Thursday, January 19, 2012


This is actually a much more complex subject than I think I can safely go into here, but I'll try to convey as much meaning in as little discussion as I can.  Let's start with a question: what is cash?  Cash is a promise.  You may have a US dollar denomination handy upon which is written, "this note is legal tender for all debts, public and private".  That declarative statement says a lot.  One, it sets the context under which that note is valid, that is, within the jurisdiction of the U.S. Federal government.  Voluntary adoption of the same currency which occurs throughout the world is just that - voluntary.  If I'm in Europe, I don't have to accept US currency, though I can elect to voluntarily.  But I digress.

The currency of a nation is only good as long as people value it.  What value people ascribe to that paper money is sometimes  a very subjective thing.  Generally we have financial markets, of rather immense complexity, which help set the value of currency.  Typically, this valuation is tied to the credit-worthiness of the issuing country.  Once upon a time, a promisary note was intended to be good for redemption in gold.  This soon proved to be impractical as inflation increased the value people ascribed to other tangible goods, the pressure on the dollar to gold ratio increases.  More to the point, as more money is printed to meet the rising demand for cash, the on-hand gold to back it must likewise increase.  For a long time, the amount of on-hand gold at Ft. Knox in Kentucky was a closely guarded secret, the facility protected by high security and snipers.  At length, though, it has become known that there is no longer enough gold in the possession of the US government to back the paper money in circulation.  In fact, President Nixon closed the "gold window", taking the US dollar off the gold standard seemingly once and for all.  Now, the paper is merely backed by the "full faith and credit of the United States Government".  What's more, it appears the government may have divested itself of the gold on hand just last year. 

But, to understand this problem, we need a basic understanding of cash on a micro economic scale. Let's for a moment pretend that each 1 dollar bill is a bottle cap (ala the Fallout universe).  If there is a limited sum of bottle caps, the value of the bottle caps would never really change materially.  Subjectively, one trader may value an article of food or clothing at 3 caps and another trader in another settlement might value it at 4 caps, but that is down to the skill of those engaged in barter.  The currency is remarkably stable due to it's fixed supply.  If someone was able to get a press up and running, and start stamping out new bottle caps, they would begin manufacturing wealth.  This wealth would be used, most likely, to engage in trade - for what is money not spent but so many rusting bottle caps?  As this wealth was distributed through trade, the supply of caps in the economic system would increase, enabling more wealth to be held by more individuals, or for some individuals to aggregate wealth to themselves so as to be able to wield power.  Now, let's say that I am a trader and I've done well for myself and have amassed a fortune of 4000 caps.  With it, I recon I can buy a shack and keep myself in beans and bullets till my last day.  Along comes Mr. Stamping Press and dumps a hundred thousand caps on the local economy.  Suddenly, my sleepy little settlement is a boom town.  As the local merchants gain wealth through the expenditures of the wealthy man, they are able to order more and better merchandise and supplies.  In some cases, they raise their prices, in others they drop them as they are able to purchase in volume and pass savings on.  But now the merchants and the suppliers (many of the locals) are also wealthy.  My one time fortune of 4000 caps is now fairly standard.  Not to worry, prices are marginally stable.  One day, one of the merchants decides he wants to be the big man and uses his wealth to buy out a competitor who was wanting to retire anyway.  Now, he's the only supplier for say, guns, in town.  Being as there is no longer any competition, he is free to raise his prices.  My 4000 caps isn't going to buy as many bullets if they go from 1 cap for 5 rounds to 1 cap for 4 rounds. 

Gradually, inflation works its way through the local economy and all of us who thought we had it made, are really once again struggling to get by.  Except for Mr. Stamping Press.  He pretty much laughs at inflation because he can press more caps any time he likes. 

So it is with cash today.  We call this "fiat currency", meaning the creation of money by dictate of the governing authority.  The US government, along with many other governments, are operating like Mr. Stamping Press.  Because the exercise of wealth gives them economic power and the ability to steer both a local economy and the fortunes of the private individuals that comprise it, they have an interest in continuing to print money once inflation sets in. 

