When The Intrinsic Value Of Money Disappears, A Weak Economy Starts To Shuffle It Around

In this post I would like to talk a little about some of my observations regarding our current economic landscape and how it’s affecting the high income wage earner. Yea, I know, I’ve ripped our economy a new one in a few posts back, it’s still a global leader, so I can’t be too critical. One of the concerns I have is that we are building more of a money shuffling economy, where money from one group of people gets shuffled into the pockets of another, without much real value being produced.

Value, is, nevertheless, dependent on demand from the consumer. But it doesn’t mean that the consumer always makes the best choices. Unrecognized, this can spin out of control and that’s how market crashes and other major breakdowns can occur. When you’re dependent on an income from an employer, you have to pay very close attention to the value of that dollar, otherwise you could be earning a lot of zeros while only spinning your wheels.

WHAT IS MONEY SHUFFLING

Technology will help illustrate my point. An app or software is created where a group of people take what they normally spent in a brick and mortar business and spend it instead on the digital equivalent. That’s fine, we saw this happen when Amazon came on the scene, some household expenses shifted out of Walmart and Target into Amazon.

The issue is that a digital business takes on the equivalence of a fiat currency, there is nothing backing it except for a string of 0’s and 1’s. Sure, a ton of money was spent on software engineers and lawyers to build up the backbone of the business, but despite the advent of the technology not much changed. The same amount of money left the pockets of the consumer, it was merely shuffled around.

In healthcare, we witnessed that the ACA brought more uninsured individuals into the healthcare market. This was accomplished by raising health insurance premiums for the healthy, therefore shifting money from one group to another.

WHAT’S Wrong With Money Shuffling

If such moves take place here and there, it’s probably not a big deal, with minimal negative effects on the economy. But if it happens en masse, the average citizen or Jane Investor may not realize the difference and not only shift their spending into the new entity but also invest their money into more and more intangible assets.

Preserving spending. It’s necessary for a weak and suffering economy to encourage spending. That’s generally how recessions are recovered from, by constantly reporting on “consumer spending” and putting more money into people’s pockets (Cash For Clunkers) so that they can spend it.

What are you getting in return for spending? If all you’re getting is entertainment then it makes for a very fragile economy and that puts the value of your wages at risk. A company such as Netflix takes movies and digitizes them for streaming consumption. People then get rid of their stash of DVD’s and even libraries carry fewer and fewer copies, replacing them instead with Overdrive, Hoopla, InstaFlix etc.

This is a very superficial example of this process but I hope it makes the point. And I hope you see the even bigger point, that somehow with this much technology in place, the price of owning/renting the movie didn’t change all that much.

Money printing. I won’t get into this too much, it’s a sore subject, I know. But when money is printed without appropriate assets backing it then it can create increased layers of instability. Only so much can be printed before the value of the dollar becomes so low that nobody will buy the bonds which are issued by the printer.

So, in order to not depress you anymore, let’s talk about the ways that us little folk can protect ourselves. Remember, the consumer is not helpless. We decide where and how we spend our dollars and because of a free market economy, we are fortunate to be able to accumulate either valuable assets or depreciating liabilities.

HOW AN ECONOMY SHOULD FUNCTION

I don’t exactly know how a strong economy should function on the macroscale, it might not even matter much if its citizens take certain precautions. Some characteristics, however, seem to be shared among the strong economies out there, let’s talk about that.

Accumulating assets. A hallmark of a strong economy is the generation of assets. If citizens are buying land and building businesses and saving money then there is a strong backbone. Regardless, depressions and bear markets will take place. What’s important is that families aren’t wiped out, and recovery is predictable. Innovation is often birthed during such recoveries.

Developing skills. The fact that we are able to treat the sick is a fantastic skill to possess, but it’s a very specialised one. Many other skills are necessary for us to function independently in an economy. Don’t laugh as I get into this, I know many of us have stopped thinking about this stuff long ago but it’s important.

