Sunday, March 23, 2014

Money II: Store of Value

Last week in our Money post we talked about the functional definitions for money. We made the argument that for our purposes, four of the five definitions are related to the value of money over time, barring some quibbling over the definition of money as a unit of account. Therefore it is reasonable to collapse all the definitions related to the future value of money into one: money as a store of value.

That naturally raises the question, is money a good store of value? Or, from a pragmatic viewpoint, does it make sense to save and store money as money for retirement? What are your chances of maintaining the purchasing power of your money that way for thirty or forty years? The answer is: almost zero.

Granted, as Robert Storm Peterson said (and apparently NOT initially Yogi Berra), "It's hard to make predictions--especially about the future." In any given period, money may actually gain purchasing power over time, more than maintaining its "value." However, given that the Fed tries to keep some inflation going all the time (about 2%), after a period of 30-something years, your first year of savings in money will only have half the purchasing power that it did in when it was earned.

Another danger to your pile of savings in the form of money is that there may be periods of enormous currency manipulation between now and the time you retire. In the US, for example, this was done during the Civil War. In the 1930's, the Roosevelt administration passed laws to keep gold out of the hands of US citizens. There is still debate whether the idea worked or not, but the idea was to encourage Americans to stop hoarding and start spending as a way to work their way out of the Great Depression.

Finally, something we mentioned in last week's post, saving money as money for retirement assumes that population demographics or other physical phenomena will not significantly change the prices in certain vital markets. For example, the price of food can become exorbitant if a true famine arises. We also pointed out that if the retiring Baby Boomer health care workers are not replaced, and the numbers of them not actually increased, then health care for retirees could also become exorbitantly expensive. Your cash savings may not be enough.

Therefore almost no one saves a significant amount of cash over long periods of time. Instead we invest. We buy things that we think have a better chance than cash does of maintaining value for our retirements. In a sense, therefore, the idea of money as a store of value is false. In many respects, money is just a medium of exchange that we use to purchase things that we prefer to cash over the long term. "Saving" is not about saving money for any length of time. "Saving" is about buying stores of value with our excess cash.

More next week.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

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