Friday, August 3, 2012

Inflation is a tax on capital

Imagine that once a month, an IRS agent would knock on your door and ask how much money you have in your pocket, in your drawers, hidden in your house and in your bank account. Imagine you wouldn't have the ability to hide or lie but instead could only report accurately the cash you have. Then imagine this IRS agent taking 0.5% of that amount and leaving and repeating this again the following month.
This is effectively what inflation is. At least with capital gain tax, it is only taxing us on the gains we have made and leaving us alone when no gains were made or even when a lost occurred. But with inflation, we get tax on any capital we might have, essentially on anything dominated in dollars, debt in particular. If somebody owes you money, that too gets taxed too in this process. It doesn't take long to realize that owing debt is better, as long as you don't pay for it. That's why our partners love the debt we built up for them which they don't pay for, but the property pays for. Interesting to know more? Contact us at

On another note, it is very interesting to stretch this analogy of the IRS agent knocking on your door in the case of hyperinflation such as what happened in Weimar Germany, Hungary, Zimbabwe and many other countries. When price inflation doubles the price every day, you can imagine this IRS agent knocking on your door every hour to take 5% to 10% of your income. How busy do you think you are at making sure you have as little as possible cash on you and in your bank account. In those economy, the people are spending most of their time at trying to preserve their wealth as much as possible as opposed to have the time to work on productive activities.

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