Wealthology
Page 15
That‘s how we should understand the cost of money (interest). We rent money. When anything in the marketplace, such as renting money, is cheap for one group of people, it is expensive for another. So, if our central bank makes the cost of borrowing money cheap for corporations, it makes it expensive for others.
If renters in Los Angeles get to rent apartments at a low price because a Central Builder build millions of new units over night (printing money), who pays the cost? Obviously anyone who owned rental units in Los Angeles before the new units flooded the market would see the value of their holdings destroyed.
In the same way, people who own dollars before the new money floods the economy will see the value of their dollars or any dollar denominated assets they own, fall. As Adam Smith said, printing money is ―favorable to the debtor [the government and corporations], and ruinous to the creditor.‖
So who are the creditors that are ruined by the massive printing of dollars? They are the taxpayers. Anyone who uses dollars or saves dollars or owns assets that are denominated in dollars are defrauded.
You now understand quite a bit about how the American economy works. And this understanding helps us understand other aspects of our economic world a little better:
1. You can see why the government would force everyone to use just one currency—it is the only way to tax our money. And knowing what they‘re up to can inform you to counteract their scheme.
2. It also makes it easier to explain the growing wealth divide in America. Every year, wealth is being transferred to the richest few at the top who get their hands on the new money (newly printed money) first. Those who get their hands on the new money first profit at the expense of people at the bottom of the ladder. They get the bread fresh out of the oven, before it dries out. They use the new money before the inflation eats away at its value.
3. It‘s easier to understand why inflation is so much more devastating for the poor, lower class and the elderly. These people earn so very little, it‘s much more difficult for them to save, invest and get out of a cyclical hand to mouth existence. The Fed‘s confiscation of their money‘s value is an enormous cost for them because they have so few dollars to begin with.
4. If the father of economics says that the counterfeiting of money has ―sometimes produced a greater and more universal revolution [loss of value] in the fortunes of private persons, than could have been occasioned by a very great public calamity‖, maybe it‘s important to understand that money, rather than bringing us economic salvation or prosperity, can utterly ruin our national wealth.
We‘re going into detail about the nature of money because the point of capital management is to preserve and grow your principal, to use it to create passive income that‘s greater than living costs. Now, here‘s the third reason we use paper as money.
Reason Three : Paper money was introduced to increase bank profits. This should be obvious. After all, it was a group of bankers that drafted the legislation to establish the Federal Reserve in the first place. Banks always want to increase the amount of money they lend. The more they lend the more interest they can earn. The more debt there is in the economy, the more money banks make. It should be obvious that banks always want to inflate the money supply. To find out more about this, log onto Youtube.com and watch a documentary titled, ―Money, Banking and the Federal Reserve.‖
Reason Four: Paper money was invented to make paying for expensive government promises (entitlement programs) like Social Security much more manageable. It also allows politicians to create new promises without having to pay for old ones.
Like the princes in Adam Smith‘s account above, government can borrow money from people enrolled in the Social Security program and when payment is due, melt down the gold (print money), add fillers and hand it back to the creditors. The creditors are the retirees who were suckered into paying 12.4% of their wages into this massive government scheme.
“A government that robs Peter to pay Paul can always depend on the support of Paul.” ~George Bernard Shaw
Inflation is Confiscation
The word inflation should be changed to confisflation because it‘s plainly confiscatory. I strongly warn against inflation because most people don‘t see how it eats away at savings and their ability to gain financial freedom. In a truly capitalistic society, all prices would go down year over year as entrepreneurs invest in more and more efficient ways of getting products to the market. The reason most prices rise every year is due to our government‘s inflation tax.
Although the inflation tax eats away at least 7% of our wealth every year, most investment advisors don‘t stress this point to their clients. A 7% tax is incredibly expensive when you compound the effects over a number of years. Investors who own stock in U.S. based companies that earn their profits in dollars lose tens of thousands (if not more depending on the amount and length of their investment) as a result.
That the government is using the Fed to silently defraud taxpayers is obvious to see in their reporting of inflation numbers. To justify printing more money, our government fudges the numbers. When they report the inflation tax numbers, they don‘t include price increases in food or energy as part of their calculations.
When I explained this to a fellow squirrel over hazelnut coffee, she exclaimed, ―What? But those are the two biggest expenses for most squirrels!‖ For the middle class, retirees and the poor, food and energy costs make up a high percentage of their expenses. Obviously, their suffering, pain and financial worry are not a consideration for the Fed.
Their official excuse for not counting food and energy in their numbers is because the price of food and energy, they say, are volatile. Well then, why not use a 12 month average?
“Inflation is taxation without legislation.” ~Milton Friedman
False Profits/High Taxes One of the ways government confisflates private wealth is by taxing false profits. It might not do this intentionally but the result is the same. They create the economic conditions that enable them to tax false profits. It taxes false profits by not allowing people to deduct the inflation tax when they file their returns. Every year, all tax filers overestimate their incomes by the rate of inflation (7-9%).
