Friday, July 29, 2011

Inflation: The Sneeky Tax

Central Banks and Governments of Western economies are encouraging inflation.

When debt is high, the best 'under the radar' method of reducing debt is to let lose the ravages of inflation. You see, under an inflation scenario, that money you borrowed ten years ago has it's value decreased through money printing.

Take for example if you held $12,000 ten years ago and left it under your pillow, at a 3% per year inflation rate, that same $12,000 would be worth $1080. Turn that around to debt and you can see how the value of your debt decreases. Good for borrowers, bad for lenders. No wonder the Chinese, holders of $3 trillion dollars in US debt, are a little upset at the Feds QE1,2 and soon 3.

Just to note, if you had bought $100 worth of gold grams each month for those same ten years, your $12,000 would be worth $24,500 now. This is how gold preserves purchasing power.

But back to our illustrious Governments and inflation.

With this policy of inflation, savings and investment is discouraged. Why save when your money loses purchasing power?

But what to do if you are in a position of high indebtedness with no mathematical way of legitimately paying it back? Well, you default out right or you default in a sneeky way. Take a look at the terms of the Greek bailout. That's a sneeky default right there. The other way, as mentioned above, is to inflate it away.

Debt is insidious and unless you default or restructure you lose. Governments and Central banks don't like to lose, so they  inflate it all away and make us all lose.

Banks really don't care. With personal debt, the banks are still playing their games. Still offering incentives to lend up to 95% of the listed value of your new home. Irresponsibility and madness are two words that spring to mind. When, and not if, houses prices plunge, the borrower loses badly. They end up still paying for a loan with no asset to pay off. Not that houses were ever assets, even in the boom times. But that's another story for another day.

This talk of default in the US is nonsense. The US has sneekily defaulted already. Note how the US dollar has lost considerable pruchasing power since 2000. You would need around $2.60 in 2011 to purchase what you bought for $1.00 in 2000.

The New Zealand rates are harder to find, but they are probably similar. Alan Bollard tried hard not to mention the 'inflation' word yesterday. Perhaps he thought we wouldn't notice. After all, it's good for him and the Government at the moment. Our debt is horrendous and can never be paid back with current dollars.

So guess who gets to pay this extra 'tax'? Yes, you and me savers and investors.

Gold in New Zealand dollars: $1856.11 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $45.61 per oz
Previous all time high: $59.19
per oz

The Anglo-Far East Company
The Original Private Bullion Custodian
Your reference: an-001

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