Inflation – The Worst Enemy of Retirees

What is inflation, a question from a listener to this week’s radio segment. I could write for hours on this subject but will try and condense it. But firstly …

At the beginning of May this year in Core Life Magazine in the editorial I made a prediction that the Cash Rate could be lowered by a further 0.25% after the elections and it was announced on Tuesday that the rate would be lowered to 1.5%.

Now back to inflation …

Inflation is an excessive increase in the currency of a country, by the issuing of paper money that is not backed by gold reserves.

What does gold reserves have to do with it?

Between the end of the Second World War and 1972, all western countries held gold reserves and paper money was a receipt for gold held. To make this work, gold could only be held by governments, the U.S. $ was the world’s reserve currency and the official price was $34 U.S. per ounce.

In other words, for every $34U.S. in circulation, there was one ounce of gold sitting in Fort Knox.

Some of you may remember when it was illegal to own gold. You could only have it as a tooth filling or jewellery.

Whilst the official price gold was pegged at $34 U.S. an ounce, the black market price got up to $90 in the early 1970’s. This was when gold started being smuggled legally with people like Mr T of the A-Team wearing jewellery in the form of gold neck chains.

To get back on track, what has this got to do with inflation?

Before Australia went off the gold standard the aim of the Federal Treasurer was to balance the budget i.e. our countries expenses did not exceed our income.

After 1972, without the restraint of gold reserves (Gough Whitlam had something to do with this), we just started spending money we did not have.

How can we spend money you don’t have?

We work on an overdraft with the Reserve Bank.

How do we pay back the overdraft?

We borrow by issuing Government Bonds.

How do we pay back the money our Government borrows?

Simple, we just print more money and call it quantitative easing.

Related back to real life, inflation is the worst enemy of retirees as the real value of their money can halve in 10 years. However, inflation can be and IS my client’s best friend.

The value of the properties we buy go up with inflation, but the amount borrowed does not i.e. we are constantly increasing equity, which we then use to buy more property.

Regarding our budget deficit, how can we get our head around the figure of a billion dollars?

Try this –

A billion seconds ago it was 1959.
A billion minutes ago Jesus was alive.
A billion hours ago our ancestors were living in the Stone Age.
A billion days ago no one walked on the earth on two feet.
A billion dollars ago was only 13 hours and 12 minutes, at the rate our government is spending it.

Author unknown

This is scary, but you can now understand that when we say a house that was purchased 8-10 years ago might not have increased in real value, it’s $Dollar value has doubled.

If the house you bought in Brisbane eight years ago for $250k, is now valued at $500k, it is WRONG TO SAY IT DOUBLED IN VALUE.

Its REAL VALUE is still the same, but you need twice as many dollars to buy it.