George Rebane
Attempting to hang on to your money today is very hard, and it’s about to get harder. Your greenback dollar is being destroyed at a prodigious rate, and destroyed it must be since at its present value there 
is no way that our government can meet its commitments to all those whose votes were bought with our bought-and-paid-for assets (yes, I said assets), and our children’s future earnings.
The government will have to come up with over $50,000,000,000,000 (that’s trillions for those who don’t count zeros) of unfunded liabilities in the next couple or three decades to cover its obligations – and that’s in the value of today’s dollars. There is no way that it will collect this amount in taxes while the people still have their guns. So the only solution is the classic one for overspent governments – destroy the coin of the realm and pay off the promised amounts in worthless fiat money. No-one from either party has come up with a better solution. (Except that the socialists have some ideas about your guns.)
The government has a number of ways to exact this tribute, the two major ways being simply by taxing your labor and your profits, and then adding the hidden tax of inflating the currency. Before going any further let’s be clear that the buying power of your dollar can go down for two distinct and independent reasons. First, by inflation when there are more dollars chasing the same amount of goods and services - inflation is purely a monetary phenomenon. And second, when market or other non-monetary forces increase demand or diminish supply for goods and services.
In any event, suppose you save or invest at some appreciation, say, 5% per year, and inflation is 2% during that time. We have been taught to calculate our ‘real gain’ by subtracting inflation from appreciation to get 3%. The careful reader here points out that even though our buying power supposedly went up by only 3%, we were still taxed on the whole 5% of fictitious gain - that is, we were double taxed on the government caused inflation. Remember, it is only they who can print more dollars.
But that simple subtraction formula is not correct when you consider the full impact on the amount of stuff you can buy with an inflated dollar. The real formula involves dividing the above simple answer (appreciation – inflation) by the amount one plus inflation rate. For 2% inflation the simple answer of ‘real gain’ is close enough to the correct answer. But the difference becomes significant as inflation goes higher. For example, if your profits were 15% in a 10% inflation year, then the buying power of your investment only appreciated (0.15 – 0.10)/(1 + 0.1) = 4.54%.
To make either formula look better, the government has been playing footsie with the way it calculates and reports the inflation rate. The above figure shows what inflation figures the previous two methods would have given. The bottom line is that unless your savings or retirement account is earning over 10%, in addition to your appreciation, your assets are also being taxed. In short, an assets tax is being levied on us every year that the government prints more fiat money than needed.
My friend Tony sent me a very interesting and important article by Adam Hamilton of Zeal Intelligence LLC that uses Federal Reserve data to make very clear how turbo-charged is the government’s current Dollar Destruction Derby. In it Hamilton points out that
“(r)ising prices are only inflation if they are directly caused by an increasing money supply. The problem is rising money supplies often coincide with supply imbalances in specific commodities, so usually both inflation and simple economics are co-drivers.
For example, global oil demand is growing as China, India, and the rest of the developing world drive more cars and transport more goods. But supply growth can’t keep pace, as big new oilfields are exceedingly rare. So much of oil’s bull is fundamental, it has nothing at all to do with inflation. But at the same time, oil priced in euros has risen slightly less than half as much as it has in dollars. So about half of the oil bull (market) seen by Americans is largely driven by dollar inflation.”
To give us a feel of how much the Fed is inflating the dollar, we take a look at the MZM money metric that the Fed computes and publishes. Recall that in the recent past our economy has been only growing at the 2-4% rate, so any excess of the country’s money supply rate pumps extra money into the economy that is not needed for price stabilization (the Fed’s announced goal). This extra money is nothing but the tax on our monetary assets that no one really wants to talk about.
The figure nearby compares the broad (MZM) money supply level and its growth rate with the Consumer Price Index (the latest one from the previous figure). There is always a delay between when fresh money is released into the economy and when prices start going up. The current runaway money supply, as seen in the figure, will soon reflect itself in the CPI and the securities markets around the world.
The flood of new money will then turbo-charge an inflation of the dollar that combines with the already shortages of basic commodities and materials on which the developing world now depends. These, of course, are exacerbated by government programs such as ethanol subsidies that violently distort the world’s food markets without having any effect on our dependence on foreign fossil fuels. Hamilton concludes with –
“The bottom line is the commodities price increases we have seen lately are not all inflation. A large portion, the majority in most cases, is due simply to global imbalances in production and consumption growth. Inflation is purely a monetary phenomenon, it has nothing to do with supply and demand in individual commodities. It has everything to do with relatively more money chasing after relatively fewer goods and services.
But while investors wrongly attribute too much to inflation today, a massive surge in real inflation is already baked into the pipeline. Bernanke’s Fed has flooded the markets with cash in a futile attempt to bail out real-estate speculators. This new money has to go somewhere, and it will probably be commodities.”
Some people are responding to this realization by investing in the basic things that the world will need in spite of all the market distortions and money manipulations that our and other governments will pull off. These are exciting times indeed.
"A great civilization is not conquered from without until it has destroyed itself from within." Will Durant
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