Tuesday, July 31, 2018

Dollars, Doughnuts and Capital Gains

Bought cider doughnuts at the farmers market  last weekend – six bucks for a half dozen. A dollar a doughnut.

"Dollars to doughnuts" was how our forebears described a virtually sure bet. At the dawn of the 20th century a loaf of bread cost a nickel, so doughnuts must have sold for a penny or less. After more than a century of inflation, my doughnuts cost 100 times as much.

Since the Great Recession, inflation has been so muted that the Federal Reserve has wished for more. We sometimes forget how even low inflation keeps dinging the value of a dollar. Savers suffer, and so do investors who may assume they're reaping profits.

Say you bought stock at $100 in 2008 and now sell at $120. A modest profit? Not after paying federal income tax on your capital gain. Thanks to a decade of "low inflation," you need to net more than $117 just to break even.

From time to time Congress has toyed ineffectually with the idea of indexing capital gains to inflation. Could the Treasury do the job for them, perhaps by issuing a regulation redefining capital gain?

Anything's possible, but we'd guess it's a dimes to doughnuts bet.


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