Financial erosion

[I]”There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” [/I] —Lord John Maynard Keynes, British economist

When we moved to Saipan over 11 years ago, the college offered either housing assistance or one of the houses they owned on Capital Hill to help newly hired faculty transition during their first three years. We chose to take the house and we had many fond memories living there, raising our young family, and entertaining friends. During our first four months in the latter part of 1997, we experienced three supertyphoons that caused a couple of trees to topple over, but we felt safe and secure in our cinderblock home that had been built during the Trust Territory years.

When our three years were up, we moved out of the house into another home on Capital Hill, but no one moved in to help maintain the old place because the government had taken possession of the homes from the college. Years later when we stopped by the original house, we were amazed to see how the jungle has taken it over. It can hardly be seen from the road because of the vegetation growth, and termites have eaten most of the wood. What was once a vibrant and active dwelling place that was well maintained has become an abandoned, uninhabitable building.

It’s difficult to keep anything for any length of time on Saipan. A typhoon will create very visible signs of destruction within a few hours, while humidity, salt, termites, and jungle growth may take years to wreak havoc on any inanimate object that is not regularly maintained. The signs of erosion and decay are subtle, but apparent over time.

The governor is proposing a reduction in pay that would amount to a 20-percent cut for most government-paid employees. Like a typhoon, the impact would have an immediate and devastating impact on those affected. That means that someone with a gross salary of $3,000 per month would now make $2,400.

What is even more harmful is the slow, but steady financial erosion that everyone in the private and public sector has suffered over the last few years. Like a slowly eroding house that is full of termites, no one may notice what is happening at the moment, but its effect is irredeemable and devastating over time.

We’re talking about inflation: the cancer of financial prosperity. To get an idea of how inflation has affected your pocketbook, go to http://www.westegg.com/inflation, and type in your monthly gross income, the last year of your pay raise and then 2007 (the most recent year you can enter). When you hit the submit button, be prepared to be shocked (unless you just got a pay raise).

For example, if my last pay increase was $3,000 per month in 1997, I would have to make $3,861.99 in 2007 to have the same buying power as I did in 1997. If I were to buy exactly the same products in 2007 and 1997, it would cost $3,000 and $2,355.61 respectively. That’s over 20 percent less! In other words, what the governor is proposing in one fell swoop has already happened to your paycheck over time. If you haven’t had much of a pay increase in the last decade, and you become a victim of the four-day workweek, then you are going to have to struggle on not 20 percent, but more than 40 percent less than what you could have bought 10 years ago. The rationale for the cut is that it’s better to have some than none. That would be fine if the “some” paid the bills, but it will only help dig a deeper financial hole for many people.

In essence, inflation ensures you have a pay decrease every year, even though your salary remains the same. That’s why you’re having a harder time making ends meet. Bills keep piling up, and your savings account is shrinking while your debt continues to rise.

You may be thinking that all of your worries will be over when the U.S. President hands out all of those BILLIONS to help stimulate the economy. Maybe you’ll be lucky enough to get a tax rebate or a stimulus check, like the one that was given out last year. Maybe the CNMI will get MILLIONS to help create and pay for more government jobs and contracts.

Well, those BILLIONS are going to be added to the TRILLIONS in U.S. debt. The “smoke and mirrors” stimulus scheme using worthless fiat money may create an illusion of economic recovery for a period of time, but it will only devalue the dollar even further and eventually lead to hyperinflation, which is the terminal stage of any fiat currency. Hyperinflation is the result of increasing, regular inflation to the point where all consumer confidence is lost and once it is gone, the value of our paper currency will become irreversibly worthless.

The chart shows the insidious effects of inflation, sometimes referred to as the hidden tax, on the purchasing power of the dollar since 1950 (source: http://mwhodges.home.att.net). It’s not totally accurate because since 1981 and 1995 the federal government changed how the Consumer Price Index is measured, which would more accurately place the value of a 1950 dollar at 9 cents using the old criteria—more smoke and mirrors stuff.

Like our first house that was slowly taken over by termites and the jungle, inflation is the financial erosion that will “debauch the currency” and eventually destroy what little buying power is still available. We know this is contrary to the hype, hope, and happiness that gets politicians elected, but we thought you might want to know what’s going on behind the curtain.

[I]”The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. Both are the refuge of political and economic opportunists.”
—Ernest Hemingway

Rik is a business instructor at NMC and Janel is a partner with BizResults, LLC (www.bizresults.org). They can be contacted at biz_results@yahoo.com.[/I]