The Value of Money

December 17, 2002

For all of those with a little gray hair and a some age on them, you may recall there was a time when money was 'special'. Years ago, I can remember how as a young kid money would never be discussed. This was an 'adult' concept. The children were to be protected from any such matters. Budgets and bill paying were taken care of when the children were not present. A young person would never see their parents pay the bills or pull out a money clip from their pocket as they made purchases at a store.

Many such purchases were made from the local grocery where a parent signed for the goods received. The grocery bill would then be paid when the next check came. You did not want to skip your grocery bill in favor of some other expenditure for fear of not having food for the children. Money was treated with reverence as their was so little of it available. Bankruptcy was unthinkable as a person MUST pay their debts.

This of course was before the rejection of the gold standard. The creation of fiat was limited to the amount of gold backing it. A scenario in which supply was tight and demand was high. Simple economics. The Feds were prevented from printing fiat by virtue of the amount of gold in the coffers. Economics were so simple then. A wealthy person was both reviled because they had it, and respected because they had so much of so little. The value of money was true. The average person did not make frivolous purchases as there was not enough money for that.

As we fast forward to the present, this attitude towards money and credit has changed. Now it is commonplace to hear of a new millionaire created out of thin air. Either by the lottery with their stock options. People working at a Coca Cola plant can become millionaires by just doing their jobs and having a few stock options. The funds do not appear to be earned, they just materialize.

Children have a callous attitude towards money. "Dad, I'm going to the mall and I need $5, $10, or whatever. 'You do? What for?' I don't know, depends on what I see when I get there. I just want to go shopping." They do not go with an express purpose in mind. Such as, "Dad, I need a pair of jeans, can I get some money to go get a pair?"

The adults are grown up versions of the same story. "Honey, let's go look at new cars. 'What for, our old one only has 55K miles on it?' But they have zero percent financing. We can make the payments." It is an attitude change overall.

Instead of analyzing a purchase based on need, purchases are now based on emotion and payment schedules. Spend your whole paycheck on things, after all we are only helping the economy by doing so. There is no problem because we are contributing to our 401K or our IRA. Along with this our government has promised to pay us after we retire. The 'I want it all generation'; money has become paper. The value perceived is not real.

With the rejection of the gold standard, we have changed the average persons idea of money. A person hears daily of the government accumulating massive debts and deficits. The continuing word is 'No problem, we will pay for it later'. Really, with what? This also results in conditioning of the people. If the government can do it, why can't I? The government even encourages consumptive spending habits. One Fed governor says money will 'rain from the sky' to prevent consequences of fiat overload. Another Fed governor says everyone should just go out and buy another SUV to help the economy. This excess money created is used by all, the people, businesses, and yes the government.

Business continues to build with easy credit to fulfill demand based on credit. This excess capacity is built on nothing but a song and a prayer to the banker. People sing their own version of the song, and use a modified version of the prayer to a banker to get the gratification of a loan. The government perpetuates this by pumping ever more money into this economic machine they have created. All the while, the government is proud of what they have accomplished. The perfect economy. The business cycle can be repudiated through 'proper' financial management.

The resolution to this arrives when the business with the new facility, building thousands of widgets at incredible productivity levels, learns that his competitors have done exactly the same. Supply and demand have exploded on credit. The market is way beyond equilibrium. The law of supply and demand. Eventually, demand subsides and Joe and Jane have all the things on credit that they can pay for. Too many products and too much capacity. Prices start to drop as the sellers try to capture market share. Those that lose this game are the first to go out of business. This results in job losses and consumer spending declines. The cycle of decline continues as people look around and see their neighbors losing their jobs, and thus their capability to pay for the items on credit. The consumer cannot step in anymore 'for the good of the economy' as they are already extended with mortgage debt, vehicle debt, furniture debt, and credit card debt. They do not own anything, the bankers do. Since when is a vehicle purchase (a depreciating item ) considered an investment? They start to pull back, resulting in more businesses closing for good.

More jobs are lost, and more hardship follows. Jane now has to pay the bills while Joe is looking for a job and collecting from yet another government program, unemployment insurance. How are they going to make the payments that were based on both persons working? Instead of setting a budget for a possible worst case scenario, they have constructed a budget based on both persons retaining their jobs. A budget based on perfection. More jobs are lost, with the resultant business and personal bankruptcies. The cycle begins to feed on itself. All the while the government has continued to say all is ok as they can continue to inject the system with liquidity.

Like a drug addict, the politicians need this injection also. The high they get off of spending money that is not theirs, and they do not have, supercedes any prudence in financial management. They cannot possibly cut spending. "It's for the kids, or It's to protect our elderly, or the most recent favorite, It's to fight terrorism!" Whatever the reason, government is addicted to the flow of money. They are going to try to continue the miracle using methods that will no longer work. The rules are changing. By now, the system has become an inverted pyramid with no strong foundation and mountains of debt. Without the benefit of gold and silver as a base from which the economy can launch to new heights, the pyramid will collapse. The system eventually breaks down.

Until all involved are willing to accept a new reality, the magnitude of the drop becomes even greater. The system will force a change over time. Do we really need 8 shoe stores in a single mall? Do we really need 4-5 car dealers in a town of 10K? You get the picture. A contraction has to occur in order that the system may purge itself of the monetary cancer created over time. Money needs to be treated as a store of value, rather than a means of further consumption.

Money 'needs' to be backed by gold and silver to prevent the politicians from experimenting with the financial well being of the American people. We all need to swallow the bitter medicine now or the system will in time force the unfortunate consequences upon us. It is time to teach our children about money. It is time to make money 'special' again.

Dad, I'm going to the mall and ………….

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Lechner is an independent business owner and investor who has studied the markets over the past 20 years, dating to the last major bull run in precious metal investments. We had a mini bull market in the early 90's and he believes we are currently in the early stages of an equivalent bull market to the late 70's and early 80's.

This is not meant as investment advice. This is only an opinion. Past performance is no guarantee of future results.

The California Gold Rush began on January 24, 1848 when gold was found by James W. Marshall at Sutter's Mill in Coloma.

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