Inflation – the biggest tax of all

It’s pretty obvious that printing money destroys its purchasing power. If the currency you use as money is being debased, a unit of it buys less and less stuff over time. What previously cost 1,000 now costs 100,000 etc. So you must spend more just to stand still.

Since the early 70s when money printing started people have coped using two strategies:

  • Earn higher amounts of currency from wages, rents, or dividends etc;
  • Put savings in non-currency assets such as real estate, equities, and precious metals.

Up until recently these two strategies worked. Or at least worked well enough for most people. For many years the majority of us have seen our salaries, house values, and investments rise offsetting the underlying effect of money printing.

Until the so-called Great Recession of 2007-2008 that is.


Wealth inequality has been growing in the US since the early 80s. But the middle class resoundingly lost the struggle against money printing circa 2007-2008. The trillions in fresh new money created by the US Federal Reserve went first to those closest to the spigot, as well as to those fortunate enough to already own real estate, equities, precious metals and other tangible assets. These segments of society, the 90th and 95th percentile of households in the chart above, literally scooped up purchasing power by getting their hands on the new money first.

Inflating the quantity of currency has always been a tax on the ordinary person. Joe Six Pack is last in line to get the new money well after it has already caused prices to rise. Occasionally the poverty created by this ‘inflation tax’ causes revolution. But it usually ends with the currency hyperinflating to zero purchasing power, then politicians have a big meeting and something else emerges as the new currency.

But I’ve Hedged with Gold!

Great, but not so fast Tonto. You’ll have to pay Capital Gains tax (CGT) on your gold and this is where the inflation tax really starts to bite.

You see, tax rates and tax bands never adjust to align with the loss of purchasing power of the currency. The government doesn’t accept the new reality that 100,000 now buys what 1,000 used to buy.

Let’s say the Lone Ranger buys one 1oz gold coin for 1,000 currency units. Tonto his friend doesn’t. Instead he keeps the 1,000 in the bank. Then the Wild West Central Bank inflates and now it takes 100,000 currency units to buy 1oz of gold and 1,000 buys only 1/100th what it did before. The table below shows the Lone Ranger, despite being hedged in gold, has only preserved 50% of his original purchasing power (lost 50% to CGT).

Wild West Central Bank

Wild West inflation with 50% CGT


OK you say, well preserving 50% is better than Tonto, who’s lost basically everything in the inflation. But what if a 90% “windfall tax” on gold investors is introduced in response to the economic crisis brought about by the government’s collapsing currency (this is exactly what James Rickards suggests in his book Currency Wars).

Wild West inflation with 90% CGT

Wild West inflation with 90% CGT


So although being hedged, the government ignores the loss of purchasing power and taxes most of the ‘gains’ you made trying to protect yourself. The key takeaway point here is the importance of avoiding, within the bounds of the law, as much Capital Gains tax as possible.

Fortunately, there are ways to legally avoid much if not all Capital Gains taxes. A good starting place to find out more is our section on Minimizing capital gains tax.

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Comments or questions are most welcome