Inflation is Taxing YOUR Wealth - So Pay Attention to it!

                                                                                         

Intended Audience:

Investors and Retirees looking to preserve their buying power and wealth. Remember that inflation doesn’t destroy wealth, it merely transfers it – and the average person is on the losing end.

Summary Points to Take Away

(1)Inflation doesn’t destroy buying power of wealth, it merely transfers it between those holding currency and the government’s printing it.

(2)Inflation is a silent tax on everyone holding the currency of the government printing the money (this tax has no borders).

(3)Individuals can fight inflation and preserve their wealth by: (a) Purchasing inflation sensitive assets such as commodities, precious metals and real estate (b) Locking into debt levels at the current low interest rates and purchase inflation resistant assets with the proceeds.

Analysis

When governments print money to purchase goods and serves, they get the full buying power of those dollars at the expense of reducing the value of dollars held by the general public. Once the additional dollars are used in the market to purchase goods, there is an increase in the supply of currency available without a corresponding change in the level of available goods and services to purchase. In other words, if there are more dollars chasing around the same level of goods, it’ll effectively take more of those dollars to purchase the same level of goods prior to the expansion of currency. The most important thing to note here is that the money supply doesn’t increase till the government actually spends those dollars on goods and services. This implies that the government is provided the full buying power of the newly printed currency when the dollars are spent. It is only subsequent to those government purchases that more dollars enter the marketplace, which cases inflation to arise, which effectively reduces the buying power of anyone holding the currency. The conclusion here is inflation doesn’t destroy wealth; it just destroys YOUR wealth by transferring buying power from individuals holding the currency to the government printing it. Individuals aren’t asked if the government can reduce their wealth, they just do it without being held accountable. That’s why I’m referring to it as the silent tax, the one you don’t know you’re paying.

When you hear people crying about the former U.S President Nixon’s decision to go off the “gold standard” during the 70’s, you now know what they were complaining about. Back when the U.S. was on the gold standard, currency couldn’t be printed without acquiring additional gold to back it up; thus, buying power couldn’t be stolen from those holding dollars like it can be today by simply printing more currency.

If you were in favor of the Wall Street and automotive bailouts before, this may change your mind as the costs won’t just be borne by tax payers, but by anyone holding a USD (transferring wealth from the average person to those working in the financial and automotive sectors). This would have serious repercussions for savers and retirees who now have to survive on fewer goods as their dollars won’t take them as far. Also note currency devaluation has no borders; thus, it won’t be just the citizens of the U.S. giving up their buying power, but rather ANYONE holding a USD.

Why will governments continue to print money? Because presidents aren’t remembered favorably if they raise taxes or cut benefits. Most governments (such as the U.S.) can’t bring budget deficits under control unless this is done. In my view, the continued printing of money by government bodies is almost a certainty. Evidence that the government printing presses will continue to run is seen through the current discussions of bailouts of troubled financial institutions and massive low interest loans to automakers throughout North America.

Where to go From Here?

Individuals can retain their buying power by purchasing inflation resistant assets that in times of inflation provide a store of value by producing more debased currency to keep the owners buying power in check. As you can imagine currency is the worst asset you can hold as it is on an everlasting path to $0 as governments continue to expand the money supply through the printing of money to fund budget deficits. See below for a list of options for the average individual to protect their wealth:

(1)Commodities – can be purchased through ETFs that focus on certain types of commodities such as oil, natural gas and agricultural products.

(2)Precious metals – similarly to commodities can be purchased through ETFs. As well precious metals can be physically purchased (bullion, coins, etc.).

(3)Real Estate – investors with enough capital can purchase rental properties or those without the sufficient funds needed can participate through REITs (sold through ETFs and your local financial institution), which essentially is partial ownership of a holding company with many investment properties.

(4)Take on additional fixed debt at the current low rates, so that the debt level in terms of buying power will decline as inflation transfers wealth from the lender to the borrower. As well you could purchase inflation resistant assets (commodities, precious metals, real estate, etc.) with those borrowed dollars to enhance your returns.

THANKS - SIMON

About the author:
Simon Giannakis is the founder and creator of WWW.THATSTOCKGUY.NET. He currently is a Senior Accountant within the Assurance and Advisory group at Deloitte & Touche LLP in Toronto, Ontario. He has a BBA degree from Wilfrid Laurier University and is currently pursuing both CA and CFA designations. Simon can be contacted through thatstockguy.net@gmail.com

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