The Government Is Expropriating Private Wealth at a Rapid Rate
by Robert HiggsAbout a month ago, I posted in regard to what I called “the euthanasia of the saver.” This comment had to do with the fact that nominal interest rates in the United States for financial investments such as bank certificates of deposit and bank savings accounts—the kinds of investments traditionally employed by retired persons and small savers, who wish to gain income without exposing their funds to great risk of capital loss—now fall considerably below the rate of inflation, and hence the real (or inflation-adjusted) yield on such investments is negative. That is, the nominal payoff is insufficient to offset the loss of purchasing power of the money invested.
About a month before I wrote my commentary, my old friend Richard Rahn had, without my noticing, written on the same issue in a commentary article published in the Washington Times, but he had gone beyond the simple point I made. Rahn notes that besides suffering the loss of wealth occasioned by the negative real yield on such investments, the investor has to pay tax on the nominal yield—truly a case of the government’s adding insult to injury. He notes that given the currently prevailing rates of interest, rate of inflation, and tax rates, a small investor who earns a nominal yield of 1% and pays a 20% marginal tax rate, while the rate of inflation is 3.5 %, actually ends up paying a real tax rate of 370%. For example, an investor buys a $100,000 CD, earns $1,000 in annual interest, pays a tax of $200, and incurs a loss of $3,500 in purchasing power on the invested principal. Total (nominal) income is $1,000; total real tax (nominal tax plus inflation tax) is $3,700.
This expropriation of private wealth is not accidental.
It is the joint product of the Fed’s near-zero interest-rate policies, the Fed’s money supply increases that underlie the current rate of inflation, and the tax rates established by Congress and administered by the IRS, including the taxation of nominal interest earnings even when they amount to real losses of capital, rather than genuine earnings. The government clearly aims to expropriate private wealth on a massive scale. The only plausible alternative interpretation of these policies requires us to believe that the government officials who set these policies are complete idiots about basic economics.
The expropriation amounts to a huge sum. For example, the value of the Non-M1 component of the monetary aggregate M2—consisting of savings and small time deposits, overnight repos at commercial banks, and non-institutional money market accounts—currently amounts to more than $7.5 trillion. If investors lose 2.7% on this investment each year (nominal yield minus the sum of the amount lost via taxation of nominal interest and the amount lost via the inflation tax), the loss amounts to about $204 billion. Because this type of investment is not the whole of the investments subject to this effect, the total amount the government is expropriating comes to a much larger sum.
Because this taking continues year after year, so long as current conditions persist the continuation of this expropriation for another year or two will bring the cumulative amount expropriated in this fashion to more than $1 trillion since the onset of the recession and the Fed’s adoption of the near-zero interest-rate policies, along with its allowance of substantial growth of the money stock and the consequent decrease in the money’s purchasing power. This is a rough calculation for the purpose of illustration. My point does not hinge on a precise estimate, because any well-founded estimate is sure to amount to a gigantic sum.
In sum, the government’s monetary and fiscal authorities are currently engaged in the expropriation of private wealth on a vast scale. Entire classes of investors—especially people who saved during their working years and expected to live on interest earnings on their accumulated capital during their retirement years—are being steadily wiped out. Astonishingly, this de facto robbery is being committed by a government that misses no opportunity to shed crocodile tears over how single-mindedly it seeks to protect the weak and helpless among us.
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Team Obama continues to work the plan to financially destroy us one way and another.
Yes, my retired parents regularly testify to everything you describe. Our policies effectively punish savers with artificially low interest rates, and steadily confiscate wealth from everyone with inflationary policies, all the product of rampant money printing to finance runaway government spending.
Fortunately, Obama is preparing yet another major class warfare speech. There is supposedly no problem that can't be solved by government spending more of our money for us. Ironically, part of his "fair share" new tax argument will likely be to argue it's a remedy for powerful interests that get special breaks, you know, like the cronyism that pervade everything Obama has done in the last three years! I'm sure it would stop abruptly once they get their hands on more of the public's money.
If inflation was calculated by the formula used in 1980 it would be closer to 7%. Anyone who consumes food, clothing and fuel knows this. http://www.shadowstats.com/alternate_data/inflati...
Between the federal government's spending and the federal reserve's loose money policy, Americans are being punished in general and retired folks on fixed income are being punished more so.
