Recent exhortation by popular financial gurus seems to follow a subject which I find ludicrous. The theme is simple in its elegance: Pay off your debts, save your cash, and live debt free. These ideas are really drawing a lot of attention in the financial press. With all due respect to the authors of these concepts, these views are more suited to a different monetary system. Perhaps it is because they are remembering the lessons of our grandparents, who extolled the virtues of a frugal existence. As refreshing an attitude as this may seem, I don’t think that it is the basis for this advice. No indeed. Most are so quick to forget the lessons of the past, that any contributions history may have to offer are virtually ignored. Well that they should be, for the monetary system as currently deployed in the U.S. is as far removed from the last generation as email and cell phones. The financial precepts that held true in the forties, fifties, and sixties, seem archaic today. They do not apply to the monetary system as currently articulated. Today’s money supply has debt as its basis. The previous monetary system counted on a fixed standard redeemable in gold or silver. Today's monetary system relies on an elastic standard that is only exchangeable for gold and silver.
For starters, we will examine the issue of saving one’s money in a passbook, cd, or other debt instrument. In order to more clearly understand this, let us compare and contrast the differences between the two systems. The primary difference has to do with supply. In the fixed supply system of the last generation, there are real and
|"Use your money to purchase tangibles. Spend it faster than it is earned by borrowing to buy these tangibles. "|
predictable consequences to things like deficits and commodity supply problems. If government spends more than it takes in, then it must borrow the deficit from the existing supply of money. As money is in fixed supply, this results in a shortage of money, and a bidding up of interest rates. As a consequence, the value of a dollar rises, and prices for commodities fall. The ebbs and flows in this system provided periods when the dollar actually rose in value. Thus the virtue of saving money in such an environment makes perfect sense. You save money that at some point becomes more valuable regardless of interest rates, or other incentives. In our recognized elastic currency system, these ebbs and flows have all but disappeared. Whenever money is needed by the borrowers, the banks now have the option of creating the money fundamental to meet these needs.
The largest borrower, the Federal government, simply borrows its operating deficit from a newly created supply. Business likewise creates a debt, which then becomes the basis for a fresh batch of money. This makes interest rates meaningless in terms of savings. Surely, no one will pay more to borrow your money when creating it is much cheaper.
As the supply is constantly growing, there is rarely a period in which current money is worth more than the year before. This loss of purchasing power is reflected in higher prices. This is not the environment in which to save money. In fact the opposite is true. Use your money to purchase tangibles. Spend it faster than it is earned by borrowing to buy these tangibles. You will pay off this debt with dollars that are worth less. Which now brings us to living debt free. Utter silliness.
What would I do with a billion dollars? Buy three billion dollars in assets! This is the formula deployed to appropriate the real purchasing power of the masses. Whoever spends the money, or incurs the debt first, wins. Yes, I would pay interest, not a problem. I would use that billion to leverage a larger portion of money. The assets purchased would rise in value relative to the supply of money, which shows no signs of abating. Look at your own home. It will appreciate whether or not you have a mortgage on it. Paying off your debt limits your ability to buy more assets. Worse yet, living debt free means you exclude yourself from this benefit entirely. The adage is simple: In an elastic money supply, whoever creates the debt and spends the dollars first gets the best use from them.