ATTN All Money-Savers: This May Be the Most Important Thing You Ever Read
I’ve spent several of this week’s issues discussing young people’s futures…
The question of college, starting a financial education early, and mapping out your plan.
Today, I want to go into a deeper lesson on all of that. And it applies to young people and old geezers, alike.
Understanding that money is no longer money is your key to financial success.
The millennial generation has solidly moved into the pole position when it comes to the workplace and our culture.
At 75.4 million strong and with the oldest members just reaching 40, they are now the biggest and arguably the most influential generation. So, it’s worth studying their money habits—and, unfortunately, they may be in for a world of hurt.
As Refinery 29 reports, according to a recent study of millennial money habits from Merrill Edge, “66 percent of surveyed participants believed their savings accounts alone will be sufficient enough to rely on in 20 years.”
This means that they have a strong preference for saving money over investing it.
It also means that many millennials have a very low amount of financial intelligence, and what knowledge they do have about money stems from the old Gold Standard rules that no longer work.
This confirms what I’ve written before: millennials need a new financial game plan.
To me this research is very concerning, because in the new world of money, savers will always be losers… and we can’t afford to have our largest generation be financial losers.
So, I’d like to share a little bit of monetary history to hopefully educate my millennial friends. And maybe teach Generation Z and the Baby Boomers something, too.
A Recent History of Money
We discussed some of this in yesterday’s issue, but here’s a deeper refresher on some American history…
My poor dad believed in saving money. “A dollar saved is a dollar earned,” he often said.
The problem was he didn’t pay attention to changes in monetary policy. All his life he saved, not realizing that after 1971 his dollar was no longer money.
In 1971, President Richard Nixon changed the rules.
That year, the U.S. dollar ceased being money and became a currency. This was one of the most important changes in modern history, but few people understand why.
Prior to 1971, the U.S. dollar was real money linked to gold and silver, which is why the U.S. dollar was known as a silver certificate. After 1971, the U.S. dollar became a Federal Reserve Note—an IOU from the U.S. government.
Instead of our dollar being an asset, it was turned into a liability.
Today, the U.S. is the largest debtor nation in history due in part to this change.
Taking a brief look back at the history of modern money, it’s easy to understand why the 1971 change was so important.
After World War I, Germany’s monetary system collapsed. While there were many reasons for this, one was because the German government was allowed to print money at will. The flood of money that resulted caused uncontrolled inflation. There were more marks, but they bought less and less. In 1913, a pair of shoes cost 13 marks. By 1923, that same pair of shoes was 32 trillion marks!
As inflation increased, the savings of the middle class was wiped out. With their savings gone, the middle class demanded new leadership. Adolf Hitler was elected Chancellor of Germany in 1933 and, as we know, World War II and the Holocaust followed…
A New System of Money
In the closing days of World War II, the Bretton Woods System was put in place to stabilize the world’s currencies. This was a quasi-gold standard, which meant currencies were backed by gold. The system worked fine until the 1960s when the U.S. began importing Volkswagens from Germany and Toyotas from Japan.
Suddenly the U.S. was importing more than it was exporting and gold was leaving our country.
In order to stop the loss of gold, President Nixon ended the Bretton Woods System in 1971 and the U.S. dollar replaced gold as the world’s currency.
Never in the history of the world had one nation’s fiat currency been the world’s money.
To better understand this, my rich dad had me look up the following definitions in the dictionary.
Money (as paper money) not convertible into coin or specie of equivalent value.
The words “not convertible into coin” bothered me. So, my rich dad had me look up the word: “fiat.”
A command or act of will that creates something without or as if without further effort.
Looking up at my rich dad I asked, “Does this mean money can be created out of thin air?”
Nodding his head, my rich dad said, “Germany did it and now we are doing it, too.”
“That’s why savers are losers,” he added. “I fought in France during World War II. That’s why I’ll never forget that it was after the middle class lost their savings that Hitler came to power. People do irrational things when they lose their money.”
Most economists would disagree with my rich dad’s correlation between the loss of savings and Hitler. It may not be an accurate lesson, but it’s one I never forgot.
The Potential Coming Financial Disaster
In recent years, the U.S. government has been creating money out of thin air through what is known as quantitative easing…
This means they bolstered the Fed’s balance sheet by buying U.S. Treasuries in order to keep interest rates low, hoping to spur the economy through this artificial means. It’s the equivalent of you or me printing money to pay off our credit card debt. And what’s crazier is that it has worked… so far.
As Bloomberg reports:
From 2008 to 2015, the nominal value of the global stock of investable assets has increased by about 40 percent, to over $500 trillion from over $350 trillion. Yet the real assets behind these numbers changed little, reflecting, in effect, the asset-inflationary nature of quantitative easing. The effects of asset inflation are as profound as those of the better-known consumer inflation.
The effects of quantitative easing have been to bolster the balance sheet of those who were already rich, while keeping salaries stagnant and creating a bubble in the stock market.
This means that when the stock market crashes, and when consumer inflation does kick in from the stock market money moving into different places, savers will be the ultimate losers. They will not have cashed in on the stock bubble and consumer inflation, which will have the potential of being hyperinflation, will eat away at their savings. Worse yet, it may happen at a point in time where it will be impossible to recover for retirement.
Get With The Currency
This brings up another important lesson, because money is no longer money but instead currency, it must always flow somewhere. Like an electrical current, financial currency must move or it will die. Savings is essentially letting your currency die.
The reason we see wild swings in places like the stock market, housing, and even cryptocurrency, is because money is moving. The rich understand this and they use their financial education to know where the money is moving to, early and often. Following the old adage, they buy low and sell high. In addition to that, they use their earnings to purchase assets that produce cash flow and exponentially grow their wealth.
The good news is that anyone can do this, if they have a high financial IQ.
If you’re a millennial, I encourage you to open your mind beyond the poor financial plan of saving your money.
Learn how money really works, and learn how to put it to work for you. By doing so, you’ll be saving yourself a world of hurt down the road.
Play it smart,
Editor, Rich Dad Poor Dad Dail