Understanding your money and the value of the U.S. dollar...
All of the currency in the United States and most of the rest of the world is backed by the 'good will' of the country which prints the currency. There is no intrinsic value to the dollar, other than the governments promise that it has some value. Most people these days never even think about this fact, as nearly all of us have lived under this system all of our lives.
Let's take a historical look at this kind of thinking and see how people in the past would have faired under such a system:
--If the empire of Alexander the Great had printed paper money backed by the empire,
what would it be worth today?
--If the Roman empire had backed their currency by the full faith and promise of the empire,
what would it be worth today?
--If the great, thousand year, Byzantine empire had paper money backed by the state,
what would it be worth today?
We could list many more examples of powerful and long lived governments in the past that no longer exist. However, the point is clear -- for in all of the examples above, their surviving currency still has value today, even though the countries and empires no longer exist! Why does it still have value? Because all of their currency was issued in silver and gold. We're quite sure that, just like today, the citizens of these great empires thought that they would go on forever. The difference between then and now is that when the modern empires fail -- the people will be left holding nothing of value! The one thing history always teaches is that it repeats itself and immortality is a delusion.
When did the system change?
The Federal Reserve system was created in 1913. This was the beginning of the end of US currency being backed by gold. Instead of having to back, by gold, every paper dollar issued -- the new system allowed a board of publicly unelected directors to create currency at will.
What was the result of this new system?
Since there was now no limit as to how much money could be created, government was free to spend as much as they wished! Money could be printed, taxes raised and the economy influenced. Most importantly, the population could be controlled. Are the people spending too much? Then tighten the money supply, reduce credit and cut back on peoples choices. Is the economy slow and people saving more than we think they should? No problem. Print lots of money, give the banks lots of money in the form of credit to pass on to the people in the form of loans and make it easy to spend. The end result is never-ending cycles of ups and downs in the economy, all the while dwindling everyone's net purchasing power, reducing people's income and increasing their debt.
What's a dollar worth?
There are several ways of determining what a dollar is worth today, in relation to some point in the past. The most conservative way to do this is based on the Consumer Price Index. So, let's take a nice, crisp, $20 Federal Reserve Note ($20 bill) from 1914 and compare it to a shiny, new, $20 gold piece from 1914. In today's money, that $20 Federal Reserve Note - backed by the US government - is worth $0.05 (5 cents!). This is a comparison of what $20.00 could buy in 1914 versus today. The $20 gold piece, however, is hovering at around $900.00! Even if you assume the unlikely possibility that you took that $20.00 bill in 1914 and put it in the bank until today. At a interest rate of 4%, which is quite generous over this long a period, you would have $682.00.
Thanks to monetary policies of the last 90+ years resulting in cycles of boom and bust, the average person can't even keep up with inflation. Every year that goes by your income diminishes as you make marginally more money. You will hear the political spin doctors tell you that inflation is only 1 or 2 percent and all is well. What they don't tell you is that this number excludes energy and food costs. Well if we didn't have to drive, eat or ship anything by motor vehicle that would be great news. Unfortunately for the masses we do have eat, drive and get our supplies shipped to us by motor vehicle.
Do you ever wonder how in the early part of the 20th century people could buy homes, cars and live in luxury with only one income per family and today, with both husbands and wives working, many people can't break even? In 1914 a loaf of bread cost 5 cents. In today's dollars that's about $1.05. However, today it costs approximately $3 for an equivalent product.
What can you do?
Putting your money in the bank is a losing proposition. The value of the dollar falls faster than the rate of interest you are getting from the bank. Many people suggest buying stocks as a long term investment option. However the stock market is directly influenced by the monetary policies of the Federal Reserve. They control the money and the interest rates. Therefore, they control the stock market. Since we have seen that federal monetary policy over the last century has resulted in lower net income and purchasing power -- what does that say about the stock market? It is true that if you put your money in the stock market and left it there for 50 years that your average return would be much better than any bank and greater than inflation. However, the fallacy of this is that nobody can put all of their money in the market for 50 years because, as inflation and currency devaluation eats away at purchasing power, people have even less to invest in the first place! Therefore the "put your money in the market long term" theory has little benefit to the person living paycheck to paycheck.
Many people suggest buying gold as a hedge against inflation. This is certainly a viable option, if you can afford to buy gold. Owning gold is also a protection against unforeseen disasters that could render paper currency, bank accounts and stocks, worthless. Putting away whatever you can in gold makes good business sense.
However, any hope of reversing this downward spiral depends on the people and their power to influence elections and pick leaders who are not going to play the global fiat money game. Talk to your friends and neighbors, know who you are voting for, voice your opinion to elected officials and news opinion columns. Nothing will change unless people stand up for a real change of direction. We're not talking the kind of fantasy change the Democratic and Republican politicians and spin doctors spew out of their twisted mouths. We're talking about a fundamental change in how we do business and run our economy. Something the Republicans and Democrats will never do. If nobody stands up, history will eventually handle the problem -- much to our detriment.
