Wednesday, September 5, 2012

Let's Talk About Money

Some parts of this discussion will be basic and familiar territory to most readers. Hopefully, it will be new to some and starting with basics helps me to organize my thoughts. A little history first. Back when people realized that not all trade was an even item for item swap they knew that they needed a medium to facilitate trade that would signify value but not necessarily of great value in itself. What required was a certain degree of rarity. In some parts of the world cowrie shells were used. Native Americans in the northeast made wampum from quahog shells. Neither of these was terribly valuable but they took time and effort to collect. Time marches on and various metals were introduced as coinage. Governments were formed and control of the money supply was in their pervue. Sometimes, especially during wars, chits were issued on paper to pay soldiers, since transporting heavy coinage in areas of military danger was close to impossible.

More time passes and paper money becomes the world standard. First it was backed by gold. Then it was backed by silver. Now it is backed by the good intentions of the government underwriting the issue. And, as Shakespeare said, "therein lies the rub". How do you anchor the value of paper money backed by a promise? You don't. And I don't. And, for the most part, governments don't. Well, who does? Speculators that work the money market control value. They will buy currencies that are down relative to other currencies and trade them when and where they can get a higher value. The money market, to me, is insanely complicated. But it is the market that controls the value just as with any commodity.

Can the government control value? The government can affect value more than control it. Which brings me to my first point. The U.S. government has a nice euphemism called "quantitative easing". In the past eight years the United States government has built up an irresponsible amount of debt. As a matter of fact, as I write this, it just passed 16 trillion dollars. That, my friends, is unconscionable. So to help to pay off some of this debt they resort to "quantitative easing". Doesn't that sound nice and friendly and benign. It is not. It means, start up the presses and print a bunch of new money. This, of course, dilutes the money supply and makes every dollar in your pocket worth less. So prices go up and net worth, in terms of tangible goods, goes down.

Prices going up should cause the inflation rate to rise, right? Yes, it should. But the government also controls interest rates. Keep those interest rates down and price inflation vanishes as a line item in a statistical analysis spreadsheet.

But low interest rates are good, right? Yeah, if your getting a loan. But loans are hard to come by with all the new regulations and not may people want loans right now anyway with unemployment and such. But all this does have one other effect worth noting. How are you doing with the interest rate on your bank savings account? Getting a great three quarters of a percent are you? Maybe even a full point? So if you trying to save for the future, saving accounts just aren't doing it.

I don't know about you but I'm skittish about the stock market. It seems to be idling between a rock and a hard place. Real estate in out for now. Where can you go? An index fund? But the indices aren't moving. Precious metals? Maybe a metals fund. I have no answers. I doubt that anybody has any real answers. But I do know one thing, the politician that you have supported over the years, and especially the last decade, have screwed you over badly. That is about as rude as you will ever see me get in these posts. And I am sorry but I am bitterly angry. You all deserve better for all that wasted money.

One more brief thought if I may. President Obama has had a hugely unsuccessful four years. He claims that he underestimated the problem and will need four more years to finish what he started. What if, as I believe, he is on the wrong track and gets his four more years. That will be eight years in the history of this country wasted. That will devastate the hopes of half a generation that are trying to start a life. Ponder that if you will.

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