EZINE 4, April 2012
MONEY'S VALUE ILLUSION
By Otto Engelberth
If you are a young person you probably think that your money's value is constant over time. My reason for writing this article is to inform you that in today's world, all currencies' values are in a state of flux. Regardless of what country you live in and what kind of money you are using, its value and purchasing power will almost certainly be less and less as time goes by. You need to know why this happens and why it's not good for you.
Within a few days I will be celebrating my 73rd birthday. For most of my adult life I've been an entrepreneur and business person. Along the way I've used millions of dollars in the process of buying and selling goods and services. I've experienced the effects of the reduction in purchasing power of our dollar.
Just last fall I got an anniversary card commemorating 46 years of marriage. In that card it listed the typical prices of food, cars, and homes in 1965. On average, the prices listed were about one tenth of today's prices. What this means is that over the past 46 years, the American dollar has lost 90% of its purchasing power; that which cost one dollar in 1965, now costs ten dollars.
Money losing its purchasing power is not a new thing. It's been going on for more than two thousand years. Usually it happens so slowly most people hardly notice. Occasionally it really gets out of hand. In Germany, their currency, the Mark, lost 99.9% of its value in six years from 1918 through 1924. My parents, who lived there during that period of time, told how people carried their money around in bushel baskets and wheel borrows. On payday, they would send someone to buy the things that they needed immediately because if they waited even a couple hours, their money would lose some of its value.
Another term in use today that describes a currency losing value is the word "inflation". This term describes the process of a central bank increasing the amount of money in circulation. This act causes the supply of money to exceed demand so its value goes down.
Money and how it is valued
So why do we have money? We have it because we need a convenient thing of value that we can exchange for the things that we want to buy. It's easy to carry. It has a universally accepted value. It is easily divided into small pieces so that it can be used to buy inexpensive as well as expensive items. Without it, we would have to exchange something that the seller wanted for the things we want to buy. This is called bartering.
Since it is advantageous for nations to have a currency to facilitate commerce, governments usually create and support the currency used in their jurisdiction. The earliest currencies were usually tied to the value of a particular metal like gold or silver because their value was fairly constant and universally accepted. For example, the U. S. dollar was originally metals based; the penny was made from copper; the nickel of the metal nickel; the dime, quarter, half dollar and dollar coins were made of silver. Our paper money was originally a note redeemable in gold. The gold that backed the paper dollar note was stored in a vault in Fort Knox, Kentucky.
As a side note, gold is an ideal metal to use in establishing the value of a currency. It is ideal because it doesn't rust, it is easily moldable, and it is attractive in appearance. In addition, the amount of gold in circulation in the world is fairly constant and limited. Experts tell us that all of the gold, that has been mined and refined during man's existence on earth, could be fit into an Olympic size swimming pool. In case you find that hard to believe, keep in mind that the gold jewelry that is sold in stores is made from a small quantity of gold that is mixed with other cheaper metals. That's why they usually have a "karat" designation number of 24 or less to indicate the level of purity of the gold in the jewelry. To arrive at the percent of gold in the piece, divide the karat designation by 24.
By now you've probably figured out one way that currency loses its value. You got it. The issuer of the currency reduces the amount of precious metal in the coin by mixing it with cheaper metals like copper or nickel. This has been done with our silver coins. If you've ever wondered why dimes turn green, it's because of its high copper content.
Another way that a currency loses value is when the issuer changes the amount of gold that a dollar note is redeemable for. This happens because the issuer has issued more notes than they have metal to back the note. Eventually they end this charade by eliminating the gold backing of the paper note all together. The United States Federal Reserve Bank actually did this in 1972. Prior to this change, the dollar's value was pegged at $35 per ounce of gold. Compare this with today's market value of gold which is around $1,600 per ounce.
About now you're probably wondering how a currency maintains its value when it loses its precious metals based measure of value. That's a very good question, given that none of the world's major currencies have their value tied to a tangible material. The real answer is; the real values of today's currencies are what the market says they are. The Forex commodity market is one of the largest markets in the world. In it all of the major free world currencies are traded. The value of each of the currencies is determined by the buyers and sellers in that market; the exception being the currencies of individual nations that aren't allowed outside their borders. The most significant of these is China's currency, the Yuan, which is pegged to the U S Dollar.
The market value of each of the traded currencies is largely influenced by supply and demand as well as the market's confidence that an individual currency's supply and demand will be kept in balance by the government's central bank that controls its supply. In the short term, a nation's central bank walks a real fine line in managing the supply of its currency because they don't control what the holders of their currency will do with it. For instance if the holder puts "the money under the mattress" it will not be part of the supply calculation. Another interesting factor is that two thirds of all U. S. dollars in circulation are held outside the country, beyond the Federal Reserve's control.
