The stock market over the last month is up a little bit. The Dow is up roughly 513 points or about 1.9%. The quarter is about flat. The topic of this newsletter will be currency and inflation. Let’s start with currency.
What is Currency?
Currency is a medium of exchange. Prior to currency being used, we had barter. That means we exchanged physical goods or services for other physical goods or services. For example, if I had excess cows but needed a sheep and someone else had excess sheep but needed a cow, we could exchange a cow for a sheep and we would both be happy. The problem is that I would need to find someone that had what I wanted and wanted what I had, and vice versa. Therefore, it would be difficult to find trading partners. With the usage of currency, I could trade my cow for currency and that currency for a sheep. Everything is more efficient because we are always trading with a good that everyone wants (currency) so we don’t have to hunt for trading partners. What you need to remember is that by itself, currency has no value. Its value is what you can trade it for. That ties into our next topic which is inflation.
What is Inflation?
Inflation is simply an increase is the cost of the goods and services within an economy that can be purchased. Most importantly it eats away the value of your currency. If a sandwich costs 5 dollars and you have 10 dollars, what’s the value of your currency? The answer is 2 sandwiches. If the cost of a sandwich rises to 10 dollars, the value of your currency is 1 sandwich. You are poorer, even if your level of currency stays the same. Remember currency has no intrinsic value.
Why this is important
There is an expression that says “Cash is King”. If you have a lot of liquidity needs, the expression is correct. Perhaps you are about to buy a property or pay tuition for junior (or the old age home for your mother). For everyone else it is wrong. You do not want your wealth to be held in cash. Bank interest will not keep up with inflation. If your wealth is held in currency, your wealth will hemorrhage away. You lose money in a slow steady drop. You want your wealth in something that will keep up with or exceed inflation such as stocks, real estate, certain types of bonds, etc. When you are risk adverse and hold cash, you are making in reality making a decision that is guaranteed to lose over time.
We sincerely hope you got value from this newsletter. We appreciate your business and trust.
Dan and Eli
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Questions for the comments
Did my newsletter make sense? Do you agree or disagree with what I said?