Know what you own.

Share:
Indexes
  1. References

I am frequently entertained and informed by the Motley Fool Money podcast on topics from the world of investments, particularly equity stocks. The conversation is always well-informed, and brings an Australian perspective with its refreshing banter. The host is Scott Phillips who is joined by Andrew Page, the Australian founder of the Strawman investment club.

Fool on inflation

On the topic of “why inflation could be here to stay”, Andrew made the assertion that money is broken. In the high inflation environment of 2022, money is not fulfilling its promise as a store of value; it’s a melting ice cube of value. This is bad for individuals, and it is bad for society as a whole. If I am fortunate enough to have a little surplus income then I am forced to become an active investor. I can’t be a simple saver and focus on my day-job. Why should I have to become a part-time investment professional to protect the value of my savings? Investing is hard and many everyday people end up putting their savings into property or other assets and get caught in the flames of speculative mania, and that is bad for society.

Scott countered with the observation that money has failed to be a good inflation hedge in the past. This has never stopped the majority of individual savers keeping their money in bank accounts or under the mattress. Inflation does not lead to speculation mania or boom-bust cycles.

Money is a melting ice-cube of value — Andrew Page

I was nodding along in agreement with Andrew’s opening comments, but something about his closing remark did not sit well with me. He claimed that money should not only be a cast-iron long term store of value, but that it should increase in value even if that leads to price deflation. Andrew was thinking beyond the exceptionally high inflation of this moment in 2022. I know Andrew is positive on Bitcoin, and he is echoing the economic philosophy of many crypto-bros, though they are often much more radical in their views.

The assertion that money should be a guaranteed store of value is wrong. Money cannot be inflation-proof in the long term and attempts to make it so are harmful. The failure to recognise that inflation is simply a brute fact already contributes to a widespread problem of absentee ownership of capital that is profoundly bad for society.

While the miser is merely a capitalist gone mad, the capitalist is a rational miser— Karl Marx

Whether you like it or not, when you have a good amount of savings, you have wealth and you are a capitalist. You are in the business of making money from money and you yield social power. You have a double edged responsibility: 1) to your future self by making sure your money retains its purchasing power in real terms, and 2) to others in the here and now by making sure your capital is put to work in ways that deliver utility to others while doing no harm.

Know what you own and know why you own it — Peter Lynch

Some folks speculate directly by becoming shareholders, bondholders, or landlords. This is by far the best way to see the impact of your money. Being a direct investor carries financial risk and can be time consuming. Many become footloose investors confuse value with price and are lured by rumours of quick profit. Some lost souls are pulled into a vortex of fear and greed, landing them on the shore of great wealth or wrecked on the rock of financial ruin.

Many people feel that investing directly is too much like hard work and put their money into the supposedly safe hands of regulated professionals. Being an absentee landlord has its own risks so we must choose an agent that has our interest at heart, will mend the windows and keep good tenants. If I hand my money over to someone else and step away then I should expect them to make best endeavours to use my capital to make money for themselves. They will of course stay inside the boundaries drawn by regulation and the law, but protecting my purchasing power is lower down on their list of priorities.

A lot of people find investing scary and are bamboozled by the jargon. They simply don’t want to lose what they’ve worked hard to save. Sensible people who want to protect their long term purchasing power and have no desire to get rich by gambling their savings. People who just want to squirrel their money away still have worries — finding a safe place to store money, low interest rates, and inflation.

If I am what I have and if I lose what I have who then am I? — Erich Fromm

If I hoard my wealth in notes and coins I have the steady march of rising prices — inflation — to contend with, if a thief doesn’t find it first. The value of my money rots away over time and over several years the effect of this is considerable. Monetary inflation is by design and with a central bank’s typical 2.5% inflation target I can expect 25% of my purchasing power to evaporate in a little over 10 years. Add to that the exceptional episodes of high inflation or hyperinflation any wealth I hold as money boils away. Central banks do their best to guard against these episodes, but they happen.

Savers are incentivised to deposit their money with banks. Some of these incentives are designed-in, for some good reasons and for some dubious reasons. The bank vault remains a thick-walled and secure place in our imagination. Banks are still considered safe and are backed by Government guarantees. Once upon a time banks would pay interest to attract your money. In more recent times electronic payments and credit facilities make banking services essential. With the migration to a cashless economy it is now almost impossible to operate without a bank account.

Central bank money — notes and coins - is something of an endangered species on the high-streets of many countries. Most money circulating around developed economies is now dematerialised commercial bank money. Most of that is credit money. For every upright and frugal saver there are many profligate borrowers. For every surplus there are many basic needs dependent on the alchemy of financial intermediation.

When I make a bank deposit, I surrender my legal title to the cash in exchange for an IOU from the bank. The bank is obliged to give it back on demand but until I do, my money becomes an asset of the bank. I may have handed the keys of my hard earned capital to the same financial joy-riders who drove us all into the Great Financial Crash of 2008. Bank runs and the collapse of a bank was once a commonplace worry but is now a rare and extreme event thanks to the promise of socialising losses among taxpayers. Even if I expect to get my principal back because of Government guarantees, I have a responsibility to know what my capital is doing.

So… There are no places to put money that are easily understood, that prioritise preserving purchasing power over promising riches, and do no harm in the world. The investment industry makes its money out of fear and greed. The savings industry does little to keep things simple, and does not encourage patient capital. Bank deposits do not protect against inflation and are used by the financial industry to feed the speculative leviathan behind an opaque paper-thin screen.

There is no such thing as an inflation-proof store of value. There are no socially neutral stores of value. As a saver I am the owner of capital. My choices are: 1) give my capital away; 2) spend it as I get it; 3) have it taken from me; 4) take responsibility for how it is put to work. Our economic institutions make the last of these difficult but not impossible.

One vendor was selling the exact same variety of cucumbers at two different prices. “Why is this one twice the price?”, the merchant was asked. “They came on higher quality mules” was the answer. — Damascus joke

Crytpo enthusiasts suffer the fallacy of safe haven as Nassim Taleb describes it. New fangled crytpo-assets allure those wanting to escape the burden of ownership but in fact are nothing new. Taleb’s paper on the exceptional fragility of Bitcoin et al is an entertaining read, if you can see through the technical language from both crypto and quant finance.

Perhaps investment professionals like Andrew Page can do more to help savers protect their long term purchasing power, to know what they own, and why they own it?

References

  1. Why inflation could be here to stay | Motley Fool Money Podcast | September 16, 2022
  2. Absentee landlord — Wikipedia
  3. The ‘Strange, Unduly Neglected Prophet’ | NPR
  4. Bitcoin, Currencies, and Fragility | Fooled By Randomness
  5. Philosophy of Money and Finance | Stanford
  6. What is money, really? And why Bitcoin is not the answer (even if blockchain is brilliant & potentially helpful in democratising money) | Yanis Varoufakis
  7. What Is Money? Definition, History, Types, and Creation | Investopedia
  8. Money — Wikipedia