When you pick up a dollar note in your hand, how much value do you think it has? The answer is, not much. It is paper ‘fiat’ money, printed by government decree with no gold or silver to back it up.
Too few people pay little or no attention to monetary policy. This is unfortunate, because money dictates how we all live. It has often been proclaimed by well-meaning people that money is at the root of all evil. In fact, this is a profoundly ignorant and counterproductive statement. Lack of money is at the root of evil, because it leads to poverty, scarcity and conflict – whether at personal, community or international levels. But how many people think about the innate value of the money that they have?
Firstly, a little history lesson. Today the US dollar is the standard to which most of the world’s currencies are linked and measured. This is a historically unprecedented situation. Doubly so because the dollar itself is only paper money. The value of it is decreed by the US government with nothing of real value to back it up. In the past this was not the case. The dollar was backed up gold and silver, which are commodities, between 1945 and 1971, which everyone can agree has tangible value. Precious metals are ‘real’ so to speak. This system was called Bretton Woods. In 1971 President Richard Nixon took the US off this gold standard, ending the Bretton Woods system. The result is that the US dollar, the foundation of the global economy does not have the intrinsic value that it once did.
The macroeconomic effects of this are substantial. Because the money can now be printed at will by the US government, inflation is a long term challenge and possible threat. Debt is another. The US debt mountain climbs astronomically on a second-by-second basis. As long as America continues to believe that it can live off a giant national credit card by printing more money, it creates an ever bigger debt threat which will one day explode. While it is true that consumer prices are low, thanks to the flood of cheap goods from China, asset prices are not, partly because the dollar is being devalued. Oil is many times higher than it was in 2000, as is housing. This is a particular problem in the UK as well.
What all of this does is cause misery for savers in the long run. It converts bank savings from assets to liabilities, because everything is linked to a currency whose integral value shrinks year by year. A dollar or pound today will have less value than one ten years down the line. This underlines what some of the wisest businesspeople have often said – real assets are tangible things like real estate and mineral wealth. Water could be the biggest one of all as water scarcity begins to hit the world in the years and decades to come. Regardless, smart investors should not put too much faith in investments and savings of fiat money. It carries too much risk.