The intangibility of money

This week has been an emotional roller coaster ride for all of us who have investments of any type.  It seems like nothing is safe haven for your money anymore.  Even if you hold your money in your mattress you would lose it due to the high inflation.  The scent of fear is really overwhelming in the air.  I have been really busy at work but I think everyone seems to be frustrated and sobered by what is happening.  It seems that every single day the government comes up with a new scheme to do something or the banks “inject” money into the system.  Here is what it really means and why we as individuals can only go with the flow.

American Dollars and much of modern money is based on a fiat system, which means that the money we earn is a type of credit declared by the United States government to be legal for paying back debts and buying things.  There is really nothing backing the money other than the word of the government.  Central banks around the world control much of the money systems and they can technically  create or destroy money at their whim because they do not need to produce anything to create money.  Since money is basically a legal instrument, banks and governments are intrinsically involved with each other.  It is actually really easy to conjure money out of thin air, all that needs to happen is for a government system to say so.  So when Paulson says that the financial system is sound, what he really means is, “Trust us, we will print more money and make people believe they have wealth to spend!”

The financial industry understands that they are not actually producing anything and they are just playing a giant numbers game so they have nothing to lose.  Afterall, banks are just trading promises between a variety of folks and I really think that intangible quality of money made a lot of people more irresponsible than they should have.  When the numbers game failed and promises were broken,  quite a few banks ended up with actual assets such as foreclosed homes, but most of them find these homes to be a liability because they don’t want to play with actual property, they just wanted to play with balance sheets.

Now money only has value when people are willing to accept it.  I could have a $100 yuan bill in America and people will probably treat it like a piece of garbage, but in China I could buy a bunch of groceries with it.  Why would a grocer in China accept a piece of paper that’s useless in America?  Is he daft? The fact of the matter is that we are all already too deep in this system where we accept a certain currency even though at its core it is just a piece of paper.  This is why the governments and banks want our trust.  They want us to believe that the money they are creating by the stroke of a pen is good and acceptable.  They want us to know that we can continue to work hard and produce goods and be compensated in ephemeral numbers.  They want to continue the game.

Money is an illusion, and I don’t even mean that in a metaphorical way.  It literally can be conjured up from thin air by those in power.  This is also why I’m not too worried about our financial markets.  As long as the banks and governments are in control, they will continue to tweak the game for their own survival.  So pick up an index fund and watch those little numbers swing up and down, but remember that it really means nothing until you have to use it and actually buy something tangible.  This may seem like you should spend everything and go in debt, but remember, most of us are not in power and we can’t make money magically appear.  Most of us still have to pay taxes and debt interest to those who control the global money game, and that can get very frustrating, but that’s life. Don’t worry about your portfolio too much and enjoy the sunshine and don’t be a workaholic because the time you have on this earth is more precious than a few numbers.  That’s all we can do.

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