Inflation the Friend of the Rich and the Foe for the Rest
Written on the 7 August 2016 by James Cagney
I know there is a lot of talk about deflation these days and some first world economies are in danger of deflation but the real enemy is inflation. If you locked 1000 economists in a room and asked them to come up with a single solution they would still be there a month later - arguing! Economics is not an exact science - it is either theory or more often trial and error. However - the trends of the past do tend to repeat themselves.
At present Australia's inflation rate is 1% and the Reserve Bank (RBA) is happy with that. Lowering the cash rate to a 65 year low has certainly helped achieve the Reserve Bank of Australia and the government's goal of keeping inflation down. However, what goes up is sure to come down and visa verse. Research is showing that the low interest rates have been the cause of property price growth and more recent prices have outstripped the rate of inflation.
If you have learned nothing from the past you will never be able to predict the future. Inflation has been the enemy of the poor and the middle class for centuries. The gap between the rich and the poor is widening decade after decade. Sophie Tucker was a Ukrainian-born American singer, comedian, actress, and radio personality known for her stentorian delivery of comical and risqué songs said "I have been rich and I have been poor. Believe me, rich is better". Below is the stark reality of inflation and you just have to see the humour or you will feel depressed.
This is what people were saying in 1956 ...............................
# "I'll tell you one thing, if things keep going the way they are, it's going to be impossible to buy a week's groceries. And forget about the beer at $0.33 per 6 pack!" Look at these prices and compare them today's:
Milk: $0.97; Bread $0.18; Chuck Pot Roast: $0 .33 lb.; Spareribs: $0.39 lb.; Cabbage: $0.04 lb.; Eggs, doz.: $0.45; Coffee: $0.69 lb.; Carnation Instant Chocolate Drink, 10oz.: $0.33; Beer, 6,x 12 .oz cans: $1.20. Monthly rent $88.00 and to buy a house in a capital city $9000.
# "Have you seen the new cars coming out next year? It won't be long before $1748 will only buy a used one!"
# "Did you hear the post office is thinking about charging 3 cents just to mail a letter!"# "If they raise the minimum wage to $36 per week nobody will be able to hire outside help at the store!". The average household wage was Income $1,872 per Annam. That is around the average wage every two weeks today and not every 52 weeks.
# "The fast food restaurant is convenient for a quick meal, but I seriously doubt they will ever catch on!" - McDonald's hamburger was $0.15 each and now 2333% more expensive. That's inflation for you!# "When I first started driving, who would have thought petrol would someday cost $0.20 cents a gallon.
Guess we'd be better off leaving the car in the garage!" Even in those days the government took more than the petrol service station.
# "It's too bad things are so tough nowadays. I see a few married women are having to work to make ends meet". Most families today can not survive without two wages coming into the home. And, that is with and average of 2.5 children per home and not four to five children.
# "Thank goodness I won't live to see the day when the Government takes half our income in taxes. I sometimes wonder if we are electing the best people to government?" The Australian government is taxing us to death considering the range of taxes they laden us with: Income tax, rates and taxes, excise duty, liqueur tax, tobacco tax, stamp duties, mortgage taxes, death tax, land tax, petrol tax, motor vehicle tax, trailer tax, boat tax, pets tax, toll / road tax and wait for it Goods and Services Tax (GST), which is added to the above taxes - so we pay tax on tax.
Then there is company taxes which eventually gets passed onto the consumer. Private and public companies have to make profit otherwise they won't exist. In Australia companies are not allowed to trade if they are insolvent. So the government collects company tax, payroll tax, licenses and government fees and GST.
I am sure I have not mentioned all the taxes collected by government and councils and frankly I am well spent thinking about how many there are. In essence we pay 60%+ of our incomes in taxes so the the public outcry and pending nightmare in 1956 is now our reality. Maybe they were the lucky ones.
# "There is no sense going on short trips anymore for a weekend. It costs nearly $3.00 a night to stay in a hotel!" Look at what it costs us to stay in a hotel today. What has happened to the tourist industry? High wages, penalty rates and inflation is the problem.
