While I am a long-term optimist, I am quite pessimistic in the short run.  It is not that I want to be pessimistic.  It is just that I am a realist and I can only conclude that there are some rough times ahead.  I’m not sure if it will become evident this year, next year, or a few years from now.  I can’t imagine that 5 years from now we will have avoided economic turmoil much worse than what we have now.

I like to look at the adjusted monetary base and the excess reserves held by commercial banks.  It gives us a good picture of what the Fed is doing (massive monetary inflation) and what the banks are doing with the vast new money being created (not lending it out).  The monetary base indicates that we should have massive price inflation, but the huge increase in excess reserves indicates just the opposite.

But these are not the 2 statistics that I am referring to in this post.  I think 2 statistics that can give us a good warning shot are the Consumer Price Index (CPI) and the 10-year yield on U.S. treasuries.

I understand that many people do not like the CPI.  It is a government measure and its calculation has been changed in the past.  I agree that it does not give us a really accurate measure of price inflation.  However, I do think it gives us a good enough picture of the trend of consumer prices.  And if consumer prices are rising, then the Fed may worry that it has to stop its monetary inflation.

The 10-year yield is important in a lot of ways.  If interest rates rise, then the government will have to pay higher interest for newly issued government debt.  In addition, mortgage rates are highly correlated with the 10-year yield.  A third possible factor is that the value of the Fed’s holdings will actually go down as interest rates rise.

And to tie the two statistics together, if the CPI starts rising rapidly, then this could cause interest rates to rise rapidly.  There is not much of an inflation premium for U.S. bonds right now, but this will change if investors perceive rising prices as a major threat.

It is hard to say what the Fed will do in such a situation of a rising CPI and rising rates.  It has not had to worry too much about this yet.  But if it does happen, it will have to decide whether to keep the monetary inflation going and risk even higher price inflation or to stop the monetary inflation and risk a depression.

Either way, there is going to be trouble ahead.  It is not that I want it to happen or that I think it will happen because of future policies.  It is already baked into the cake.  We cannot avoid the consequences of previous bad policies.  We can try to minimize the damage by getting policies right going forward, which would include ending monetary inflation and massively cutting government spending.

The Fed is happy right now.  It is getting a free ride in a way.  It is creating huge monetary inflation, bailing out the banks, and we have had relatively low consumer price inflation.  This cannot last forever.  The pain can only be delayed for so long.  So when you see the CPI rise significantly and you see rising rates with it, then that is your warning that you should hunker down and get ready for some rough weather ahead.

In today’s economy, some people will point out that the younger generation of today may actually be worse off than their parents.  This would be the first generation since at least the Great Depression era where this could be said, and even the Depression era is arguable.

Today’s world is bizarre in many ways.  There is some truth that we are actually poorer, at least in a sense.  When it comes to things like housing, medical insurance, and education, we really are poorer.  Wages have not kept pace with the costs of many of our basic needs.

On the other hand, today’s young people enjoy technology that was not possible just a couple of decades ago.  The internet did not take off until the 1990’s, and even in the late 90’s it was just a fraction of what it is now.

I think one of the most important investments you can make, if you are in the minority of middle class Americans who does not already own one, is to have a smartphone.  I believe in frugality up to a certain point and I know that hardcore savers (like Mr. Money Mustache) will say that you can have a pre-paid cell phone or something equivalent for just a few dollars per month.  If you own a smartphone and have a plan that allows internet usage, you may pay something close to $100 per month.  You may be able to get a little discount for a family plan.

I think for many people, they would be fools not to have a smartphone, especially if their time is valuable to them.  Of course, every individual has a unique situation.  If you are unemployed with little income, then it is probably a good idea to cut your monthly expenses to the bone, which would include not having an expensive plan for a smartphone.

I know some people criticize smartphones.  They like the good old days.  They think they are anti-social.  On this point, they may be right to a certain extent.  If you are having dinner with friends or family, put down the phone unless it is an emergency.  But this is just a matter of being courteous.  You have to use good judgement in your life.  However, it also doesn’t mean that smartphones are a bad thing just because some people may be rude.