During economic booms, confisflation is a big problem because individuals and companies report much higher earnings. In such times, squirrel spending is up, tree real estate prices go up, nut prices soar, squillionaires are created and everything is going through the roof. But all this wealth is a mirage, fake, phony.
But the federal government doesn‘t treat it as fake wealth. It still taxes people as if they‘d really made higher wages and profits. It doesn‘t give the money back when the bubble economy they‘ve created bursts.
Here‘s how this works on the local level. State and county governments also over tax people during credit created economic bubbles. In California, for example, everyone is taxed a percentage of their home‘s value, usually around 1%.
Now if property prices are inflated, local governments can collect more tax revenue than they would have if prices remained closer to their real values. But now that prices have come back down, the millions that homeowners overpaid in property taxes won‘t be refunded. At the very least, homeowners now know enough to register lower home values to save money.
We should always be sure to save in a hundred different ways if we expect to remain get rich; these are just some of the more unseen ways money leaks through our pockets. The only people who experience capital loss are those who don‘t put in the time to become educated about economics. We‘re never trapped. Education always gives us options and leverage.
Your Loving Uncle,
Two Global Trends You Can’t Ignore
Dear Kidus, I‘ve given you all the bad news about paper money because the dangers of misunderstanding it are great. More importantly, if we understand money clearly, other parts of the nutconomy will easily be understood. Here‘s a list of the negative impacts of money depreciation we‘ve previously outlined:
2. Increases our tax liability because we can‘t deduct inflation from our earnings. Inflation reduces the real value of our wages.
3. Reduces the real value of our assets.
4. Reduces the value of our passive income.
5. Paper money exposes every citizen living in a debt burdened economy to the possibility of a currency collapse.
Now here‘s the good news: We live in a global economy in which we‘ve got all sorts of choices, including the currency we choose as out store of value.
Our money doesn‘t have to be trapped in a single economy. The way to escape the inflation tax is by investing in foreign economies with appreciating currencies.
Since the values of different currencies rise and fall relative to all the rest, so does the comparative wealth of different economies. For example, since our wealth is measured in dollars, and it falls 20% against Germany‘s currency (the Euro), the net worth of Squirrelmericans (everything in our economy) also falls by 20%. Germans would then be 20% richer than American citizens.
It‘s this kind of economic understanding we ought to use to make our investment decisions. Here‘s how I see it. We‘ve got two things that are occurring and must occur in the global marketplace.
1. Foreign currencies must appreciate against the dollar: As foreign economies grow, their currencies grow because its value is tied to the strength of their economic output. As capitalism spreads across the globe like a flood, foreign economies will be growing at a much faster pace. It‘s an opportunity to grow our net worth alongside them.
2. The U.S. dollar will depreciate for two reasons. First, because politicians don‘t have the courage to decrease spending or increase taxes, more and more of our budget will be financed by debt. Secondly, we‘re a developed economy with no chance of reaching double digit growth rates.
In either case, we have two guarantees: our money can appreciate or depreciate. Your money can appreciate if it‘s invested in fast growing foreign economies or, it can depreciate in the States.
Let‘s assume we invest a greater portion of our income in foreign economies. If we do so, the four of the five negative consequences of the dollar‘s depreciation (listed above) will be eliminated:
1. Decreases our living expenses. Since our money will be appreciating against the dollar, our costs at home will be kept low. Remember that costs only go up if the value of our money goes down. Congress can‘t print foreign currencies.
2. Increases the value of our assets. Imagine you own a nice loft in Brazil that‘s appreciated 10% in a single year. Now, let‘s say you sold it to take a 10% profit. But we also get a bonus if Brazil‘s currency (the Real) has appreciated against the dollar. When proceeds of the sale are converted, you get more dollars per Real.
3. In the same way, our passive income (rents, dividends, interest, etc) paid in foreign currencies will also appreciate.
4. And lastly, the biggest benefit of investing in foreign economies: You avoid the possible complete collapse of the U.S. dollar.
Of course, I don‘t want any of this to come true. I want what‘s best for the U.S. because I love just about everything about it. Maybe if enough people understand economics, a collapse can be averted. I remain hopeful because America has always come out on top.
Your Loving Uncle,
Understanding How Government Scams Taxpayers
Dear Kidus, There‘s a reason saving capital has taken such a prominent place in my letters. Do you remember what happened to the Squirrelmericans in our story?
They went hungry and cold for only one reason—they ate up their store of nuts.
At the same time, they weren‘t planting new nut trees. What else could cause
squirrels to experience hunger?
