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Friday, 21 October 2011

Inflation the insidious tax on capital

I was looking at my $20 dollar gold coin the other day, it is amazing how little it has changed since it was minted in 1887, the greatest change being the value of it which has ranged between $1,550 and $1,900 so far this year, which since it was worth $20 till 1933, then $35 till 1971 is a sign that the good times ended a long time ago.

Twenty Dollar Gold Coin (1 troy ounce fine gold)
But the truth is that if the coin has not changed, if it is the constant, then what has changed? The answer has to be the value of the dollar. Inflation is a hidden tax and like all taxes is disproportionately levied on the 'poor'.

By 'poor' I don't really mean the poor, who on a global scale are those who earn less than $800 per year, they have nothing anyway, so they have nothing to lose. In fact everyone who lives in Jersey is rich, everyone has an income of at least $7,500 per year. That places them in the top 20% of the world's rich. The 'poor' are those who are between 2% and 20% on the 'rich list'. If you have $50 million then you are ultra-rich top 1% in the world. Coincidentally there are not that many of these people in Jersey.

Inflation since then has been running at about 10% to 15%, I am well aware that those rates are substantially higher than the government statistics and I will explain later how the government massages the statistics but for now you are just going to have to take my word for it.

Over that time period interest rates have been 0%, wage increases have been 2%, taxes have been raised as follows: GST +2%, Social Security +1.5%, accounting for the loss of income tax allowances versus increase in threshold and whilst I obviously cannot give an exact figure for every person for an 'average' person it is around £2,500 which is +7.5%, when all the other stealth taxes are taken into account that means that the 'average' person is paying around 10% more tax than they were three years ago.

Now it may not seem so bad, yet, because mortgage interest rates are so low, but let's look at the value of that house.

Again government statistics are confusing as they continuously change the way they are calculated but let's assume a drop in value of 10% over that period. A house that was £500,000 is now worth £450,000. But that is not the true decrease in value.

Not only has you decreased in value by 10% in terms of £sterling but the value of £sterling has decreased in value against other asset classes.

In 2008 the house you purchased for £500,000 would have cost you 1,000 troy ounces of gold, sell your house in 2011 for £450,000 and you will be able to buy 400 troy ounces of gold. Six tenths of your worth has been wiped out, probably without you even realising.

The buying power of your income has similarly decreased, the value of your pension fund, the value of your savings.

Government uses inflation as a means of wealth extraction to fund social programs and war. We in Jersey who use £sterling have been paying for the United Kingdom's debt through this means.