Can the silent tax solve our national debt problem? What is this silent tax I’m referring to? It’s inflation of course. The debasement of the currency has been used for centuries as a way of creating budgetary flexibility when governments have political desires that exceed the piggy bank.

The ability to tax the population is limited by the tolerance of the population. Tax too little and you have ineffective government and anarchy. Tax too much and you have social unrest, and eventually violent revolution.

Let’s imagine for a moment that the government collects about 20% of GDP in tax. I’m just making up that number.

The model used by economists is often too simplistic to be an accurate reflection of the real world.

All of these economic models suffer from the same problem. They assume a fixed point of reference that is in reality never fixed.

Is your point of reference US dollars? Is your point of reference ounces of gold? How about 1BR apartments? Maybe you count your wealth in terms of bitcoin, or tons of copper, or barrels of oil.

What if your point of reference is Japanese Yen? Did your wealth grow or shrink this year?

If your local economy imports almost all its food and energy, as is the case in Japan, what do international exchange rates have to say about price inflation?

Some people ask how many cans of soup you can buy with your paycheck?

That might be your point of reference. Can you feed your family? That would be a good point of reference, at least until the manufacturer changes the size of a can of soup and you no longer have a reliable point of reference .

As real estate investors, should we measure our balance sheet in dollars? Maybe we should measure the number of two bedroom apartments we own outright? Would that be a more meaningful point of reference?

At the start of WW2, the US had a debt to GDP ratio of about 40% and by end of the second world war, the US had a debt to GDP ratio of nearly 120%. All of this happened in approximately 3 years. From 1960 until 1995, the US had deficit spending every year except one. Yet somehow, the debt to GDP ratio went from 120% in 1946 to 35% in the early 1980’s. What caused that reduction in debt? That’s right. It was inflation. Inflation devalues the purchasing power of those on fixed income, it devalues cash savings and it devalues debt.

So did the debt increase from 1945 until the early 1980’s, or did it decrease? I guess that all depends on your point of reference.


Host: Victor Menasce