Saturday, August 20, 2011

A Very Painful Dose of Reality from Gary North

In his free newsletter, Gary North writes:

The U.S. government’s Bureau of Labor statistics offers a useful too free of charge: the inflation calculator. I use itconstantly. I have for at least five years.

The BLS calculator factors in changes in consumer prices, as estimated by the BLS's consumer price index (CPI). You can track this back to 1913. That was the year before the Federal Reserve
System started operations.

The Federal Reserve was officially created to guarantee price stability. Test its performance. Type in 1000 in the beginning year box. Click CALCULATE. See how much money, after taxes, it would take to match $1,000 in 1913. (Note: there was no income tax in 1913.)

Very few financial journalists use this tool on a regular basis. How do I know? Because they discuss investment returns from stocks without factoring in price inflation and income tax payments. Consider this statement:

"And keep in mind, that 'lost decade' wasn’t so for everyone. If you put $10,000 into the S&P 500 in 2000, you’d have about the same amount in 2010," Thoma said. But investors who put in $10,000
over time in regular monthly installments? “Their money would have grown to over $14,000 during that timeframe, if you were in a 65/35 portfolio,” Thoma said.

Use the calculator. Find out what it takes today to match the purchasing power of $10,000 in 2000. Mr. Thoma didn't. Neither did the wide-eyed 20-something who wrote the article.

If you have a 401(k) or IRA retirement account, pick the year you opened it. See what the dollar bought then compared to now.

This will help you find out how well your portfolio has done.

Next, factor in income taxes owed when you cash it out.

Next, see what the after-tax annual income your portfolio would generate today if you were 60 years old and you started living on the dividends generated.

How is your portfolio working for you?

You say you don’t want to know? You say this exercise would depress you?

That’s why so few people ever use the BLS calculator.

Reality hurts.


  1. "Neither did the wide-eyed 20-something who wrote the article."

    Your source hurts his credibility when he throws in cheap shot like this. Especially when two minutes of proficient Google use would teach him that she's 40-something with a pretty darned good master's degree in journalism.

    He might actually be able to learn a thing or two from her about writing - like how to use quotation marks.

  2. Grammar Queens, eck, how pathetic & petty.

    It's the bigger picture that matters.

    Also, do you suppose the person who has their name on the paper isn't the same person who wrote the piece? Lots of that going on these days ya know.

  3. @ David Clayton. I like the curmudgeonly Gary North anyways. Your criticism of his irritation with the writer is not particularly earth shattering.

  4. David,
    I think it is called straining at a gnat and swallowing a camel.

  5. @ David Clayton, how intellectually challenging to criticize the messenger rather than the message. Let's discuss substance, not style.

  6. Okay, I'll go first.

    Not counting gold, when I use the BLS, I have the exact same purchasing power today that I had 4 years ago. I am down about 8% from 10 years ago.

    When I add gold back to my account, I am up by about 3% over 4 years, and almost 15% over 10 years.

    If I'd have taken Dr. North's advice when I was 20 I'd be over $1,000,000 (not that it would buy what it used to).