What surprises me is how much people leave in demand deposits and money market funds. As a smart money manager, I recently moved my retirement account away from Schwab, where it paid .01% on cash deposits, to Scott Trade, where I literally doubled my interest rate to a dizzying .02% (that's point oh-two).
Twice the income with a stroke of a pen. (Pre-tax, of course.)
To quote Francis Dolarhyde, "No, Mr. Lounds. You owe me awe."
"Government is like a baby. An alimentary canal with a big appetite at one end and no sense of responsibility at the other."
Ronald Reagan
"Government's first duty is to protect the people, not run their lives."
Ronald Reagan
"Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."
Ronald Reagan
It's a shame I couldn't give that four or five thumbs up.
Spot on.
I appreciate that. Ronald Reagan opened my eyes to what is wrong with government in the early 1980's, and I have admired his writings and work ever since. He was a true patriot!
Great bit of analysis. It makes clear the doubly confiscatory nature of inflation coupled with control of interest rates.
This appears to be very similar to the way in which the national debt was "reduced" after World War II. High levels of inflation reduced the value of war bonds and savings bonds to virtually nothing. Up until the 1980's the national debt as a portion of GDP fell enormously despite continual borrowing. Until the present, this was the greatest confiscation of wealth by the US government.
Republican candidates should hire Higgs to write speeches explaining this wealth confiscation scheme, that is assuming that there's a Republican candidate that can actually understand what Higgs is saying.
Sounds like an Obamacare "death panel" back-up insurance policy to me. If they can't get grandma and grandpa out of the system with the "death panel" they can always starve them out of it.
http://www.politiseeds.com
Lets not forget that if you try to put some money away into stocks Obama in the name of fairness wants to take away the three things away that cause your investments to grow (profits in the form of demanoing them or regulating them away), dividends (in the form of taking away the tax rules that have encouraged greater dividend payouts), and price growth (by crippling capital gains growth in the form of higher taxable capital gains)
Walter Hanson
Minneapolis, MN
Government jiggering their statistics for underreport bad stuff and overreport good stuff. Imagine that
This site chronicles much of the shady reporting going on.
And I have a suspicion some of these money market funds quietly own some amount of toxic assets, the truth of which will only come out during another financial crisis.
Regarding the third quote, when "it stops moving", government also aims to tax that as well (inheritance taxes).
Tax your employer. Tax your wages. Tax your purchases. Tax your investments. In some cases, tax what's left when you're gone.
Tax, tax, tax, tax, tax. And yet, by some strange alchemy, it's never enough to cover what government spends.
Not to mention, not only are savers punished, they are chased into riskier assets in an attempt to offset inflation. But even that is thwarted as you describe, plus there is greater risk of loss of principal.
Our policy makers have succeeded into painting everyone into a corner: borrow-spend-gamble…or die.
Stop and think about it.
You are taxed at almost every moment of every day. Everything you touch has been taxed and every time money changes hands it is taxed. Every time you cook an egg, talk on the phone or even make a bowel movement, you are being taxed. Even if the feds stop taxing you at all, you are still at the mercy of state and local taxes. If they are not income based, they are sales and/or property taxes.
You can't even choose who receives your largess when it comes to charities. Politicians give away YOUR money to garner votes for themselves.
And of course, because the politicians screwed up the economy, they need more taxes to cover their shortfalls because they still need your money to buy votes from the unions.
A perfect example of this round robin type of thievery is as follows: Your local utility spends a few million dollars on charities and a few million more on direct mail and television campaigns to convince you to wear sweaters in the winter and sweat in the summer to save energy. You do that and then they raise your rates because they are losing money because people are conserving.
I think the occupy people have the right idea—they just have the wrong target.
I believe this one sums it all up for you.
"Government is like a baby. An alimentary canal with a big appetite at one end and no sense of responsibility at the other."
Ronald Reagan
Agreed, well said. But don't start me going on Occupy…
Of course. This is nothing new – merely a convergence of factors creating a higher blip in the overall rate of value-loss. Fractional banking with just a touch more oomph.
The spending: classical socialism whereby the politicians buy votes by means of stealing wealth from those who have gathered.
As for the Federal Reserve 'inflating the money supply' – that is a euphemism for FRAUD. Pure and simple – as per Ludwig von Mises, whereby the politicians steal the value of the wealth you gathered over time (to buy more votes) – and thus making it nearly impossible (eventually) to build up a nest-egg of wealth for retirement (thus forcing you to vote for them.)
