HOW GOVERNMENTS DESTROY YOUR SAVINGS

Savings is something that you build slowly over time, little by little, such that it grows to something big eventually. 

It also acts as a buffer for shocks in your life. 

At the very least, you want your savings to not decline in value. 

That is the expectation. 

What happens in reality? 

For the purpose of this discussion, let us assume you are investing only in debt instruments. That is supposed to be safe and risk free right? Right? Ahem, right! 

Your savings are channeled through the financial markets into some debt instrument. You earn "interest" on your savings. 

The interest, as we all know, barely keeps up with inflation. 

The interest rates are controlled by the government which has a vested interest in keeping  them low for various macro economic reasons. 

To add insult to injury, you pay tax on your interest income. 

Meanwhile, all currencies in the world today are fiat currencies, meaning they are just pieces of paper that governments can print at will. 

The government prints currency, and it distributes the largesse. All that money  eventually goes to inflate asset prices. 

And who owns assets? 

Of course, it's the rich who own all the assets! 

Did you know that capital gains taxes that you pay on assets are invariably lesser than taxes on income? 

Did you also ever think about the fact that it is far easier to evade taxes when it comes to assets than when it comes to income? 

Meanwhile, the government is printing currency with abandon, while you are thinking about all this. 

The deflation in the currency, you can call  debasement also, happens gradually so that you don't notice. And then it crashes suddenly. All fiat currencies come to an end eventually. All, every single one of them. 

When the currency crashes, money is worthless. Only assets have value. 

Who owns the money when it crashes? Money includes debt instruments. The poor and the middle class! 

Who owns the assets? The rich! 

And then a "reset" happens and everyone starts from scratch. 

Who are the people who are positioned to be the leaders when the reset happens? 

You guessed it, those who own the assets! 

This is not a cuspiracy theory that I am laying out. It is just an inexorable, natural, inevitable denouement. 

Money is not an asset. 

Money is not a store of value. 

Real assets are stores of value. 

And what are the real assets? 

Any tool, commodity, item, or thing that lasts over time and retains value is an asset. This includes real estate, equity, commodities, cigarettes, batteries, match boxes, and gold and silver. 

How can you hold these assets? 

You can hold them physically in your possession or you can hold a piece of paper like an ETF, InVit, or stock certificate. All these pieces of paper depend on other people to make good their promises to you, in other words they carry counter party risk. 

Which is the best asset, the one which packs maximum value in minimum space, and  is accepted across the world, easy to hide, store and transport? You guessed it, it is gold! Followed by silver! 

Which is the best way to hold gold and silver? Physically, in your possession of course. And other way involves counter party risk. 

Think about it. And tell me what you thought. 

ON DEBT

The subject of debt has always been controversial. People never seem to agree on whether debt is good or bad. 

The moralist will argue that debt leads you down the road to perdition, and it is so much more satisfying anyway to save up and enjoy the fruits of delayed gratification than to binge on future earnings. 

The economist will say that debt keeps the wheels of the economy moving and the machinery of commerce functioning, and hence everyone should borrow.

The hedonist will aver that it is better to live life for today, borrow and enjoy, for who has seen tomorrow? 

The personal financial planner will say that all portfolios need an "allocation" to debt which should increase as you grow older for debit is less risky. 

I think everyone is missing the point. 

We need to understand the nature of money and the structure of modern capitalist systems first to think through this properly. 

As a youngster, you need to start saving up, and ensure you don't live beyond your means. The modern consumerist culture encourages reckless spending and you need to be wary that you don't fall into the consumerist trap. 

Credit cards, easy EMIs on durables, and other forms of easy credit lure you into a lifetime of deficit, ensuring you keep working for money which is perpetually in short supply. 

Youngsters should avoid debt.

It is not very easy to do so in some cases. What about that educational loan, should you take it? 

Be very careful when you think that through. Most education is useless. Are you really going to borrow and spend 100000 dollars for an undergrad degree  studying gender rights and LGBTQ issues? Does that Comp Science degree teach you anything that won't be obsolete by the time you pass out? Is that MBA degree worth anything at all? Even if they were worth something till now ( except the liberal arts courses, they are of course a scam), in the new world these degrees are going to be useless. 

