Cash is king...of trash
Posted by Dave Robertson on Thursday, December 10, 2009
archived from December 8th, 2009
Have you heard the saying cash is king? We have been told that cash is king, and I agree with the statement for the lesson it's trying to teach. This saying is trying to teach us that having sufficient cash flow is chief because cash flow is what allows us to meet our daily financial needs and saves us from having to use credit cards and other forms of debt. With enough cash flow we can live debt free. When we are tight on cash flow, some sort of surprise expenditure comes up in our lives which causes us to pull out the credit card and the spiral of debt begins. A better way of teaching this lesson would be to say "cash flow is king."
Cash is actually trash. I am using the term "cash" to mean paper money, or for us in Canada: Bank of Canada Notes. Have you ever stopped to think what money really is? What is the paper notes that we call cash? The only reason that those pieces of paper is considered money is because of 5 little words printed on them: "This note is legal tender." Those notes are considered money because our federal government has decreed that the paper is legal tender and must be accepted as method of payment and exchange. On it's own, those notes have practically no value. Without those 5 little words printed on the bills, and without the federal laws to support those words, dollar bills would be worth next to nothing. Perhaps they could be used to make paper airplanes or to start a fire, or be used as a book mark, etc. On their own its just paper. Term for this kind of currency is called a fiat currency.
Prior to August 4th 1914, the Canadian dollar was worth something...it was worth gold. Before August 4th 1914 a dollar bill could be exchanged for a fixed amount of gold. Back then it was a Representative Currency system. The dollar bill represented a piece of gold. Under this old currency system, the government couldn't just print more dollar bills without having the appropriate amount of new gold to back it up, otherwise the dollar to gold representation would be diluted. Because of this, the money supply was nearly constant. However in an "act to conserve the commercial and financial interests of Canada" near the time of the 1st World War when many people were beginning to panic and make a run on the banks, the government along with the Canadian Bankers Association severed the dollar bill from gold. Ever since then, the Canadian dollar hasn't been backed by anything other than those 5 words "This note is legal tender."
The Bank of Canada was established and also declared the "lender of last resort" (which I'll be sure to talk about in the coming days) and now there is no restraint on the amount of money that can be printed. There is no real constraint on the number of bills allowed in circulation. If there is a deficit in the federal budget, no problem, we'll print more money, monetize it, and put it on the books as national debt. If there is an economic downturn and unemployment goes up, no problem, we'll print more money and create new jobs. If a public corporation is too big to fail and requires government intervention, no problem, we'll print more money and bail them out. In all of these examples the monetary supply is increased or "expanded". Economists describe this monetary system as being "elastic" which basically means that the government can stretch the supply of money however necessary.
What happens though when more money is printed? Realize also that money doesn't even need to be "printed" anymore. All it takes is a few keystrokes in the Bank of Canada computer and voila!... money is created. Every time the money supply is expanded however it has a direct impact on everyone who is hanging on to cash. Ever time new money is created, it dilutes the purchasing power of all dollars, including the old money and the new money. For this reason cash is trash. Money does not retain it's value. Money constantly devalues. Ever time the government goes into debt, it lowers the value of your cash savings by an equal amount to the spending gained by the government.
Consider also that all the debt carried by the government carries interest charges, new money has to be created simply to service the debt. This is a whole other paradigm that perhaps we can explore together. For now just understand that there is only enough money in the economic system to repay the principal only. new money constantly has to be created to repay interest. The system perpetuates itself in this way. We are on a never ending treadmill of printing new money to pay back old principal plus interest.
Cash is trash. It doesn't retain value, it goes down in value. Savers are losers, and the people with real assets are winners. While cash loses value, real assets keep their value. All of the above discussion is labeled "inflation." Most people think of inflation has prices rising. The more accurate description would be that the "price" of things (that is the value of those goods or services) isn't changing, but it's actually the purchasing power of the dollar going down. Because the purchasing power is lower, it takes more dollar bills to buy the same amount of goods and services.
