Skip to comments.The Government Is Expropriating Private Wealth at a Rapid Rate
Posted on 12/01/2011 4:46:49 PM PST by BfloGuy
About 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 accountsthe 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 lossnow 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 yieldtruly a case of the governments 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 Feds near-zero interest-rate policies, the Feds 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 M2consisting of savings and small time deposits, overnight repos at commercial banks, and non-institutional money market accountscurrently 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 Feds 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 moneys 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 governments monetary and fiscal authorities are currently engaged in the expropriation of private wealth on a vast scale. Entire classes of investorsespecially people who saved during their working years and expected to live on interest earnings on their accumulated capital during their retirement yearsare 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.
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 is the slow, unremarked-upon economic destruction Obama and Bernanke are wreaking on us. Our nation's hard-earned capital is being stolen from us.
They have to keep interest rates at zero so they can afford to keep the entitlements flowing.
Yeah. And I got 26 cents interest for the few thousand I had in my checking account last month. Plus Zillow says my house is worth 25% of what it was.
Somebody needs to write a sad cowboy song.
Six Whiskey Tango
This scenerio fits us perfectly. My husband must continue to work at age 73 inspite of having amassed what in the past would have provided a comfortable retirement. Now, we can’t live on it w/o eating up the capital.
It makes me think of a quote from Thomas Paine: "Absolute governments (though the disgrace of human nature) have this advantage with them, that they are simple; if the people suffer, they know the head from which their suffering springs, know likewise the remedy, and are not bewildered by a variety of causes and cures. But the constitution of England is so exceedingly complex, that the nation may suffer for years together without being able to discover in which part the fault lies, some will say in one and some in another, and every political physician will advise a different medicine."
Good post. Both parties are to blame for this disaster.
And printing the money to drive up inflation to reduce the effect of the debt. The gold standard had its flaws, but the fiat standard is the most wicked monetary invention devised.
Some one we all know once told joe “that he believed in spreading the wealth around..”
Inflation is the easiest way to do this. Government rewards it favored groups who get to spend the new money first, while responsible people who have worked and saved take it in the shorts..
If he stuffed it in his mattress, the fact remains that he'd lose an additional $800.
Anyone who can understand rudimentary math knows the government double and triple taxation of paper assets/paper gain is a financial killer, and over time instead of gain there is interminable loss. It has been going on for far too long and unfortunately it isn’t just the American investor now at stake. It is the world economy which is nothing more than billions of people and their combined wealth.
Sounds like a pretty good one-sentence definition of the institution of Marxist rule.