This is an article written as a writing sample.
How Government Spending Kills Your Wealth
by: Kelly Coones
I’ve often heard my parents reminisce about 75 cent gasoline and 25 cent movie tickets. I’ve also, often wondered why prices have gone up so much. I knew what it was called, inflation, but I never really had a good grasp of why it happened so quickly and with such a drastic change. It is what many economists now have dubbed the hidden tax or inflation tax.
Taxation is a means by which a nation’s government appropriates wealth from its people in order to function. I am no fan of taxes, but I understand the fundamental necessity for taxation. In relation to the amount of wealth a government appropriates from its taxpayers, it creates virtually no wealth on its own. In order to function they must tax the population for it is in the private sector and the commerce that occurs there in between private citizens, that wealth is generated. The upfront way a government receives tax receipts is through the taxation of these different means of commerce. They range from reasonable, to onerous, to outright ludicrous (i.e. the taxation of the toothbrush as a ‘medical device’ under the newly proposed healthcare reform). All taxation reduces the wealth of the individual and transfers it to a separate entity, in this case, the government. If we are not already, we will soon be the butt of the greatest transfer of wealth in our nation’s history; perhaps in all of history. How?
Enter inflation. Before 1913, inflation was virtually an unknown phenomenon in the American economy. If you had a dollar in 1814, and could purchase three loaves of bread with that money, you could still purchase that same three loaves in 1912, almost 100 years later! I realize that a price remaining the same for almost 100 years is a mind boggling concept to you and I, today’s consumer. So what happened that introduced inflation, the insidious form of governmental taxation that erodes the strength of the dollar and the wealth of the individual like nothing else? In 1913, the United States Government created the Federal Reserve Bank as a means to print additional dollars and pay off war debts incurred during World War I.
Though still backed by gold at this time, the extra influx of paper currency reduced its worth in proportion to the gold that it was valued against. In order for this new currency to be absorbed into the economy, prices on goods bought and sold rose accordingly. This inflation tax was nominal as the paper currency was still tied to the value of gold, and the government cannot create new precious metals. The next event to setup the American economy for the erratic instability we see today was the governments’ confiscation of all gold coinage as a means of legal tender by the Roosevelt Administration in 1933. What this meant for the private citizen (you and I) is that we were no longer allowed by our Government (whose purpose is to protect our personal freedoms) to request our paper dollars be exchanged for gold, a right available to all Americans up to this point. This action made it much more difficult for private citizens to protect their wealth from government taxation as it is much easier for the government to inflate the dollar than it is to inflate the price of a precious metal such as gold. Imagine it as removing the child proof caps on every medicine container in America. Little hands can now reach in at will.
The single most crippling action by our Government in regard to the economy’s ability to control inflation came about on the 15th of August, 1971. Then President “I am not a Thief” Nixon severed the last remaining link of the American dollar to gold by ending the Bretton Woods system, or the ability for a foreigner investor to do what American investors were so long ago barred from, changing their dollars into gold (I often wonder what our founding fathers would have had to say about this, but that is a subject for another day). Although I have read that international pressures left Nixon with little choice but to do this, its effect remains the same. The black hole that is inflation was unleashed in our little economic universe. As the government printed more and more greenbacks, mostly in an effort to finance the growing national debt brought on by exploding government spending, the value of the dollar was no longer kept in check by the stable anchor of a precious medal, namely gold, and the incredible inflation of the 70’s ensued. Gone were the days of 75 cent gasoline and 25 cent movies. Forever.
Recent years we have seen an enormous influx of additional currency into the economy. Since 2000, the amount of currency (or dollars) in the economy has increased by 70%, calculated to just over $11 trillion in 2007. A major consequence of this “creation of cash” is that it inflates the Dow. Since the Dow is valued in dollars, it has become one of the major pulses the “doctors of economy” use to gauge the health of the economy. If it’s going up, everything thing is sunshine and lollypops, if it’s going down, get the rope because proximus est mors! Due to inflation and in part to the government’s ability to manipulate the consumer price index numbers (remember gold is no longer the anchor for the value of the dollar…) what you see with the Dow is not what you get. In 2007, with the amount of currency at $11 trillion, the Dow would have to be above 20,000 in order to be beyond the red ink (its actual avg. was 14,115 or around that). Government deficit spending (the only kind that exists today as far as the numbers are concerned) causes inflation. The Treasury sells bonds to the Federal Reserve in order to monetize the debt, and you and I are stuck holding the bill with a devalued dollar.
Hey wait! Don’t follow the Medias lead and go for the rope just yet. There is a way for investors to not only weather this coming storm, but to profit greatly from it. How? Invest in the one thing that the government cannot devalue by simply making more of, precious metals. Traditionally, gold and silver have been stellar performers during times of inflation as more dollars chase less and less gold. In the rampant inflation of the 70’s and 80’s gold started out at $35, but after the dust cleared and the dead dragged from the field, gold stood at a towering $650/oz. (at one point it hit $850!). As we saw with the 80’s, current investors will eventually revalue gold and silver after inflationary periods as they move to reinvest in real money. This storm is estimated to revalue the price of gold to $10,000/oz. Quiet the windfall for those who are informed and position themselves early to protect themselves and their wealth from the hidden tax of inflation.
Reference Links:
“The Dow is Crashing” : by Mike Maloney
“The Greatest Wealth Transfer Ever” : by Mike Maloney
