’s more according to the Social Security Administration when the program started there were approximately forty working people paying into the system for every one retiree. Well obviously that’s a healthy ratio, meantime pension programs kept growing, by nineteen fifty nine point eight million Americans or twenty five percent of all private sector workers were covered by a pension. Over the next twenty years that number would increase to twenty six point three million or forty five percent of all workers. Throughout all those years however life expectancies also continue to increase and this presented a growing financial challenge to the very concept of businesses and government providing financial security for retired workers. By the early nineteen seventies, Congress had identified a growing pension crisis in the country in nineteen seventy-four they enacted the employment Retirement Income Security Act or ERISA, in an effort to address the crisis. One of the results of ERISA was a gradual rise in the popularity of defined contribution plans as an alternative to traditional defined benefit pension plans. Increasingly, businesses began to offer employer matched investment plans like 401k in lieu of traditional pensions which had become less financially viable as retirees lived longer. It was one thing to commit to paying a worker’s retirement income for five to ten years on average, it was quite another to make that commitment for ten to twenty years. Defined contribution plans such as 401k’s which were introduced in nineteen seventy-eight shifted some of the burden back to workers themselves by now however, increasing life expectancies and the option of taking early retirement were also putting a strain on the Social Security system. With retirees living longer and the birth rate declining after the baby boom era, that healthy worker to retire ratio of forty to one shifted dramatically. As of today, there are only two point eight working people paying into the system for every one retiree. Within twenty years or so that ratio is expected to be only two to one, changes were made at the Social Security system in two thousand to try to address some of these concerns. But even today many retirees continue to worry about Social Security being depleted and about where their benefits being there for them when they retire. By two thousand and six life expectancies had risen to age seventy-four for men and age seventy-nine for women. Also by then forty-three percent of all private sector workers were covered by defined contribution plans like 401K’s rather than traditional pensions, that number has only increased since but so of longevity rates. Today according to the Centers for Disease Control, the average sixty-five year old… for the average sixty-five year old there is a fifty percent chance that you’ll live at least into your late eighty’s. For the average couple aged sixty-five there is a fifty percent chance that at least one spouse will live to the age of ninety-two, the bottom line is that American workers today need to plan for retirement income that will last them up to thirty years. And although Social Security is reportedly solvent through twenty thirty-three and being amended to prevent reductions to benefits beyond that for most people, it will not be enough. Social Security by itself won’t provide sufficient income to meet their retirement goals or even needs, that leaves it up to them to parlay their 401k’s or other plans into vehicles and strategy that will provide majority income of their retirement. Achieving that goal with a sense of security and with so many complex options can seem very daunting and as David has pointed out that’s especially true for this generation of retirees with all the uncertainty in today’s economy and financial markets. It’s also the reason that David starts to urge them to start identifying their retirement goals and by embracing their identity as the Income Generation.