Knowing how to do general maintenance on your vehicle, being able to take on some repairs of your house, understanding some legal code, being able to preserve food and grow some of it as well. How many of you did I lose?Investing, preserving health, preventing injury, marketing and sales, are all skills which many of us should spend time learning.

These skills become assets which cannot depreciate in value. They will safeguard your wealth during poor economic times and help you grow your wealth during the recovery phase.

WHAT IT All MEANS FOR THE WAGE-EARNER

In an economy where money is constantly shuffled around, it’s easy to mask its value. It may not be intentional. No scheming character has perhaps sat down to dream up such a system, but the legal scene and the tax code are certainly encouraging it.

The wage-earner who depends on their employer as the sole source of income is potentially screwed in an economic downturn. If this wage earner does nothing but take a little off the top of their income and set it aside in a savings account then they are disregarding the fact that a paper dollar only has the value that others are willing to pay for it.

After all, isn’t that the beef many have with the stock market? They claim that it’s too chaotic and too dependent on the mood of the consumer (investor). If people decide to stop investing in the stock market then it would crash miserably and a lot of money would be lost.

The same can hold true for the dollar. It’s not a doom and gloom picture that I’m trying to paint. Most such events are temporary. What matters is that you have the resources to get through them. Even if everyone panicked and took money out of the stock market, there would still be a need for businesses to raise capital in order to buy inventory, to upgrade, to expand etc. So, eventually the market would recover – to what level? Who knows.

And so, if the dollar lost its value, eventually it would recover. But when you’re a physician who got their first real job at age 30, starting out with nearly $500k in student loan debt, you can’t afford to leave things to chance. If it take 5 years for the value of the dollar to recover, would you get completely wiped out? Or have you built assets, skills, wealth, capital or resources which can get you through those dry years?

How To Combat Shuffling

Well, you knew I was gonna say this, but don’t be the average consumer. Don’t get the unlimited cell phone plan. Don’t buy the brand new car off the showroom floor. Don’t depend on the local grocery store to get all your consumption items. Don’t get a vehicle that’s so hard to repair that you’d have to pay 10x the labor cost in an inflamed economy. Take a Zofran because here are some more:

Don’t have all your assets/wealth in form of currency, diversify
Don’t rely on spending in order to create entertainment
Don’t get so specialised that you lose your marketability
Don’t depend solely on other’s expertise to run your household
Don’t jump onto the bandwagon of the newest technology
Create redundancy and diversify
Create buffers in any system upon which you heavily rely upon
Understand and practice some bartering techniques
Build a strong social network with those who share your outlook
Master budgeting, spend less than you earn

It’s Okay To Stand On The Sidelines During So-Called Economic Disasters

Finally, whenever something new happens in the economy, it can feel as though the walls are caving in. Media will spin things out of control and those who “predicted” it will light up on center stage.

Do not get caught up in the hype. My personal strategy has been to delete news from my life, I don’t consume any news, period. You don’t have to take such a drastic approach, but learn to ignore sensational reporting. Bonus level: also ignore inflated values. If housing prices around you are higher than they should be, realize you are experiencing a bubble.

If you have learned about finances, developed an understanding of your position in your organization, honed your skills and built some resilience into your life, then all you have to do is tune out the negative Nancies and continue on your course. The right system will work well in a market crash, in a booming economy and in a bear market.

The key during bear markets and depressions, during financial disasters and economic collapse, is to preserve your capital, to hold onto as much of your assets and wealth as possible. I don’t mean this in an apocalyptic way, so get the picture of you with a Rambo vest and guns out of your head. And certainly don’t be greedy, that’s just as bad.

You might have a business, you might have real estate or intellectual property that you’re working on. Don’t let those fall apart during economic downturns. Instead, think of such events as wonderful opportunities to build further wealth.

Some of the greatest wealth has been built by those who capitalized on recessions. They stayed focused on what was working, they didn’t lose hope and they chose one available opportunity and built it up.