A simple and effective mechanism – modern politics in a nutshell.
And underlying and lubricating it all – the essential rot, the essential filth, that is hippie-ism – liberalism – humanism: in other words, a group of people who are both incredibly stupid, as well as incredibly self-righteous (I wonder if any other group of people on planet suffers from both denial and projection to such extreme degrees.)
None are so blind (and corrupt, and lethal) as the hippie who is (truly) incapable of rational thought, yet imagines himself as a genius… with the exception of the idiot who refuses to react to what is obvious.
What this country needs more than anything else is another Ronald Reagan. (And maybe a Lincoln and a couple of Washingtons, too)
I posted a link to the Shadow Stats particular chart for inflation in my post above. I have been following John Williams work for quite some time. It is generous of him to post so much free info. I agree, government is peeing on our leg and telling us it is raining.
That about sums it up. Well said. The only group you forgot to describe is that of the voters that the politicians bought or brainwashed/indoctrinated. That would be the parasite class. The second handers. They are those enabled by the corrupt ideology of altruism and victimhood the so-called "intellectual elite" (aka….dirty, stupid hippies) perpetuate.
My sarcasm above asite, it was Schwab that got caught doing just that in one of their money market funds a couple of years back. I know first hand. I lost 20 grand. Two class action suits eventually got about a third of it back, but the rest is lining lawyer's pockets somewhere.
That was the real reason I left Schwab.
To Paraphrase: Never have so many owed so much to so few. This is the classical socialist/marxist economic model, all giving to one. This is also the Democrats vision of democracy. Unfortunately too many Republicans just went along …
This is true cannibalistic socialism at its parasitic worst. God, what a chilling thought. We the People are the ones being devoured, and then it will be our children within the future of our own lifetimes. We shall bear witness to the burden we have placed upon them.
Our government is no longer a government of the people. It penalizes and burdens generations of people yet unborn, into the perpetual pit of government imposed poverty. It is truly a government that has imposed upon us the road to serfdom. Like sheep, we are already upon that road, allowing ourselves and our wealth to be taken and eaten alive.
Welcome to the New World Order. The cancer of debt that they have created will be with us long after they are gone.
The problem is that the CPI was calculated for 1980 for a market basket that included things like 8-track tapes and other obsolete things. Also, where would cell phones be in the market basket for 1980? Internet service? Personal computers? HD TV's? SUV's?
Yes, we need to make sure the CPI is calculated correctly. And use a representative market basket, but simply calling for the use of an outdated CPI which includes market baskets that don't fit today is not the right approach.
Here's a radical idea: How about not having fiat currency?
Why hasn't anyone filed suit against the Fed and Congress for Constitutional rights violations?
The Constitution says that only gold and silver are money. Yet our government says the fiat money is money.
The government can't be socialistic without fiat money.
Get rid of fiat money. THAT will starve the beast!
In addition, isn't inflation against the 5th amendment which says the government cannot take away private property without just compensation?
Ouch, sorry to hear that. I'm sure there are more land mines lurking out there for the rest of us.
I've read of a few very savvy, prudent guys, who know better than most about current risks, and yet still wound up shanked by MF Global. It's getting harder and harder to avoid for even the innocent and prudent to avoid getting sucked into the morass.
Good article. Although what is described is self evident and has been going on for some time, it's unusual to see it described in such stark and real terms.
And let's not forget the lapdog media and our educational institutions for providing the misinformation that promotes the confiscation of our wealth…
and the undermining of Judeo/Christian values, making it a virtue to confiscate in the name of social justice.
"Twist" and scream, America. Of course the policy is intentional. John Maynard Keynes said, "Inflation is the cruelest tax of all." Combined with interest repression inflation leverages the cruelty. The real problem is taxpayers have even more bills to pay than for the looting and pillaging of the world economy by a few people in the financial services industry. State and municipal governments cannot print money or move decimal points at the Fed to pay for about $18 trillion in deferred costs coming due over the next 50 years. Right now there is no combination of service cuts, tax increases and economic growth that can cover the tab. "Twist" and other federal policies, especially health care mandates, only make their dire fiscal situation worse. Every year state and local leaders refuse to deal with reality, it gets worse. We must force them to act or replace them with leaders who will. http://www.franklincenterhq.org/2732/commentary-f...
Obama said that he wants another term so he can run us the rest of the way into the ground.
