I would like to introduce you to the cronies of fiat currency.
Meet Terrible Tax, Invisible Inflation and his pal, Insidious Interest.
Sure, you may have heard of these felons. You certainly interact with them on a daily basis. But how much do you really know about them, and the criminal roles they play in stealing your money?
As inventions of the modern day financial system of fiat currency, they are tools of manipulation and control. They were not created out of necessity, but rather agenda-driven intention. Why? To ultimately bolster national authority coffers.
The general public would not take lightly to military-type raids on their homes and forceful theft of their wealth, now would they? No. Rather, governments created these mechanisms to siphon money from you in ways they could justify with a myriad of lies. Lies we have, for the most part, simply come to accept as part and parcel of being an active participant in the traditional economic system, whether willingly or otherwise.
So, let us take a closer look at these three tricksters, and get a sense of their impact on your earnings, savings and long-term wealth, shall we?
Terrible Tax is a particularly annoying chap. Akin to a pickpocket, he is quick off the mark and generally gets away with your money before you even realise it.
He is also a shapeshifter, and takes on a number of forms, the most overt being Income Tax.
Based on UK’s 2017 rates, if you are earning £100k per annum, unmarried, younger than 65 years old and have no pension deductions, childcare vouchers or student loan, Income Tax will cost you an effective 29%, or £28,700 of your gross earnings per year. Your National Insurance contribution will reduce this by a further 5%, or £5,520 annually, leaving your take home pay at 66% of your gross earnings. That's £34,220 of your hard earned money. Gone. As instantly as you get paid.
Terrible Tax also presents as VAT or Excise Duties for the likes of motor fuel, alcohol or vehicles . In this form, he is ultra-sly. These taxes are considered indirect as they are ‘built in’ to your everyday spending at the petrol pump, at the grocery store, when you purchase a new laptop, car, house or even a simple bottle of wine. And so, through general and required spending you help to line the government coffers even further.
In fact, a 2016 report revealed that the lowest income earners in the UK will pay a further £3,500 annually in indirect taxes, whilst the most affluent percentile can expect to fork out up to £9,700 for the same. Incidentally, it is no surprise that the lower income class receives a greater ratio of their tax back in the form of benefits than higher income earners.
So, once you have suffered at the hands of Terrible Tax, Invisible Inflation is lurking around the corner for its chance to rob you.
Now this bloke, he is the masked, serial thief of the night. He creeps in and takes your money, bit by bit, over a period of time. As it is a gradual process you may not notice it at first, but as you make purchases you notice that your Pound is certainly not getting you as much as it used to. We have come to accept that it is simply ‘normal’ for prices to increase over time. Surely the production costs must be rising, requiring that we pay more, right? Let me assure you, a farmer supplying a grocer with eggs, fresh produce or meat has not changed his basic operations in any way that makes it any more expensive. It is the fact that the currency, in which products are priced, has been devalued.
Inflation is the inescapable loss in buying power, or value, of fiat currency as a result of an expansion in the money supply.
You see, when the Government decides they need more money - and yes, it is always far more than they can afford to pay back - they approach the central bank to expand the money supply. In the ‘good old days’ this would mean they needed to hold gold reserves to an equal value to support the additional currency. As you may guess, it is not like that at all today. They simply add a good couple of zeros onto the total currency supply in a computer somewhere and BOOM - more money to spend.
And here is the critical issue with this approach.
Paper money eventually returns to its intrinsic value – zero. - Voltaire, 1694-1778
As the new currency is not backed by anything tangible, it has to derive its value from somewhere. And so, it sucks its value from the existing supply. This is called debasement, and in the UK, inflation is the primary contributor to the Pound’s exceptional loss in value since its inception. The chart below indicates the decrease in purchasing power since the 1700, and highlights a miniscule retention of value.
To add insult to injury, we also need to consider that the average increase in salaries does not keep track with inflation. Our savings are dwindling faster than what we can earn, as a result of inflation. The scenario leaves us with no alternative but investing on a permanent basis to offset the erosion of inflation erosion. This becomes less sustainable as cost of living increases disproportionately to salary increases.
It is a vicious circle and, more often than not, causes people to turn to credit as a means to keep their heads above water.
Reaching the point of credit spending is where you really get a slap in the face!
Unlike his covert buddies, Inevitable Interest is a daylight mugger. He is out there in the open, for all to see. He is unapologetic, demanding, and unrelenting in his approach.