October 2008 Update: Our elected officials, in a frenzy of greed and corruption, have passed a so called "bailout package". In addition to printing 700 billion new dollars to give to the banks who, encouraged by the government, made unwise investments -- they also put together another 150 billion in pork spending for the various politicians. Behind the scenes, they printed 600 billion in new money to shore up the European banks and then spent 85 billion more to save an insurance company from it's own misdeeds. Imagine an insurance company, who insured lousy and risky mortgages, now bailed out by the federal government in spite of the greed and corruption on their part. Of course the corporate officials of all of these companies walked away with multi-million dollar payouts. They are also in line to administer the new federal bail out program so that they can make some more money off of the 700 billion dollar bailout they caused.
To top it all off, it seems something is fishy when the FDIC insists that Citibank must buy troubled Wachovia for a seventh of what Wells Fargo is offering. The difference is that Wells Fargo is using their money for the whole corporation and the Citibank deal is brokered by the FDIC for only the banking assets. Why would the government want to broker a deal to save a bank and use taxpayer money if there is a way to do it that costs the taxpayers nothing? Perhaps to hide the fact that their theory of making banks "too large to fail" as they have done with Citibank and others would be proven wrong without the accounts and cash Wachovia offers?
By the time all is said and done, they will have printed a couple of trillion dollars of new money. The people whose stock portfolios, jobs and houses that have been lost, get nothing. Imagine what your dollar is going to be worth in the future after all of this sets in?
November 23, 2008 Update: The bank that was too big to fail is on the brink of failure with it's stock going below $4 a share. With the Wachovia deal failing, the Fed is now talking of a new "rescue plan" worth billions more to save Citibank. One has to question why not let it fail, sell it's assets, like it's deposits, to another bank and be done with a bank that overspent, under planned and paid it's executives millions of dollars as they drove it into the ground. All while providing risky loans at exorbitant interest rates in order to make a quick buck? But with talks of the Obama administration printing another 700 billion dollars for a new stimulus package to be released in January we fear that the spending spree is far from over. Republicans, Democrats it doesn't really make a difference as the answers are always the same, print money and spend your way out of every problem. A change to believe in will be when someone at the top finally stands up and declares this global Ponzi scheme for what it is. When they bring us back to a monetary system we don't have to blindly believe in because it's based on hard assets of real value.
January 25, 2009 Update: The first $350 billion dollars of the Bush bailout has disappeared without a trace. Nobody in government or the Federal Reserve thinks the people have a right to know where it went. But reports have surfaced of bank corporate offices spending millions on new offices for the chief executives. All this while they lay off tens of thousands of employees. All we know is that the average Joe got none of it. It's not over yet, more banking layoffs are on the horizon. We've given billions to the banks and received nothing.
Congress just agreed (by not disagreeing) to allow the next $350 billion to be spent. Obama says this $350 billion will be more transparent. Well of course he says this -- he's in line for a totally new package of his own for what will amount to a trillion dollars! It's a good thing most of this new money is handled by computers as there are probably not enough printing presses in Washington to actually print the new money they are creating. Yes, they are not borrowing this money, the taxpayers are not paying taxes to make this money available, they are making it up out of thin air. They have tripled the amount of US currency issued in the last few months and they still are going to go ahead with another trillion dollars.
We have been assured by all the geniuses at the Fed and in the old and new administrations that this is not going to eventually lead to hyperinflation and the fall of the dollar. Of course, these are the same geniuses who didn't even see the recession coming! We're told this recession started in December of 2007. It's funny that during all the primaries leading up to the election, none of the politicians bothered to mention that. The bottom line is that Bush, Obama, Clinton, McCain and all the rest didn't have a clue and all of them are still playing their political games at our expense.
Heck, the new Secretary of the Treasury can't even seem to do his taxes correctly! But we're supposed to have confidence that he can handle the trillions of dollars of bailout money? Of course we realize that he has to say that he made a mistake, because the truth of "I'm too important and powerful to be bothered with taxes", won't fly. The problem is, if he truly didn't know what he was doing and was confused by his taxes, then he is an idiot and doesn't qualify for the position.
They are hoping that people will start spending like crazy, by borrowing more money, and that they can cover up the Ponzi scheme for a few more years. We're betting just like Bernie Madoff, this time around there won't be enough suckers to keep it going. At which point we will see the breaking up of the greatest Ponzi scheme in history. When this happens, we can finally agree that we have seen "change that we can believe in". Because other than window dressing, nothing has changed in the fantasy land called Washington and nothing will until the people see the "man" behind the curtain.