Inflation and Gold

I think it is safe to say neither QE1 nor QE2 is trickling down to the average income earner.And if it is, it's being spent to keep up with inflation that we are told really doesn't exist.

Evidence of this comes to us as we examine consumer spending data. This chart, prepared by Gallop, compares spending this year to last.When you consider trillions of stimulus, it's truly a wonder as to where all the money has gone.

From February 2009 through January 2010, the average consumer spent an average of $64.42 per day.From February 2010 through January 2011 (January 2011 data based on estimates) that number had risen to $64.67.

This rise of $.25 per day came in the wake of a $1.8 trillion deficit that equals about $12,000 per worker.Now you tell me how this extra spending is going to produce enough spending to increase wages to the point where the added tax revenue can come close to repaying just one-year's deficit let alone $14 trillion of accumulated debt.

If my math is correct, consumer spending, per this chart, rose less than $28 billion in 2010.Where did the other $1.772 trillion go?According to Dave Rosenberg of Gluskin Sheff, the American consumer is in for even a greater challenge in 2011.

According to Dave, the rise in gas prices, not considering further rises from today's $3 plus per gallon, will take about $60 billion of spending power from consumers this year.Rising food costs could take another $40 billion.

There goes about half the benefit of the estimated 2011 reduction in employee-side payroll taxes.If estimates of higher gas prices near $4 to $5 per gallon by summer come to fruition, there goes the other half of that beneift.

To me, indications are that stimulus is highly inflationary when it comes to goods or services that consumers must buy - like food and energy.However, that leaves fewer and fewer dollars available for non-discretionary spending.Tell me how an economy can grow when more and more of your money goes to keeping warm and eating.

So far, the effect of stimulus on the economy has been equal to the results you get when you try to pound a railroad spike with a tack hammer.Yes, there may be some progress, but it is painfully slow, to say the least.

Meanwhile, back at the gold mine, gold prices continue rising in response to inflation.While the cost of things we don't need to buy may be falling, the cost of things we must have to survive are rising.Savvy investors, who still can, are learning to put some of their savings into precious metals.The rise in gold prices over the last 10 years, (more so in the last two years) has more than kept pace with rising food and energy costs.

I think it's this simple.As you hear our officials speak of inflation as something currently non-existent, make the distinction between discretionary spending and non-discretionary.Things you don't need may be going down in price while things you must have are going up.This serves to fuel the illusion, (at least for those who still have jobs) that life has not changed.Because you are able to maintain your lifestyle, there is little fear of further economic crisis.To listen to the experts, you have survived the worst and things will slowly get better.

But, let's travel down this road for a period of time.If the trend continues and food and energy costs continue to rise, the amount of discretionary income we may have now will erode.Then, eventually, purchases made with discretionary income will also decline.People won't be so quick to trade up for the new cell phone or the 360 hz television.240 hz will be fine and as long as I can still hear, text, email and catch sports scores from my phone, I just don't need the upgrade right now.

Cars will be run longer and gourmet coffee will be cut down to a weekly treat instead of daily.Dinner out will become a monthly event instead of every Friday night and let's not forget our nails.Maybe it's time we learn to do our own.

Just with these few mentions, think of all the jobs dependent on the consumer having disposable income.Think of an entire country whose economy relies so heavily on our consumer's ability to buy "Stuff"!What happens when their economy shrinks and they no longer buy our debt?And when we do spend money, what is the real effect of having millions, billions or trillions of dollars leave our country on its way to those who produce the world's oil?

What's the solution?We may be so far gone there are no solutions to the greater problem just ways to survive and prosper yourself as inflation is all but a foregone conclusion.You have to own assets that pace inflation.If you don't yet own gold, maybe now's the time.