The Government Is Expropriating Private Wealth at a Rapid Rate
By Robert Higgs • Monday November 28, 2011 9:37 PM PDT • 21 Comments
About a month ago, I posted in regard to what I called “the euthanasia of the saver.” This comment had to do with the fact that nominal interest rates in the United States for financial investments such as bank certificates of deposit and bank savings accounts—the kinds of investments traditionally employed by retired persons and small savers, who wish to gain income without exposing their funds to great risk of capital loss—now fall considerably below the rate of inflation, and hence the real (or inflation-adjusted) yield on such investments is negative. That is, the nominal payoff is insufficient to offset the loss of purchasing power of the money invested.
About a month before I wrote my commentary, my old friend Richard Rahn had, without my noticing, written on the same issue in a commentary article published in the Washington Times, but he had gone beyond the simple point I made. Rahn notes that besides suffering the loss of wealth occasioned by the negative real yield on such investments, the investor has to pay tax on the nominal yield—truly a case of the government’s adding insult to injury. He notes that given the currently prevailing rates of interest, rate of inflation, and tax rates, a small investor who earns a nominal yield of 1% and pays a 20% marginal tax rate, while the rate of inflation is 3.5 %, actually ends up paying a real tax rate of 370%. For example, an investor buys a $100,000 CD, earns $1,000 in annual interest, pays a tax of $200, and incurs a loss of $3,500 in purchasing power on the invested principal. Total (nominal) income is $1,000; total real tax (nominal tax plus inflation tax) is $3,700.
This expropriation of private wealth is not accidental. It is the joint product of the Fed’s near-zero interest-rate policies, the Fed’s money supply increases that underlie the current rate of inflation, and the tax rates established by Congress and administered by the IRS, including the taxation of nominal interest earnings even when they amount to real losses of capital, rather than genuine earnings. The government clearly aims to expropriate private wealth on a massive scale. The only plausible alternative interpretation of these policies requires us to believe that the government officials who set these policies are complete idiots about basic economics.
The expropriation amounts to a huge sum. For example, the value of the Non-M1 component of the monetary aggregate M2—consisting of savings and small time deposits, overnight repos at commercial banks, and non-institutional money market accounts—currently amounts to more than $7.5 trillion. If investors lose 2.7% on this investment each year (nominal yield minus the sum of the amount lost via taxation of nominal interest and the amount lost via the inflation tax), the loss amounts to about $204 billion. Because this type of investment is not the whole of the investments subject to this effect, the total amount the government is expropriating comes to a much larger sum. Because this taking continues year after year, so long as current conditions persist the continuation of this expropriation for another year or two will bring the cumulative amount expropriated in this fashion to more than $1 trillion since the onset of the recession and the Fed’s adoption of the near-zero interest-rate policies, along with its allowance of substantial growth of the money stock and the consequent decrease in the money’s purchasing power. This is a rough calculation for the purpose of illustration. My point does not hinge on a precise estimate, because any well-founded estimate is sure to amount to a gigantic sum.
In sum, the government’s monetary and fiscal authorities are currently engaged in the expropriation of private wealth on a vast scale. Entire classes of investors—especially people who saved during their working years and expected to live on interest earnings on their accumulated capital during their retirement years—are being steadily wiped out. Astonishingly, this de facto robbery is being committed by a government that misses no opportunity to shed crocodile tears over how single-mindedly it seeks to protect the weak and helpless among us.
Tags: Economics, Federal Reserve, Inflation, Money and Banking, Morality, Taxation, The State 
Hello Robert,
I trust this comment finds you well. It has been awhile...
There’s no denying what you stipulate in your article above. Here are several questions: How long does it take for an individual to understand what you write about above? What will an individual do once s/he comes to an understanding of exactly what silent plunder (inflation) is all about? Will s/he stay and take the plundering punishment? (BOHICA) If no overt action is taken to protect one’s wealth from predatory government (The FED) then essentially, as Bill Bonner so eloquently states: One does not always get what they want but they will usually get exactly what they deserve! Place your head in the lion’s mouth – what do you expect?
Americans (and others throughout the world) seem complacent and continue to live ho-hum lives. DO NOTHING and get screwed! (Some like it!) And that’s the way it is. Blighted generations subjected to plunder, the voting booboisie accepting it with little regard... The Master/slave relationship is an ongoing process: you will bare the yoke (exaction) and if necessary the lash if you do not submit to the master’s edicts. There’s only ONE real, legal way to get relief: leave the government’s jurisdiction – and renounce citizenship. Period. Take care...
