For The Love of Money.

By Logan Flatt, CFA

   One million dollars is a lot of money. Many Americans would love to have $1 million sitting in their bank and brokerage accounts. In fact, according to the 2007 World Wealth Report published by Capgemini and Merrill Lynch, over 2.9 million Americans do have at least $1 million in cash and securities on account today.

   Yet, do Americans really love money? For many, as soon as we get money in our hands, we spend it on some shiny new thing that pleases us, or on some new experience that, for a short while, distracts and entertains us. So, do we love money, or do we love what money enables us to possess and experience?

   Regardless, note what money gives us – freedom, opportunities, security, flexibility, and power – stems not from money’s quantity, but from its quality. It matters not how much money we possess or how impressive the rate at which we bring it home if our money steadily decreases in value over time.

   So, is $1 million really a lot of money? It depends – how fast is the dollar decreasing in value? There’s one simple way to tell: price inflation. As consumer prices increase, a dollar buys less than it used to. Thanks to America’s average annual inflation rate of 2.7% over the past seven years, $1 million in 2000 was worth only $829,864 by the end of 2007. In 2008, inflation has jumped to 4.1%, degrading the dollar faster still.

   What is causing price inflation today? It’s a two-fold problem. First, through deficit spending, the U.S. Congress spends today hundreds of billions of tax dollars borrowed from our future. This acceleration of future tax dollars into the present increases the supply of dollars sloshing around our economy in 2008, increasing demand for – and prices of – goods and services.

   Second, the Federal Reserve swells the U.S. money supply with credit. By lowering short-term interest rates – as it did by 1.25% in January – the Fed encourages banks to loan money to borrowers looking to spend their future earnings today. The result is more dollars sloshing around the economy, further driving up prices of goods and services.

   How can we stop the Federal government’s willful degradation of the U.S. dollar? Vote. Write. Call. Demand that your elected officials in Washington, D.C. practice sound fiscal and monetary policy: a balanced Federal budget each year; a lower Federal debt outstanding; and inflation-fighting (e.g., higher) short-term interest rates.

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NOTE: This article first appeared in the Winter 2008 issue (Volume 6 Issue 1) of The Swan, a publication of the Lake Forest Community Association, Inc., a nonprofit Texas corporation.

Image above copyright 2006 by Chris Palmer of Huntsville, AL USA. Used with permission. All rights reserved.

Copyright 2008 PowerWealth.com. All rights reserved.

Comments

[troy]

I agree Americans really do love money. I believe that in the near future we will all have to rethink (and maybe even retool) our thinking about finnaces due to the economic growth/change in our nation.