Money =/= Currency
From the beginning of time many things have been considered currency. Livestock, grains, spices, beads, and paper have all been forms of currency, but only two things have been money. You guessed it: gold and silver.
In 1971, the U.S. dollar died because it was no longer money—it became a currency. And there is a big difference between money and currency.
It’s a common misconception to think currency is money. For instance, when someone gives you some cash, you presumably think of it as money. It is not. Cash is simply a currency, a medium of exchange that you can use to purchase something that has value.
The word “currency” comes from the word “current,” like an electrical or an ocean current. The word means movement. In overly simple terms, a currency needs to keep moving. If it stops moving, it rapidly loses value. If the loss of value is too great, people stop accepting it.
If people stop accepting it, the value of the currency plummets to zero. After 1971, the U.S. dollar began moving to zero.
Money, unlike currency, has value within itself. Money is always a currency, in that it can be used to purchase other items that have value, but as we’ve just learned, currency is not always money because it doesn’t have value in and of itself.
Think about it this way: is the paper your $100 bill printed on worth $100?
The answer is, of course, no. That paper simply represents value that is stored somewhere else—or at least it used to be before our money became currency. The U.S. dollar is backed by nothing other than hot air, or what is commonly referred to as “the good faith and credit of the United States.”
Dread the Fed
The beginning of the end for the United States economy started with the inception of the Federal Reserve. The Fed, as it’s called, is a private bank, separate from the U.S. government, with the power to dictate our country’s fiscal policy. Since the Fed’s formation, the U.S. dollar has become nothing but currency.
The U.S. Federal Reserve Bank—which is neither “U.S.” nor “Federal,” technically has no reserves, and is not really a bank—was given the right to print U.S. currency by the government.
While the Fed doesn’t have reserves, it does have a printing press. The Fed has been allowed to flood the world with dollars, also known as funny money, magic money, fiat money: currency.
While this did the world some good, such as increasing the standard of living of many countries and making many people rich, it also caused many people to become poorer by not only having to work harder but ultimately earning less money. They earned less money because they paid more in taxes, interest, and inflation.
During the classical gold standard our currency was real, verifiable money, meaning that there was actual gold and silver in the Treasury backing it up. The currency was just a receipt for the money. Then, in stepped the Fed, one of the most notorious and misunderstood institutions in the history of the United States.
The difficulty with the Fed is that there’s a lot of information out there, which is one reason why it’s so controversial. There are two very polarized camps when it comes to the Fed. On one end you have the government, which trusts it to regulate the U.S. economy. On the other end, you have the conspiracy theorists, who believe, in no uncertain terms, that the Fed will eventually bring about the collapse of the U.S. economy.
As former senator and presidential contender Barry Goldwater pointed out, “The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States.”
Value vs. Price
Anytime you find yourself in a situation where you are the informed investor and the masses don’t yet know what’s going on, you have the advantage. Once the cycle has changed, and once you’ve verified that conditions have shifted, you can flourish.
Any investor that does reasonable due diligence, takes a position early, waits for the masses to wake up, and hangs on for the ride, has an extremely good chance of making boatloads of money.
So how do I see what the value of something truly is? Simple. You stop measuring value with the dollar. The dollar can’t tell you what true value is because it can’t tell the truth. To borrow a phrase coined by Al Franken, the dollar is a “lying liar.”
People always ask me, “How high will gold go?” The answer they are expecting from me is a price in dollars. Just remember this: It’s not what the price of gold is that matters, but rather how much stuff it will buy.
If I said, “Gold is going to a million dollars an ounce,” most people would say, “Great!”, and run out and buy as much gold as they could. But then if I said, “But a cup of coffee is going to cost a billion,” then they’d say, “Let’s see… that means coffee cost a thousand ounces of gold a cup. That’s not so great.”
Under those conditions people would sell all their gold while it was still worth something, and not wait until it went up to a million dollars an ounce and effectively worth nothing.
Why do I bring up the idea of “true value”? Because it’s the only way to tell whether an asset class is overvalued, or undervalued, and nothing is more important to an investor.
What if I asked you: What’s the value of your house? You probably know the price, but what’s the value?
Here’s how to find out. Most people know what other homes are selling for in their neighborhood, so just make a guesstimate of the price of your house. Then divide the price of the house by the current points of the Dow and you’ll know how many shares of the Dow your house is worth.
Now take the price of your house and divide it by the price of gold and you’ll know how many ounces of gold your house is worth. Then take the price of your house and divide it by the price of a barrel of crude oil and you’ll know how many barrels of oil your house is worth.
Value shifts when the public rushes from one asset class to another. The public generally chases whichever asset class is the hottest and is the one that everyone is jumping onto the bandwagon for.
Those are the asset classes that are sucking capital away from other asset classes. And by doing so, the one that’s hot becomes overvalued. The one that’s not becomes undervalued. It’s really that simple.
Here is the important lesson: During financial upheaval, a bubble popping, a market crash, a depression, or a currency crisis, wealth is not destroyed. It is merely transferred.
During the Weimar hyperinflation, gold and silver didn’t just win, but smashed their opponent into the ground, by delivering yet another devastating knockout blow to fiat currency.
Thus, those who held on to real money, instead of currency, reaped the rewards many times over.
Editor, Rich Dad Poor Dad Daily