Money Saved, Money Spent

A question that is repeatedly asked during periods of unknown inflation and deflation is: where should I put my money?

The quandary that people develop is what is safest:
1. Housing assets?
2. Investing long in stock assets?
3. Investing short in stock assets?
4. Bonds?
5. Foreign investments?
6. Savings?

The difficulty with making investment predictions is that they’re all based on one common flaw: most are bought using virtual dollars, not physical dollars. Virtual dollars (M1, M2 and M3 money supply) tend to be self-replicating. As dollars are moved from account to account (the velocity of money), various banks can use the money multiplier effect to create more virtual dollars to loan out more debt liquidity. Yet other goods (fuel, food, clothing, etc) that is primarily bought with physical cash (in some cases) may not have the same effect as those dollars tend to travel from consumer to retailer to wholesaler to producer (overseas). Those dollars tend to leave the economy, causing deflationary pressures as physical currency runs low.

Because virtual money investments tend to replicate as long as physical money investments are parked in banks, an investment in any of the 6 items listed can be both lively (in terms of price swings) and dangerous (in terms of liquidity in a deflationary period). When physical dollars are removed from the banking system, the reserves for the 6 main investment categories are threatened. When the reserves are not available to back the investments, mass sell-offs occur to try to recoup the reserves. This can introduce an odd period of deflation in the top investment categories, while still producing a period of inflation in the basic human needs categories. At the moment, we’re seeing this bifurcation in stock and housing prices, while seeing fuel and food costs skyrocket.

The basis for all of these items is the central banking cartel’s use of physical money as reserves for virtual money. As physical money gets hoarded out of the system, a huge pressure is put on the banks to shore up reserves, which it has a harder time doing because it can not pay a valuable return on deposits. When investment interest rates are low but consumption interest rates are high, savers have the power to leave the system with their reserves in tow, while banks find themselves in a liquidity crunch.

If one follows the M0/M1/M2 charts closely, they’ll see that the M1 figures are relatively stagnant, even decreasing over time. Deposits are on the decrease, putting pressures on banks to find new reserves or putting pressure on the central banks to find new ways to extend credit with different reserves. Most central banks have a short term borrowing window where member banks can borrow money for a short term (overnight, or for 1 month, etc) using assets that may not be as valuable as rated. Currently we’re seeing M2/M3 virtual money supply backed by new assets, such as federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The difficulty here is that some of those assets are already being used to back loans to individuals (such as in housing), so using the same asset twice is a recipe for disaster if the asset value should drop.

The strongest position a person can have today is a duality that is rarely seen: borrow at a fixed rate to purchase very reasonable and affordable asset such as housing at a price far below what one would be expected to own based on income, and use one’s excess income to hoard in physical cash and gold. By making a small housing purchase at a fixed rate, one is shielded from the future effects of hyperinflation (the home will be paid off with depreciating dollars). By hoarding in physical cash, one is shielded from the future effects of deflation (the hoarded dollars will be worth more over time).

The difficulty is that most people bought assets that are way overvalued and have no physical savings, which means that inflation will make any banked savings fall in negative value, while making their loan hard to pay as their wages will not rise equal to the price increases caused by monetary inflation.