were disturbing enough to become my wake-up call. In the early 1980s, my study began, and my eyes were opened to facts that many powerful people do not want us to see.
How Does This Affect Me?
In the big picture of personal finance, there are four financial forces that cause most people to work hard and yet struggle financially. They are:
1. Taxes
2. Debt
3. Inflation
4. Retirement
Take a moment and reflect briefly on how much these four forces affect you personally. For example, how much do you pay in taxes? Not only do we pay income tax, but also sales taxes, gasoline taxes, real estate taxes, and so forth. More important, to whom do our tax dollars go and for what causes?
Next, how much does the interest on debt cost you? For example, how much does interest on debt cost you on mortgage payments, car payments, credit cards, and college loans?
And then take a moment to think about how much inflation has affected your life. You may recall that not too long ago people began flipping houses because prices were going up so rapidly. During that same period, the prices of gasoline, a college education, food, clothing, and more were climbing steadily—but incomes weren’t. Many people did not save because it was smarter to spend today rather than pay more tomorrow. That was inflation in action.
And finally, most people have money taken out of their checks and placed into retirement accounts like a 401(k) before they ever get paid. That money goes directly to Wall Street, where it is “managed” by someone the employee doesn’t even know. On top of that, additional money is skimmed through fees and commissions. And, today, many people do not have enough money to retire because they have lost all their wealth in the stock market crash.
It is important to understand that these forces of taxes, debt, inflation, and retirement are kept alive by the Federal Reserve System’s license to print money. Prior to the Federal Reserve, Americans paid very little in taxes, there was neither national debt nor much personal debt, there was very little inflation, and people did not worry about retirement because money and savings retained their value. Here is a brief and simple explanation of the relationship between the Fed and these four forces.
1. Taxes: America was relatively tax-free in its early days. In 1862 the first income tax was levied to pay for the Civil War. In 1895, the U.S. Supreme Court ruled that an income tax was unconstitutional. In 1913, however, the same year the Federal Reserve System was created, the 16th Amendment was passed, making an income tax permanent. The reason for the reinstatement of the income tax was to capitalize the U.S. Treasury and Federal Reserve. Now the rich could put their hands in our pockets via taxes permanently.
2. Debt: The Federal Reserve System gave politicians the power to borrow money, rather than raise taxes. Debt, however, is a double-edged sword that results in either higher taxes or inflation. The U.S. government creates money, rather than raising taxes, by selling U.S. bonds, IOUs from the taxpayers of the country that eventually have to be paid for with higher taxes—or by printing more money, which creates inflation.
3. Inflation: This is caused by the Federal Reserve and the U.S. Treasury borrowing money or printing money to pay the government’s bills. That’s why inflation is often called the “silent tax.” Inflation makes the rich richer, but it makes the cost of living more expensive for the poor and the middle class. This is because those who print money receive the most benefit. They can purchase the goods and services they desire with the new money before it dilutes the existing money pool. They reap all of the benefits and none of the consequences. All the while, the poor and the middle class watch as their buck gets stretched thinner and thinner.
4. Retirement: As stated, in 1974, the U.S. Congress passed ERISA. This forced Americans to invest in the stock market for their retirement through vehicles like the 401(k), which generally have high fees, high risk, and low returns, and gave Wall Street control over the country’s retirement money.
Reader Comments
Living in Zimbabwe, which has had the highest inflation in the world of over 5,000 billion percent, I have come to understand the added advantage of not keeping money (currency). Basically, the price of a good changed three times in one day and there was need to lock down the value in the morning and resell the product in the evening, which meant a nice profit.
—drtaffie
I think the most evil of the four is inflation. It affects the poor and the middle class equally. The middle class pays more taxes than the poor, but everyone pays equally through inflation.
—kammil2
The Beginning of the End
I started this chapter with an important date: August 6, 2007. That was the day that American Home Mortgage, one of America’s largest mortgage providers, filed for bankruptcy.
The reason this date is important is because it marked the point where debt had gone too far. The global system could not absorb any more debt. On August 6, 2007, the debt bubble burst, and today we have deflation, which is a much more serious problem than inflation—something we’ll go over in more depth in future chapters.
To save the world, President Obama has to stop deflation. The primary tool he has for fighting deflation is inflation. This means he will have to employ massive amounts of debt and print more money out of thin air. And ultimately, this means higher taxes, debt, and, if he is successful, inflation.
Think of the global economy as a big hot-air balloon. Things were going along splendidly until August 6, 2007, when too much hot air—debt—caused a tear in the balloon. As the horrifying ripping sound spread, central banks of the world began pumping more and more hot air—debt—into the balloon in an attempt to keep it from crashing to the ground and causing a depression.
In his book A Tale of Two Cities, Charles Dickens famously wrote, “It was the best of times, it was the worst of times; it was the age of wisdom, it was the age of foolishness.” Amazingly, things have not changed much since Dickens wrote that in 1859.
For some people, deflation makes these the best of times. The cost of living is going down as the prices of oil, real estate, stocks, and commodities drop and thus become more affordable. Apparently, Walmart isn’t the only one rolling back prices. The central banks and governments of the world, hoping people, businesses, and governments will get deeper into debt by borrowing more money, are pumping trillions of dollars into the economy at interest rates near zero—virtually free money.
Holders of massive pools of money are waiting like vultures for the right moment to flood back into the market and pick clean the bones of dead and dying companies. For well-positioned investors, this is the opportunity of a lifetime to snatch up assets at a discount. For well-positioned businesses, now is the time to gain market share, as their competition goes under due to bankruptcy. These people see abundance.
For others, these are the worst of times.
The cost of living may be going down, but these people are unable to reap the benefits because they no longer have a job to cover even their basic living expenses, or they are so saddled with debt that they owe more money than their assets are worth—and the assets they have are really liabilities, such as their houses.
The