I started a job in 2008 with a new company.  Since that time, the consumer price index shows that the value of the dollar has eroded a full 9%.  My wages have remained flat, along with many other people in the US (those who have jobs anyway).  In effect, my wages have decreased 9%.  It's a bit like my fictional self as a trader with inflation eroding the value of my stash of caps. 

That brings me, long way around, to the point of this post.  What to do about cash?  Should we save it in a bank?  Should we horde it at home?  Credit Union? Capital assets?  Land?  Yes.  All of the above.

Since cash is losing value, saving it in the  bank is really just making sure there is something there later when you need some money.  It will NOT increase in value, even with interest earned.  Inflation is sucking the wind out of the sails faster than they are being filled.  But, it's not as risky as investing in stocks, which can vary wildly with the mood of the markets, or bonds, once though to be safer than safe.  Having some money in savings is good because you're going to need to conduct financial transactions with the bank to pay your mortgage (if you have one) or write checks to pay bills, so a checking / savings account is going to be something you need.  But don't park all of your wealth there.

I do advocate stashing some.  Nothing grandiose, you don't want your retirement money sitting around the house, but get a fire safe or other secure device to lock up a month or two worth of expenses in on-hand cash.  If, as some early reports suggest, banks are rapidly collapsing and becoming insolvent at an increasing rate (See Barnhardt, January 19, AD 2012 12:35 PM MST), there is likely to be a big government directed reorganization of the commercial banking in this country - soon.  What money you have there then may or may not survive, but chances are it will at least be inaccessible for a time.  Cash on hand will enable you to not starve and take care of basic needs for the short term while things shake out.

I at this point have more faith in credit unions than banks, but with a federal government that only sometimes follows the law of the land (in a highly selective fashion), one can not be too sure.  At the very least, credit unions are not FDIC insured but are backed by the NCUA, a separate but different organization.  While the FDIC risks becoming quickly overwhelmed with over hypothicated banks, the NCUA should be in better shape if credit unions are smart enough, and I belive they are to an extent, to not hypothicate or re-hypothicate your savings out as unstable high risk loans.  So, a CU is favored over a commercial bank at this point. However, you may note: "the NCUSIF is a federal insurance fund backed by the full faith and credit of the United States government."  Again - I trust thrift focused institutions more than I trust profit motivated ones when it comes to handling my money correctly, but the "full faith and credit" means much much less than it used to.

Money Markets were once a great, medium risk way to make better interest and they function like a checking account.  I have had one for years and recently elected to move most of the funds to the CU, some of which I'll diversify into stable assets.  Which brings me to what to do with cash you don't want to keep as cash.  I believe, and I think history will bear this out, that certain commodities will increase in value with time as cash declines.  Look at Gold.  At $1400 an ounce, it's a bit late to get into the game there, though you could if you wanted to but without actually taking delivery, the receipt for your gold in some warehouse is as worthless as the dollars in your wallet.  Things of local utility are a better option.  If you live near the ocean, stocking up on supplies that enable people to survive through fishing and boating would be a wise investment.  Pacific Northwest?  What do people need to survive in a heavily wooded, mountainous region?  Dried food, seed stock, flour, sugar, band-aids and other medical supplies, bullets, tools, raw materials such as stock aluminum and steel, fuel for generators, cutting torches and cooking... these are things of real value that will soon be very expensive if traded for in cash.  Let me put it this way: gun sales are going through the roof in this country right now.  The general sentiment is that things are precarious at best.  Park your money in things that are easy to obtain now but may become scarce later.  Innocuous things that don't make you stand out as a panic-buying survival nut.  Just the things you and your neighbors are likely to need in the coming year.  Trade and barter is something you'll want to become good at. 

In summary, cash is breathing it's last as we know it for the time being.  Some reorganization will occur in the near future and cash savings will be worth practically nill - maybe.  I'm no prophet, but the circumstances are very much like those surrounding the revolutionary war when that $4000 was the sum held by a man by the name of Fulton, one of the first inventors of the steam boat.  Inflation, driven by the war, reduced it to about $40 in the space of 2 years.  The only difference is we have a central bank that is ostensibly there to help balance the currency supply and hence value, but most of those in charge of that franchise have an interest in seeing it enter crisis mode as it will provide them ample reason to reorganize it and remake the rules to their advantage.  Just like our friend with the stamping press.