Put Your Money Where Your Heart Is

It appears that everyone is ready to go back to work after a week of tragic TV news in Virginia. Not to diminish the grief of the families and friends suffering their loss, I am pretty happy to be able to focus on something else as well. There were a lot of comments about the Tech article, but after leaving that up for several days I think it is best to heal and move on the best we can.

The news you are going to be hearing this week will probably include something about the imminent record close of the Dow Jones Industrial Average (Dow), for the first time a close is expected over 13,000. I know this could be a boring subject for most people, but it brings up a subject that I think is important in this day and age, definitely worth discussing. The financial markets can at best be confusing, but in my simple view there are a few things that most people don't know and could benefit from. My basic advice is this, find something that you are very interested in where you can invest your money and beware of assuming everything will continue to go along as "normal." My goal here is not to scare anyone into putting cash in their mattress, actually it is completely the opposite. We should save for a rainy day and be prepared to invest in appreciating assets (key word here is "appreciating"), it is a subject even the Bible talks about (remember the parable of the "talents" in Luke 19 12-26 as one example?).

A little background to start, a very important history lesson that I can pretty much guarantee you will not hear in the mainstream media. In the early 1970's our nation removed ourselves from the Gold Standard that existed (other than the Confederate States during the Civil War) since the start of our national economy after the American Revolution. What that meant is that each dollar that existed in circulation had a corresponding value of gold at a central depository, like Fort Knox for example. Each dollar had a real value based on gold, you could show up at any time and request your dollar be traded in for gold. What happened to change that? Well, simply put, we ran out of enough gold to ensure it could back the currency due to our expanding economy, the government had to remove us from that standard and then create "legal tender" laws that basically made it illegal for anyone to refuse the non-gold backed dollar in any financial transaction. This was a key moment in time.

Why is this a problem? Well, simply put again, any fiat (another name for a currency that is not backed by some tangible, precious metal source) currency in the history of the world has eventually failed due to the fact that only the faith and credit of the issuing government backs the currency, not a bonafide source of wealth. It is a 100% certainty that as more dollars enter circulation, the value of each dollar has to become less (remember Econ 101?), and it will take more dollars to buy the same item you purchased yesterday when fewer dollars were in circulation. This is called inflation, and it is important to remember that it is not the price of goods and services that is going up, it is the "cheapening" of the dollar you are using to purchase them that creates inflation. The only way to stop inflation is to stop printing more money.

So why do we keep printing money? We continue to print money for one reason, to keep our economy alive and vital. Over our history we find a cycle of boom and bust that generally happen each 37 months for boom and 18 months for bust. Our Federal Reserve Bank does an unbelievable job at efficiently managing the money supply to keep the economy rolling. As inflation gets carried away, in simple terms they just reduce the amount of money printed to slow it down to a reasonable level. As the bust cycle takes over and unemployment begin to rise, we print more money to pay for programs that stimulate the economy and bring us back to a boom cycle. This happens over and over again, pretty much indefinitely, as we generally increase the supply of money to keep up with our promises over time. If you want to ask my political affiliation, this is one of the main reasons I am in favor of less government intervention, which typically falls to the Republican side of things. I know there are several programs that really help people, as we have removed the church from our support of those less fortunate and replaced it with government programs, but that is a subject for another day...

The Federal Reserve is rather artful at managing this scenario, but the end result is that the endless money printing does have a price. Inflation and taxation act together to erode the value of our dollars, to the point where we have to borrow against the faith and credit of the US to keep the cycle intact, which will continue until we either stop printing money and let inflation run wild as it did in Venezuela most recently (not going to happen in the US, I know that much), or until the borrowing to maintain the boom and bust cycles buries us in the failure of our currency, most likely to be replaced with another world currency such as the Euro or the Yuan (much more likely, followed by the biggest credit call in history). With the pressures of our current entitlements such as Social Security, the pressures to continue the cycle are enormous.

Unfortunately, I have an opinion there is not much that we can do other than prop up our economy the best we can until the inevitable happens, until we cannot even maintain our standard of living because our dollar is mostly in circulation to pay for the interest on our approaching 10 trillion dollar debt (have any idea how much money that is? Each trillion is a thousand billion dollars, enough to already force nearly half of our national budget toward payment of interest on that debt due to our borrowing). Until we either force our elected officials to revise the policies and stop the trend, which I do not see happening because they want to be elected and that is not the way to get (or stay) elected, or other nations begin to stop offering loans to support that debt, we are going to sail along in this present cycle of building huge mountains of borrowed money in order to maintain the steady increase in our money supply. We are already opearting at a discount of nearly 30% to the Euro since its inception, and I don't think that trend will reverse itself. As Haggai remarked in the Bible, we are putting our money into bags with holes.

What can you do to protect your investments? For now, you can just play along and try to achieve returns that exceed the combination of taxation and inflation, there is no need to alter that strategy unless a collapse appears imminent, and I would think that would be reasonably well publicized in advance. I would strongly suggest, however, that you also invest a portion (maybe 10-15%) of your savings in something that you are really interested in that involves a tangible (something you can touch), appreciating asset. New clothes, furniture and most new cars are not apprecaiting assets, but if you think about it for a minute you can find items of interest from classic cars to baseball cards to antiques to actual gold and silver. The key would be to buy the best quality available of an item known to be appreciating and of interest to you. I would think of it in terms of holding certain items that you could use to buy groceries if you could not access a bank account, but don't take that statement as suggesting the sky is falling. If you can act prudently and be aware of what is going on, then you can be prepared for most anything that comes your way.