Another influence on supply is the money that is put into circulation when a nation's central bank creates money and uses it to buy government debt; thus funding the government's natural tendency to spend more money than it receives in taxes.
While on the subject of taxes; we need to recognize how money plays a central role in the calculation and payment of taxes. There are essentially two ways governments calculate and collect taxes. They tax transactions and they tax assets. Examples of transaction taxation are sales tax, capital gains tax, and payroll tax when an employee sells their services to their employer. Corporate income taxes are also a form of transaction tax since corporate profits are calculated as the sum of a corporation's transactions.
And finally, the second type of tax is a tax on an asset. Estate tax is a form of asset tax that is triggered when a person dies and their assets are taxed before they are distributed per their will or as directed by the probate court. The other popular asset tax is the annual property tax on assessed value of real estate.
In both the transaction and the asset tax, taxes are calculated as a percentage of value measured in money and money is used to pay the taxes due.
Why most Governments want their currency to lose value
The first and most important reason governments want their currency to lose value is that they get to pay off past debts with cheaper dollars. An extreme example would be the money borrowed in 1965 would be paid off in today's dollars worth 10% of the dollars borrowed.
The second reason is psychological. Citizens are deluded into thinking that times are good because the things they own are worth more dollars as time goes by. Homes, the stock market, and wages are worth more dollars but often their real value has gone down.
The third reason, governments like inflation, is that it results in added tax revenue. Rising dollar regular income pushes people into higher income tax brackets and raises their income taxes. Assets such as real estate and stocks are often bought and then sold several years later for more, but cheaper, dollars. These transactions are subject to capital gains taxes on the dollar difference without regard for the fact that the total value of the cheaper dollars received on sale could be less than the total value of the dollars used to purchase the asset.
For example, if I had bought a stock for $10 in 1965 and sold it for $100 today, I would have to pay capital gains tax on the $90 difference in dollars in spite of the value paid a purchase being the same as that received on sale of the stock.
The fourth reason politicians like inflation is that they can portray sellers as the bad guys for raising prices to reflect the reduction in the dollar's value. They do this to gain favor with the buyers when in reality the politicians are the cause of the need to raise prices.
Learning how to live with inflation
Inflation is real, and living in denial of it is expensive. This is especially true if you are planning to get ahead financially. You need to think of currency inflation as your greedy partner for life. I call it greedy because it doesn't do much but still expects to be paid before you do.
For example, cash or cash equivalent asset such as a bond will depreciate in real value an average of 4% per year. What this means is that you will need to get an after tax return of 4% if you want to break even.
Typically you will want to invest in material assets because their price at sale will have the value of the dollar already built into it. Be aware that the tax on the capital gain at sale varies from one asset to the other. While most are taxed at the 15% capital gain rate, the gain from investing in gold and silver is at the higher regular income rate. Could it be that the government wants to discourage us from owning an alternative form of currency?
How governments of the future will use money to turn their citizens into serfs and slaves
The term Armageddon is a word in common use today. It is usually used to describe a catastrophic event. Its origin in this context is found in the Christian Bible's prophetic book titled "the Revelation". Actually Armageddon is the place where the satanic world dictator called the Antichrist or Beast will have his 200 million man army destroyed by Jesus and his host of angels.
My reason for mentioning this is that the prophet describes in detail how the Antichrist controls the people he rules over. Essentially his control is through his currency. All of his subjects are required to receive the Antichrist's special mark either on their forehead or the back of their hand. People who do not have this mark will not be allowed to buy or sell anything or work for wages.
We may not be far from seeing something like this in our time. With the free world governments' debt loads getting to the place that no one will lend them money because of their credit risk. They will eventually have to tax their citizens for all the money needed to pay their bills, including the interest on their debt. When this happens, the high tax rate will have the effect of stripping their citizens of their assets, effectively making then serfs owned by the government. The serf's position is similar to the farmer's cow. They are fenced in, fed well, and milked.
The technology needed for the fencing and the milking is now available. We now have imbedded chips, GPS, and digital money. The chips will tell who you are. The GPS will tell where you are. The digital money will record what you are doing and be the vehicle for transporting your milk to the state.
Lest you think this could never happen, consider an environment where we are experiencing terrorist attacks within our borders. The government would declare martial law and implement these changes under the guise that they are needed to locate the terrorists. In order to make these changes effective, the use of any currency other than the designated digital currency would be outlawed.
In this economy, owning gold and silver would not be of much use especially if it was the only government on earth.
This is something to think about.
The next time you look at a dollar bill, think of its value illusion and how you will plan to deal with that illusion.
At least now you know why it will not be worth taking your money with you when you die. I'm fairly certain that you won't be able to use it when you get to where you are going. In any case, it will probably be worthless after a short time anyway.
This is also something to think about.