The more I read, and the more I see, it seems hopeless….What can one person do?…What can a group of people do?….The goons, and bloodsuckers in Washington don't seem to care how many people scream and holler, and say what the politicians are doing is wrong…They seem to take it like a joke, and laugh in our faces…They come up with "fixes" that don't fix a darn thing, just word the old laws in a different way….There has to be a way to fix this, but when you have 50%, or close to 50 % of the people that have no clue and vote for freebies etc., it's a high mountain to climb…….
As much as this site (Breitbart) wishes to lavish the Occupiers-whereever, with scorn, the sad fact of the matter is we, the people, have a Hell of a lot more reasons to stand shoulder to shoulder with them.
Time is running short for the retired and soon to be retired. The youth, the blue-collar and white-collar.
Thank you for your article Mr. Higgs. Its simple point sheds great clarity on the immense financial subjugation being perpetrated on us for our "governments" corrupted benefit. World markets are not fooled and investment, both foreign and domestic will soon enough pull the punchbowl. I look forward to it.
Grandma and Grandpa are merely the tip of the iceberg. But you probably knew that.
Interest rates need to be high enough to make saving profitable yet low enough to not penalize the borrower. Too high and, while granny's Passbook Savings account is doing well, the young couple can't afford to buy a home. Too low and banks become too free with their lending while grampa's nest egg that was supposed to last for 20 years is gone in 5.
It's a balancing act but one that's easier to maintain when the Gov't and it's endless cadre of Congressional meddlers and bureaucratic busy-bodies aren't attempting to enrich themselves and their cohorts via regulation and manipulation.
Here's a great idea… the Gov't only set the ground rules and let the Free Market actually work.
No kidding. I mean, of course that is what they are doing. Saved money your whole life, then the Fed play games to drive your interest rates below inflation, then tax you. This has been going on for what 5 years now. Who do you think paid for those Wall Street bailouts and the Fed Res money policy. How did you think they were loaning money out to Citibank, AIG, JPMorgan, at 1%.
Next, the author might note that free trade hasn't worked out too well for America either. Can you say manufacturing? In Chinese, because they don't do it in America anymore.
It is so refreshing when the polysyllabic old farts come out of the woodwork to examine simple facts of life. Current interest rates are artificially low thanks to a bald headed mouse who works for some dude who apparently got through Harvard without having little things, like a roommate.
The largest single segment of the population now faces retirement without a snowball's chance in Hell. If AT&T or
Lilly were ever to cancel their dividends, the Grey Panthers would come unglued.
Maybe it's time for you old farts to stop posturing and pontificating, and go fix the goddam problem.
Yes its the holding down of interest rates that cause this plus this caused the interest in mortgage backed securities. Investors couldn't get any return on their money to beat inflation with CDs and Money markets so they turned to MBS and a new investment vehicle. Plus the lower interest rate artificially spurred the housing bubble. Remember when you could get a CD at 9%? Now you can't even get half a percent.
Makes me wonder why we are being egged on to be so revolted by the Occupiers. Surely there are far more level headed people in that crowd than is currently shown to us here. Seems to me the occupiers need to be occupied by folks like us to swell the ranks some more.
folks there is no quick fix to this mess. its an inter-generational SNAFU that will take decades to recover.
tighten your belt now and count whatever blessings you have left. if you need more income you will need to start a small business or do consulting work from your home. move the grand parents in with the working parents. The retirement golden years pipe dream is over because we were too stupid to keep our politicians out of the gravy train. sucks to be dumb americans doesn't it?
NIcely done. You know what I was thinking recently: instead of fiat monies, why not tie the price of the dollar against a trifecta (so to speak) of commodities. I was thinking along the lines of grains and livestock, gold, and oil. To my mind, it seems that if a fiat currency base is done away with, and there are multiple, nearly unrelated commodities that act as the basis of currency and trading value, then there is nearly no chance of a monetary collapse by the means of a simple redundancy. It helps matters immeasurably that the US has more than enough economic engine to supply large amounts of agriculture and oil, and I believe there would be a means to shut OPEC's price-controlling on crude out in the bargain. I'm not enough of an economist to begin to set the pricing per dollar, but I'm curious of anybody else's take….
Indeed, for any of his faults, nobody could ever downplay Reagan as anything less than a true patriot and an elegant and well-spoken statesman. I may be on my own, but I believe that Reagan was the last true President we've had, and it's a shame how many people of voting age don't know what "Presidential," really means.
