Today I am going to take a step back and talk about money. The prices of gas and food are not going to go anywhere, and the credit crisis and the housing market are not going to go anywhere either.
Have you ever looked at your money? Take out a dollar or any other piece of paper money and look at the front of the bill. Notice up at the top of the bill are the words FEDERAL RESERVE NOTE. If your bill says Silver Certificate take it out of your wallet and hold on to it. It is a different kind of money. It has silver behind it. No, the back of the bill is not made out of silver. Do not be silly. The bill is backed by silver. There is a commodity behind the value of the paper. Most likely, your paper money is the kind that says Federal Reserve Note. What is a Federal Reserve Note? It spends. In fact, on the bill it says “This Note is Legal Tender for All Debts, Public And Private.” So, what is wrong with that?
There is nothing wrong with paper money unless people lose faith in what that paper money represents. Here at home in the good old USA, it is all we have to use for money. (Although I have read recently that shops in New York City are accepting Euros from foreign shoppers.) Those of us who shop locally, by that I mean in the United States, do not see the decline in the value of our money the way an American tourist sees the decline when they exchange their dollars for Euros or any other foreign currency that has appreciated against our dollar. This is part of why the price of oil has risen to the $135 a barrel range. You might remember that oil, the commodity, is priced in US dollars. And, if the value of the US dollar goes down against other world currencies, the price of oil must go up. There is also the added demand for oil from developing countries that as recent as ten years ago were not using as much oil as they are today. But, the oil situation is another story for another time.
Money is a commodity. You can rent money just like you can rent a car or a hotel room. At the end of the rental period you give the room or the car back plus you pay a rental fee. When you rent money, at the end of the period you pay back the money plus the rental fee. We know the rental fee on money as interest. Each month you pay your mortgage, you pay back a piece of the principal you borrowed with some of the rental fee, interest. At the end of the time period, 15 or 30 years, you have paid back all your principal and all of your rental fees. An adjustable rate mortgage is another way of saying an adjustable rental fee. When you buy a house, you want to lock-in the interest rate because if you do not want to have your interest rate (rental fee) raised, then the monthly payments can go up, sometimes way up. If you have locked-in your interest rate, and interest rates go down by at least 150 basis points, you might want to get yourself a new fixed rate mortgage with a lower interest rate. That is one approach.
What if you rented a hotel suite for 30 years. But because the purchasing power of your rental payments were decreasing the hotel gave you a smaller and smaller room each year until you were sleeping in a large closet. How would you feel about that? Remember you are paying your same amount of money, but the size of your hotel room over the years has gone from a suite to a big closet. No one would stand still for that, but our government is doing that with our money and most people do not even know it.
What is it going to take to wake people up to the fact that monetary policy in this country is not a level playing field? I am not a Monetarist nor am I a Keynesian when it comes to economic policy. I believe in trying to maintain a level playing field, and if it must be tilted slightly, that the tilt be in the direction to protect the least able among us. I think that is fair. There are a lot of elderly and poor in this country that are being hurt and will be hurt by the decline in purchasing power of the dollar now and in the years to come. The rich and the educated are not hurt by a more level playing field. They just will not benefit as much by leverage. Leverage is another word for debt.
If you can handle debt (leverage) you can build wealth in a monetary system that expands the monetary base and grows the money supply to the detriment to those that do not have the education or ability to borrow. I could build a case that the present credit crisis is directly related to the monetary policies of our central bank the Fed. That is another story.
My purpose is to cause people to think about monetary policy and the impact monetary policy has on the decline of the dollar, also known as purchasing power. I know full well that fiscal policy has caused the printing of more money, but an independent central bank is not a branch of the administration on Pennsylvania Avenue. The Fed has a responsibility to all Americans for the integrity of the US dollar. Remember at the beginning, I said our paper money said FEDERAL RESERVE NOTE. It did not say White House or Capitol Building on the front. The Fed is responsible for the integrity of the US dollar, and each year your dollar buys you less the Fed is not protecting the integrity of your money. The American public needs to get interested in monetary policy and the direction that monetary policy is tilted. Unless some changes are made in this direction, there is going to be a lot of elderly people hurting in the years to come. I know there are a lot of elderly and poor people hurting now, but the class known as the “baby boomers” will bring about a crisis of gigantic proportions if monetary policy does not take a new direction. Stay tuned.
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6 comments:
I am just now jumping into the arena of money. Having been a teacher and a nurse, it is all new to me. It has been quite an eye opener to me. Many of the terms seem like Chinese, and being from Mississippi, I obviously know nothing of Chinese. So, I am reading what I can and learning what I can from the ground up.
It is exciting to say the least to know that there is an entire world out there that I have been missing. KC
Hi K.C.,
The terms are not in Chinese. They are in Hebrew. Just kidding. As for terminology, you can look everything up on the Internet under investments terms. There are web sites that will give you good definitions. Once you learn the language, then you can start putting together the concepts. When you were a nursing student, you had to learn the parts of the body, now you need to learns the parts of finance and investing. Every discipline has its own vocabulary and investing money is no different. If I write something and you want a better explanation, you can call me out on it, and I will do my best to write a crystal clear answer.
Fred
Hi Fred,
“Hebrew’. You are to funny. Don’t think for a minute we don’t see that humorous little devil in your blog stories also, Fred.
I wanted to say (for K.C.) that the reason I really appreciate Moneythoughts is that its written in terminology we can ‘all’ understand. I was just dumbfounded with the first story I read. You defined every ‘term’ you used before you went on to explain your thoughts on the subject. Only second to that, I like that you always give a response to your bloggers and that you allow us to challenge you. With class and elegance, you’re come back is, “I hear where you’re coming from, but have you thought about…...” You request that we open our minds, learn, think and ask questions.
Your brilliant Fred and could easily leave us in the dust, but you don’t. You take us by the hand and help us, ‘every step of the way.’
Thank you, thank you, very much.
Vikki
There is purpose in my madness. I want everyone to take an interest and think about money and monetary policy, especially for those of us in the United States. Other countries are doing a better job of protecting the integrity of their currency than we are. We need to do a better job with the US dollar. We are a great and powerful nation with tremendous economic muscle, and we need to be a leader in the world not just as a democracy, but also in the way we run our monetary policy. In order for this to happen people must be knowledgeable about money and what monetary policy can do and should do. Whether you are an elephant or a donkey or neither, we all need our money to stop shrinking. If I write about money and monetary policy, knowing full well that it is not sexy, I hope to develop a grass roots movement and awareness of what's up with the US dollar. Lou Dopps wrote a book about the war on the middle class. I have not read his book. But, if he is not talking about money and monetary policy, then he is missing an important piece of the puzzle. Today, it is the oil crisis. Tomorrow the Baby Boomers will face an even bigger crisis because of a shrinking dollar. This economic empire can fall. The people and the countries holding our money and our debt will tell us first. We may well be the last ones to know. Stay tuned.
Fred
As you know, you and I are of similar mind - except you know this stuff inside and out and I just know the effects - but I have a question. What effect are hedge funds having on oil prices? If any.
How much? I don't know. But, hedge funds are definitely having some effect on the price of oil and other commodities. Hedge funds and other investors look for ways to hedge themselves against the falling value of the dollar by buying commodities. Some of the price increase in oil can be attributed to hedge funds, increased demand for oil outside of the hedge fund buying and OPEC holding the line on supply.
Fred
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