“Inflation is the one form of taxation that can be imposed without legislation.”
– Milton Friedman

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June 12, 2024 – It’s wise to follow trends, not specific headlines or singular data points. But every day, there’s a new piece of economic data to add to the puzzle of how the world really works.

One key event is Consumer Price Index (CPI) data. A single data point from this series may not mean much unless you’re a day trader. But an overall trend can prove insightful.

Today, Grey Swan Investment Fraternity managing editor Andrew Packer is looking at some simple math behind today’s inflation numbers … and why you may not want to join the chorus of investors cheering the latest number.

Enjoy ~~ Addison

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Washington’s New “Phantom Tax”

Andrew Packer, Grey Swan Investment Fraternity

 “…As violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”

That’s how the “Great Communicator,” Ronald Reagan, once described inflation.

After waves of double-digit inflation during the 1970s … it’s easy to see why.

Between 1968 and 1980, inflation cut into purchasing power so much that the stock market lost 70% of its value, the second-worst return since the Great Depression.

However, inflation masked that fact. If you bought stocks in 1966, during the roaring go-go years … it took you until 1982 just to get back to breakeven. That’s 16 years.

The past few years have felt similar. After all, with inflation trending lower in the 1980s, 1990s and 2000s … and finally seemingly no inflation in the 2010s, what was once old is new again.

No matter how you slice it, inflation is a tax on your wealth. And inflation’s rise is a new tax imposed on you by unelected bureaucrats at the Federal Reserve.

But the most insidious thing about inflation is its persistence.

Even 2% inflation, the Federal Reserve’s Goldilocks target, means your purchasing power erodes over time.

The Simple Math Behind the Phantom Tax

Investors can use the “Rule of 72” to approximate stock market returns.

Don’t worry; the math is simple.

Simply take your expected investment return each year, divide by 72, and that’s how many years it takes to double your wealth.

If you can get 9% returns each year, you take 72, divide by 9, and find out that you can double your money every eight years.

The same calculation also works in reverse for inflation.

2% inflation will cut your wealth in half over 36 years.

That means $1.00 in purchasing power over the average lifetime will see two such cuts, leaving investors with about $0.25.

And that’s all before taxes.

Some say that the world has changed. With today’s high debt levels, central banks like the Fed need to target 3% inflation.

The Rule of 72 tells us that with 3% inflation, your wealth is cut in half in 24 years. So, over a lifetime, $1.00 becomes $0.125.

Today’s inflation reading, as measured by the Consumer Price Index (CPI), was an annualized rate of 3.3% for the 12 months ending in May.

It’s the lowest year-over-year read since April 2021. And it’s better than the 3.4% economists expected.

Naturally, markets cheered the news. Stocks soared – even though they were already at all-time highs – and even as inflation remains 65% higher than the Fed’s target.

Let’s do the back-of-the-envelope math…

At 3.3% inflation, your wealth erodes by 50% just under every 22 years.

That’s what markets are cheering. An imperceptible slowdown in wealth destruction.

Meanwhile, CPI has not seen a down month for the duration of the Biden Presidency.

Consumers now pay 19.5% more on average since he took office. That’s a rate more than twice that of the 8% during Trump’s term. The phantom tax adds up over time.

But this is a tax that you get hit with no matter who is in office. Daily, weekly, monthly, yearly. Without end. And they’ve conditioned you to feel good about it!

How Washington’s Phantom Tax Takes Another Crack At Your Wealth

As long as we have fiat currencies, we’ll have inflation. Inflation is the heat melting the ice cube of your wealth. And the past few years have been like a hot summer day.

To protect from inflation,  you need to take on some risk with your wealth. Cash won’t do (although cash-generating investments might do the job).

But there’s another overlooked part of persistent inflation. And it’s the most insulting part of all:

While inflation steals your wealth, governments get to double-dip and steal more when it’s tax time.

That’s because investment returns aren’t indexed for inflation.

If you buy a stock for $100 and sell for $200, the government will want a cut on the $100 gain.

But if inflation cut your purchasing power in half during the time you owned that stock, you didn’t have a gain in real terms. You merely broke even.

So you’re being taxed on phantom gains, not real ones. The phantom tax strikes again!

That’s why investing in tax-advantaged accounts like an IRA or 401(k) might be an optimal inflation play.

They’re not perfect, as your investment options in those vehicles are limited. But if you can grow your wealth without taking a tax hit along the way, you have a fighting chance against inflation.

Inflation is down, but it’ll never be out.

And it’ll likely get worse as the math of today’s exorbitant peacetime spending makes inflationary pressures more likely.

Sure, you can cheer along with today’s soaring markets. But it comes with a caveat: the war to protect your wealth is a never-ending one.

And that Washinton’s phantom tax on your wealth will never go to zero … and will likely go higher again in time.

Until next time…

~~  Andrew Packer, Grey Swan Investment Fraternity

So it goes,


Addison Wiggin
Founder, The Wiggin Sessions

P.S.: How did we get here? An alternative view of the financial, economic, and political history of the United States from Demise of the Dollar through Financial Reckoning Day and on to Empire of Debt — all three books are available in their third post-pandemic editions.

(Or… simply pre-order Empire of Debt: We Came, We Saw, We Borrowed, now available at Amazon and Barnes & Noble or if you prefer one of these sites:Bookshop.org; Books-A-Million; or Target.)

Please send your comments, reactions, opprobrium, vitriol and praise to: addison@greyswanfraternity.com