How much value your money is loosing in a bank account?
By Simon Chobod
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So, you had been burned by the stock market. You swore never to give to those financial vultures another dime. Let's examine other alternatives. You can always keep your savings in cash. You can even put it in a bank in a savings account. The returns are meager, but look at the safety of your investment. You can finally sleep well at night.
Can you? Think again. What is cash? Can you exchange it into gold? Silver? No, that arrangement had been stopped by the Nixon administration long time ago, in 1970. Look again at your $100 dollar bill. Does it promise you anything? No, all it says: "This note is legal tender for all debts, public and private".
What does that mean? You had just bought a share in the largest public corporation in the world - US of America. The Federal Reserve promises to pay its own public debts with those notes. They never promised that they wouldn't make any more debts. You know what? They can print as many of those notes as they want.
Now, if a public corporation would be sending to the market more and more of their shares, what would happen to the value of their stock? It would be diluted and the prices would go down.
Guess what happens to the value of all those paper dollars? Precisely that. As more and more of them are printed, their value gets diluted and they buy less and less. If you would invest one dollar in the Magellan mutual fund in 1977, you would have 28 dollars today. If you would keep this dollar in your wallet, it will be worth less than 28 cents now in terms of 1977 cents.
If you look closely, investing in paper money never had been an attractive alternative to building your retirement nest. What happened the last time, when the prices of oil went through the roof in the 1970s?
The US Federal Reserve then said to the Arabs: "You want more dollars for those barrels of oil? Fine, we are going to print more of them, so you can have as many as you want."
And of course as more dollars were printed, the inflation went up higher and higher. By 1980 it was running more than 20% a year. Was it punishing those oil rich Arabs? No, they had so many of those dollar bills that they had stopped counting them.
By the way, the Arabs never kept their oil profits in paper dollars. They were buying California Real Estate and American factories. (Yes, we still had American factories back then. Hard to believe now.) The real victims of the inflation were you and me. People, who worked hard for their next paycheck. And with each month your paycheck would buy less and less.
Since you are still keeping the greenback shares in that USA corporation, let's take a minute and examine how it is run.
We change our CEO, which is also our President, and the Board of Directors every four years. Do we look at their economic performance? Not at all. We usually pick up a man with a nicest smile. After all, we are going to see him on TV for the next four years, at least we want to choose a pleasant face to look at.
What are the business results of running such a government system? We had accumulated the largest public debt in the history of civilized world. I am not going to quote you the staggering numbers, since those lines of zeroes are so long that we are not capable of comprehending their meaning any longer.
So, we are looking for more shareholders to spread the burden of our debts. The Chinese are still willing to take our dollars, at least for the time being. They are currently keeping a treasure chest of about $400 billion.
Look again at your dollar bills. You have a few and the Chinese Government holds another $400 billion. What will happen to the value of the dollar, when they will decide to dump some? To shift their holdings to some other places in the world? Or even stop buying additional T-bills from our Treasury?
All this talk on the Capitol Hill about the impending threat of China, about the need to monitor their armaments program. It makes the Chinese old party leaders laugh with contempt. They know that they finally accomplished the fundamental goal of Mao Tse Tung, they had won over the Imperialists Americans.
We are not ready to acknowledge that yet, but in order to destroy our economy, all the Chinese Government will have to do is to make some changes in their investment portfolio. You can say, why would they want to do that? That is the subject of another article.
Back to our problem. Should you keep the cash under your mattress or in a savings account? (By the way, accounting for the inflation, it pays approximately the same interest rate - zero.)
I will rephrase the same question differently. If the lazy Chinese would finance their ostentatious living standards by shifting their technological developments to India and their manufacturing to the United States, would you keep their currency in your wallet?
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