Inflation: The Cruelest Tax | The Cruelest Tax of All

Thirty cents for a cheese sandwich? That’s what it cost at Woolworth’s in the 1950s.

Government is the only entity in the world that can take an intrinsically valuable commodity such as paper and render it absolutely worthless by applying ink.

"Brother can you spare a dime?” was the classic plea of the panhandler during the Great Depression. In the 1930s a few dimes could buy enough groceries to provide a meal for a family of four. The quintessential Gen-Y panhandler, if there is another depression, would likely plea, “Bro, can you spare a five-spot for a two-shot mocha decaf soy­ milk grande latte?”

In 70 years both tastes and prices have radically changed. One thing that has been fairly constant has been the corruption of our currency. According to the inflation calculator on the U.S. Bureau of Labor Statistics website, the dollar has lost more than 95 percent of its purchasing power since 1913. (1913 is a critical year because that is when the Federal Reserve was formed and empowered. Prior to that there was no inflation, no loss of purchasing power for a period of 125 years.)

Ben Franklin was serious when he said, “A penny saved is a penny earned.” I am not as old or wise as Ben, but I do remember that, growing up in the 50s, if I could get my hands on a few pennies I could go to the variety store and get a belly full of penny candies. Now I go into a restaurant or store and a whole bowl of pennies is lying there to be taken freely. I doubt if many of us, while walking down a crowded sidewalk in Manhattan, would bother to stoop to pick up a nickel, dime, or even a quarter if we saw it lying there.

Given that the dollar has already lost 95 percent of its purchasing power, what does that bode for the future? Why is inflation endemic in our country? Why is inflation the cruelest tax of all? What can we do to preserve our lifestyle, especially in retirement, to combat the ravages of inflation? Answering each of the above questions could require a long article, or even a book, but I will take a shot at them in a very condensed format below.

1. Inflation is endemic because politicians get elected by promising goodies to get votes. Since there is no such thing as a free lunch, these goodies (entitlement programs, health care, roads, schools, etc.) have to be paid for. It is not very popular to raise taxes to pay for these, so the politically astute use debt and money creation to fund the projects. In essence, they apply ink to paper and create more and more currency. This is a complex process (much too complex to explain here) involving the Federal Reserve that is facilitated by the fact that the currency is not backed by anything. Being neither backed by gold or silver, the dollar is properly classified as a “fiat currency.” I doubt that the dollar will lose 100 percent of its purchasing power. However, all indications point towards an acceleration of the dollar’s demise in the coming years.

2. Inflation is the cruelest tax of all because it does the most damage to the middle class, retirees, and anyone living on a fixed income possibly supplemented by hard-earned savings. This group of people spends the highest percentage of their income on food, rent, gasoline, etc.—the necessities of life. They have no choice but to go from steak to stew to beans and rice and finally in desperation even to (God forbid) pet food. The rich or highly compensated executives or employees can keep their cars longer, cut back on vacations, or dine out less often and are not hurt nearly as much by inflation. I can’t figure out how or why, but the very poor seem to survive no matter what happens to financial markets or local economies.

3. If one has no savings or other liquid assets, there is not much one can do to avoid being victimized by inflation. Investors, in my opinion, have little choice but to invest a significant portion of their assets in precious metals—gold, silver, and mining shares. Before the secular bull market in precious metals runs its course I expect to see gold exceed $3000 per ounce, silver approach or exceed $100 per ounce, and the mining shares to have parabolic rises.

Next month I will explain why I think most stocks are heading much lower and should be avoided, and I will suggest specific vehicles to be used to invest in the precious metals.

Finally, I would suggest that everyone who is seriously interested in markets, the economy, currencies, etc., go to the web and search John Mauldin, and subscribe to his free newsletter, “Thoughts from the Frontline.” Mauldin is a brilliant observer of the economy and the various markets and is a marvelous teacher. I believe everyone would enjoy his writings.

Thanks to so many for the feedback. It is highly appreciated:

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