That does not mean you don't learn of course. Since when have degrees had anything to do with learning? 

Education is one example. In every area of life, learn the difference between price and value, and you may never need to borrow in the first place. 

But as you grow and start saving, you need to take a different view. 

The money that we think is wealth, the rupee, the dollar, pound, eura, dinar... They are all what is called "fiat" currencies, just worthless pieces of paper that keep depreciating in value. 

Forget all the finance theory and what the personal financial planners tell you. Forget what you have been taught to think. 

Think. 

Would you hold your savings in real assets or in that useless fosterer of illusions called money, that constantly keeps going down in value? Why on earth would you keep your savings in the form of money? 

Why would you want to hold fixed deposits, debt mutual funds, or any other form of debt when the return that you earn , that mirage called interest, does not keep up with the debasement of the currency itself? 

Debt is a way for the system to systematically erode your savings, and appropriate it for itself.  It is foolish to invest in debt. 

Rather than that, borrow money if anyone is willing to lend it to you and invest that money in real assets. 

It is better to be a borrower rather than a lender. 

Think about it. 

And ask your financial planner what he thinks. 

The illusion called money... Part 1

As the world moved from the barter economy, we needed an intermediate item to function as money. Gold and silver fulfilled that role for a variety of reasons to do with physics, chemistry and scarcity. 

The fact that these metals also have industrial uses complicates the matter further but I shall be focusing only on the monetary aspect in this note. 

Gold and silver coins were money. The fact that the king's visage was printed on the coin did not make it any more valuable. It was the gold content and the silver content in the coins that gave them value. 

When gold and silver are currencies, there can be no inflation by definition. Things cost what they do and the prices keep varying depending on availability, but the currency itself ought to remain stable. 

But right from ancient times, kings had voracious appetites that needed to be fed. They had vast armies and armies needed to be equipped and kept happy, and various interest groups depending on their proximity to the throne needed doles and freebies. How does a king get money for all that? 

Going back in history, every king finally fell to the temptation of adulterating his coinage with base metals. Slowly, the proportion of gold and silver in the coin would decline. Obviously, prices of goods and services measured in terms of the currency would go up. 

It was never the prices that were rising, it was the currency getting debased. 

And then paper was invented. Someone said let's keep gold in a locker and issue promissory notes payable to bearer against the gold kept in the vaults. "I promise to pay the bearer x amount of gold", said every currency note. 

In theory, you could walk into the offices of the issuer of the note, give your note, and get gold in return.

Post World War 2, in 1944, the Bretton Woods Conference agreed that the US Dollar would be pegged to gold, and all other currencies would be pegged to the dollar, effectively creating an international gold backed monetary system. 

No government kept its promise - they printed currencies with abandon. In addition, the US saw its gold reserves drain away as other nations took gold in exchange for currency. 

Richard Nixon realised that it would be foolish to continue on this path and unilaterally abrogated the US promise, the promise to pay gold. 

Thus from 1971 onwards, every currency in the world is a fiat currency, backed only by faith in the government, and a common understanding to subscribe to the illusion that that piece of paper is worth something. Take out your currency note and see right now, what does it say? "I promise to pay the bearer rupees so and so", not gold, not silver, but the same rupees that you hold in your hand! Realise that what you hold in your hand is a worthless piece of paper! 

And we thought only children played imaginary games. In reality, the whole world runs on illusion and nothing else. 

Meanwhile, every government in the world continues to print money with abandon. This printing can take various forms, including that other fosterer of illusions called fractional reserve banking. 

If you thought that only faith in God is a matter of  pure belief, without any proof that God exists, you have obviously never thought about our faith in money. God is a better and more useful illusion! 

All fiat currencies till date, every single one, has eventually reached the value of zero. 

Well, thanks for the good news,  now what in f*#* name am I supposed to do, you are thinking. 

Doing is for later. First, learn to see. 

Our cognitive maps, meaning our view of the world, is fostered on the illusion that money is something real. The governments and powers that be do everything in their power to ensure that this illusion is maintained. 

You have to step outside that reality and see the truth about money first. 

Once you see it, you cannot unsee it. 

Ok, I see it, you are saying, now what should I do? 

That we shall discuss in the subsequent parts. 

To be continued...