Are You Tired Of… Your Life’s Work Eroding Right Before Your Eyes?
Previously
In the very first posting of this series (here), we looked at the declining value of your dollar over the course of nearly a century. I realize that a century is essentially an impossible time horizon for most people. So, let’s make that more approachable by looking at a shorter time span.
Eroding Your Wealth By A Mere -2% Over Your Career
Let’s take a look at what happens to your money over the course of a mere four decades, the average working span for most Americans. We’ll start with an annual erosion rate that is “only” 2% per year.
Note: “2%” is a common “target inflation rate” by many economists and central banks. If you’re feeling particularly motivated, ask any economist, government official, or central banker to justify that 2% inflation. You might be surprised by what you hear. Hint: It’s not good…
We start out with a scenario where you are able to save $1,000 in the bank by the time you are 25 years old. Going forward, we’ll examine what happens to the purchasing power of that initial $1,000 every subsequent decade into your career until the typical age of retirement, 65.
At the end of your career, after forty years of honest work, you’ll notice that the initial $1,000 has less than half (45%) of its original purchasing power.
What happened?? Wasn’t that $1,000 supposed to help sustain you in your golden years?? Wasn’t it supposed to be there for you in case of an emergency?? And, what happens to the value of that $1,000 for the next 15 – 20 years of your retirement??
To add insult to injury, you already paid income tax on the original $1,000 to the government. Now, the state is taking an additional 55% on top of that! That is a hidden tax.
That is the state extracting value out of your wallet in real time.
And, without your knowledge nor permission.
That is… taxation without representation.
Eroding Your Wealth By A Mere -2% Over Your Lifetime
Let’s extend the above scenario. Let’s pretend that, on the day that you’re born, your sweet grandparents gave you a gift of $1,000. Now, we can trace the value of that $1,000 over the lifespan of an average American, about eighty years.
Well, this has gotten noticeably worse…
After a lifetime, what your grandparents left you has one-fifth of the original purchasing power. And, that is with a mere -2% annual “erosion rate“.
How about we turn up the heat a little, hmm?
Let’s Get Real About The Eroding Power Of Inflation: -5.6% Erosion Rate
Now, let’s make the above scenario match reality. Let’s use our original -5.6% average annual reduction in value of the USD (what we called”Compound Average Growth Rate” or “CAGR” previously).
Note: You can read the original post here and see how the numbers played out when the U.S. dollar is valued in gold.
After 80 years, we’re left with… $10?? Only 1%??
That’s right. Even though we’re not looking at the same 90 year time span as in the original article (here), the end result is essentially the same. We’re left with a paltry 1% of purchasing value. The inter-generational gift that your grandparents left you with can buy… a couple of loaves of bread.
Compounding Consequences
We are so accustomed to prices of goods and services and our paychecks moving up over time. But, do they move up at the same rates? And, what is happening to our savings in the meantime? On the surface, a 5.6% increase in prices (relative to what you’re earning) might not seem like much.
So, let’s flip this around. Let’s say that prices for all of your goods and services (gasoline, mortgages, food, vehicle repair services, etc.) stay exactly the same but, your take home pay goes down by 5.6%. Every year. Another 5.6%. Even though prices of goods stay the same, you can afford less and less of them every year. This is effectively the same as your pay staying the same but prices of your goods going up.
I bet you would be to be pretty irritated. And, you would be justified in feeling irritated. The state is eroding your savings. It is stealing your life’s work. It is stealing… your life. Most people don’t think of it this way but inflation is a tax. It’s a tax that you never voted on. It is a tax that saps your wallet and fills the government’s coffers. And, you rarely see it coming.
“The strongest force in the universe is Compound Interest,” is a quote often attributed to Albert Einstein although there are no primary sources for attribution. Regardless of the source of the quote, the principle is solid.
Normally, compound interest would work to the benefit of the individual employing it. In this case, though, the compounding effect of inflation is working against you and for the state. The state gets to extract 5.6% of value out of your wallet every year.
Let’s be honest; few people are considering the effects of inflation over the course of four decades. The state is counting on that! Government is counting on our intellectual laziness and apathy.
We’ve all heard the personal financial managers touting the wonders of compound interest. We can hear them touting a core principle of personal finance, “Just a few extra dollars invested at the beginning of a person’s working years has a huge payout by the time they reach retirement!“
Well, if, after four decades of hard word, the government is taking 90% of those dollars, then where does that leave you? It leaves you with 1/10th. From your point of view, is it worth the extra effort, volatility, and sacrifice if the state is taking 9/10th of what you’ve earned?
