In 1940, 100 yuan bought you a pig.
In 1943, a chicken.
In 1945, a fish.
In 1946, an egg.
In 1947, one-third of a box of matches.
This was the story of an everyday person living in war-torn communist China.
In just seven years, even as the Chinese economy grew, wealth was evaporated by inflation.
The inflation we face today isn’t quite so dramatic. Since 1980, inflation has averaged 3%. But that’s still enough to destroy your retirement.
A loaf of bread cost you just over $1 in 1980. If inflation continues at the same rate, it will cost $7 by 2043.
That means prices will increase by 491% in your lifetime. Maybe that’s why the Federal Reserve targets 2% inflation. That keeps price gains to “just” 233%.
For a while, these price gains went largely unnoticed. Because as prices went up, so did productivity and our quality of life.
But right now, there’s a generational headwind facing the economy. And if this trend continues, it will make inflation all the more painful…
Alarming Inflation Chart to Watch
Economists use total factor productivity (TFP) to measure economic efficiency.
In the late 1800s, TFP soared as new technologies boosted growth. Developments in infrastructure — water, sewer, electricity, and roads — made the economy more efficient and directly improved quality of life.
A century later, new computer networks delivered less growth than these earlier innovations.
The chart below shows the long-term trend in TFP is down:
Source: Federal Reserve
TFP measures year-over-year change. We saw a brief spike last year, since productivity was much higher than the pandemic-crippled economy of 2020. But now, TFP is back below the downward trend.
This is a huge headwind for the economy. There are no great technologies likely to increase productivity in the next decade.
Sure, some tech breakthroughs will improve your life. Biotech may even prolong it. But these developments are unlikely to turbocharge the U.S. economy the way infrastructure did 200 years ago. That means we face stagnation.
At the same time, we will continue to deal with inflation.
Other countries are now reaping benefits from improved networks. As clean water, sewers, and electricity spread to the countryside, the quality of life will increase. Businesses will move into rural regions, boosting GDP. The middle class in developing countries will grow fast, and their consumers will compete with us for goods and services. Inflation is replacing the disinflation that defined the last few decades.
Combined, this puts us at risk of a period of prolonged stagflation.
As stagflation permeates through the economy over the next several years, we’ll face the challenge of a weakening currency and slower or negative economic growth. On average, Americans will earn less and what they do earn will buy less. Fixed social security payments won’t go as far as they used to. Neither will the cash from your 401(k).
That means a much tougher retirement.
But there’s still a way to save it…
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Regards,Michael Carr, CMT, CFTeEditor, True Options Masters