You get taxed on your income, you get taxed when you spend it, you get taxed on your property, you get taxed when you visit other properties (hotel tax), and you get taxed when you die. Americans are subject to taxes in every form. What most people don’t realize is that the government taxes savings as well.
Yep, after you put in your hard effort earning at a discount, buying at an increase and trying to make those ends meet, the government steals away a significant portion of the money responsible people and businesses set aside. The money is taxed as you earn it, then anything unspent gets taxed repeatedly until it is reduced to nothing. What really drives my crazy is the government is taxing the very behavior that prevents individuals and companies from needing bailouts and welfare programs.
How are they stealing savings?
One word: Inflation
How is inflation the government stealing savings?
It should be fairly obvious that inflation causes the buying power of your savings to go down. You might be able to buy milk today for $3. In a few years, it might cost $5. In other words, by putting your money into a stagnant account it lost 40% of its buying power. By setting it aside for your future, you just made your $3 worth $1.8.
What is less obvious is how this puts it into the government’s pocket. Imagine you are in severe debt. Wouldn’t it be nice if dollars were worth less? With a government as in debt as the United States, it is pretty easy to see why they might like inflation.
Inflation is a socialist. It takes from the prudent and prosperous to benefit the reckless and failing.
But wait Milly, inflation has been near zero for a decade and hasn’t been high since 1981.
I guess it all depends on how you measure inflation.
When you look at inflation data, it is usually represented by the CPI (consumer price index). What is the CPI? Supposedly it represents the price of household goods.
A tricky method many economists use is the “Core” CPI, a CPI that excludes energy and food. The justification is that energy and food costs are much more volatile and large moves in those prices don’t necessarily indicate true inflation. The truth is that CPI isn’t that great of an indicator unless you are averaging over a long enough time anyways, negating that argument.
The problem with “Core” CPI is that it is held artificially low by more heavily weighing items that rapidly decrease in price as technology develops. Remember buying a 1G thumb drive a few years ago? What does a 1G thumb drive sell for today? Now look at your own expenses from groceries to electricity to toys. You know prices are going up. When prices do go up, what is the first thing you start trying to adjust to meet your budget? Probably energy and groceries, exactly what “Core” CPI doesn’t include. Energy and food matter a lot to the consumer!
The bottom line is that by using different indicators, inflation can be carefully crafted to whatever the Federal Reserve wants it to show and that means low inflation. They’ve even kicked their game up a notch and are making a huge show to try and increase inflation, as if that is a good thing. If they can get us excited about avoiding deflation, their job gets a lot easier.
Latest CPI data broken down into subcategories and months
Weighting of categories and locations for the CPI (in 2014). I ran the numbers against my personal spending percentages for 2016 and the weighting they give each category (at least in 2014) seems reasonable.
June 2017 CPI data update:
Overall, the CPI has already gone up 1.5%, and we are just halfway through the year, putting us closer to 3.0% at the close of the year if we keep going. Last year, the annual CPI rose 2.1%, the two years prior, have both been less than 1%. Clearly inflation is on the rise.
What is crazy is the Fed’s are saying it is great that we are on track and even above our target 2% inflation. They also say that 3% is okay since inflation has been so low for so long. Three problems with that thought:
- They are acting as if their target 2% is a benchmark to beat. Shooting an arrow a yard above your target isn’t a good thing. They are making it sounds like we don’t need to worry about anything, it is only May and we are already exceeding our new years goals!
- It hasn’t been near zero for long. It averages pretty close to 2% since 2008.
- Even if we were near zero for a decade, that mind-set is very hard on the consumer. Imagine going years of near zero inflation. In your perceived prosperity, you load up on all forms of debt. Then, suddenly prices jump in one year. Between higher living costs and adjustable interest debt (such as credit cards) your budget becomes VERY tight.
Economists’ Plea for More Inflation!