Is it worth trying to take advantage of compound interest when you are still going to end up with less value than when you started? Government has completely corrupted our incentive structure to our detriment and its benefit.
“You’re Working For The Man“
Let’s take a look at a different area of personal finance – investing. Specifically, investing and creating a portfolio for the purpose of generating greater purchasing power over the decades.
How many people would be satisfied with earning 5.6% on their portfolios over forty years? I know I would be! I would find four decades of increasing wealth and purchasing power to be of great comfort.
Let’s say that you were able to generate an average of 5.6% in your portfolio during your hypothetical working years. Even if you have earned 5.6% of positive returns then you still have to subtract the government’s cut of the 5.6% “erosion rate”. Realistically, you’ve earned an additional purchasing power of… 0.0% (Thank you “Animal House“! [1]).
Thus, if you want an effective return (“inflation adjusted“) of 5.6% (an increase of purchasing power) then your portfolio has to earn… 11.2% (5.6% + 5.6%)! And, you have to do it year in and year out for four decades!
I only know of a handful of people who have actually done that (i.e. Charlie Munger, Warren Buffet, Tim Draper, Stanley Druckenmiller, George Soros, Benjamin Graham, et al, etc.). These are professional super-traders. I can assure you that I have never achieved anything even remotely like their results and I’m assuming that the vast majority of you have not done so either.
By the end of your career, you would only be able to buy one-tenth the food or gasoline with your savings. That’s exactly what happens to your hard work; it simply evaporates. And, the state is quite happy for you to work for them. So, unless you’re Warren Buffet or Charlie Munger, you just have to take it. And, all the while, “you’re working for the man“, the state.
Zugzwang [2]
Look at what the state has done; it has forced you into the unenviable situation of having to choose between two bad options:
- Keep your money in a savings account to take the “safe” route and allow the government to erode your savings into oblivion or…
- Try to retain your purchasing power by taking on more risk and volatility by investing in stocks, bonds, and real estate (or other riskier assets)… and hope that your portfolio doesn’t crash right before you retire.
- (2008, anyone?)
All of this is money mischief [3]; our government injecting their politics into your money.
Social Engineering
Let’s take a look at what all of money mischief means for society at large.
From your standpoint, since the state is constantly devaluing your dollars, wouldn’t it be better just to spend the money today and get the maximum benefit immediately instead of delaying your gratification for a pittance of purchasing power later on in life?
In fact, given the fact that our federal government is corrupting your personal finances, you would be making a completely rational decision to spend the money now instead of trying to save it.
This is the way that the state distorts your decision making process – by discouraging prudent saving and investing for tomorrow and encouraging frivolous spending today. This is how the government engages in social engineering, deliberate or not. It is a pernicious effect that we will explore more in future articles.
Next Steps
In the next article, here, we’ll take a look at the loss of value of the U.S. Dollar and how it is impacting your ability to store your life’s hard work and dedication.
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End Notes, References, & Citations
[1] “Animal House (8/10) Movie CLIP – Finished at Faber (1978) HD“
[2] Zugzwang
Brave search engine: “zugzwang“
Forcing the Opponent to Choose Between Two Bad Options in Chess
“In chess, a common tactic is to create a situation where your opponent is forced to choose between two unfavorable options. This is often referred to as a ‘zugzwang‘ situation, coined from German ‘Zugzwang,‘ meaning “compulsion to move.” In such cases, any move the opponent makes will worsen their position, leaving them with a difficult decision.”
[3] “Money Mischief: Episodes In Monetary History” by Milton Friedman
About the book: “ ‘A lively, enlightening introduction to monetary history…from monetarism’s most articulate apostle.‘—Kirkus Reviews ‘The Oliver Stone of economics‘ (Chicago Tribune), Nobel Prize laureate Milton Friedman makes clear once and for all that no one, from the local corner merchant to the Wall Street banker to the president of the United States, is immune from monetary economics. In Money Mischief, Friedman discusses the creation of value: from stones to feathers to gold. He outlines the central role of monetary theory and shows how it can act to ignite or deepen inflation. Through colorful historical episodes, he demonstrates the mischief that can result from a misunderstanding of monetary economics — how, for example, the work of two obscure Scottish chemists destroyed the presidential prospects of William Jennings Bryan and how Franklin D. Roosevelt’s decision to appease a few senators from the American West helped communism triumph in China. And he explains, in plain English, what the present monetary system in the United States means for your paycheck and your savings as well as for the global economy.“