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Thread: Inflation: Understand how the Government cheats you through Inflation

  1. #1
    Join Date
    Oct 2008

    Inflation: Understand how the Government cheats you through Inflation

    Governments create inflation by over-printing of money. The paper gain you make from your assets are then taxed by the Government, even if the gain may be less than inflation. So you lose both ways:

    1. Through loss of purchasing power when the asset growth does not match inflation,
    2. Through tax on your paper gain, even though, you actually lost money.

    Over the long-term, this can be a very significant cost.

    What's the solution?

    Buy assets that are not subject to tax and beats inflation - gold and silver.

    Please Steal From Us – A Lesson From TIPS

    by John Newren CPA on February 12, 2009 · 10 comments

    Reading time: 5 – 8 minutes

    [Editor's Note: Please leave your comments. Years ago I addressed this in a paper where I asked two questions: Whether there is a right to currency and if so whether that right vests with The People or the government. This is the first post from John Newren, CPA who is a tax accountant with a big four accounting firm. These views are his own and do not reflect the views of his employer.]


    While perusing the internet scrounging for investment vehicles I stumbled across an article suggesting Treasury Inflation Protected Securities (TIPS). With TIPS the government agrees to borrow FRN$’s at a specified interest rate. The creditor receives interest payments based upon the invested principal. Also, the government promises to adjust the principal periodically throughout the year to reflect the loss of purchasing power resulting from inflation during the period.

    On its face, this appears like a safe and secure investment. The creditor receives modest interest income by lending capital to the government and are compensated for it and therefore do not bear the downside risk of devaluation through inflation. Surely many retirees must feel warm and fuzzy with this instrument that performs like a stock that pays both a cash and stock dividend. As the instruments are guaranteed by the venerable United States government surely any investment advisor could recommend TIPS to anyone.


    A deeper review reveals a dirty little government trick. But first a question. Assume 0% interest. If you invest $100,000 in TIPS for a year and the government declares the inflation rate to be 3% and after a year you redeem at $103,000; did you make an economic profit? Did you have a gain on your investment? Technically the government’s own decree is that you have not had economic profit. The TIPS principal is in the exact same economic position as a year earlier.

    This is fine until you file your tax return and the government attributes to you $3,000 of taxable income. The less astute may not bat an eye as the government is simply doing what it does best, taxing you. The government concedes no economic profit because of inflation but still assesses a taxable gain.

    If you assume a 25% tax rate, that would mean the government has managed to rob almost 1% of your purchasing power in just 1 year. Yet, no one complains because the amount of FRN$’s increased overall. Over 15 years the loss of purchasing power would be a slightly over 10% by investing in the very instrument the government asserts is designed to protect you.


    This scenario plays out in hundreds of examples where there is a taxable gain but an economic loss or loss of purchasing power. Real estate, stocks, bonds and commodities are all affected by inflation and investors get taxed through inflation without representation or due process of law. Have a 3% gain on real estate? Pay tax and end up behind. An 8% return on a stock portfolio? Well, 3% was courtesy of the government and now “the people” have the audacity to force you to give a share back.

    Many assert that inflation is a tax. I partially agree. Theoretically in a predictable inflationary environment all assets rise together. Real estate, stocks, bonds and commodities all rise as the illusory currency evaporates. I am unaware of any government that permits concessions for currency debasement when taxing businesses and citizens.

    This reveals the perniciousness of the inflation tax which results when there is either no economic gain or an economic loss yet taxation still results, it is unavoidable and pervasive. Even worse, the poor are most affected as they have no assets to rise with the illusory tide.

    A gold ounce is an excellent example. In 2001 a gold ounce is purchased for $275. In 2008 the gold is traded for either $975 FRN$s or the equivalent amount of goods or services. The gain would be $700 even though the useless gold ounce did not change, grow or become scarcer in the world. Now the government demands a $200 share. Why?!?

    Well, the government assert there is a gain and they want their cut whether they deserve it or not and are willing to use force to get it. Gold is especially painful because of the automatically higher tax rate which is instituted to make it less competitive as a currency in ordinary daily transactions. This is an splendid reason to support sound money legislation like the Indiana Honest Money Act.


