American Compass has six easy steps to steal the stored wealth of virtually all the citizens of a country. Not possible? Well, it first takes a government.

Step 1: Create Inflation

Inflation must be steady and somewhat predictable. High rates of inflation are unacceptable to businesses and individuals alike because everyone must be aware of the inflation rate to calculate the fair value of goods. Instead, a central agency must create a low rate of inflation – between 1-5%. The rate must be just high enough for citizens to recognize that they cannot just sit on their savings. Savings must earn interest; risks must be taken; larger institutions must safeguard wealth. Only a central banking authority can create the expectation of steady inflation by setting target interest rates and controlling monetary supply. In the United States, the Federal Reserve Bank was created in 1913.

Step 2: Tax Savings

Savings cannot be taxed directly. Otherwise, citizens would hide wealth or incorrectly report their wealth. Arbitrary taxation on net savings would create social unrest and could only be used temporarily. Instead, interest on savings must be taxed. The citizenry will still entrust their savings to large institutions, but will be forced to take larger risks to preserve their wealth. If the rate of inflation is at 3% and banks offer an interest rate of 3.25% (taxed at 33%), then most individuals will move their wealth to higher return assets (stocks, corporate bonds, tax-free municipal bonds, overseas currency markets, etc.)

Step 3: Index income to the rate of inflation

What could be more fair than indexing income to the rate of inflation? When the rate of inflation rises, income rises too. Net loss due to inflation is zero, right? Unfortunately, pay raises always lag reported data. In a system with periods of net inflation and deflation, the risks of income indexing are low. When prices fall, income would be sticky and would only fall the year following the deflation report. Individuals would actually fare better on those years. But in an economy with inflation only, pay raises only come the year after the inflation report. For each individual, the net wealth lost is fairly minimal. But for an entire society, 5 decades of net inflation can soak up a huge proportion of existing wealth.

Step 4: Under-report inflation

Citizens must continue to believe that the inflation rate is low. Otherwise, they would demand higher salaries. But recall with steady inflation, individuals have moved their stored wealth to banks. With taxation, this wealth has moved to riskier assets to garner higher return. As risky assets appreciate in value (i.e. soaring tech stocks, ballooning home prices, and “peak” oil), inflation should increase by a commensurate amount.

Governments may solve the problem of higher real inflation by under-reporting real inflation. For example, commodity prices may not be included in inflation calculations because their prices are too “volatile.” Home sale prices do not have to be included either when prices increase uncontrollably. Instead, the government may use “equivalent rental price.” For, if an owner is paying $8000/month in home mortgage payments, but can only rent the home for the prior mortgage amount of $4000/month, then the consumer price index should reflect that fact, right?

Simply put, individuals see a shrinking real salary as the real consumer price index soars, even with a link between salaries and the CPI.

Step 5: Institute fiat currency

People could just hold gold though, right? Gold has been a reliable store of wealth of millenia. Even if the government has a fiat currency backed by nothing but a promise, gold should maintain its value. While gold remains a good store of value even in a fiat money system, one’s psychology inevitably changes under fiat money. In a paper money only system, asset prices may soar as never before. As asset values seemingly exponentially increase, gold yields almost no annual return. In fact, in a system with low inflation and high asset appreciation, gold is a terrible investment. Gold pays no interest. It can be difficult to store large amounts of gold. And, asset bubbles may last well over a generation in a fiat money system. Gold slowly loses its luster. Individuals who own gold finally capitulate and transfer their wealth to equities. That’s when the crash finally comes.

Step 6: Allow a central agency to control interest rates

With the crash, gold suddenly appears to be the only safe investment. As asset values fall, everything loses its value. But gold falls less than most goods in value. Witness the stocket market crash from 2008-2009: while most equities fell well over 40% in value, gold dipped just over 25%. So gold wins over all investments, right? Well, not quite. Belief in the system runs deep after decades of sustained inflation and a steady transfer of wealth to the mighty. Increased interest rates could shatter gold as a long-term investment once more by driving money towards higher yielding assets. For the government – which issues fiat currency – may always choose to create the appearance of scarcity in the system. By this point, the individual will have lost most of his wealth anyway. Fluctuations in interest rate may be moot.

But no government could create such an onerous system without overwhelming protests from its citizenry, right? We shall soon find out.

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