Why Savers are Losers in the 21st Century ?

Saving money has historically been considered to be a virtue. Perhaps, it was the most important one with the most far reaching consequences in one’s life. However, the world changed in 1971. Saving money is no longer an act of virtue. Rather it is act of foolishness and ignorance. Saving in its crude form does more harm than good to the person indulging in it.

In this article, we hope to provide a breakthrough revelation to the readers. We hope to educate them about the nuances of the new global financial order.

The World Has a Fiat Money System

Not all money is the same. The basic nature of money has undergone a change. The rules that were passed down by your grandparents are relevant to what we can colloquially refer to as “old money”. Modern societies have “new money”. The technically correct terms for old and new money would be “commodity money” and “fiat money” respectively.

Commodity money is money made up of commodities like gold, silver or other metals. This money has value in of itself. It can therefore be exchanged for other things of value. For most of recorded history making has been using commodity money. All the rules passed down from generation to generation are fit for commodity money.

Fiat money, on the other hand, is paper money. It derives its power and value from the government that backs it. On its own, the paper money has no value at all. Therefore if the US government were to collapse the US dollar would have no value at all. This has happened several times across the globe.

Historical Precedents

History is rife with instances wherein fiat money systems collapsed. In fact historical analysis will show that fiat money has a 100% record of going to its original value i.e. zero.

Prehistoric cases include the Chinese empire and the Roman empire, both of which fell because of the excessive greed of their governments which led these governments to debase their money and steal from their own citizens.

Modern precedents include the hyperinflation in Germany in 1933 which caused Hitler’s rapid rise to power. Also, the Zimbabwean hyperinflation is a wonderful case in point.

In each of the above mentioned cases, savers were the ones who lost the most. All the money kept in a bank account was simply wiped out of existence!

Printed Money is Losing Value

Printed money does not lose value only in doomsday scenarios. Instead, printed money loses value, almost on an everyday basis. Most governments that issue fiat money are in debt. They finance the excessive spending simply by printing more money. Hence, when more money is printed, each unit becomes less valuable due to the inflation that is being caused. Steadily mounting inflation causes savers to lose value. Even though it may appear that banks are compensating savers for their loss by paying them interest, the real rate of inflation in the economy is far greater than the meager interest that if offered by these banks.

Hence, if a person buys stuff today, they get to pay the money back with cheaper dollars tomorrow! The savers therefore end up losing value whereas prodigality is rewarded. This is one of the many bizarre outcomes of the modern monetary system.

The Alternative

Saving is rewarded only when one saves in commodity money or old money. The government cannot print more gold and cannot debase its value. This is evident from the fact that the United States dollar has lost close to 94% of its value in the past 100 years whereas the purchasing power of gold remains unchanged. Therefore, if someone had saved their money in cash, they would have lost value despite the fact that compound interest started accruing on the same sum of money. On the other hand, if one had purchased real assets such as gold, silver and real estate, they would have been sheltered against this inflation and would have preserved their value.

The Problems with the Alternative

Investing in gold and silver is a good idea in general. However, like other markets, gold and silver tend to get inflated too! The rise of gold has been steady but not at all linear. Like every other commodity, gold too has got its share of booms and busts. Hence, entering the gold market is not a straight forward decision that will always pay off.

In finance, the key to success is doing the opposite of what the crowd does. Hence, investors should save cash and convert them into gold and silver when the stock markets are booming. A booming stock market sucks the money out of other markets and gold and silver are no exception. It is during this phase that the market plummets and investors find a good bargain.

To sum it up, traditional saving i.e. saving money in bank accounts is doomed for failure. The government is printing and will continue to print more notes and will steal the value from you. Instead, real commodities like gold, silver and real estate provide a hedge. The objective therefore is to convert cash into commodities at regular intervals.

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Managerial Economics