In polite circles, it often isn’t considered proper to talk about money. In some ways, it’s too bad, because basic knowledge of how money and credit works is vital to protecting your hard-earned wealth. Anyone that doesn’t understand this, lost money during the past year. Let me show you how.
Early in our careers, we usually have more things to pay for than we have money to pay for them. The problem isn’t what to do with our money, but rather how to get by on so little of it. But if you work hard and are diligent with your expenses, this is usually a temporary problem.
Eventually, the problem shifts—subtly at first, but then more substantially—away from how to obtain more money, to what to do with the money that you managed to save. Under the current monetary system, this is not a trivial matter. It can be a costly one. Anyone who doesn't understand this, will surely pay for their lack of knowledge.
Under a hard monetary regime, saving some of your wealth was sufficient. You could earn interest at the bank, and you could be confident that the money that you saved would buy just as much tomorrow, as it would today. All you had to do was mind your p’s and q’s, try to be a good citizen, and spend less than you made. Do those basic things, and money couldn't help but accumulate.
But then what? What to do with the money? Under our previous monetary system, it was pretty simple. All you had to do was loan your savings to your local bank, and let them make loans with it. From those proceeds, they would pay you interest, which eventually would grow to the point that it covered your expenses. When this level of wealth was reached, you were financially self-sufficient and could stop working to obtain even more money.
Pretty easy to understand, right? Work hard, save, and eventually live the good life. Once upon a time it was that easy. However, the powers that be were not willing to simply hand over a life of ease to the people.
When the US was under a gold standard, the supply of money was finite. The Treasury couldn’t print currency unless it had a corresponding level of gold or silver to offset it. Since gold and silver can’t be created out of thin air, there was a natural brake on the supply of money. Here is where it gets interesting.
You see, the longer that humans work, the better we become at it. For example, modern technology enables us to substantially increase our crop yield per acre compared to what the settlers were able to harvest with their hand tools. Likewise, a modern front-end loader can do in an hour what used to take humans days to accomplish with picks and shovels. As we get more efficient at our jobs, we are able to produce more.
When we produce more, the supply of goods correspondingly increases. Remember the law of supply and demand? If the supply rises relative to demand, the price will fall. That is why the price of goods and services tend to slowly fall in a fixed monetary regime. This is a feature, not a bug. We are told that deflation is bad because it discourages spending, but does it really?
If your dishwasher quits working, are you going to hold off purchasing a new one until a few years from now in case they drop a little in price? How about your computer? Your car? Clothes? Food? ANYTHING? Of course not. Computers have fallen in price for years, yet I can’t think of anyone that is still waiting for them to get cheaper before they buy one.
An economy with high savings, and stable, or even falling prices, is not a problem for you or I. Those conditions typically mark a period of peace and prosperity, with financial security for anyone that puts in the effort.
But that basic contract with the people has been broken. Working hard and saving is no longer sufficient. Don’t believe me? Let’s see what happened to anyone that tried that approach during the past year.
This week, inflation numbers were released that shows prices of goods and services have risen 7% in the past twelve months. Looked at another way, your hard-earned savings can only buy ~93% as much stuff today as it could just one year ago. Someone took the remaining 7% without your permission-you had no say in the matter. That is a huge expense in just one year! But it is no less real. See the chart below? By printing money to pay for debt instruments, savers are robbed of their purchasing power.
By putting the Fed in charge of the nation’s money and credit, we have a fox guarding the henhouse. The Fed is the fox. By using an elastic money supply, the government, with the help of the Federal reserve, can tax the purchasing power of your savings through inflation. This is not some idle threat.
If the past year is any evidence, it should now be obvious to anyone with money that you have to do something with your savings. The old ways of handing it over to your bank and collecting fat interest checks are over. Not only have interest rates all but disappeared (surely you've seen interest deposits in your checking account for one or two cents a month), but the purchasing power of money is disappearing also!
Now that the government broke its promise with you, you need to act. Not acting is no longer possible. Those that tried last year lost 7%. The USD is no longer backed by hard assets, and is no longer a safe store of wealth. It’s unfortunate, because now everyone—from an eighteen year old kid to a seventy-five year old retiree—is forced to learn how to invest, even if they don’t want to.
Don't get us wrong, we are all for investing. But investing is work. It is a craft that requires time and effort. There is a learning curve to get good at it, and even then you are exposed to the whims of the market. Putting capital at risk in exchange for a potential gain is great for those that have excess capital to speculate with. But should a retiree really be buying Tesla stock with their savings in hopes that it will break more valuation records, and continue ever higher? Again, sure, if they have the excess capital to speculate with. But that isn't a spot that enough retirees are in.
A capital gain is supposed to be a GAIN...a reward for the risk involved. Today, we need a 7% capital gain just to break even in terms of spending power. That is akin to needing to run on a treadmill just to avoid going backwards. Wouldn't it be easier to just shut off the treadmill? Awww, if only the political will existed. Shutting off the treadmill might protect the purchasing power of the saver, but it also retains the true cost of the mountain of debt owed by borrowers.
Adding money and credit to the economy spurs growth and feels good. But it is a temporary high. Paying back the debt always feels terrible, especially if the money wasn't spent productively. By increasing the supply of money, debt becomes relatively cheap compared to the amount of dollars in existence. Eventually though, the consequence of a rising money supply reveals itself. Prices begin to rise. Since few people understand the root cause of inflation, there is little pressure to stop it.
Instead, we blame greedy corporations for attempting to get rich off of the backs of the poor by raising prices on goods and services. Who hasn't heard of the evils of big oil for high gas prices? But take a look again at the money supply in the graph below. Under that kind of dilution, it's impressive that prices haven't risen even faster.
In summary, history has shown that it is a grave financial miscalculation to rely on the government to maintain the purchasing power of our currency. On the contrary, we should expect most governments to abuse their position of power as creators of money and debt. After all, it's what's popular with the public, until it isn't.