Takes liberality and a willful suspension of reality to believe that theft, by any other name, is virtuous.
I think it's the nature of what everybody sees and is shown on a regular basis. I believe that all of the media time devoted to cutesy communist sloganeering and signage is a means to demonstrate the "will of the people," regardless of the majority status of their preferred people. While there may be a few level-headed amongst that crowd, there's no chance in hell that I could stand anywhere alongside a brat screaming to be "bailed out," of the student loan (or any other example) contract that said brat voluntarily engaged. Recognizing one's mistake is part of adulthood, demanding that others fix the problem is childish.
I think I see where you're going here, and you're probably correct, but stand with THAT? Never…
The OWS should be camped out at the US capital. That is where the true 1% reside.
The Progressis (socialist) party implemented their Re-distribute the wealth programs in the early 1900's. Those financial progrms are in place right now.
MR R. HIGGS, Here's my theory: When a loan is made, the Principal amount is in the seller's hands. OK…Now, those Proceeds of Sale are in the economy is some form or fashion. Now, the interest portion of the loan is not in the economy. Therefore, the economy is "shorted" that cash or currency and in effect, can not be paid back.
The situation, starts with the very lst deal.
Don't sit still and wait to be destroyed: Defend your money!
Thanks for your level-headed reply. Since I haven`t been to a "movement" I really don`t know how much of it is "bowel" beyond what I have seen. And since "They" can`t seem to understand completely why they showed up or where they`re going from here, we won`t be seeing them much longer.
I appreciate you getting my drift that the movements parents ought to be the ones out there.
"The only plausible alternative interpretation of these policies requires us to believe that the government officials who set these policies are complete idiots about basic economics."
I think you hit the nail on the head right there, Mr. Higgs.
Our major problem in this country, It is called the Department of Education. Like anything our government comes up with, it means the total opposite.
So like, we have millions of American families who are unemployed, or struggling to survive on income barely above poverty … and all we can do on this site is cry and moan for the poor investors who are leaking 2-3 thousand on 100K investments?
This makes perfect sense if the goal is to discourage saving and encourage indebtedness. The entire financial model of the US, even the world, is based on debt. If the current crisis makes people wake up and start getting out of debt, then it will have devastating effects on the banking system. If people save instead of borrowing, everything will be turned on its head.
If we had a government that didn't discourage investment we wouldn't have millions of unemployed Americans.
Aye.
Reason_for_ Life has it right, "This appears to be very similar to the way in which the national debt was "reduced" after World War II. High levels of inflation reduced the value of war bonds and savings bonds to virtually nothing."
The Fed injected liquidity into the world's financial system to prevent its collapse in 2008, and the world's governments approved its actions, in spite of inflation that would surely follow. Why?
Because if governments can reduce their debts via inflation – and pay their continuing obligations with ever-cheaper dollars, what better way to stave off a collapse that would end the high life that our Imperial politicians around the world now enjoy?
Think about it this way – starting this month SS recipients will "enjoy" a 3.6% COLA, the first increase in three years! If the real rate of inflation is 7% (see 4arepublic's comment) then that inflation has reduced government's cost of paying SS benefits by 17.4% (21% minus 3.6%)
The biggest loser besides our seniors is China, obviously. If our national debt erodes at 7% to 10% per year, it will be meaningless before long…and existing home prices eventually will begin to rise again – it's going to take more dollars to buy the materials needed to build new ones, but it's also going to take years to survive the coming storm – an economic winter – one that many seniors will not survive.
Unfortunately for you and me, politicians know that we will remember their stirring speeches long after we have forgotten their broken promises and long before we will try to understand concepts that require us to think. We'll cluck about higher prices but politicians know that we want to believe the best in them – especially when the cold hard facts are too uncomfortable to face.
I'm reminded of my favorite line from the movie "Annie Hall." It comes at the very end – during the credits crawl.
Woody Allen tells the story about a family who brings their uncle(?) to a psychiatrist because he has believed for many years that he was a chicken. When the psychiatrist asks the family why they waited so long to get him treatment, they reply, "We needed the eggs."
We're a lot like that family.
Title as Introduced:
The REINS Act
Take Action
Bill Number:
H.R.10
Description:
A bill to amend chapter 8 of title 5, United States Code, to provide that major rules of the executive branch shall have no force or effect unless a joint resolution of approval is enacted into law.
Read more: http://prosperityactions.com/siteapps/advocacy/Bi...
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