Don’t Fall for this Wealth Illusion

Did you earn a pay rise last  year?

  Think hard before you answer.  Because if you think your pay went ‘up’ in your most recent review…you might  be dead wrong.

  Even if you’re drawing a  pension or annuity that rises every 12 months, that pay rise could be little  more than an expensive illusion.

  The entrenched elites who pull  the strings of the financial system have many methods of separating you from  your money. And this illusion is one of the oldest tricks in theimgir book.

  This ruse distorts the economy and can destroy your wealth. If you don’t see through this game, it could cost  you dearly…

  The ruse we’re exposing is  individuals’ tendency to confuse real and nominal prices.

  In short, people ignore  inflation when figuring out if they’re better off. Here’s what we mean…

  Imagine you’re a building  engineer working for a construction firm, which pays you $100,000 per year. The  firm gives you a 2% raise, so now you’re on $102,000 per year.

  Most people would feel better  off after the raise. But if inflation is 3%, your new $102,000 salary is only  worth $98,940 in purchasing power relative to where you started.

  Sure, you got a $2,000 raise in  nominal terms. But in real terms, you suffered a $1,060 pay cut. How do you  feel about your boss’s generosity now?

  Most people would say you’re  better off because of the raise. But because you’ve lost purchasing power,  you’re actually worse off. The difference between your perception and reality  is ‘money illusion’.

  Money illusion is not a new  concept. Economists have argued over its impact since the early 1700s.

  But just because a concept is  old doesn’t mean it tends to sinks into common sense. Power elites — central  bankers and senior regime officials — exploit this fact.

  You see, the money illusion  goes far beyond wages and prices. It applies to any cashflow — dividends,  interest income, and the prices of stocks themselves.

  The powerbrokers use the money illusion to transfer wealth from you — a saver and investor — to debtors. They  pursue policies that stoke inflation, which cuts the real value of debt.

  This action gives relief to  those who have borrowed too much. It also encourages people to borrow more.  This is an emblem of what seems to have become the central bankers’ creed —  where the best cure for too much debt is more debt.

  Now that you see through the  money illusion, you should know that this dynamic is threatening to spin out of  control…


The  hidden tax

  Last week, the Australian  Bureau of Statistics released inflation data for the quarter ending March 2015.  Until recently, inflation has looked pretty benign. But the latest reading  shows that things are heating up.

  Core inflation, which excludes  some volatile items and is the measure investors watch most closely, ticked up  to 2.35% for the year. Markets were expecting 2.25%.

  These might seem like small  differences. But inflation is a critical driver of Australia’s economic  outlook. And as we showed you in the salary example above, it can erode your  purchasing power much faster than you think.

  When inflation bites, don’t  think your purchasing power just floats away into the ether. It’s a direct  transfer of wealth from you, who earned it, to debtors, who have borrowed it.  But the beauty of the trick is that most people barely notice inflation when it  runs around 3% per year.

  As my old pal Jim Rickards  says, ‘In effect, inflation is a hidden tax used to transfer wealth from  savers to debtors without causing the political headaches of a real tax  increase.’

  More people are blind to this  hidden tax today than at any time in the past five years. According to  independent research firm Capital Economics, nearly half of the 90 economies it  tracks are now experiencing inflation of less than 1%. The number of countries  in that boat has grown steadily since 2010.


Source: Capital Economics

Click to enlarge

This trend points to a populace  who have grown accustomed to low inflation. But the chart above shows that  inflation of less than 1% is less than a historical exception — it’s  practically an anomaly.


A  brand-new way to protect your wealth

  The transfer of wealth through  the money illusion never stops — it just ebbs and flows. Last week’s inflation  reading shows that the hidden tax could be set to soar.

  If you’re part of the middle  class who is struggling with school fees, health care and tax after tax, your  savings and investments are a lifeline you can’t afford to lose. If you let  inflation erode your savings, the pain is real and you’ll have to cut your  spending.

  That is, of course, unless you  take steps to protect yourself from this hidden tax before it rises. This  month, your editor is devoting himself to developing strategies that will help  you do that.

  Your editor is devoting himself  so fully to this project that you won’t see him in these pages so frequently in  the near future.

  But we’re convinced that this  brand-new project — more details of which we’ll reveal soon — will prove the  perfect way for you to protect your wealth. Stay tuned — and beware the hidden  tax.

Tim Dohrmann,
  Editor, Australian  Small-Cap Investigator

Editor’s Note: This article originally appeared in Money Morning.

Join Markets and Money on Google+

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money