On June 9, 2017, a group of 22 prominent economists including former Federal Reserve President Kocherlakota, wrote a letter urging current Federal Reserve President Yellen to raise the target inflation rate above 2%. The argument is that with only 2% of room to play, there will not be enough “ammunition” in an economic downturn to raise up employment with near-zero interest rates (closely tied to inflation). In other words, if the expected inflation was at 5%, near-zero interest rates would be closer to 5% lower than expected and produce a much faster recovery than a 2% lower than expected interest rate.
Kocherlakota also states, “periods of zero nominal rates are likely to be more frequent“. With the current 2% inflation target, the rates will need to be at the “zero lower bound about 30 percent to 40 percent of the time.” It is clear that Kocherlakota sees that the economic times have changed and drastic measures must be used.
Note: the other way they could achieve these results is to toy with Europe’s idea of NEGATIVE interest rates. In other words, paying someone 3% for them to hold your money for you. This idea could only work if money is trapped in the system. Like in India, we could see a situation where paper money is forced to be converted to digital money, where Uncle Sam can see, track, and tax it all.
So how should we be measuring inflation?
Rising prices aren’t inflation, they are a symptom. Actual inflation is simply the increase in money supply. Imagine a closed system. If a disaster limited the production of one product, the price of that product would increase. Because one product is tying up more money, the other products must lower their costs to sell their supply to those who bought the limited product. As a total, there is no inflation.
Imagine the same situation, but instead, the government gives a subsidy to the producer of the limited product in order to keep the prices affordable to all. Some people are lucky and buy the product and still have their normal money to buy their other normal products. The remaining people have extra money unspent on the limited product. The other producers then raise the prices of their products to soak up the extra money. Inflation occurs.
M3, Broad Money
Money supply is measured in several categories. The most useful in this case is M3, or broad money. This includes cash as well as assets easily liquidated into cash (savings accounts, money market accounts, CD’s, repurchase agreements, etc.) If you look at a historical chart of this number, it has been steadily increasing until 2006, when the Federal Reserve announced they would no longer provide M3 numbers (source).
When my daughter is about to do something she knows she’ll get in trouble for, she shuts the door or asks me to go into a different room. If broad money was increasing like it was when openly disclosed, what do you think has happened since 2006? If you check out shadowstats.com for a private sector calculation of the numbers, you can see a dramatic ramp up in money. Is there any wonder why there was an inflated real estate bubble and a massive falling out in 2008 with double-digit percentage increases in broad money?
Why are they concealing the true inflation?
Every time the Federal Reserve adds dollar, money already distributed decreases its share of buying power. The United States depends heavily on borrowing. If they let the rest of the world know what they are doing to the value of the dollar, who would loan us money? At a minimum, they would demand interest to adjust with real inflation, something we simply cannot afford.
Officially low inflation also keeps domestic benefits cheaper. If they released what the true inflation was, they’d have to also increase Social Security benefits. Tax brackets would raise as well, limiting the money we give them.
What can we do about it?
There really isn’t much we can do to stop the problem except spreading awareness and electing officials brave enough to stand against the Federal Reserve. Luckily, you can protect yourself from the effects. When you are storing your economic resources, don’t leave the bulk of it exposed to inflation.
The advertised way to do remove the effects of inflation is by investing in TIPS (Treasury Inflation Protected Securities). When inflation increases, so does the payout. One major problem, the official inflation tracks CPI, not the money supply. Your savings will still get eaten by the dying power of the dollar and you are back where we started.
Here’s what you should do. Keep your emergency funds liquid and ready, but diversify your deep savings such as retirement. Most people think diversifying their portfolio means investing in different stocks and bonds. But what happens if it is the dollar that crashes? All of those deals and obligations become worthless. Instead invest in some domestic stocks, some foreign stocks, some real estate, some precious metals, some in long shelf-life food storage, and most importantly invest in your own personal education and skills. With a diverse portfolio like that, you can weather any depth of economic crisis and make it out just fine.
Disclaimer: I am not a licensed or certified financial coach, planner or adviser, just an enthusiast. Anything I recommend should be personally analyzed and discussed with your financial adviser.