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Honest Money
What It Is and What It Isn't

Money Part IV - Store of Wealth

Douglas V. Gnazzo
Apr 5, 2006

Quality vs. Quantity

Last week we ended with a discussion of the difference between present and future time preferences, and how they affect direct and indirect exchange accordingly. We saw that there are both direct and indirect credit transactions because of different time preferences.

This week we will discuss the importance of money retaining its purchasing power into the future. Money is only good for one thing - to exchange for other goods. You cannot eat or drink money.

The quality theory of money emphasizes the purchasing power of money as the most important determinant of a sound currency.

The quantity theory of money emphasizes the number of units of money as being the factor of greatest importance. The quantity theory is inferior to the quality theory of money.

The more purchasing power that money retains, the more goods that can be purchased with it. If money loses purchasing power, then fewer goods can be purchased with the same amount of money. Loss of purchasing power is loss of wealth.

Staying Even

If the quality of money is decreasing, then one has to accumulate more units of money to buy the same amount of goods as before. This means that one must work harder in order to earn more income just to stay even with the loss of purchasing power.

When one's income buys less than it used to, more income is needed to keep one's standard of living the same as before.

The loss of purchasing power is also referred to as inflation, or the debasement of the currency. Whatever you want to call it, the bottom line is that your bottom line is getting worse - you are losing wealth.

If the quality of our money is losing 10% if its purchasing power, then we will have to earn 10% more units of money just to keep our standard of living the same as before.

Since the Federal Reserve took control in 1913, our money has lost 95% of its purchasing power or value. This is why it takes both parents to work to support a family today.

Our income has not kept up with the loss of purchasing power.

This means our standard of living is going down - not up, as the establishment would have you believe. Just because one is in possession of more stuff, it does not mean that they are necessarily wealthier, or better off.

Bottom Line

Wealth is measured by the bottom line, after you subtract out what you owe from what you own.

If you own more than you owe, you have a positive net worth. If you owe more than you own, you have a negative net worth.

Whatever your net worth is - that is your bottom line - that is your financial wealth.

If the mortgage never gets paid off in full, one does not legally own the title to their house. The bank holds the title and owns the house until the mortgage is paid off in full.

If an individual is fortunate and pays off the mortgage, if taxes and other debts exist, one's house remains subject to forfeiture.

A 30-year mortgage, if paid every year for 30 years, adds up to 3 times the original amount of the loan paid out as the total final cost. The extra is the interest - the vig - paid to the man for loaning money that he created out of nothing - by fiat.

If 2/3 thirds of the way through all of the payments, one suddenly loses their job and cannot pay, the bank can foreclose on the house. One must sell and move out.

The bank gets the house and whatever money paid to date.

Then the banker will extend another loan to a different party and they will purchase the mortgage payments, and the cycle starts over anew.

Nice work if you can get it and rest peaceful at night. It might present a slight problem on the final day of reckoning, however, when all is weighed in the balance.

From the above we can see that it is very important for money not to lose its purchasing power. If the quality of our money is eroding, our standard of living is eroding along with it.

We must work harder and earn more income - just to stay even.

... Read the full report on Doug's new website.

-Douglas V. Gnazzo
email: Douglas V, Gnazzo
website: HonestMoneyReport

Honest Money: What it is and what it isn't
Part I : Part II : Part III : Part IV : Part VI : Part V : Part VII : Part VIII

Douglas V. Gnazzo is CEO of New England Renovation LLC, a historical restoration contractor that specializes in restoring older buildings that are vintage historic landmarks. He writes for numerous websites and his work appears both here and abroad. Just recently he was honored by being chosen as a Foundation Scholar for the Foundation for the Advancement of Monetary Education (FAME).

©2006 Douglas V. Gnazzo. All Rights Reserved.

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