CASH IS DEBT: WHY YOU SHOULDN’T HOARD CASH
June 7, 2019
From the Desk of Worldwide Precious Metals
In 1971, President Nixon took the entire world off the gold standard and ended the Bretton Woods monetary system. The paradigm we live in as a result is that all cash in circulation is quite literally, government debt. In other words, all cash in existence is a type of credit.
Most of us have been taught to save cash for our retirements, and to avoid using credit. There is a lack of understanding as to what cash truly is – government debt or credit. If you truly believe in saving, then you should be saving something that will always have intrinsic value (or a value of its’ own) and be in limited supply. When we had a gold standard, cash acted as a receipt to get gold at any time. Cash was a derivative of gold, meaning its’ value derived from gold.
In the current paradigm, cash only has value because it is deemed legal tender by governments all over the world. In other words, cash has value because the government states it does. There is NO intrinsic value in cash. Gold and silver on the other hand have intrinsic value. They can be used to manufacture weapons, bullion, jewelry, and electronics. Any asset with an intrinsic value can never be worthless.
The fate of cash is to become completely worthless. To justify this statement – monetary systems that utilize cash are susceptible to both inflation and hyper-inflation because cash can be printed infinitely, ‘out of thin air’. Gold and silver cannot, by definition, have inflation as they are produced in limited supply. The net effect of inflation is that the cost of assets, goods, and services becomes more expensive over time. You may have noticed that the cost of food has been increasing steadily over time, but your pay cheque likely has not!
To make matters worse, governments are quite notorious for increasing deficit spending. A popular issue in politics recently has been to increase minimum wages for example. If the minimum wages increase, it costs employers more to run their business. Employers will be forced to lay off staff or increase the cost of their goods and services. If they increase the cost of goods and services, we all pay more to receive those goods and services, including those whose minimum wages were raised. Inflation is often thought of as a ‘hidden tax’ because most people are not truly aware of its’ net effect on society.
What is the difference between cash and traditional loans associated with the term ‘credit’? From a technical standpoint, there is no difference – they are the same. From a practical standpoint, the difference is the interest paid. If you use a credit card, your interest may be 20%. If you use a line of credit, your interest rate may be 10%. If you use cash, there is no interest rate, but you do pay for inflation. The Federal Reserve, and other central banks, try to control inflation at about 2% per year. I would rather pay 2% inflation, than pay a 20% interest rate on a credit card! In this regard, saving cash is better than using credit. Nonetheless, I still lose 2% purchasing power per year if I save cash because the cost of goods and services will increase by about 2% on average each year. If I truly want to save, I need to save assets that offset inflation, and this is precisely why individuals choose to hoard (hedge with) gold and silver.
Let’s examine visually what the true net effect of inflation is on our purchasing power:
As you can see, the net effect of inflation over time is devastating! In 1913, the purchasing power of $1.00 USD equated to $1.00. Today, the purchasing power of $1.00 USD is worth less than a nickel! This is why goods that used to cost a few cents, now cost a few dollars today! Nothing changed, other than inflation. Investing in gold and silver is thought of as a way to offset inflation. Today, gold’s spot price is at $1,285.50 USD. Nothing changed with regards to gold, the only aspect that changed was the weaker purchasing power of the dollar.
Once again, inflation is directly caused by printing an abundance of cash. We have modern banking laws to thank for this. Most cash is created through the fractional-reserve banking system! You read that correctly, it is banks, not governments, that create most of our cash supply, and most of it is digital! Fractional reserve systems allow banks to print exponentially more cash for every dollar that you deposit in your bank. In most instances, banks follow a ratio of 10:1, meaning for every dollar you deposit in your bank, the bank can legally print $10.00 out of thin air! The bank will than use the newly printed (or digitized) cash for loans that they earn interest on, as well as, making investments in the stock market.
Cash is debt because it is susceptible to inflation. Inflation is a hidden tax that punishes savers! Saving cash means you are agreeing to face a GUARANTEED loss of purchasing power in the future.
Inflation only occurs because cash is over-printed. The solution is to acquire assets that offset inflation, like precious metals, and investment diamonds.
Shawn Sklar, Broker and Contributor at Worldwide Precious Metals – May 25, 2019