Debasement: The Hidden Tax

Welcome to Financial Fluency - your weekly guide to mastering financial English, learning how money works, and making confident financial choices.

In this issue:

• A Look at the Markets: Bitcoin

• Debasement: The Hidden Tax

• Quote of the Day: Lyn Alden

• We value your feedback

• Words of the Day: Debase and Debasement

• Test Your Knowledge: Interactice quiz

• Whenever you are ready, here is how I can help you

A Look at the Markets: Bitcoin $BTC.X ( ▲ 0.31% ) 

The value of Bitcoin fell last week amid continued market uncertainty over tariffs. Such swings are to be expected in the world of cryptocurrencies.

Looking at the chart, if the $112,000 level holds, it could become a new area of support and resistance. As always, time will tell.

Debasement: The Hidden Tax

The invisible tax that transfers wealth from savers to governments

Last week, we explored why traditional saving fails to protect wealth, with currency debasement acting as a hidden tax on savers.

This week, I want to examine currency debasement in more detail with the help of Lyn Alden's excellent book, 'Broken Money'.

Nothing New - The Romans Did It!

Lyn introduces the concept of monetary debasement by going back to Roman times.

Even Roman emperors and ancient governments faced hard monetary decisions. Wars and conquering new territories was expensive and taxes were unpopular. Some things never change! So what was their solution?

They debased the currency.

Lyn Alden goes on to illustrate this ancient practice with a specific example: the Roman denarius. When introduced in 211 B.C., it was over 95% pure silver. By 247 A.D.—nearly 500 years later—it contained just 5% silver. The Romans had gradually replaced 90% of the valuable silver with cheap filler metals, essentially stealing purchasing power from every coin holder.

What was the effect of this? As Lyn describes, wages would not change initially so the emperor could get more value for his silver. However, foreign merchants were often the first to catch on, and demand more coins for their goods as they recognised the declining precious metal content. The purchasing power of the coins had been reduced.

Think This Can't Happen Again?

It is tempting to believe that this doesn't happen today.

Firstly, under the fiat system (where currency value is based on government backing rather than gold or silver backing) the value of our dollar, euro or pound does not depend on precious metal content. Secondly, unlike in previous centuries, major Western powers are no longer seeking to build colonial empires.

But they are still going to war.

The War on Terror

Lyn explains in Chapter 13 of Broken Money that after the 9/11 (11th September 2001) terror attacks in New York, the United States responded with military efforts focused on Afghanistan and subsequently Iraq.

This was known as the 'War on Terror'.

Lyn explains that Gallup polls in 2003 showed that 76% of Americans supported going to war in Iraq. She questions whether, had there been a 10% special war income tax for all Americans, the level of support would be so high?

There wasn't a special income tax so how did the US government pay for the war? They haven't finished paying and, in fact, they're still paying through debasement.

Lyn cites the Watson Institute for International & Public Affairs at Brown University who estimate the price tag of $5.8 trillion by 2022 and perhaps a total cost of $13+ trillion by 2050 including debt repayments and veteran's care.

But how does the government service this massive debt without raising taxes? The war was paid for by issuing debt - essentially government IOUs (promises to pay back later). Then, through currency debasement - expanding the money supply electronically - the government reduces the real value of that debt. What cost $1 trillion in 2003 dollars is worth much less in today's debased currency, transferring the true cost to all currency holders.

Same Playbook - Just Easier!

The comparison between Roman emperors and modern day Presidents is striking.

However, what took the Romans centuries can now happen in decades. While the Romans had to collect physical coins and melt them down, modern day currency debasement can be done digitally - more or less at the click of a button.

The fundamental dynamic remains unchanged: governments facing budget constraints choose currency debasement, which is opaque, over transparent taxation, which is unpopular.

Does Currency Debasement Affect All Currencies?

You might be saying that this is all very well, but I do not hold US dollars. Is my local currency debasing?

The likelihood is yes. The US dollar is still one of the strongest world currencies in comparison to other currencies, so if currency debasement is happening for the US dollar, the likelihood is it is happening for your local currency as well.

Check the charts of your currency against the US dollar over recent decades - you'll likely see a downward trend, showing your currency has weakened even against a currency that's itself being debased.

For instance, when I started in business in 1991, the GBP/USD was approximately 2.0. Now it is around 1.34. That's a 33% decline in the pound's value against the dollar over three decades - and this is against a dollar that has itself been significantly debased during the same period.

What Can We Learn?

Currency debasement is real and we should all be aware of it in order to protect our wealth and our financial futures.

Next week, we will look at who benefits from currency debasement and we will return to Lyn Alden's aptly named book, Broken Money.

As always, none of this is financial advice. Everyone should invest according to their personal circumstances, risk tolerance and financial goals.

Quote of the Day: Lyn Alden

The key point here is 'non-transparent.' Most people understand that higher taxes reduce their income. Few realise that currency debasement achieves exactly the same result—transferring purchasing power from citizens to government—without the political accountability that comes with traditional taxation.

We Value Your Feedback!

Your opinion helps us improve and lets you suggest topics or ask Business English questions for future issues.

Words of the Day: Debase & Debasement

Debase - verb - to reduce the quality, value, or purity of something; in financial contexts, to deliberately reduce the precious metal content of coins or systematically reduce the value of currency through money creation.

Debasement - noun - the act or process of reducing the quality, value, or purity of something; the systematic reduction of currency value by governments.

Context and Usage: These are the standard modern terms for reducing currency value. Whilst Lenin used "debauch" in his famous quote (which we covered last week), "debase" and "debasement" are the terms economists and historians use when discussing currency manipulation throughout history.

Note: Currency debasement has been used by governments for over 3,000 years as a way to fund expenses without raising taxes transparently. What took ancient rulers centuries to accomplish, modern governments can achieve in decades through digital money printing.

Common Collocations:

Debase the currency - systematically reduce the value of money Governments often debase the currency during wartime to fund military expenses without raising taxes.

Currency debasement - the systematic reduction of money's purchasing power The $5.8 trillion cost of the War on Terror represents massive currency debasement spread across two decades.

Gradual debasement - slow reduction in currency value over time The gradual debasement of Roman coins took centuries, unlike today's rapid monetary expansion.

Historical Context: From Roman denarii to modern fiat currencies, debasement remains the preferred method for governments to fund large expenditures without the political cost of transparent taxation. The technology has changed, but the economic incentives remain identical.

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Disclaimer:

This newsletter is for informational and educational purposes only and should not be construed as financial advice. The information contained herein is generic and does not take into account your individual financial circumstances. You should always consult with a qualified financial professional before making any investment or financial decisions.

Additionally, the authors and/or publishers of this newsletter may hold investments in securities or other financial instruments mentioned herein. These are included for illustrative purposes only and should not be taken as a recommendation to buy or sell such securities or financial instruments.