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.
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.
Editor, Australian Small-Cap Investigator
Editor’s Note: This article originally appeared in Money Morning.