Inflation Risk: The Hidden Tax And The Way Out

It is a grave mistake to trust the state and its central planners with one’s savings, retirement or the accumulated wealth one intends to…

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Editor’s Note: This is Part II of a two-part series: Click here for Part I

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by Claudio Grass via Claudiograss.ch

The hidden tax

A lot of people might be aware of historical cases of hyperinflation, like that of Hungary and the Weimar Republic, or even contemporary ones, like that of Venezuela. And yet, these are taught or reported like extreme cases, very far removed from the daily experience of most modern Western citizens. They are presented as though this sort of thing “could never happen here” and very often, the mechanisms and the conscious choices that led to these disasters are being downplayed. External circumstances, particular and unique conditions at the time, and other irrelevant factors are frequently used to disperse the blame and make it appear as though it wasn’t the out-of-control money creation alone that was the cause. This is why, in so many taxpayers’ and savers’ minds, the link between the loss of their purchasing power and the policy choices of their governments and central banks is much weaker than it should be.

Unfortunately, when inflation does begin to “bite” and by the time it becomes apparent in the rapidly climbing prices of housing, groceries and bare necessities, it is too late to stop it. Even worse, this kind of uncontrollable devaluation of the currency, even if doesn’t rise to the level of true hyperinflation, always hurts the poorest and the weakest parts of the population the most. Those who have no access to the investment world, who hold no diversified assets or property and who only have their wages and perhaps some modest savings, all denominated in the currency that’s quickly losing its value. 

At its core, inflation is nothing more than a hidden tax. That lost value doesn’t just evaporate without any effect on the system and there are not only losers in this scenario. While the users and holders of the currency see their wages and their savings diminish, the issuers and debtors just see a covert and politically viable way to default on their obligations without actually declaring it. Given the unprecedented level of debt that most western states have accumulated over the last decade, and especially over the last year, it should come as no surprise that some would resort to this option. Essentially, apart for a wealth transfer mechanism, inflation is also a debt transfer mechanism, and one that is sorely needed by extremely irresponsible governments all over the world that have mismanaged their finances for years. 

What’s more, because of this delay between cause and effect, between the actions that led to this massive loss of value and the actual impact as it is eventually felt directly by the population, politicians can easily deflect any responsibility for it. They can claim it was the fault of their predecessors, or of factors that were entirely out of their control. And then they can position themselves as the saviors of the nation, ready to take the “hard decisions” to end the crisis. Naturally, such decisions always come at the expense of the people, who are called upon to foot the bill, once again. 

The way out

There’s a very good reason why we tend to find a lot more gold investors, especially small ones, in nations with a history of monetary collapse or even more tame inflation crises. The people there know well that’s it is a grave mistake to trust the state and its central planners with one’s savings, retirement or the accumulated wealth one intends to leave behind for their family and children. They remember what happened the last time they did place that trust in their government and they understand how crucially important it is to take direct responsibility and plan for their future themselves. Physical precious metals have always and very reliably served this purpose. For millennia they provided value preservation but also protection against both governmental incompetence and overreach. 

Today, too many taxpayers and savers in advanced, Western economies seem to have forgotten this lesson. They blindly trust in the promises and assurances of their governments and they simply hope for the best. And even when they do consider precious metals as an investment, they only do so in a speculative sense, using paper gold and silver, unbacked instruments or ETFs with cash settlement clauses, that are mostly useless as an inflation hedge. Unfortunately, given the trends and the dynamics that are prevalent in the present environment, they could very well be about to get a truly shocking and possibly devastating refresher course on the dangers of fiat money. 

Of course, there is a bigger picture here and much more important and relevant take away, not just for investors or savers, but also for ordinary citizens everywhere. Blind faith in any system and sheer ignorance of the threats one faces constitute, naturally, a recipe for disaster. Naively hoping for the best and completely relying on others to fix our own problems is an attitude that seldom breeds success. However, even for those of us who truly understand the system’s vulnerabilities and clearly see and recognize the risks, merely criticizing it and complaining about it, is also a road that leads nowhere. Taking action, directly and personally, is really the only way out.

In order to ensure that our own future and that of the next generation is protected, especially from the mistakes, the greed and the recklessness of the powers that be and of those that claim to know what is best for us all, we need to think and plan independently. We have to carve our own path and eventually simply “opt out”. For most of us, this journey begins by securing financial freedom and sovereignty and by making sure that all we’ve worked for and saved for will not be at the mercy of or subject to the whim of politicians and central planners. Physical precious metals are the first step in the right direction, especially when they are held outside the banking system and in a safe and predictable jurisdiction. 

Claudio Grass, Hünenberg See, Switzerland