In order to understand the impact the Fed and our currency system has really had on us, we need to understand what money really is. For money to really be money, it must have these four characteristics:
- Money must be a medium of exchange such as when it is used to intermediate the exchange of goods and services. It thereby avoids the inefficiencies of a barter system
- It must be a unit of account in that it is a standard numerical unit of measurement against the market value of goods, services, and other transactions. To function as a 'unit of account', whatever is being used as money must be:
- Divisible into smaller units without loss of value; precious metals can be coined from bars, or melted down into bars again.
- Fungible: that is, one unit or piece must be perceived as equivalent to any other, which is why diamonds, works of art or real estate are not suitable as money.
- A specific weight, or measure, or size to be verifiably countable.
- Money must be a store of value which means money must be able to be reliably saved, stored, and retrieved ? and be predictably usable as a medium of exchange when it is retrieved. The value of the money must also remain stable over time.
- Money must be a standard of deferred payment, which is to say an accepted way to settle a debt
Let's see if our currency qualifies as "money".
Can it be used as a medium of exchange? Yes.
Can it be used as a unit of account? Yes.
Is it a store of value? No. There's the rub.
If my grandma had taken 100 $10 bills and buried them in a sealed container in 1913 and I found out where that container was buried and dug it up now, they would be worth $1000 today. So isn't that the same as saying the money retained its value? That it's a store of value
? Absolutely not. Inflation between 1913 and today means that what cost $1000 back then costs about $21,435 today. I'd call that a pretty significant loss
But if grandma had instead put 50 $20 gold coins -- still $1000 by her reckoning -- into a sealed container, that would represent about $67,500 in today's dollars (assuming about $1350/oz of gold in today's dollars and not counting the numismatic value of the coins). The gold did
retain its value and then some.
If you look back at the value of commodities relative to other commodities (eg: livestock to textiles, or books to carrots) they tend to more-or-less hold steady relative to one another. So it has been with gold and its relation to other commodities. So when the price of gold rises, what does that mean exactly? It doesn't necessarily mean that the value
of gold has increased so much as it means the money you're using to buy it has decreased in value
Here's one more point that's very definitely worth noting. For the last few thousand years, the value of silver has roughly been at 1/16th that of gold. That is, 16 ounces of silver is about equivalent in value to 1 ounce of gold. As of this moment, gold spot price is $1,332.00/ounce and silver spot price is $26.77/ounce. That means the current gold:silver ratio is 1:49. Said another way, either gold is way overpriced
and should be about $428/ounce or silver is way underpriced
and should cost about $83/ounce. Given the extremely strong demand and limited supply of gold, I don't see the price falling anytime soon. Given the even more limited
supply of silver and that it is used far more in industry than gold, I'm inclined to think silver's price is artificially low.
And in fact it is. We are reasonably certain that JPMorgan-Chase, Goldman-Sachs and other players have been keeping silver's price very low for some time. JPMorgan is reputed to have engaged in enough naked-short sells of silver certificates to account for the next 4+ years global
production of silver. Ballsy, but stupid. God help 'em if people want to take possession of physical metal. If anyone is still reading this and actually cares about this, PM me and I'll send you some links to peruse for more info.
So the upshot: if you want a store of wealth that is time-tested and easy to acquire, I can't say buying either gold or silver is a bad idea. Personally, I'd recommend silver for reasons mentioned and not mentioned here.
OK, back to our currency. It isn't really money because it can't hold a store of value because it has no intrinsic value and it isn't backed by anything that does have intrinsic value. How did we get to this point? Through several decades of incremental dumb-ass, short-sighted decisions. To really understand, you need to read the (financial) history of the U.S. and Europe pre- and post-WWI and pre- and post-WWII. Don't neglect Bretton Woods. Pay close attention to Nixon in 1971.
So where does that leave We the Little People? Screwed, mostly, but there's still hope and opportunity. Here's something to consider: if you're dumping money into the market (either as a day-trader or through a 401k or some other method), take inflation into account: even as the market creeps up, the value of the dollar creeps down. What looks like an upward trend relative to the dollar may actually be a flat line relative to the decrease of the dollar. It all depends on what scale you're measuring by.
Personally, I buy silver bullion when I can. It is not done as an investment but rather as a hedge against the bottom of the dollar dropping out. It's just a store of wealth. (I have some gold, too, but I don't buy gold right now due to cost.) Rather than contribute as much as I can toward my 401k, I'm diverting that money instead to bullion.
If you do purchase metals, I strongly urge you to take physical possession of the metal; don't buy certificates or paper anything. The whole idea is to get away from paper. You can buy locally from coin dealers (be prepared to pay a little more over spot price): walk in with cash, walk out with metal, no problem. Stick it in your safe at home. (If you don't have a safe, get one.)
Another thing you can do is work very hard to pay off debt. Start with your smallest debt first, pay it off, and work your way up. When you put your mind to it and really think about not nickel-and-diming yourself to death, you can save a lot of money. Just keep at it and most folks can become debt-free sooner than they might think.
Finally, work toward some degree of self-reliance and self-sufficiency. Don't be a kitchenista
who uses kitchen appliances and storage space for your fashions. Learn to cook and cook well. Keep a hefty supply of store-bought food on hand (at least six months, IMO). When you go to the grocery store, put the new stuff on the back of your shelf and use the older stuff you've stored first. Rotate it out. Grow vegetable gardens. It's inexpensive, produces a helluva lot of food, it tastes great, and it will save you money (to pay off debt). If you're so inclined, learn to fish and hunt. Doing these things, you will eat better food for a lot lower cost. Keep a generator and a store of fuel, candles, flashlights and extra batteries, radios (the type that run off the wall main, batteries and crank dynamo), a means of communication between family and friends, keep your clothing in good shape (if your best shoes are three-year-old sneakers that are all torn up and you can afford something better, go get some decent Merrill hiking shoes now.). You get the idea.