In going through my site tracker I ran across a link online that I had written almost 2 years ago. This was in response to another poster on a financial forum. After reading it again I was amazed that I did such a good job in explaining what money is and it's historic role in the marketplace. I have added some thoughts in red to expand upon my original writing of 2 years ago. Maybe people looking in on this blog might take note and learn why the world economy is in the shape that it's in. Very few people can explain this better then I have done here. These thoughts are taken from what Ive learned from others as well as my own observations. The more that people begin to understand the problem, the sooner we can begin the dialog to fix it.
Yes Jim, you are correct. However, it's not that the "old financial rules of thumb have changed" I would submit that the old financial rules are thumb are being rediscovered. I agree with you in some respects as to how to save but to start with you must have savings that is out of the system. Savings that the "Pin Striped Bandits" cant steal.
Having been in the investment world since I was in my 20s and did quite well I have learned a few things. First off I have learned that the U.S. monetary system and the economy is based upon a massive lie. They are the greatest Ponzi schemes ever inflicted on the world. Once you come to accept this you must go back and relearn the history that has been untaught.
Sadly what I'm about to tell you has not been taught in the western world for over 80 years and there is a reason for that. Everyone needs to understand what money is. Very few people can define money and its role.
To start with money has 5 elements. The 5 elements of money are...
(1) A medium of exchange - something of value to exchange for the payment of goods and services
(2) Money must be easily recognizable - in other words people must be able to easy recognize that medium of exchange as being valid and not counterfeit
(3) Money must be divisible - you must be able to easily make change, to take larger amounts and be able to make them smaller
(4) Money must be a store of value - In other words the ability to buy goods and services must be able to be stored for spending at a later time, also called savings.
(5) Money must eliminate DEBT. The payment of money must be able to eliminate any and all debt that is created in the marketplace.
Sadly what we use as money today only satisfies the first 3 elements of money. Elements 4 and 5 are not elements of what we use as money today. What we use as money is not a store of value and it doesn't eliminate debt.
The store of value element is very important in the role of money. In fact I would submit that is is the most important role. Money is a payment that one receives for the value of their time and expertise. That payment of ones labor is a claim on goods and services in the marketplace. Instead of bartering by accepting goods or services as payment one can accept money that allows that person to buy the goods and services they need that the person making payment doesn't have. The ability to buy the same amount of goods and services at anytime in the future is the store of value. If one can fill up their car with gas when they receive payment for their labor today then they should be able to so so at anytime in the future. Sadly this is not the case because the ability to buy the same amounts of goods and services from ones savings is debased by a hidden tax called inflation. The effect of inflation is an increase in the amount you pay for goods and services in the numbers of dollars. Price increases is not inflation and inflation is not good in any amount because it debases your buying power that you have labored for. Once you begin to understand this concept you can therefore conclude that the store of value element of money being debased is the same thing as SLAVERY. The ability to steal the value of ones savings through inflation means that you must labor even more and harder to keep the same standard of living over time. Therefore inflation by debasing money (creating money out of nothing) is immoral. Money is the store of value of ones labor.
Next is the element of eliminating debt. What we use as money doesn't eliminate debt because what we use as money comes into existence as a direct result of debt. Government doesn't issue money, they issue debt called bonds or Treasuries. The ability for government and the banks to create money out of nothing without laboring for it debases or takes away the value of the existing money supply. The value of the newly created money has to come from somewhere so through a process called inflation it is stolen from savers and transferred to the newly created money supply. And because government and the banks create the new money out of nothing they are the first to receive the benefits of spending that medium of exchange for real goods and services that they have no real or right to claim. They didn't earn the new money they created it. To eliminate the debt used to create the new money would be to destroy or deflate the money supply. This is why the government can not and will not ever get out of debt. They cant allow a deflation to happen.
That brings me to gold and how to best explain gold and its role as money.
Gold is money and a store of value. It is the "Currency of last resort" as Greenspan has stated many times through the years. Gold doesn't pay interest, dividends, doesn't restate earnings, has no lawyers, accountants, CEOs or CFOs lying to you on television. Gold doesn't ask for bailouts, doesn't go Bankrupt and cannot cook its books. Gold cant be debased or printed at the will of a company or government and holds its purchasing power.
Gold sits there as a store of value, is labor intensive, and a one ounce coin will not split into a bunch of half ounce coins at the direction of the "Pin Striped Bandits" on Wall Street. Also Gold is the ONLY asset class in the last ten years to increase in value and retain every dollar of its purchasing power.
