The Great Money Illusion: How the government has been picking your pocket for 80 years…

They’ve done it for years… Decades in fact. 

The government has outright stolen your money to pay their bills.

That may sound a little conspiratorial, but as you’re about to see, it’s the truth. It’s a program of long term government theft. You just haven’t noticed it. 

An inside job of inflating away their debt by devaluing the purchasing power of your wealth. Lessened their obligations by heaping more and more costs onto you

And they’ve done it in a pretty underhanded way. By using a little known cognitive bias to sneak it past you.

I want to clear that up for you right now…

Returns vs. “Returns”

In the world of finance, there are two kinds of returns — nominal and real.

Nominal is what you get paid.

Real is what you keep.

Think of it like gross versus net income: Your job pays you $10,000 each month but the government takes their cut first. So maybe you only take home $7,500.

It’s approximately the same in the financial markets. For example, say you buy a 10-year bond that pays you 2.5%. That means on a $1,000 bond you’ll earn $25 every year for the next 10 years. 

But now consider that consumer prices are rising at an annual rate of 8.3% (according to last month’s CPI report).

You’re earning 2.5% while the prices of everything you have to pay for are rising by over 8%. When your bond matures, your $1000 will have become $1250 but if inflation persists at 8.3% what cost $1000 when you bought your bond will cost over $2200 at maturity. 

In your last letter I told you about central banks that had actually lowered their nominal rates to below zero. So you might be thinking, “So what Bob? The Fed is raising interest rates here!” 

Doesn’t matter.  Any time nominal rates are below the inflation rate, you’re getting a negative real return on your investment.

They get this by you by using something known as the “money illusion” to conceal the theft.

You see, negative nominal rates are controversial because they’re negative! They’re a direct tax on your savings. But… as long as you’re receiving a positive nominal rate you’re not inclined to notice the loss in your real wealth.

That’s the money illusion.

Sure, the Fed has boosted rates up to 1% so far. And their current target (if you believe them) is something in the 2-3% range. Inflation is currently at 8% and as I’ve written before, there’s not a lot the Fed can do to bring down. So basically no matter how high the Fed boosts rates, your wealth will still be shrinking.

A History of Investor Theft

Have a look at how long they’ve been screwing you…   Below is a chart from the end of WWII through today. The black line is the nominal rate of interest. The red line is inflation. That means the blue line is what investors’ real returns were.


You can see the massive negative returns in the post-war 40s and 50s. Negative rates returned throughout the 70s and into the 80s as the Fed did battle with out-of-control inflation. Finally, as inflation was subdued and rates began their endless trek lower, real rates flipped negative again in 2007 and have pretty much stayed there.

Remember, negative real rates are a net positive for the government. So no matter how high the Fed moves rates to combat inflation, as long as they’re lagging inflation, you’ll be paying their fair share…

Make the trend your friend,

Bob Byrne
Editor, Streetlight Daily