What is Money?

Money makes the world go around. You would think this question has an easy answer. It doesn't. The Federal Reserve has many different definitions. Here is one definition from the Federal Reserve:

The money supply is commonly defined to be a group of safe assets that households and businesses can use to make payments or to hold as short-term investments. For example, U.S. currency and balances held in checking accounts and savings accounts are included in many measures of the money supply. 

Here is an example of recent money supply calculations based on two different definitions of Money from the Fed. If you can figure it out, you are a smarter person than I. Or maybe you have more time than I do! Or you could read the Wiki entry on the money supply. I did until I had a bad case of EGO—eyes glazed over. 

So after much reading and thought I decided to present my own amateur musings. Hopefully you will conclude that I am a talented amateur. 

Some people actually think that money grows on trees-more on this next week. The primary category of "money" is wealth that can be accessed immediately—currency, savings accounts, checking accounts, and here is where I probably disagree with many…short-term treasury bills. 

Secondary "money" would be financial assets that are highly liquid and have a small transaction cost: stocks, CD's at a bank, gold, silver, and other semi-monetary metals, or medium-term debt from the government.   

Tertiary "money" would be real estate, corporate bonds, and long-term government debt. These have either high transaction costs or interest rate risk, or both. In my view anything in an IRA or a 401K would be in this category. 

Quaternary "money" would be things like collectables and derivatives.   

So what is money? How about real estate with a line of credit on it? You just pick up a phone and voilà, the money is in your checking account and you can spend it. Is this "money"? Or what about Apple stock? One call to your broker and it is in your account and it can be spent. Apple has been volatile lately, but the transaction costs on stock sales keeps dropping. Is an investment in Apple stock money? 

Before I answer these questions, you probably have another question. "Why does this matter?" It matters because we all like to plan for the future; I hope you do anyway. So among the hard money types the question of the moment is “Are we headed for deflation?” Mish Shedlock would be in this school. Or, are we headed toward hyperinflation? Peter Schiff is in that school. John Mauldin speaking at the Cambridge House seminars I attended offered a third way. 

This would be just as true with a picture of Bush.Who is right? If you define money as in my first definition, we are in an inflationary period. Hooray for Peter Schiff. If you use the second definition we seem to be in a neutral period. Hooray for John Mauldin. If you use definition three then we are in a deflationary period. Hooray for Mish Shedlock. (Even Peter Schiff thinks real estate is grossly over-valued, and sorry Peter, but this is deflationary.) If you include the fourth definition of money, then it changes nothing but does manage to intensify the alternatives. 

We cannot trust the definition of money. We cannot trust the price increases announced by the government CPI, Consumer Price Index. If we use the same method that kept Jimmy Carter from being reelected, our inflation rate is 5 to 7%. Remember that Nixon was horrified and instituted wage and price controls when inflation was at 4%. Even if inflation was the 2% the government insists that it is, a 22-year-old college graduate just now entering the work force, good luck by-the-way, would have 90% of whatever he saves today stolen from him over his 45 year working life. Yes, inflation is "only" 2%! We cannot trust the government announced unemployment rate. 

We are screwed. This is not the word I wanted to use but this is a family-oriented blog. 

What is money? I have no idea. Yogi Berra was right. “It is difficult to make predictions, especially about the future.” Liza Minnelli and Joel Grey were right too. 

I have decided to conclude with an analogy. Imagine you are in a plane in a blinding hailstorm. The plane's navigation systems fail, just as our financial system is mostly failing today. After the financial plane crash you might be eaten by dinosaurs! Co-pilot Schiff says we will crash and die and we will all go to inflationary hell. Co-pilot Shedlock thinks we will crash, and the plane will be a total loss and we will go to deflationary purgatory. Co-pilot Mauldin thinks we will crash, but we will repair the plane and fly again to heaven. I might wish that Mauldin is right, but I would not rely on it. I plan to talk about Mauldin and his theories on Tuesday. 

I remain guardedly pessimistic. 

In the meantime, here is an interview with another opinion, this time by co-pilot Gary Schilling. He thinks that everything is A-OK and that there is no reason to worry, the plane will have a safe, but bumpy landing. I think in the short run he is right, the government will spend money and sell bonds until it doesn't, then the plane will hit the ground. 

Are you wearing your financial seat belt? 

