When most people think about taxes, they picture income tax forms, payroll deductions or sales tax at the checkout counter. But the reality is far more subtle and pervasive.

Government spending

is the real tax on society. Every dollar spent by the state is ultimately claimed from the economy’s resources, regardless of whether the bill is paid through income taxes, borrowing or

inflation

. The mechanism may differ, but the burden remains the same.

History’s warning: Gold confiscation and dollar debasement

To understand why this matters, look back to 1933. In the depths of the Great Depression, U.S. president Franklin D. Roosevelt issued Executive Order 6102, forcing U.S. citizens to surrender their gold coins and bullion under threat of a $10,000 fine or 10 years in prison. This wasn’t symbolic; it was purposely designed to fund massive fiscal expansion.

Between 1933 and 1939,

federal spending

nearly doubled as a share of GDP, rising from 5.9 per cent to 11 per cent, driven by New Deal programs and public works. At the same time, the federal deficit ballooned to

5.8 per cent of GDP

in 1934, levels unprecedented outside wartime. These deficits were financed in part by gold confiscation and revaluation.

After Congress revalued gold to US$35 per ounce in 1934, the Treasury realized an immediate US$2.8 billion windfall, significantly bolstering its fiscal position.

This single act devalued the dollar overnight, transferring wealth from the public to the government. It was a covert form of debasement executed through policy rather than market forces and marked one of the greatest wealth transfers in American history. Why did this happen? Because tying currency to gold limited the government’s ability to manipulate monetary policy. Once the dollar was unshackled, policymakers gained the freedom to expand or contract the money supply at will, fuelling credit cycles and inflation without the constraint of a hard asset.

Today, the same principle applies, only through different mechanisms: fiat currency, quantitative easing and

interest-rate

manipulation.

Fast forward: Today is 1933 on steroids

U.S. federal spending today is dramatically higher. Total federal outlays are about

23–24 per cent of GDP

in 2025. The 2025 deficit sits at 6.2 per cent of GDP.

Here in Canada, the

federal deficit

is expected to reach 2.5 per cent of GDP, the highest outside recession years since the mid-1990s.

Few realize that the Government of Canada is trying to help stabilize the Canadian mortgage market and began

purchasing Canada Mortgage Bonds

(CMBs) in 2024 up to an annual maximum of $30 billion. Since the program began, the government has purchased roughly 48 per cent of total issuance, and for 2025 it has committed to buying 50 per cent of fixed-rate CMBs in the primary market.

Sound money matters — and history proves it

When sound money is abandoned, inflation becomes the silent thief. It erodes purchasing power slowly; almost imperceptibly at first but relentlessly over time.

For some perspective: Since 2019 the cost of living has surged directly, driven by government policy. In the U.S., prices are up roughly 27 per cent, meaning a dollar today buys about what $0.79 did in 2019. In Canada, prices have risen about 19 per cent, also eroding purchasing power significantly.

Housing affordability has deteriorated even more dramatically. In the U.S., national home prices are up roughly 60 per cent since 2019, according to Harvard’s Joint Center for Housing Studies, making homes about five times the median household income. Benchmark home

prices in major Canadian cities

increased between 40 per cent and 110 per cent from 2019 to 2024, according to Zoocasa Realty Inc., based on Canadian Real Estate Association numbers. Canada’s price-to-income ratio now stands at more than 10 times median household income in certain markets. Mortgage payments in many cities now consume over half of after-tax income, and 110 per cent in Toronto and 112 per cent in Vancouver making home ownership unattainable for many.

As you can see, for those who don’t own assets, the impact is severe. Inflation erodes cash, while housing appreciation leaves non-owners further behind. This is the essence of wealth transfer: Those with assets benefit, those without fall behind, very far behind.

The investor’s dilemma: Cash isn’t safe

This is why investors must pay attention to fiscal policy, not just monetary policy. Interest rates may dominate headlines but they are only one lever in a much larger machine. The real driver of long-term inflation risk is government spending. When deficits balloon and debt piles up, the temptation to inflate away obligations becomes irresistible.

Against this backdrop, many investors are holding excess cash, worried about a market crash. It feels safe but it really isn’t. In this environment, cash is a melting ice cube. Ron Baron, American mutual fund manager and the founder of Baron Capital, sums it up perfectly when he says at our current pace of debasement, the value of money halves every 15 years. Think about that.

This is why one has to be careful about holding cash too long. Rather stay invested and manage drawdown risk that comes with being in equity markets. Investment managers and advisers must now become risk specialists, more than ever before.

Government spending is the real tax. Inflation is the silent thief. And cash, while comforting, is a dangerous long-term bet. Since 2019, cost of living has surged, housing affordability has collapsed and those without assets have been left behind. Investors must position themselves for a reality where monetary and fiscal policy is a lever of power not a neutral backdrop. That means staying invested, staying diversified and remembering that history doesn’t repeat but it sure does rhyme.

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Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.

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