Can gold go down? Yes. However that would mean that all essential goods and services must fall as well. Gold is and acts more like an insurance policy. You are insuring that something in your portfolio can never go to $0.00. All paper assets have the ability to go to $0.00. This is what you are insuring against.
As Alan Greenspan former Chairman of the Federal Reserve said ....
"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold (from 1933 to 1975). If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard." Allen Greenspan 1966
Gold is not in a bubble and here is the reason why. Those that say that gold is in a bubble are only looking at the value of gold in relation to its price in the number of dollars it takes to buy it. However I would submit to you that gold has not changed in value at all. Here is the reason why. In January 1999 when gold was at it low it traded at $287.85 an ounce. Crude oil in January 1999 for its low traded at $17.00 a barrel.
When you look at how much crude oil you could buy in 1999 with 1 ounce of gold it comes out to be 16.93 barrels of oil for each ounce of gold. Today gold trades for $1400.00 and oil is trading for almost $90.00 a barrel. Today the same 1 ounce of gold buys 16.13 barrels of oil. In 1999 gold bought 36 more gallons of crude oil then it does today. So in reality, since oil is the main driver of the economy as everyone needs energy to heat homes, fuel cars, run factories etc, Using oil as the basic foundation of to figure out the golds value you can see that gold is currently UNDERVALUED in relation to how much oil gold bought in January 1999.
When you begin to price everyday living expenses such as rent, fuel, power, food, medical expenses, schooling expenses, TAXES, etc you will see that the gold buys the same amount of those essential items you must have for a basic standard of living and quality of life.
Therefore in reality, GOLD is UNDERVALUED at this time. And if you take into account that the Bank of England dumped all their gold on the market in January 1999 pushing its price down, then you have to conclude that gold could really be valued much higher then where it is today when you base the purchasing power of gold in historical terms.
Can gold go down? Yes. However that would mean that all essential goods and services must fall as well. Do you see gas going back to $1.00 a gallon or food dropping by 75%. I don't think so.
Gold is NOT in a bubble. Gold has not gained in value. Paper currencies have declined in value. That is why essential goods and services cost more in paper dollar terms. Now you have to ask yourself where did the value of our dollar go. That value was stolen from us through a process of a hidden tax called INFLATION.
To address what happened in 2008 when gold and silver went down, you have to understand that ALL asset classes declined in dollar value. This was due to the liquidation of debt. Gold declined by 30% yes, however crude oil went from $147 a barrel to less then $40 a barrel. This means that during the deflation period gold purchasing power increased during that time. However, during the last 3 months of 2008 paper/electronic U.S. dollars increased it's purchasing power even faster. This was because the wold economy was going through a deleveraging cycle and the demand for U.S. during this time went up because all market transactions worldwide are conducted in U.S. dollars. The U.S. dollar is the "WORLDS RESERVE CURRENCY" at this time. True, it has been loosing ground as the reserve currency but in 2008 it was still the most dominate currency of the world. This is a status that the U.S. dollar is loosing more and more ground every day. As more and more nations reject using U.S. dollars and look to other currencies as payment to settle trade among themselves, a few of them including China, India, Iran, Russia are turning to their own currencies and gold as the new reserve currency to settle trade debts. Look at gold as a currency and not as an investment.
Before investing in the markets you need real money. Real money is gold and silver.
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Was thinking the other day about how old financial "rules of thumb" have changed, on many fronts.
Gone are the days from my parents generation where you worked at the same job for 40 years and you got a nice pension for life like my Dad did, now I think you must adapt a "portability" about your job, retirement, health care etc. the onus is now on you not the company you work for.
What I think is important is to "increase the stock in yourself" like improve your marketability by taking courses, learning things/branching out in your field, getting endorsements etc.
I think the old axiom to have 3-6 months living expenses in a liquid account is inadequete, I think it should be more like 9-12 months.
I believe you should save for retirement by first investing in a company 401K (up to and IF they have a company match) then a Roth, the earlier you start the better, it can be done quite painlessly, I've always been a fan of index funds (except my naive early investing days LOL), over time they have proven to be pretty much on par with actively managed funds, why pay the higher expense ratios ? a couple funds have target retirement funds, like target 2035, they automatically tweak as the time moves on.
Invest in your health, eat right don't use tobacco products, drink sparingly, maintain optimal body weight, get check ups, sleep well, cherish friends, family, significant other, don't sweat the small stuff.
Try to save money without doing without, there are so many ways to do it that really add up, the usuals: brown bag it, don't go to Starbucks, watch movies at home, go to library.
