The Silent Wealth Eater
January 13th
The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her saving in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation, or pays no income taxes during years of 5 percent inflation. Either way, she is 'taxed' in a manner that leave her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 120 percent income tax, but doesn't seem to notice that 5 percent inflation is the economic equivalent.
Inflation, despite its subtlety, has a substantial impact on investments. It is an insidious opponent that silently erodes capital, leaving the investor poorer in real terms. This effect is akin to a tax, leaving no real income and causing the expenditure to come directly out of capital. Even a seemingly low inflation rate, such as 5 percent, can gnaw away at wealth just like a high income tax would.
We must not overlook this covert threat. Unlike high tax rates which are clearly represented in annual statements, inflation's impact is not explicitly stated. Yet, its presence is real and its effects are equally impactful, quietly diminishing purchasing power.
This covert erosion of wealth calls for vigilance and strategic planning. A shrewd investor looks beyond the numbers in the account and understands the real value of money. In terms of safeguarding our investments, we must take inflation into account, striving to preserve not just capital but its purchasing power over time.
Copyright © 2023 by Scott Sansovich