Time to Prepare for the Political Gold Rush

Society is changing more rapidly than perhaps at any time in history. The unprecedented response to the COVID-19 virus has opened the door to frightening political and social changes that will have significant economic consequences.

Everything that is happening these days can be discouraging to dwell on, but it’s important that you do not ignore the impact the political climate may have on your personal finances.

Government spending is at a historic high with no end in sight. The U.S. government debt is currently $23.3 trillion, which does not include the $1.9 trillion Biden spending package that is expected to be approved soon. Economists project that by 2030, U.S. debt will reach $32 trillion.

Most of us tend to tune out when pundits discuss numbers this large because they lack context to our individual lives, but let me explain how the largest governmental peacetime spending in history will affect you.

The only way our government can continue this reckless spending pace is by increasing taxes, borrowing, or printing more money. It’s fair to assume that all three are in our future and will have significant impact on your finances.

The consequences of tax increases are obvious, but let’s analyze the impact of increased government borrowing and the increase in the money supply.

When the dollar was linked to gold, inflation occurred following gold discoveries like the California Gold Rush. But today, the U.S. dollar is fiat money, meaning paper money not backed by anything more than the perceived stability of the government.

Inflation is always the result of a rapid increase in the quantity of money in circulation, and because the U.S. government controls the printing press, Washington is solely responsible for inflation.

Politicians and economists often speak of fears of excess inflation, but when government has complete control over the money supply, it’s a mystery as to why inflation exists at all. That story is where things become interesting, and downright sinister.

Regardless of their rhetoric, politicians love inflation because it’s a hidden tax they exploit to spend more of your money without acknowledging they’re increasing your taxes. In other words, inflation is how politicians raise taxes without publicly voting for it. Inflation allows them to hide their culpability.

When government spends more than they seize through taxation, they’re forced to borrow money, which is what has fueled the $23.3 trillion in debt. 

The government will never be able to settle that debt without dramatically raising taxes and/or cutting spending. Spending cuts are unpalatable to politicians because once their constituents are accustomed to an entitlement, they tend to assume it’s a right, so support for a dramatic spending cuts is usually political suicide for politicians.

Instead, the government uses the Federal Reserve to print more money, and historically, inflation is always accompanied by a rapid increase in the quantity of money.

Now, here’s why politicians love inflation. As the money supply increases, the real value of the dollar decreases, and as the real value of money decreases, so too does the real value of debt.

Let me try to explain with an example. If, over time, the cost of a can of Coke increased from $1 to $2, the real value of debt during the same period would theoretically be cut in half. In other words, the government cuts their debt expense by making the dollars you own less valuable.

There are some apparent perks to inflation, but they are more costly than is immediately apparent. It may seem appealing when you receive a pay increase because of inflation, but that’s also part of the scam. 

When inflation drives wages up because of the decreased purchasing power of the dollar, you will be pushed into a higher tax bracket. The higher tax bracket will decrease your income while increasing the government’s income. This is another hidden tax increase.

The Federal Reserve is in the inflation business. The only way to stop inflation is to have the government print less money, but based on the current political climate, there appears to be zero chance of that happening.

Regardless of what the media may report, the fundamentals suggest that significant inflation is likely, especially as the Federal Reserve is focused on resolving the higher-than-average unemployment levels caused by the government mandated lockdowns.

What I hope you take away from today’s letter is to prepare for the possibility of higher inflation. 

It might be time to reassess your investments, because if the historical annual inflation rate is about 3%, and your investments are not earning at least that rate, you’re actually losing money each year as the government steals from you through the hidden tax of inflation.

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