I think the biggest point that needs to be reinforced is that your time is worth something.  Some people’s time is worth more than others.  This doesn’t mean that one person is more important than another.  It just means that some people’s time is more valuable.  A heart surgeon’s time is more valuable than a guy sitting at home who can’t find a job.  One guy is short on time and long on money and the other is short on money and long on time.  Sometimes it is important to put a price tag on your time.

For this reason, smartphones are amazing.  You can convert what was previously unproductive time into productive time, even if the productive time is for entertainment purposes.  I tend to read more about the latest news in the world or the financial markets.  Other people may just look at their Facebook account and what their “friends” are up to.  But even the person using their phone for Facebook and other entertainment is far better off if the alternative is just sitting there and looking at a wall.

I think about this in certain settings.  For example, think about waiting in a waiting room for the doctor. Before,  it would really annoy me if I had to wait a long time.  It might still annoy me if I had somewhere to be, but having a smartphone makes the situation a lot more tolerable.  I can visit some of the websites that I like to visit on a daily basis.  I can also check email.

This could apply to almost anywhere that you can get cell service.  If you find yourself sitting there waiting, you can convert that into productive time.  If I read a few articles while I am in the waiting room, then that will free up my time to do other things later on.  Or maybe I will have read something that I otherwise wouldn’t have seen.  In the past (and smartphones have only been around for a few years), you would have been stuck reading some magazine that you probably didn’t care about.

Also, consider your commute to work.  If you have a commute to work, you can convert this into productive time.  Some people spend over an hour a day in the car.  You can use your smartphone (or an iPod) and listen to podcasts or speeches.  (I would recommend listening to it through your car stereo if you have the capability.  I actually have an old school tape deck in my car that I can use to listen to my iPhone through the car stereo.)  Even if you like to listen to music, you can mix it up between podcasts and music.  And even with music, technology has made us much better off, allowing us to listen to songs we like instead of waiting for something on a radio station, or doing endless searches on the radio.

In conclusion, if you have some money to spare and you value your time, I think a smartphone is a great investment.  You can convert waiting time (unproductive time) into something productive and enjoyable.  In this way, we are much better off than past generations.

The latest FOMC statement was released on July 31, 2013.  You can compare it to the June statement.  As usual, there was very little change in the overall statement.  Other than a few changes in wording, there were really only two differences between this statement and the last.

The first difference comes in the first paragraph.  There was an acknowledgement that “mortgage rates have risen somewhat”.  However, there was no change in policy because of this or even any further detail provided on this subject.

The second difference was in the second paragraph.  It is in regards to inflation, which is really referring to price inflation and not monetary inflation.

In the FOMC’s June statement, it said: “The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

In the FOMC’s latest July statement, it said: “The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.”

So there you have it.  I wonder if this change was inserted by Professor Bernanke, the student of the Great Depression.  The Fed is worried that inflation below 2 percent could pose risks to economic performance.  Yes, if only I could pay 5 or 10 percent more at the grocery store, instead of a mere 1%, economic performance would be so much better.  With the stagnant or falling wage rates, we must hope that Professor Bernanke can make life more expensive for us in order to help the economy (end sarcasm here).

Other than that, there was essentially no change.  The most important piece stayed the same where it says the following: “the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.”

So the Fed will keep its policy of expanding the monetary base by approximately $85 billion every month.  This comes out to an annual expansion of about $1 trillion.  In 2013 alone, the Fed will have created more new money than what was done from 1914 to 2008.  We must not forget that the adjusted monetary base was only just above $800 billion in 2008.  It is now over 4 times that, with the Fed continuing to press on the accelerator.

In conclusion, we are still heading over the falls and Bernanke and company aren’t even trying to slow the boat down.  But Bernanke is going to try to jump out of the boat at the end of January 2014.  He might get out in time, but that doesn’t save the rest of us.  And I sure wouldn’t want to be the next captain taking over.