# "If they think I'll pay $0.30 cents for a haircut, forget it!" OK I know this is Elvis Presley but I am sure John Farnham (born 1949) could be in this same seat with his parents complaining about the price of the haircut.
The government may believe they have inflation under control but the end result is that inflation is the Foe which in every economic crises comes back to bite us. Look at the countries around the world where inflation is smashing the economy. For example, the current inflation rate in Brazil is causing untold hardship on the majority of the population and the people are marching in the streets protesting about the amount of money spent on the Olympics. The Brazilian government is guilty of raiding their coffers to pay for the Olympics instead of supplying the needed funds for public health, education, social needs etc.. All governments collect taxes from what consumers and companies spend and purchase. The bust in prices of commodities, which delivered Australia out of the Global financial Crises (GFC), has now put a big black hole in the Australian government's budget.
The decrease in interest rates over the past two years has not given the government the desired result they were hoping for. They want consumers to spend so they can make more in taxes. However, the confidence of consumers is relatively low and we are not spending enough for the government to make up the shortfall. The government could spend money on infrastructure but the current deficit in the balance of trade has caused them to hold back on the promises they made during the election. They could borrow more from the international banks but that would increase our interest payments which is already more than we can afford. i.e. $12.4 Billion a year and that is over $1 Billion a month and increasing. What this means is that interest rates will rise again and inflation will once again became public enemy No.1.
Let me get to the way you can protect yourself against inflation. Simple - become a landlord. In Australia rents are rising at rates which exceed the inflation rate. As a property investor - not only will you benefit from the capital gain from the property but you will have increasing yields as rents rise year after year. For the first time in 30 years - last year more renters were in the market in the 26 - 34 age demographic than those who took out a mortgage. Australians like Europeans will become a nation of renters. There are more than just economic reasons for this surge in renters with families more concerned with child-care and education costs. The younger 18 to 25 year demographic are looking for lifestyle choices rather than taking on mortgage debt thus increasing the demand for rental accommodation.
The price they will pay for this lifestyle choice later in life does not seem to worry the younger generation. Many believe they are going to inherit their parents' homes. Well the bad news for them is that their parents will unfortunately have to sell their homes to fund their own retirement. I go into the amount of money people on the pension are going to need in an article I wrote last year. If you believe that you have enough money for your retirement you are probably wrong. Make sure you read this article click >>> MY RETIREMENT DREAM OR NIGHTMARE!
Do not shrug your shoulders and say it is too late for you to build a profitable property portfolio. Do not listen to all the Doom-Sayers who are predicting a property bust. Diane Grant, the award winning playwright and screenwriter, said that "It's better to walk alone, than to walk with a crowd that is going in the wrong direction". Let these negative people walk in the wrong direction. Choose the right direction and invest for your future. James Cagney is able to assist you to help you reach the amount you need to ensure a comfortable retirement. Our real estate division will show you investment properties which will provide excellent capital growth and rental returns. Do not let inflation become your foe. Use property to keep you ahead of inflation so you can enjoy a comfortable retirement. American entrepreneur, Malcolm Forbes, most prominently known as the publisher of Forbes magazine wrote "People who say that money isn't everything are usually broke" . So the alternative to having money is to be broke, embarrassed, ashamed and living off the charity of family and friends during your retirement.
In addition, if you have money, you can help unfortunate people in Australia and around the world. Whilst most of us have been enjoying the excitement and the drama of the Olympics, on CNN news today, a small boy called Omran was pulled from the rubble after the humble dwelling he lived in with his parents was bombed in Aleppo Syria. Dazed, dirty and bloodied he just sat on a chair confused and unable to even cry. If you make inflation your friend you will be able to donate money for these unfortunate people who have no chance of helping themselves. You have to help yourself first - then you will be able to help others. Decide today if you want to make a difference in the world and start today by clicking >>> HERE or call James Cagney on 0416 137 645.
To access the next article in the series on BOOM-BUBBLE-BUST Cycles click >>> How to PROTECT your assets in the BOOM-BUBBLE-BUST Cycle
This information was written and compiled by James Cagney. The opinions expressed herein do not necessarily represent the views and opinions of his associates including Asset Financial Services Pty Ltd.
Author: James Cagney