The answer to our nutconomic problems is simple—we waste nuts
(capital) on a massive scale because we don‘t understand what it is or why it‘s
important. The only way to replace wasted nuts is to economize/save more nuts
as we go forward. We can‘t bring wasted nuts back to the forest trees by
printing nutty money; we can only do so by planting new nut trees. What most voters don‘t understand is how the overconsumption of
capital happens. There are three ways that capital is wasted:
1. The Fed, as we‘ve seen, is a huge factor in getting people to overspend by tricking them into thinking they‘ve got more nuts than they do. A false sense of financial security creates problems for the whole forest because it leads most squirrels to eat their food before the winter sets in. One financial commentator put it best: ―Americans were consuming their capital without knowing it.‖ The Fed creates the ―not knowingness‖ that leads to capital waste. Review the letters on economic literacy to understand this further.
2. A second way in which capital is destroyed is through war spending. With over 900 bases in 140 nations worldwide, the total U.S. military budget accounts for 50 to 60% of the world‘s total military budget. Big military budgets are especially wasteful in an age of global capitalism because it‘s a consumer of capital and wealth— not a creator of it.
3. A third way we waste capital is through welfare spending (corporate and public). Welfare spending is also mostly unproductive but unlike military spending, its only saving grace is that the money we spend on those programs at least stays in our system as recipients spend it. It‘s recycled.
Both sides (warfare and welfare) contribute to the inefficiency of the total system by increasing taxes to pay for things that give us less happiness. What Squirrelmerica needs is a new political party whose only purpose is to preserve capital.
The Social Security Scam Every government welfare program is wasteful by necessity. Part of the reason my heart goes out to the lower classes is because almost every government program or department promises economic salvation but eventually ends up impoverishing them.
Social Security is both spiritually and economically impoverishing: The program is premised on the idea that government can take better care of you than you can for yourself. The program is economically impoverishing because the people who pay into the system will never get the same amount of money back out. Even if they seem to be getting a corresponding amount back, it‘s an illusion because it will be paid for by a devaluation of the value of the benefits—through the inflation tax.
People who live off dividends don‘t have to pay 12.4% of their incomes into the Social Security System. But if you‘re a wage earner, you cannot get around this tax.
“The more you seek security, the less of it you have. But the more you seek opportunity, the more likely it is that you will achieve the security that you desire.” ~Brian Tracy.
Let’s Do the Shuffle Social Security is called a ―pay-as-you-go‖ system—as you work, the government takes your money and gives it to other Social Security recipients. To get you to participate in the system, the government promises to deduct pay from other people‘s wages and give it to you when you stop working.
Because it‘s set up like a real Ponzi scheme, it can work as long as there are more payers than recipients. When the program started, the worker to beneficiary ratio was about 16 to 1. This means that because there were so many more payers than recipients, the government should have an enormous surplus. Even with retirees living much longer, there are still about 3 workers for every 1 beneficiary. The resulting surplus in 2008 was $180 billion.
If the Social Security Fund had a surplus of $180 billion when the worker to beneficiary ratio was a measly 3 to 1, it should‘ve had much more when the worker to beneficiary ratio was 16 to 1. And it did. Since 1982, Social Security has run a surplus of over $2.5 trillion. So why then, is it broke? As Snoop Dogg would ask, ―Where all them greenbacks at?‖
The answer is that the government ―borrowed it‖ and spent it on other programs without having any way of paying it back. It‘s called an �
��intragovernmental debt.‖ Bernie Madoff would have called it ―intra-investmental debt.‖
Whenever the government takes money out of the fund to spend it elsewhere, it writes an I.O.U. to the fund. So that $180 billion ―surplus‖ in 2008 is actually an I.O.U. So, in effect, the Treasury owes itself money.
16 Workers Pays $1 S.S. Fund 1 Recipient Gets
The Effect This means that whenever you pay 12.4% of your income into the Social Security fund, each dollar paid creates a dollar of debt plus an interest liability for new people joining the system. By 2017, the total debt liability will be about $3.5 trillion.
That $3.5 trillion figure must be collected in the future through taxes. After all, the money is owed to people who would‘ve paid into the system.
If you‘re following the story so far, Squerrelmericans trusted their Squirreliticians to safeguard their nuts so they‘ll have some left when their furs are thin and grey. Of all the places Squirrelmericans can invest 12.4% of their incomes, they‘re forced, by law, to invest in Acorn Treasury notes that earn a negative return.
But here‘s a twist to the story. The negative return isn‘t incurred only by people who are entering the system but also workers who are already receiving benefits. In both cases, when government borrows from the Social Security fund at interest, we must not forget they‘ve got only one way of paying it back—by raising taxes. Those taxes fall on everyone—people in the system (workers) and retirees.
“Collecting more taxes than is absolutely necessary is legalized robbery.” ~Calvin Coolidge.
Filling in the Gap The government has two tax options: (a) increase taxes/print money (same thing); (b) borrow money. If they choose to borrow money to keep the system solvent, by 2082, the Social Security fund‘s deficit will reach $30 to $40 trillion and they‘ll just create a bigger hole. And by the way, we‘ll have solved nothing in the process. We‘d only create a problem that‘s ten times as big as the initial $3.5 trillion gap. The government‘s most likely option is to pick option C: ―All the evils above.‖