David Scranton: Very few people paid attention to a news event that happened during the very last days of two thousand and fifteen. I made note of it though and I even shared it with the advisors that I coach and mentor around the country that are part of our advisors Academy network. And I mention how Purton it is to future inflation expectations, what was it? On December thirtieth, Saudi Arabia said it will not change its oil production policy meaning that even if there is a glut in over supply of oil, they will not scale back. Many people didn’t think about it but the price of oil affects the price of everything sold that has to be transported and delivered, that is to say if it’s not a service or it can’t be delivered digitally by computer. Or you’re not picking up yourself at a farm, the cost to get it to the store shelves is affected and compounded through every level of production and shipping because of oil prices. We’ve been talking a lot about inflation on the Income Generation but the reality is today the cards are stacked against rising prices and here’s why. When economies are strong demand is high, this might translate into higher profits for manufacturers but in a weak economy like todays. Competitive pressures force companies to pass the savings on to you. If you follow my show you know that I think economic weakness will last for quite some time. And this is ironically the bright spot in our disappointing economy especially for retirees, Income Generation members. That inflation may not be an issue for a long time. How long? Well up until about nineteen thirty, it’s important to understand that the United States really didn’t have inflation. When we first started experiencing permanent rising prices, permanent inflation was when the government got into permanent debt, this was during the Roosevelt administration. So inflation is actually a newer phenomenon here in the United States, at least permanent inflation is. And there’s absolutely no reason to think that it should persist without fail every single year in the future, in fact, I like in our economy to that of Japan ten years ago. We have a similar shifting in demographics, over the last four years they have experienced a low inflation average below one percent. In fact, in two thousand and twelve the annual inflation rate was below zero, the correct term for this is deflation. Over the last decade Japan has experienced deflation five times, fifty percent of the time they’ve experienced deflation and although we’re probably ten years behind the Japanese economy or more. An economy which has been dormant for over twenty years, we might just have the right recipe for the same low inflation or deflation. Why? Because as baby boomers peak they drive business and growth because the new consumers begin to go through a high consumption periods which typically occur early in life. This drives economic activity, as the baby boomers which caused the stimulus for a strong economy retire and consume less they effectively are no longer stimulating the economy. This happened in Japan as their average age increased and the US with this aging population is headed in the same direction. We’re just a decade or more behind so the good news for the Income Generation is that they are in the right place, just as they benefited more than most generations from the high flying economy in the eighties and nineties and the stock market that correlated with it. In fact, in many ways they cause it, they should also drive benefit from income producing assets and payments especially as the economy goes through a period of low inflation or deflation. You see, your buying power won’t quickly be eroded by a fast growing inflationary or economy that’s why the period going forward could actually be looked at as rosy if you’re in or approaching retirement. And in many respects better than it would be if the economy were roaring again, because it would allow for stable or lower prices and income producing assets is where you should look if prices are going to drop. Think about it, the income you get will become worth even more, your fixed income payments don’t change on their own right. Yet the payments will buy more and more over time. You’re not likely to get that kind of benefit with stocks or real estate which could be negatively affected by a shrinking economy. A lot of people have a difficult time comprehending no inflation or deflation with decreasing prices and there’s a reason for this. We have to remember the nineteen seventies and that’s the experience for most of us when President Nixon took the United States off the gold standard causing inflation to roar to eight point eight percent in one year, twelve percent the next. And by nineteen eighty we saw fourteen percent inflation in that year and that period is still part of our mental fabric. It’s part of the paradigm which created our financial thinking. Just as many still expect the stock market to act as strong as it did in the nineteen nineties although in our hearts we know that’s really not true. Neither is likely to reoccur based upon history, yet they become part of our paradigm, part of our experience. So in some ways many have become too expect it. Again, historically inflation is actually a recent phenomenon with demographics being what they are in the United States, wage pressures are low so cost of production should remain low also. I mentioned earlier that transportation costs are down, slow economy means less demand for commodities and raw materials used to make the goods. All of the factors that generate inflation are well under control for the foreseeable future in fact, the Fed through its stimulus over the last seven years has been trying to generate and create inflation. They believe it benefits businesses and let’s face it, since the national debt has grown so much in recent years if the US got to pay this debt with cheaper dollars it would make the job easier. I know this idea could be hard to wrap our brains around so I’ll describe it a different way. If you bought a home in the nineteen seventies or eighty’s, the mortgage payment initially I’m sure seemed huge but over time inflation caused your income to increase. While your mortgage payments stayed the same, so your mortgage payments over time seemed to be smaller and smaller and they were indeed a smaller percentage of your income. The same is true with the government, you see inflation causes tax revenues to increase having the same effect with the national debt as you had with that initially seeming large mortgage payment that ended up being less than a car payment by your thirty. The problem though is that the Federal Reserve has failed to generate inflation, they have the recipe right, they flooded the market with cheap money to purchase essentially the same amount of goods and services. This all started of course seven years ago, eight years ago when the Fed brought rates to near zero and flooded the market with money. They threw in everything but the kitchen sink to right the economy and fight deflationary pressures, what happen? Well currently our inflation rate is as low as one-half percent not very impressive if the goal is to create inflation. They simply could not make it happen. So if the extreme stimulus the Fed used with zero interest then three point five trillion dollars in quantitative easing didn’t raise inflation. Then I suspect Janet Yellen could stand on her head and spit wood and nickels and it still couldn’t overcome the deflationary forces of an aging population. Baby boomers simply are not taking the low interest rate bait that the government has been providing. They stop making the big ticket purchases that they don’t really need, they’re reducing their monthly payments and saving more for the future. Which is just considered sound personal finance. Now, you may still have some doubts about low inflation especially if you haven’t been following Japan over the last twenty years. History originally dubbed the period between nineteen ninety-one and two thousand and one as Japan’s lost decade. As time passed the following decade came and went then the term changed to the lost two decades and that term became popular, during this period the Japanese stock market and the real estate market collapsed. The fifteen years that followed this initial lost decade highlighted the reality of deflation. The economic collapse resulted in people accepting lower wages. Less pay led to a decrease in demand which the drop in demand caused even further decrease in prices and layoffs and so on and so forth as the cycle began.

As people became accustomed to seeing prices drop it also set their expectations that they continue to decline. The thought then becomes well, why buy today when we can buy the same thing cheaper tomorrow, waiting for lower prices less than demand which caused prices to spiral downward. That is known as the deflation spiral. Now, this may not sound like good news and I believe the United States can avert the extreme levels of deflation Japan has experienced. But a little deflation could be good for you the Income Generation. You know we’ve learned a lot from watching the average age rise in Japan, one very important thing I’ve noticed is fixed rate assets do well when deflation is a threat. As investors become defensive in buying more bonds, high quality bonds tend to fare quite well especially compared to stocks during periods of deflationary threats. This is why the traders and analysts at my firm Sound Income Strategies under my direction look to add these opportunities to our clients’ portfolios. I want to thank Professor Robert Shiller for being on my show, please look for his new book entitled Phishing for fools and learn how to avoid being fooled. I also appreciate the time Marti Johnston and I had discussing solutions and unknowns to a risk we all share which is losing purchasing power due to inflation. Now if you haven’t signed up yet for a complimentary special report entitled The Income Generation which allows readers to discover many answers to their investment questions. Get it now at The Income Generation dot com, you’ll discover a wealth of useful ideas you could put to work to better secure your financial security. And if you’d like call us and let us know what else we can do for you, get your questions answered and discover what other resources Sound Income Strategies can make available to you. That’s all for today, I’m David Scranton you’ve been watching The Income Generation and we’ll see you all again next week.

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