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Saturday, March 24, 2012

Show me the REAL money


An economy certainly needs money so that goods and services can be exchanged. If there is too little money goods will remain unsold, prices will fall and we call this deflation. If the scarcity of money becomes serious, eventually the economy will go into recession, that is, production comes to a halt, people lose their jobs, and misery starts to reign. So it is very important that the amount of money in circulation is at all times sufficient for people to buy the goods and services that are being offered. 
            So where do we get the money?  What determines the value of our money?  The answer lies a great deal in the type of government under which you live.  A little research this week uncovered that there are four types of money 1) Representative money 2) Confidence money 3) Intrinsic money and 4) Fiat money.  Hmmmmm. 
Representative money has no value on its own, but is backed by something of value like US gold or silver certificates that have an equal value of real gold or silver.  Confidence money is money that is worth whatever people think its worth and its value is determined by the stability of the government that issues it like the US Dollar or the British Pound.  Intrinsic money has its own value because it is made of something valuable like a gold or silver coin such as the South African Krugerrand.  Fiat money is basically worthless and is used because the government demands it as payment and punishes those who don't pay in the government's prescribed form, such as the Russian Ruble in the 1980s.  At that time the international markets wouldn't even trade in it.
The difference between confidence and fiat money can most easily be seen in the inflation rate. Sooner or later all confidence monies become fiat, and all fiat monies super inflate until they are worthless. Basically, if you make more of something, its value decreases.  Sound familiar? 
This brings me to my visit this week to the Birmingham Branch of the Federal Reserve.  It was fascinating to learn a bit more about the Fed, and I came away with the feeling that I really should not only have known some of these facts better, but I certainly should pay a lot more attention to them as well.  The Federal Reserve is a Quasi-Federal structure comprised of 12 Districts of which Atlanta is one, and the Birmingham office is a sub section.  The Federal Reserve is a politically independent entity that is charged with setting monetary policy with the long view in mind.  It is accountable to Congress and is weighted with the responsibility of unifying banks and creating stability.  The Fed has a dual mandate by Congress to create price stability and full employment.  
So how are we doing?  Jim Rogers spoke to the Brock School of Business recently in a signature event sponsored by independent investing firm Fi-Plan Partners.  From the moment of introduction, Mr. Rogers has my attention.  Rogers is a famed commodity bull and legendary hedge fund investor credited with running the most successful hedge fund in history, the Quantum Fund, with now billionaire George Soros.  Rogers has a storied career that includes growing up in Demopolis, Alabama, and traveling for 3 years across 116 countries.  His message is direct to “Invest in what you know, and you will not know if you don’t go there.”  If you are interested in the global marketplace and wish to understand what it means here at home, then you must go and see for yourself.  His noted quote of Rudyard Kipling spoke volumes.  Kipling is remembered to say, “What can you know of England if England is all that you know.”  I mention it here because Rogers reminded the audience that the Pound Sterling was the standard in the 19th century.  We see the US dollar as the standard in the 20th century, and Rogers predicted that the Chinese official currency of the Renmimbi will be the benchmark in the 21st Century.    Rogers opinioned that that the Chinese, while Communist, are still the best capitalists in the world.  They save 35% of their income compared to 3-4% savings here in the US.  China is our largest customer and continues to grow by leaps and bounds. 
Rogers charged the audience to learn about currency to better appreciate the economic turmoil in the world.  The largest creditor nations of China, Korea and Japan are a force to be reckoned with by the largest debtor nation of the United States.  We aren’t just the largest debtor in the world, but we hold the dubious distinction of being the largest debtor in history.  
A telling event certainly, and one that I am very glad to have participated in as I seek to understand the dynamics of not only business, but competition and planning.  

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