The Slow Destruction of Wealth

The Slow Destruction of Wealth

You’re wealthier than ever before.

Yes, you really are.

What, don’t you feel rich?

Well, there might be a reason for that.

It involves the slow and subtle destruction of your wealth. Though you’ll never hear the government admit it.

On paper, Aussies are rich. The problem is that we won’t stop complaining about how broke we are.

But we have good reason to feel this way.

The essential costs of living are screaming higher. Electricity prices were up 12.4% in the 12 months to 2017. Fuel costs jumped 11.1% in the same timeframe.

Of course, these numbers come from official data. They’re pumped out by the Australian Bureau of Statistics.

I suspect the actual costs of living have risen much higher.

Worst of all, these increasing costs are supposedly meant to be covered by Australia’s weak 2.1% annual wage growth — good luck with that.

Nonetheless, on paper, Australians are a trillion dollars wealthier than five years ago.

Roy Morgan, a market research company, crunched the numbers last year. It found that Australia’s collective household net wealth jumped $2.43 trillion in the four years to 2017.

Take a look:

Source: Roy Morgan

The biggest increase came from housing stock, with equity in owner-occupied homes rising 5% in that timeframe.

For those with super funds and ‘other’ assets, which I suspect would be a collection of bank deposits and shares, the net worth fell 0.8% and 3.8% respectively.

What the Roy Morgan study didn’t mention is that the wealthiest 1% of Aussies now own more wealth than the bottom 70%. Wealth is increasingly becoming a club for the privileged.

Either way, if you’re a homeowner, you’ve hit the jackpot. Even if your purchasing power is falling, the paper value of your home should make you feel financially secure.

Just don’t plan on swapping bricks for food.

The silent theft of wealth

The silent theft of wealth often has nothing to do with your money habits; granted, saving a dollar or two will help.

No, the biggest threat to your financial future is inflation.

A government’s closest ally is steadily rising inflation. Governments work in cahoots with central bankers to manufacture inflation. What’s worse, they don’t even try to hide it.

Too much inflation and price rises get out of control, resulting in people spending less. Too little inflation and asset prices don’t increase fast enough, with debt taking longer to pay off.

The flip-side to that is if prices increase too slowly, there’s no urgency for you to spend money.

The rationale behind inflation-targeting monetary policy is that it sets medium-term monetary policy goals that enable consumers to make long-term financial decisions.

At least, that’s the claptrap you’re sold when in fact it’s nothing more than the slow erosion of your wealth.

The real reason governments love inflation is because it makes long-term debts cheaper. A $10 billion debt today becomes a hell of a lot cheaper to pay off a decade or two from now as inflation rises.

Both governments and central banks explain how they will engineer inflation through interest rates to get the theft number to sit between 2–3%.

This range allows the ‘real’ value of the debt to fall, but encourages asset prices to grow at slow and steady rates. That way, you feel a tad bit richer because your paper wealth increases and your debt stays roughly the same.

At least, that’s the theory.

Governments and central bankers alike are happy to point to the wealth effect from rising prices. Yet the rarely mention the slow erosion of what your dollars can buy.

They neglect to mention that $10 in 2008 would be worth roughly $8.30 today. That’s a 17% decline in purchasing power in the last 10 years using ‘official’ inflation statistics.

Protecting yourself from inflation

As you know, the inflation rate causes the value of money to decline.

Of course, the face value — the numbers on the actual notes — remains the same. But what that $10 can buy today is less than what it could in 2008.

Now, Roy Morgan has a different idea as to what inflation looks like.

It says the inflation rate average since 2010 is closer to 5.10%, rather than 2.5%.

Using Roy Morgan’s numbers, you’ll find that $10 in 2010 is now worth $7.10. That’s an incredible 29% drop in almost eight years.

This is the problem with fiat dollars. Their value is completely determined by government policies. And what they’re worth declines with every passing year.

In addition, the official ‘inflation target’ range of 2–3% is complete hokum.

There is one thing that has historically proven to be a means of wealth protection from the theft of inflation, and that’s gold.

In 1901, the price of gold per ounce in Australia was around $8.50. 100 years later, using the RBA’s own inflation calculator, that puts the price of gold in ‘today’s dollars’ at $425.

In 2001, the average price of gold in Aussie dollars was $460 per ounce.

With the complete absence of reliable statistics, the RBA’s inflation calculator says that, today, one ounce of gold should be worth around $650.

But Roy Morgan’s inflation data shows us that the RBA’s calculator isn’t an honest account of our loss of purchasing power. Taking its 5.1% average back to 2001, it gives us a price of $1,090 in today’s dollars.

Yet today the price of gold in Aussie dollars is trading at $1,700 per ounce.

Gold has been a reliable protector against inflation over the past 200 years. Chances are, the price of gold per ounce is a far more reliable measure of Australians’ loss of purchasing power.

Kind regards,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia