Third, lower interest rates also benefit government when applied to the cost of paying interest on the National Debt. A low interest rate on more money gives the false appearance of stability. This is particularly true when the interest is subject to change as the financial instruments backing the funded National Debt mature. Ask the sub-prime crowd about this overlooked phenomenon.
Fourth, inflation artificially increases the value of assets. The number one asset that our government has is you. Inflation creates upward pressure on value and wages. Taxes are levied against value and wages. The higher the value, the higher the wages, the higher the taxes. Huh, who would’a thunk it.
As inflated values climb, the appearance is that the GDP is rising and the national debt (as measured against the newly inflated national wealth), is going down! This enables government to create more debt without changing the asset to debt ratio. There’s no jail term for this crime due to diplomatic immunity.
So what to do now? The FED is absolutely destroying our currency. If you have dollars invested in such instruments as certificates of deposit, savings accounts, or low fixed interest income on any dollar based investment vehicle, you’re losing money. That lose is picking up steam like a runaway train as inflation robs your wealth as sure as John Dillinger robbed banks.
If you have a cash stash that is not drawing interest, that stash is racing toward becoming worthless. To give that statement some meaning, my friend and I made a one day trip yesterday and burned $135.00 worth of diesel fuel. How much fuel would your cash have bought when you stashed it? How much will it buy next month?
Cash is trash and that is all there is to it. Here is a simple equation. If you have money drawing 4% interest and real (not reported) inflation is 7% (which is a conservative estimate), your perceived gain is an actual lose of 3%. It gets worse. That lose is reported as a 4% gain on your taxes and you pay income tax on your loses! I told you government was winning and you were losing. Your actual realized lose is somewhere in the neighborhood of 4%, exactly what it appeared that you were gaining.
So given the above, cash is not a good thing to be holding. Yes, some cash is absolutely necessary and we will talk about that tomorrow, but as an investment; nada.
Turn cash into real value. We established that cash loses money and we don’t need to establish that making interest payments loses money, so moving cash to paying debt at this point makes all the sense in the world.
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