Saturday, March 28, 2009

Counsel from Poor Richard

For the Year of Christ, 2009, being the First after Leap Year:

The financial crisis will not break the banks. They will recover, stimulated in part by the injection of the trillion plus dollars of new cash by the Fed in the coming months. These cash credits, known as reserves, will soar in the effort to prevent deflation--or overvalued, scarce cash.

The system will have more lubricity and inflation will soon rise. While this is happening, it is not sound to hold on to too much money because the inflation will act as a sort of tax--charging you at the rate at which money is devalued by its overabundance.

But this is kind of the point--to stimulate finance while simultaneously punishing its tendency to use the held money of long-term investment for short-term gain. It would be unwise then to stand near while the dunce gets lashed. It would be wiser indeed to invest instead in non-money, valued, material assets--such as land, merchandise (for a future business or personal project), etc., because these will become harder to acquire in the next year (as the currency is devalued).

When and while the currency is most devalued, sometime around the middle of 2010, it will be recommendable to save. This is to say that you get it while it's cheap--wait until the excess liquidity is phased out by increased interest (and tax!) rates--and gain as the money is revalued. Whatever you earn from interest during this period will be compounded with the discount of having purchased your investment (ie. your money) on inflationary discount.

Ben Franklin, primordial American money printer, on the way this works:

"This currency, as we manage it, is a wonderful machine. It performs its office when we issue it: it pays and clothes troops, and provides victuals and ammunition; and when we are obliged to issue a quantity excessive, it pays itself off by depreciation. But this depreciation, tho' in some circumstances inconvenient, has the general good and great effect of operating as a tax, and perhaps the most equal of all taxes, since it depreciated in the hands of the holders of money, and thereby taxed them in proportion to the sums they held and the time they held it which generally is in proportion to men's wealth."

Moral of the ant and the grasshopper was that ant bought into something while it was easy to get. In seasonal scarcity, the value of what he'd gotten naturally got gooder. Buy things you want now--invest in material--and when money gets cheapest either sell or save, or sell and save, and watch your dollar earn.

You can tell 'em you bought it on the Fugio Special.

First coin issued by the U.S. government, designed by Franklin, 1787.

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