Money

 Don’t Chase Your Tail:  Money, Debt, Hard Assets

First:  What is Money?  Is it the (F)ederal (R)eserve (A)ccounting (U)nit (D)ollar to which we’ve become accustomed?  Or, might it be something else?  And, by the way, how can you tell?

 To begin with,  money has two jobs and only two jobs:  money is intended to be both a store of wealth and a medium of exchange. 

While the Dollar continues to work as a medium of exchange it has not been a very good store of wealth for quite some time.  Those with the nasty habit of undermining your savings are very busy these days. As a result, you might be advised to be a little flexible in how you define money.

(See more on this topic in various ARL articles on inflation and deflation.)

Debt: Inflationary economies – and the money created in them – are built on debt.  Understand this:  The US Dollar is a 0% interest bearing debt instrument that steadily depreciates as more and more new dollars are borrowed into existence.  It represents an obligation to repay a debt, not a redeemable credit for a real asset.  It’s like the difference between your mortgage and the deed to your house.

So, even with a thick roll of cash in your pocket, you’re in debt.  And, frankly, debt is just about that hard to avoid.  Like the “monkey trap“, too much debt will, in the end, make you a slave to your lender. 

Frankly, you will generally be punished for staying clear of debt.  Most of the time, the only way you’ll keep ahead of inflation is to, very carefully, take on debt only for the purchase of hard assets that will tend to keep pace with inflation. 

Treat debt like a campfire and don’t let it burn out of control.  And, stay away from consumer debt if at all possible. 

Hard Assets:  Things of Real Value.  In the end, saving “money” in an inflationary economy will rarely help you preserve wealth.  Your only long-term protection is the collection of so-called “Hard Assets”, notably precious metals and strategic resources such as oil, food, and land. 

Only these will tend to “appreciate” over the long-term…in direct (inverse) correlation to the “depreciation” of fiat and credit based money.    

The Future of the US Dollar:  As Keynesian monetary policies reach their logical destination (as they are now in the process of doing), currencies and conventional financial instruments will continue to be debased.  

A look ahead (“to the future of tomorrow”):

  • As the sovereign debt load escalates, nations will have an increasingly difficult choice between fiscal austerity, debt default, and the printing press.  While any and all such avenues will be utilized to one extent or another, monetary inflation will continue to lead the pack as the only ”politically viable” solution in a socialized economy. 
  • For the United States, some large share of such inflationary effects have been deferred by the global distribution of dollars (and/or dollar-denominated debt instruments) as the world’s reserve currency, a practice dating back to the 1944 Bretton Woods agreement.  As the dollar is put under increasing pressure, these deferred effects are likely to return to their source (with interest, of course).
  • The “Reserve Status” of the dollar has also led to the pricing of strategic commodities, such as oil, gas, and food, in dollar terms; justified on the basis of the sheer size and liquidity of the US economy and, of course, the traditional stability of the dollar.  The inevitable loss of that reserve status will result in the repricing of those strategic commodities.
  • The producers of strategic resources (especially oil) will, eventually, begin to insist upon payment on the basis of non-depreciating (hard – or, at the very least, harder) money terms.  Some such producers may also opt to pursue specific geo-political goals with the leverage these changes will afford.   

In the end, “hard asset” classes remain the only “safe-haven” available for capital preservation.  This has always been true to one extent or another, but it has never been more true today.  In a potential (even probable) hyper-inflationary environment, they may return as the only reasonable day-by-day medium of exchange. 

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