C’est la guerre,
Capt. A.
Principauté de Monaco
Capt. A. | Nov 29, 2011 | Reply
So what would you recommend the average middle-class American family do to at least minimize this loss? Should we, in fact, invest in real estate? I’ve heard all the arguments for gold...but I can’t help but wonder how it would really benefit me to purchase a miniscule amount of gold that I cannot make immediate use of and that I would likely find quite difficult to actually use to pay for goods and services.
RSS Ronald Reagan | Nov 29, 2011 | Reply
It doesn’t seem to matter whom we vote for, so what solution are you Independent Institute offering to end this ever-growing thievery?
Peter Namtvedt | Nov 29, 2011 | Reply
There is only one answer: Abolishing legal tender laws.
Bob Robertson | Nov 30, 2011 | Reply
Eventually there will be a revolt, probably nonpeaceful, if this situation persists.
richard | Nov 30, 2011 | Reply
“The [only] plausible alternative interpretation of these policies requires us to believe that the government officials who set these policies are complete idiots about basic economics.”
Not true. Another plausible alternative interpretation of these policies requires us to believe that the government officials who set these policies are conspiring expert economists – knowing perfectly well what they are doing.
Elliot | Nov 30, 2011 | Reply
It does matter who you vote for. Vote Ron Paul.
Elliot | Nov 30, 2011 | Reply
DuH!!
Yes, the government is stealing my retirement — what else is new. I don’t know what to do that doesn’t have huge risk and not being a politically connected “crony”, I will have to eat any losses.
My only hope is that we die on or before I get cleaned out by our government. That means living less than my projected 20 more years. O’ well, the last few years are often bad anyway. However, the government should make is easy and provide all of us victims of their theft with suicide pills to take when they run out of theft opportunities.
At least our children have been provided excellent educations (both Ph.D.’s in sciences) and don’t need an inheritance.
Dallas Weaver | Dec 1, 2011 | Reply
Freeze dried and ammo.
Harold Cockerill | Dec 2, 2011 | Reply
To RSS Ronald Reagan and Peter N:
Vote for Ron Paul, tell all your friends to vote for Ron Paul, and tell them to tell their friends, and tell the Republican Party if they don’t put Ron Paul up, you’ll vote for Obama. And keep your powder dry. Scorched earth.
Mike in MI | Dec 3, 2011 | Reply
Adherents of Keynesian economics have long held that “large savings by a wealthy class have an inherent evil: they increase and perpetuate a functionless, tribute-levying class of rentiers, which is already a dangerous element in the State.” All that was needed was control of the apparatus.
Believe All Things | Dec 3, 2011 | Reply
@Elliot
“Not true. Another plausible alternative interpretation of these policies requires us to believe that the government officials who set these policies are conspiring expert economists – knowing perfectly well what they are doing.”
That was kind of the point in the article. The ALTERNATIVE TO THAT is that they are incompetent. (To have an alternative, there has to be at least two possible explanations).
Reggie | Dec 4, 2011 | Reply
Mike in MI: Your hidden assumption is that voting matters. Every election people were told they could make things better if they voted correctly. The truth is the system is rigged to protect the power elite against change. That is why Ron Paul will never get elected. MSM is ignoring him to protect the elite. The election is rigged to protect the elite. If voting could remove the elite from power it would not be allowed. GET IT? People in power will use their power to: 1. Stay in power. 2. Increase power. It is the creation of power that has to be challenged. As long as the public concentrate their power in the hands of a few they will continue to get what they have gotten for centuries: SCREWED. And that’s exactly what they deserve.
Don Duncan | Dec 4, 2011 | Reply
R.R.; If you have no wealth, you can’t buy gold but you can move to the country and become self sufficient, or immigrate if you have a skill to sell.
Capt. A: Renouncing citizenship gives $450 to the U.S. and alerts them to watch you for tax evasion (you still pay for 10 years). Just leave or go underground like I did in 1972.
Don Duncan | Dec 4, 2011 | Reply
“The government clearly aims to expropriate private wealth on a massive scale. The only plausible alternative interpretation of these policies requires us to believe that the government officials who set these policies are complete idiots about basic economics.”
How about both?
Carolyn Wu | Dec 5, 2011 | Reply
Another good one Bob. I love the easy-to-understand example and I expect to use it.
erne lewis | Dec 6, 2011 | Reply
You took the words right out of my mouth.
Marc | Dec 8, 2011 | Reply