The Piggy Bank Died Long Ago
Mom and Dad are usually right, but they’re wrong about this thing. They are wrong when they say “Save your money”. Get a job, and “save it in your bank account”. “If only you saved your money…”
I’m writing to suggest to you that you are (practically) unable to save your money now (to no fault of your own). Perhaps you’re not aware but in the 1950s and 60s, you were able to buy a car for $2500. I even remember my parents telling me that a dime would get them a bag of chips and a large can of pop when they were kids. So, what went wrong?
In 1971, the dollar stopped being ‘money’ and it became a ‘currency’. Money is a means of exchange and a store of value; or a unit of account of your hard work. Whereas currency is simply a means of exchange but not a store of value. Currency only has its value because we have faith or belief it has value because it is backed by the government (often by way of a military but that’s for another post). You may hear currency being called fiat which means ‘a formal authorization or proposition; an decree’. It is essentially a ghost, it exists as money only cause we believe it does—but it really isn’t money.
Okay, how the heck does this relate to savings?
Notice that I said money was a store of value of your hard work whereas this was not a principle in currency. The way currency units come to ‘be’ is through a digital money printer that the central bank owns. Commercial banks can also ‘create’ currency at will to make themselves whole; essentially as long as there is a fair value of IOUs between banks, the number of currency units are irrelevant. These banks need to keep creating new currency units to sustain the economy but the result is that more and more currency is flowing around the economy with the same amount of goods and services.
Again, how does this relate to savings…?
In effect, the value of everything doesn’t necessarily go up, its that the value of the money goes DOWN. This is an important concept known as inflation. If we assume your savings account pays you 1% per year, but the value of your currency is declining at 6% every year, then you LOST 5% of your savings [6% of lost purchasing power but you gain 1% more currency the net difference is still 5% less purchasing power]. Think of you paddling to shore but the current takes you back out to sea faster than which you are paddling inward. People find this difficult to understand because the number in their bank account remains unchanged–the trick is understanding what those numbers can then go and buy you in the real market. You’ll quickly figure out that you’re falling behind by saving in currency.
To realize the severity of this in economics, please click this link https://wtfhappenedin1971.com/ & share as often as you can to your friends.
If you want to save your money, you have to think about–> what is the rate of inflation & what is the savings rate the bank is giving me. Unfortunately, there are very few places where the banks are paying you MORE than the rate of inflation, so “saving” guarantees you lose.
Next time Mom, Dad or your friend tell you that you should save your money you can say “No, I have to hedge or invest my money”, but… stay tuned for other articles to find what that means!
Hint: It helps if you look like the photo below
#StayOnTheBall
