How You Can Protect Your Savings From This Hidden and Devastating Tax
Normally we write about how to protect your assets and avoid obvious and direct taxes by using offshore companies, trusts and changing your legal residency. Today we’re going to look at another tax. It’s something that most don’t even recognise as a tax. But it’s just as deadly.
An inflation tax is a hidden tax caused by central banks creating too many currency units.
Every time the Federal Reserve or The European Central Bank creates more of their currency it causes the value of the existing units of currency to reduce in value.
Central banks can create new money but they can’t create new goods and services. This is done by real people in the productive economy. Not by central bankers creating currency out of thin air.
When the world’s central banks create new currency they reduce the value of the rest of the currency in circulation. The dollars or euros that we have in our bank accounts. This is the hidden tax, otherwise known as the inflation tax.
The Federal Reserve increased the money supply substantially last year to fund hand outs to citizens and businesses who were affected by the lockdowns. It’s estimated that the total amount of dollars in circulation increased by 22% in 2020. The Federal Reserve and the European Central Banks are continuing to print money this year too.
Countries, such as the United States issue government debt and then the central bank issues new money to buy the government debt. Effectively the governments owe money to themselves. So much new money has been created in recent years that it can never be repaid. It can only be inflated away. This means the value of everyone’s savings will be reduced substantially in the future.
The inflation tax is unfair to savers. It is a hidden tax that transfers wealth from people who are struggling to save money, to those favoured by the government.
It’s one of the ways governments and central banks fleece citizens, no matter what’s happening in the economy.
Here are seven ways to avoid the inflation tax.
1) Save in a form that is inflation proof. Anything from real estate to commodities, such as gold and silver.
Any physical asset is likely to maintain its value better than government issued currencies. Commodities and Precious Metals will always do well in inflationary environments. Real Estate can be more of a mixed bag. As most people buy real estate with mortgages it’s likely to become less affordable as inflation causes interest rates to rise.
2) Invest your money in inflation hedges like treasury inflation protected securities (TIPS). TIP’s are bonds with an embedded stock option that helps protect inflation.
(TIPS) are a type of Treasury security issued by the U.S. government. TIPS are indexed to inflation in order to protect investors from a decline in the purchasing power of their money. As inflation rises, TIPS adjust in price to maintain its real value.
3) Invest in inflation proof companies that can increase their revenue and raise their prices as inflation rises. Such as healthcare, telecommunications, food and beverage companies etc.
Companies that have real assets and operate in essential services are likely to offer protection against inflation. Be careful not to invest in any companies that are too leveraged or that depend on issuing debt to survive as they’ll likely struggle to raise new debt in an inflationary environment. Interest payments on existing debt may rise substantially too.
4) Buy real assets with inflation protection like timber and farmland.
Timber and farmland are classic inflation hedges. Timber is a commodity that’s always in demand and farmland is one of the most durable assets you can buy.
5) Maintain a balanced portfolio of inflation hedges and inflation proof investments .
Mining stocks are always good investments in an inflationary environment. As the price of commodities increases the profits of these companies should rise exponentially.
Commodity Index tracking funds such as Invesco’s DB Commodity Index Tracking Fund offer a hedge against inflation by owning a basket of commodity producing stocks.
7) Borrow at low fixed interest rates against tangible assets. As inflation causes the value of the assets to increase, the real value of the debt will decrease.
If you’re able to borrow long term at very low fixed interest rates and buy commodities or real estate you’re likely to get a double whammy of increasing asset values and the decreasing value of the borrowed currency.
Diversify Your Assets to Avoid Inflation
It’s best to diversify how you save your money. For example, if you have most of your money in cash at a bank it could be eroded by inflation. But if you have your money in cash and invest some of it other ways, such as real estate, commodities and inflation proof investments then you will be protected from the hidden tax known as the inflation tax.
This is how to avoid Inflation eroding your savings.
When prices increase, consumers are forced to give up more of their income in order to maintain their standard of living. This is because they must spend more money on basic necessities such as food and shelter.
Inflation does not affect everyone equally. Inflation disproportionately impacts people on fixed incomes such as retirees and those who do not have significant management skills with their investment funds. Those who do not save in inflation-protected assets such as Treasury inflation protected securities (TIPS), gold, or commodities will see the value of their savings erode over time.
The inflation tax is present in all economic environments. In the short-term inflation can be good because it reduces the value of consumer debt, making it easier for consumers to pay off their loans. High inflation periods ultimately lead to higher interest rates which can slow economic growth and investment by businesses .
However, inflation can be a negative force in society when inflation rates are high and inflation expectations continue to be high. Hyper inflation, with rates above 20%, is a destructive force in society. This is when inflation eats away at the savings of retirees and other fixed cash income consumers.
When inflation gets out of control it forces up interest rates so high that it becomes impossible for borrowers to meet their debt obligations, or for lenders to earn an adequate return on their savings. That’s when inflation turns destructive. It wipes out the value of savings and threatens to wipe out both jobs and businesses.
If inflation rates are increasing at a faster rate than inflation-proofed assets can keep up, it creates a situation where inflation will destroy the purchasing power of cash savings held on deposit in inflation-proof savings accounts. This inflation tax, sometimes called the inflationary gap, forces savers to make a choice between inflation-sensitive investments that will keep up with inflation and cash savings on deposit .
It is important for consumers to understand how inflation works and how it can impact their personal financial situation. If inflation rates are expected to rise in the future, people need to take action now. They need to find ways to protect themselves from this tax by investing in assets like gold or real estate, which keep pace with rising prices or invest in inflation-protected assets like Treasury Inflation Protected Securities.
This type of investment is more risky than holding cash savings on deposit, but it also has the potential for greater returns.
Discover how to avoid inflation and protect your assets from seizure and taxes. Find little known methods to store your wealth in safe offshore jurisdictions and protect your assets with offshore companies and trust. Our Special report, Bullet Proof Asset Protection takes you through a detailed plan to protect your assets.