To recap, we are already suffering from direct and indirect taxation, plus the eroding effects of inflation on our purchasing power and savings. In an attempt to counter this, we turn to borrowing from the ‘additional money supply’ available to banks and financial institutions. Borrowing money, that for all intents and purposes, has been created from thin air and backed by nothing. Magic Money, as I like to call it.
And for the privilege of this ‘service’? Well, we have to pay the money back, of course - but with Interest. The rate of interest depends on the type of loan, e.g. long-term or short-term, but you can be assured you will be forking over a considerable amount more than your initial loan.
To make matters worse, unless you have a fixed rate loan, an increase in the nominal interest rate is going to make those monthly payments all the more expensive. While the UK has not seen a base interest rate hike in a decade, market whispers are that this is on the cards for as soon as November this year, with an expected increase from 0.25% to 0.5%. Furthermore, analysts fully expect a steady increase over the next 3 quarters, effectively bringing the interest rate to 1.0% in the next year period.
Naturally, this is the base interest rate, and the rate at which we pay back our loans is generally at a much higher percent.
A recent article on The Guardian highlighted the potential impact of an interest rate increase for mortgage payers.
The average UK standard variable mortgage rate (SVR) is 4.6%, according to financial data provider Moneyfacts. Someone on that rate with a £200,000 outstanding mortgage balance and 25 years remaining would pay £28.72 a month extra (a payment of £1,151.77, up from £1,123.05) if the rate goes up by 0.25%, assuming it is on a repayment basis. If there were a series of rate increases, and the rate was to go up by a total of one percentage point (ie, four lots of 0.25%), the extra cost would be £117.10 a month, or more than £1,400 a year.
Sadly, we still have not arrived at the most insidious element of Credit Interest. Considering the fact that the initial money supply is created from nothing (remember Magic Money?), where do you think the Interest we pay comes from? It too comes from thin air, and therefore when paid back it simply adds to a growing money supply, backed by nothing, and needs to find value from somewhere. You guessed it. Just swipe it from the existing supply, which gives old Invisible Inflation more ammunition. This is the perpetual cycle of debt-based fiat currency.
So, where does bitcoin come in? Can it help us beat this triple-whammy of wealth ‘theft’ in the traditional financial system?
Bitcoin has a number of advantages over the legacy financial system, and its token, fiat currency.
Firstly, bitcoin is not a debt-based currency and thus, the ills of credit interest do not apply. Coins are created when miners solve complex mathematical equations and append transactional blocks to the blockchain. They are rewarded in bitcoin for doing so at a current rate of 12.5 bitcoin per block. The rate of issuance is regulated by Bitcoin’s founding algorithms that allows for a halving of the bitcoin reward every 250,000 blocks, which occurs every 4 years. This will continue at this set, predictable rate until such a time as the finite supply of 21 million bitcoins is reached.
This gives bitcoin a design that is deflationary by nature. Because the eventual supply is fixed and no more coins will ever come into existence once the threshold is reached, bitcoin can never be subject to the toils of inflation. In fact, as opposed to experiencing a continual decrease in value, bitcoin has steadily grown in buying power over the years, and there is certainly opportunity for further increases as more utility is built into the system, and the network is able to process transactions faster and more cost-effectively.
Admittedly, bitcoin may not be able to solve taxation fully, and to be fair, this was not a key driving factor in its creation.
Depending on your location in the world, and the country’s stance on bitcoin’s classification as an asset class or currency, you will most likely be subject to taxes in some way, shape or form. As bitcoin becomes an acceptable form of payment, such as in Japan since April this year, regular taxes such as VAT may be levied against commercial transactions, allowing the government to get their ‘piece of the pie’. Those who earn bitcoin in exchange for goods or services, may be obligated to disclose this as income for income tax purposes. And from an investment perspective, you may find that profit on your portfolio performance may be subject capital gains tax.
As a largely unregulated industry though, and with money moving around outside of the traditional financial system, governments are determined to find the means to introduce formal regulation policies and procedures. Whilst they will never be able to regulate the network itself, we do believe that a level of regulation for the businesses operating with, or in, bitcoin and other cryptocurrencies is necessary to provide a more secure environment for clients and end users.
Ultimately, the fact is that bitcoin offers a decentralised financial system that is void of the serious threats to your money that fiat currency imposes. It can not be manipulated by monetary policies that lead to a gradual erosion of your wealth, it can not trap you in a cycle of debt and interest, and most of all can provide a safe-haven and a store of value that has, to date, proven to beat any traditional strategy for outpacing inflation.
Not yet benefiting from bitcoin? Get in touch today, and see how we can help you!