Have you heard the saying cash is king? We have been told that cash is king, and I agree with the statement for the lesson it's trying to teach. This saying is trying to teach us that having sufficient cash flow is chief because cash flow is what allows us to meet our daily financial needs and saves us from having to use credit cards and other forms of debt. With enough cash flow we can live debt free. When we are tight on cash flow, some sort of surprise expenditure comes up in our lives which causes us to pull out the credit card and the spiral of debt begins. A better way of teaching this lesson would be to say "cash flow is king."
Cash is actually trash. I am using the term "cash" to mean paper money, or for us in Canada: Bank of Canada Notes. Have you ever stopped to think what money really is? What is the paper notes that we call cash? The only reason that those pieces of paper is considered money is because of 5 little words printed on them: "This note is legal tender." Those notes are considered money because our federal government has decreed that the paper is legal tender and must be accepted as method of payment and exchange. On it's own, those notes have practically no value. Without those 5 little words printed on the bills, and without the federal laws to support those words, dollar bills would be worth next to nothing. Perhaps they could be used to make paper airplanes or to start a fire, or be used as a book mark, etc. On their own its just paper. Term for this kind of currency is called a fiat currency.
Prior to August 4th 1914, the Canadian dollar was worth something...it was worth gold. Before August 4th 1914 a dollar bill could be exchanged for a fixed amount of gold. Back then it was a Representative Currency system. The dollar bill represented a piece of gold. Under this old currency system, the government couldn't just print more dollar bills without having the appropriate amount of new gold to back it up, otherwise the dollar to gold representation would be diluted. Because of this, the money supply was nearly constant. However in an "act to conserve the commercial and financial interests of Canada" near the time of the 1st World War when many people were beginning to panic and make a run on the banks, the government along with the Canadian Bankers Association severed the dollar bill from gold. Ever since then, the Canadian dollar hasn't been backed by anything other than those 5 words "This note is legal tender."
The Bank of Canada was established and also declared the "lender of last resort" (which I'll be sure to talk about in the coming days) and now there is no restraint on the amount of money that can be printed. There is no real constraint on the number of bills allowed in circulation. If there is a deficit in the federal budget, no problem, we'll print more money, monetize it, and put it on the books as national debt. If there is an economic downturn and unemployment goes up, no problem, we'll print more money and create new jobs. If a public corporation is too big to fail and requires government intervention, no problem, we'll print more money and bail them out. In all of these examples the monetary supply is increased or "expanded". Economists describe this monetary system as being "elastic" which basically means that the government can stretch the supply of money however necessary.
What happens though when more money is printed? Realize also that money doesn't even need to be "printed" anymore. All it takes is a few keystrokes in the Bank of Canada computer and voila!... money is created. Every time the money supply is expanded however it has a direct impact on everyone who is hanging on to cash. Ever time new money is created, it dilutes the purchasing power of all dollars, including the old money and the new money. For this reason cash is trash. Money does not retain it's value. Money constantly devalues. Ever time the government goes into debt, it lowers the value of your cash savings by an equal amount to the spending gained by the government.
Consider also that all the debt carried by the government carries interest charges, new money has to be created simply to service the debt. This is a whole other paradigm that perhaps we can explore together. For now just understand that there is only enough money in the economic system to repay the principal only. new money constantly has to be created to repay interest. The system perpetuates itself in this way. We are on a never ending treadmill of printing new money to pay back old principal plus interest.
Cash is trash. It doesn't retain value, it goes down in value. Savers are losers, and the people with real assets are winners. While cash loses value, real assets keep their value. All of the above discussion is labeled "inflation." Most people think of inflation has prices rising. The more accurate description would be that the "price" of things (that is the value of those goods or services) isn't changing, but it's actually the purchasing power of the dollar going down. Because the purchasing power is lower, it takes more dollar bills to buy the same amount of goods and services.