Thanks to Eric Anderson at Universe of Lies for pointing out this video. 

Investments in Uncertain Times

The elephant in the room is the effect of inflation on investments. Having decided not to buy Jr. Mining stocks, what then should I buy? 

One traditional piece of advice is to buy an index fund of various stocks so that one participates in a market upswing, while not having the risk of just one, or a few, stocks. Maybe, but the way the market works right now it is difficult for me to suggest that. Things are just too uncertain. Here is what Simon Black says about that strategy:

Most investors only think in terms of ‘nominal’ numbers, i.e. Dow 14,000+ is 40% higher than Dow 10,000 (back in November 2009). But few think in terms of ‘real’ numbers… inflation-adjusted averages.

...

Take beef, for example. Based on USDA retail price data, today the Dow will buy you 3,332 pounds of beef in the supermarket. This sounds like a lot. But it’s actually about 20% less than the 4,046 pounds of beef the Dow would buy back in December 1999.

...

Gasoline is an even more interesting example. Today, the Dow will buy roughly 3,812 gallons of unleaded, non-premium gasoline in the United States. This is almost exactly the same as last January, just fifteen months ago, when the Dow was only 12,633.

 

But to match its high of 10,718 gallons set in March 1999, the Dow would need to almost triple from where it’s at today.

Simon Black may be right, but he does ignore dividends. While dividends are considerably smaller than they were a few years ago, they take away much of the comparison Simon is trying to make. It is misleading. 

But in any event, I agree with Simon that now is not a good time to be buying stocks. It is just too chaotic a time for "normal" investments—remember the video I shared yesterday about market manipulation. 

Here is what I recommend before you do any investments at all. 

A. Do away with all credit card debt. 

B. Have one month’s worth of household expenditures in cash in your house. (Yes I know it is a risk, it could get stolen.)

C. Have three months’ worth of family monthly expenditures in a savings account at the bank. (Yes I know it is a risk, the banks could close.) 

D. Have three months’ worth of household expenditures in junk silver divided between a safe deposit box and your house.  (Yes I know there is a risk that the money in the safe deposit box will not be accessible. During the Great Depression when banks were closed, customers could still get into their safe deposit boxes.)

But please no Pop Tarts! E. Gradually build up an inventory of food, in other words have a large pantry. Buy food that you normally eat. You do not need expensive survival food. 

After you have done these things you might consider some investments. I have not done all these things myself, but I plan to do so this year, especially building up a food inventory. 

What should some of your early "investments" be? I use " " since the two next things I am going to suggest are not exactly investments. 

A. Pay off your house. Or sell your house and rent. It makes no sense to me to buy bonds that yield you 1 or 2% while paying 4% or more on your house. If Peter Schiff is right and Real Estate is Grossly Overpriced, downsizing your exposure to real estate is a smart move. Do not think of your house as an investment, it is consumption that some day might be sold for a partial return of your capital. 

B. Install an alternative energy system if your house is situated properly. Note that there is a substantial tax break for doing so, and the reduction in electricity costs are a tax-free reduction in household expenditures.  I hope to do this in 2014.

Once you have done all these things, then it might make sense to make some investments. Most people will never be in a position to do all these things, so I guess I am saying not to invest until you do. 

Note that you can do each of these things gradually in a multi-track plan. I have not done all these things myself, but hope to over the next year. If you try to do everything at once, you will become discouraged and do nothing. As clichéd as it sounds, I suggest baby steps. 

We live in interesting times. We can use the time we have until the crisis hits to get our respective financial houses in order, or we can have whatever financial house we have taken away from us.  

Update on Wednesday, March 13, 2013 at 1:51PM by [Positive Dennis]

Let me add a couple of points. 

If you do pay off your house, save at least what your house payment was to replenish your savings. 

Solar only works as an "investment" if you pay a substantial amount of income taxes each year. The tax credit makes it work. 

I do not feel confident giving financial advice except in real estate, so remember that this is preinvestment advice! 

Abbott & Costello's What's the Unemployment Rate?

From Uncle Sam's Misguided Children on Facebook.

COSTELLO: I want to talk about the unemployment rate in America .

ABBOTT: Good Subject. Terrible Times. It's 7.8%.

COSTELLO: That many people are out of work?

ABBOTT: No, that's 14.7%. 

COSTELLO: You just said 7.8%.

