The Big Picture

“Money, it’s a gas. Grab that cash with both hands and make a stash!”
-Roger Waters

The song “Money” was written in 1972 by the progressive rock bank Pink Floyd. Roger Waters said at the time “money interested me enormously.” Seems a fairly apparent truism.

What is money exactly? Seems like a silly question. The answer is more complicated than many would think. Money defined, has three common functions:

  1. Unit of Account – Currency is a measurement. Most of us have an idea of what a cup of coffee cost. If you walked in to your favorite coffee shop and they asked $20 for a cup, this would likely not register as the going price. Simple enough.
  2. Medium of Exchange – This function took us off the bartering system. I would like a carton of eggs. The egg-man wants apples. But all I have are oranges. The deal is dead in the water! Money took care of that. I give the egg-man some paper for his eggs, and he can use said paper to give to the apple-man. So on and so forth. It’s a good deal, I’ll take it!
  3. Store of Value – Money should maintain its value over time. What is not needed for current consumption can be saved for use at a later date.

The first two are easy enough. What about the third? Money, under our current monetary system, is no longer a store of value. Money loses value over time. The reason for this is a controversial subject. It has caused many great debates!

Today, most currencies are no longer backed by anything of value. Most currencies today are fiat currencies. Fiat currency is backed by the issuing government. There are several implications about a fiat monetary system. In 1971, just a year before Waters composed “Money”, dollars went from being backed by gold to being backed by the government. This point in time marked the end of money being a store of value.

Have a Plan and a Process!

From the Trenches

“At the end fiat money returns to its inner value, zero.” – Voltaire

Voltaire was a French philosopher who lived in the 18th century. He had a good understanding of some of the issues with fiat money.

So what is the deal with a fiat currency? The ultimate concern regarding fiat currency is if it isn’t backed by anything of value, then what is it worth? The answer is it is worth what the market tells us it is worth. Currency values are priced by the market. This may seem a bit perplexing but there is a price to the dollar and it changes continuously. Are there forces that try to control the “price” of the dollar? You betcha! One of the most critical, and controversial, aspects of fiat currency is it must be managed by a central authority. The management of the U.S. dollar rests primarily with the Federal Reserve. Yes, them again… 

Fiat currency is fully backed by the issuing government. That’s it. We go about our day utilizing this piece of paper to purchase goods and services. Hold on a sec… does anyone use paper anymore? Electronic transactions are slowly sending paper currency into extinction. Most transactions today are done via computers changing numbers from one account to another. Back to the issue at hand. We must now venture briefly into modern monetary theory. As money itself is no longer a store of value; money put under your mattress and left there for a period of time is nearly guaranteed to lose value. Why? Inflation.

What $1 bought in 1913 requires $20 today.

One of the Fed’s goals is to attempt to control inflation. They aim for a certain amount of inflation in the economy. Inflation is necessary in our current system. Inflation is good for the government, it can be good for investors, it may or may not be good for savers. Inflation is not much fun for consumers. Where you are sitting in this group is a critical factor.

Why do you ask am I babbling about what most find as a completely dull subject? A few reasons: First, this affects you greatly! Second, most people do not have a good understanding of how our monetary system works. Third, today more than ever there are incessant fear mongers and misinformation about our monetary system.

Bottom line: Holding fiat money under your mattress or in a zero-to-very low interest bearing account is likely to lose over time. Those dollars won’t buy tomorrow what they buy today. 

The Weeds

“Money, it’s a crime. Share it fairly but don’t take a slice of my pie.” – Roger Waters 

A touch of controversy (or shadow economics)?

Have you heard that your government is stealing from you? Have you heard that your dollars are worthless pieces of paper? Have you heard that the government has printed so much new money that we will soon face hyper-inflation and the system will collapse! Lions and tigers and bears, oh my! I have heard all of these and more. There are facts about a fiat monetary system that are not always explicitly stated aloud. However, they are not really a secret either.

Is it a conspiracy? Not really…

The government does not want you hoarding dollars. We have been through periods where hoarding occurred and it was not beneficial for the government or society as a whole. Fiat currency solves this problem as its value can be reduced through inflation. The government wants to generate growth, which generates tax revenues, and holding dollars under your mattress isn’t going to do that. They want you to spend that money, i.e. stimulate the economy. Or invest that money, i.e. stimulate the economy! Now, sometimes the Fed is o.k. with you saving money in the bank. When is this? When interest rates are higher, which are set by the Fed, you are able to earn more on your dollars. For many years now rates have been very low so the implication is the Fed does not want you to keep those dollars at the bank, or under your mattress.

Does the Fed hide their intentions? Not necessarily. They just don’t always state the full story! From time to time the Fed is very transparent. They have even admitted that inflation is “like a tax”. The Fed is using the tools at their disposal to attempt to meet their stated mandates. Which primarily revolve around growing the economy in a prudent manner. Now, at times, It doesn’t always work. During these times there is a loss of faith in the system and anxiety erupts.

Now admittedly there is more to this story. Too much for a short post. I am always available to deliberate further on this controversial matter… 

Bottom Line: Fiat currency is not designed to hold value over the long term. Its purchasing power is intentionally eroded over time. Under a fiat monetary system, the value of money is managed by the government.