Cash is king… or is it.
Currencies are meant to be used as notes in exchange for goods and services and are typically backed by governments. The reason currencies need backing is because there needs to be an “authority” that can vouch for the note holder. For example, when we take the US dollar (aka the greenback), most countries around the world are willing to trade for it as the US government is backing the dollar.
Well you may say that’s a great thing especially if you are from America which has one of the biggest GDPs and think that the currency you hold is great. But, that could not be further from the truth. in reality, you are at the mercy of the government that is backing the currency which in this example is the US.
The central banking authority has the power to basically do whatever they want and that can greatly influence everything from inflation to economic growth. As of this article’s writing, the federal reserve is using a quantitative easing strategy and basically pumping an unlimited amount of money into the stock market in hopes of keeping the economy strong during Covid.
The issue is this means the cash you currently hold is only go down in value as more currency is circulated. Additionally, if you don’t hold cash in the stock market where the federal reserve is essentially propping up the market, you are missing out on the benefits of quantitative easing. The stock market is an easy metric for governments to point out and say “hey the markets are doing well so our economy is doing well”, but the stock market and economy are not always on the same page.
Holding cash essentially becomes a lose lose situation because you if you don’t put in the market you are missing out on potential gains, and when the government feels like it, they can print as much money as they want which makes you money less valuable.
At the end of the day, the people that truly benefit from this are usually the higher net individuals who have the ability to keep more of their wealth in investments and not cash. This is why the wealth inequality in the US is growing at such a rapid pace. How are you supposed to be invested when you don’t have money to put in and if you don’t, you can’t beat inflation.
Monetary policy is obviously very complicated, but it should be used to help as many people as possible.
Also, for all of our US readers, the greenback is potentially facing many headwinds. With all the new dollars being circulated, other countries are noticing and wondering is the US dollar going to be stable?
As we can see, the US dollar is slowly decreasing in it’s hold as the world’s currency reserve. This isn’t surprising and considering how poorly the US is responding to the Coronavirus when compared to the rest of the world, the road to recovery may be a long one.
So, what can you do? If you don’t have extra money that can be invested, quite simply you’re screwed holding paper (aka currency) that will only further decrease in value. The government can print as much as they want which hurts those that are in need because it makes things more expensive down the road (note: inflation on consumer goods is quite significant). That’s why holding cash and currency in general is so rigged.
So next time someone tells you cash is king… tell them it’s not.
It is well enough that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
Henry Ford