ABBOTT: 7.8% Unemployed.

COSTELLO: Right 7.8% out of work.

ABBOTT: No, that's 14.7%.

COSTELLO: Okay, so it's 14.7% unemployed.

ABBOTT: No, that's 7.8%.

COSTELLO: WAIT A MINUTE. Is it 7.8% or 14.7%.

ABBOTT: 7.8% are unemployed. 14.7% are out of work.

COSTELLO: IF you are out of work you are unemployed.

ABBOTT: No, Obama said you can't count the "Out of Work" as the unemployed. You have to look for work to be unemployed.

COSTELLO: BUT THEY ARE OUT OF WORK!!!

ABBOTT: No, you miss his point.

COSTELLO: What point?

ABBOTT: Someone who doesn't look for work can't be counted with those who look for work. It wouldn't be fair.

COSTELLO: To whom?

ABBOTT: The unemployed.

COSTELLO: But they are ALL out of work.

ABBOTT: No, the unemployed are actively looking for work. Those who are out of work gave up looking and if you give up, you are no longer in the ranks of the unemployed.

COSTELLO: So if you're off the unemployment roles that would count as less unemployment?

ABBOTT: Unemployment would go down. Absolutely!

COSTELLO: The unemployment just goes down because you don't look for work?

ABBOTT: Absolutely it goes down. That's how the current administration gets it to 7.8%. Otherwise it would be 14.7%. Our govt. doesn't want you to read about 14.7% unemployment.

COSTELLO: That would be tough on those running for reelection.

ABBOTT: Absolutely.

COSTELLO: Wait, I got a question for you. That means there are two ways to bring down the unemployment number?

ABBOTT: Two ways is correct.

COSTELLO: Unemployment can go down if someone gets a job?

ABBOTT: Correct.

COSTELLO: And unemployment can also go down if you stop looking for a job?

ABBOTT: Bingo.

COSTELLO: So there are two ways to bring unemployment down, and the easier of the two is to have administration supporters stop looking for work.

ABBOTT: Now you're thinking like the Economy Czar.

COSTELLO: I don't even know what the hell I just said!

ABBOTT: Now you're thinking like our current President!!!

Here is vitage Abbott & Costello, Who's on First?

Investments

At the Cambridge House Investment conference there was an emphasis on Jr. Mining stocks. This was only natural, as their presence at the conference was paying the bills. I found the individual stories fascinating. But if I wanted to invest I would have to really study mining, engineering, and the geopolitics of the country where the mine was. Another option would be to follow an expert in these matters and buy his advice.

But then I heard one presentation that eliminated any thought of such "investment." He said that if you invested in ten penny stocks you could expect to lose money on 9 out of 10 stocks, but hopefully make enough on that tenth stock to make it worthwhile. That does not fit my definition of investment.

Nothing wrong with a little speculation. It serves a useful societal purpose by keeping prices from dropping too low or too high. But when government becomes the speculator to the point of becoming a market manipulator, we begin to have problems, big problems.

How then should a person invest? I will discuss this tomorrow. But in the meantime here is a video that discusses the various types of governmental interference and manipulation. 

Food Matters

You must have all three or society collapses. This continues my recent posts on health matters. I disagree strongly with Bittman's implication that profits are bad. They are not. In fact, people are profits. I know this will annoy people, but so be it. If we as individuals do not produce more than we consume we die. This is not to say that there is not a place for insurance, personal charity, and societal charity. The problem is when special interests can seize control of the government and direct government expenditures to private pockets. During the 19th century it was Big Rail and Big Manufacturing. Today it is Big Ag, Big Pharma, and the Military Industrial Complex President Eisenhower warned us against.

This chart tells you what you need to know about Ag subsidies. But Bittman does point out an important point about our lack of a market system. With the distortions in the food pricing system, nothing is priced correctly. If things are under-priced, too much of them are used. Through agricultural subsidies the price of corn and soy is reduced to below market levels, yet at the same time the price of corn is raised artificially through ethanol subsidies. The energy used to produce the corn and the ethanol is actually less than the energy we get from burning it in our cars. What is the correct price? Just as in real estate I mentioned earlier this week, no one knows.

Bittman is spot on in his prediction that we need to do what our mother told us and eat our vegetables.

I do not agree with much of what is presented, but I still feel that watching it will be beneficial.