    I am not among the gold bugs that assert gold is a perfect inflation indicator because I find that with the random volatility, or lack thereof in the 90’s, gold is too volatile in the short run. Nevertheless, in the long run gold has been a great indicator of a competing currency’s value and is signaling that almost all are eroding fast. Even worse; all the governments are taxing businesses and citizens the entire way down during the great credit contraction.

    This is a wonderful example of why businesses and individuals play tax games to reduce their exposure. But they are not the only ones. Who decrees the inflation rate used in the TIPS calculation? Yep, that same government that promised to adjust the TIPS so the investor would remain whole … before the taxes of course. There is surely no conflict of interest and people like John Williams of ShadowStats must be loony to assert that the inflation rate is understated. For these reasons TIPS are almost always an invitation, not that they care to ask, from the government to steal from holders of capital. runtogold.

  2. #2
    Join Date
    Oct 2008

    Tuesday, March 22, 2011 – by Dr. Ron Paul

    Dr. Ron Paul

    Last week, the subcommittee which I chair held a hearing on monetary policy and rising prices. Whether we consider food, gasoline, or clothing, the cost of living is increasing significantly.
    True inflation is defined as an increase in the money supply [monetary inflation]
    . All other things being equal, an increase in the money supply leads to a rise in prices. Inflation's destructive effects have ruined societies from the Roman Empire to Weimar Germany to modern-day Zimbabwe.

    Blame for the most recent round of price increases has been laid at the feet of the Federal Reserve's program of credit expansion for the past three years. The current program, known as QE2, sought to purchase a total of $900 billion in US Treasury debt over a period of 8 months. Roughly $110 billion of newly created money is flooding into commodity markets each month.

    The price of cotton is up more than 170% over the past year, oil is up over 40%, and many categories of food staples are seeing double-digit price growth. This means that food, clothing, and gasoline will become increasingly expensive over the coming year. American families, many of whom already live paycheck to paycheck, increasingly will be forced by these rising prices into unwilling tradeoffs: purchasing ground beef rather than steak, drinking water rather than milk, and choosing canned vegetables over fresh in order to keep food on the table and pay the heating bill. Frugality can be a good thing, but only when it is by choice and not forced upon the citizenry by the Fed's ruinous monetary policy.

    While the Fed takes credit for the increase in the stock markets, it claims no responsibility for the increases in food and commodity prices. Most economists fail to understand that inflation is at its root a monetary phenomenon. There may be other factors that contribute to price increases, such as famine, flooding, or global unrest, but those effects are transient. Consistently citing only these factors, while never acknowledging the effects of monetary policy, is a cop-out.

    The unelected policymakers at the Fed are also the last to feel the effects of inflation. In fact, they benefit from it, as does the government as a whole. Those who receive this new money first, such as government employees, contractors, and bankers are able to use it before price increases occur, while those further down the totem pole suffer price increases before they see any wage increases. By continually reducing the purchasing power of the dollar, the Fed's monetary policy also punishes savings and thrift. After all, why save rapidly depreciating dollars?

    Unfortunately, those policymakers who exercise the most power over the economy are also the least likely to understand the effects of their policies. Chairman Bernanke and other members of the Federal Open Market Committee were convinced in mid-2008 that the economy would rebound and continue to grow through 2009, even though it was clear to many observers that we were in the midst of a severe economic crisis. Even Greenspan was known for downplaying the importance of the growing housing bubble just as it was reaching its zenith. It remains impossible for even the brilliant minds at the Fed to achieve both the depth and breadth of knowledge necessary to enact central economic planning without eventually bringing the country to economic ruin. Our witnesses delved deeply into these issues and explained this phenomenon in very logical, simple terms. The American people increasingly understand what is going on with our money. I only hope the Fed is listening. TheDailyBell

  3. #3
    Join Date
    Mar 2020
    While calculating the profit, we should take care about economic as well as accounting profit. Accounting profit considers explicit costs only while economic profit looks at the explicit as well as implicit costs.

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