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How to save for the future

Steven Lachance
Posted on Sep 25, 2007

There are two fundamental problems with long-term financial planning under the regime of irredeemable currency. First, and most obvious, it is impossible to forecast the future purchasing power of money. Irredeemable currencies don't float, they sink. At what rate, though, is unknowable. Second, and less well understood, is the systemic reliance on intermediaries. Hold financial assets, for instance, and you are beholden to the leveraged broker or dealer with which you have an account. Eliminating risk means eliminating the middleman, but this has become increasingly impractical by design. An individual's future financial well-being depends to a large extent on dealing with these two problems successfully.  

Stocks: Of the twelve original names in the Dow, only one remains: General Electric. Polaroid, Emery Air Freight, and Joe Schlitz Brewing, members of the Nifty Fifty, which famously drove the bull market of the early seventies, are long gone. Companies have life spans, and these need to be longer than your savings redemption period. But who has seen a stock certificate lately? Choosing a corporate survivor is not enough if your stock doesn't leave the books of a reckless broker. Today's leading Wall Street investment banks are financially vulnerable as never before. Investors are so leery of Bear Stearns, for example, that its bonds trade at a discount to Colombia, literally a banana republic in the midst of a perpetual civil war. If you own a stock in street name at a broker, as almost all individual equity investors do today, you will share the same fate as the middleman himself, no matter how conservative your stock selection. The only way to be free of intermediary risk is to register the stock in your name on the company's books and receive a physical certificate, which can be a very expensive proposition, or impossible altogether. The advantages of electronic stock ownership are manifold, but unattainable without relying on a highly suspect third party. The sole alternative to registering ownership in street name at the broker is direct registration with the company's transfer agent, but in most cases, the transfer agent is really just another broker.  

Bonds: If you are what you eat, an economy is how it lends. The underlying ability of bond issuers to repay debt depends on what they've done with the money. Astonishingly, around two-thirds of the nearly $50 trillion in total credit market debt in the US was issued since 1995, most of which was used for unproductive purposes like financing the purchase of consumer goods and houses or to engage in financial speculation of every stripe. Economists call this type of debt non-self-liquidating because it does not result in an income stream for redemption. Bonds for this type of debt are, in effect, fundamentally worthless to begin with. They are programmed to default. How depends on who issued them. Bonds issued by companies as well as by state and local governments will default directly by a simple payment stoppage. Bonds issued by national governments will default indirectly by a repayment in devalued currency, which is still better than nothing at all. Unless, of course, your sovereign-backed bonds are in a fund or account managed by one of our now familiar middlemen whose financial position resembles a hedge fund, if that's not in fact what they are. As with stock certificates, it is better to keep the bonds in physical form in the depository of your choice, with the key in your own pocket.  

Commodities: All the same intermediary risks that apply to stocks and bonds also apply to commodities. The broker from whom you bought your wheat or copper does not have silos or storage tanks. It just signs contracts that promise delivery of the real material, the possibility of which is purely theoretical. The creditworthiness of the issuer of these contracts, or derivatives, and of the broker with which you deal, can stand in the way of redeeming an account. In the past, you could readily take physical possession of stock and bond certificates and thereby eliminate the middleman. You could then sell them at a latter date, effectively accessing your savings, to whichever broker happened to still be in business. It was never practical to physically own pork bellies or West Texas Intermediate crude oil, which was why saving in the form of commodities was never commonplace. Governments, in the form of tank farms and the like, and companies, in the form of managed inventory, have periodically saved in commodities, but not individuals.  

Real estate: Property is a means for an individual to own something of value without having an intermediary retain possession. When fully paid for and legally deeded, there are also no private claims that can be brought against it. The major consideration then is the timing of the purchase and the sale. The regime of irredeemable currency provides fertile ground for credit bubbles that can temporarily inflate real estate prices. If the purchase and sale of a property are in alignment with the credit cycle so that you buy high and sell low, this potentially effective saving vehicle can backfire. The minor consideration is the behavior of the state, or the government. You cannot, in fact, actually ever own property in the full sense of the word, although some societies have more respect for private ownership than others. From changes to building codes and property taxes perpetrated by local governments, to expropriation and forced eviction by national governments, a home is not necessarily a man's castle. That said, real estate still offers the individual saver more real security than stocks and bonds in a fund or account controlled by middlemen who have been permitted by financial regulators and encouraged by central bankers to gamble with other people's money. The drawback is that real estate is not transportable and can be highly illiquid.  

Collectibles: As an asset class, collectibles are similar to real estate. Under the regime of irredeemable currency, they too rise and fall in tandem with the credit cycle; only price fluctuations tend to be far more extreme. Collectibles also can by held free-and-clear of the intermediaries from whom they're bought. To their credit, they are not particularly vulnerable to claims against their ownership, bogus or otherwise. Most collectibles are transportable but can face severe liquidity constraints. You can carry more wealth in the palm of your hand with a gemstone than any other tangible asset, but converting it to currency or trading it directly for a good or service will normally require proof of authenticity. Gemstones and other collectibles are generally only a suitable means of saving for the wealthy, assuming they are acquired at favorable prices near the bottom of a credit cycle.  

Cash: Irredeemable currency is, by the force of law, perfectly liquid. The seller of a good or service literally has no choice but to accept it as payment. This characteristic fulfills one of the two requirements of money. The other, a store of value, is where the trouble starts. After having remained generally stable for more than a century, the dollar has infamously lost 97% of its purchasing power since the Federal Reserve was granted a monopoly over its production in 1913. A thirty year old wage earner saving for retirement would be ill advised to keep irredeemable currency under the mattress: at the present rate he could expect to have 80% or 90% of the purchasing power evaporate, if indeed the currency survives that long. Conveniently for financial intermediaries, the wage earner is compelled to deposit his savings in a bank, which, as the last decade has shown, will promptly lend them out irresponsibly for unproductive purposes. Thanks to changes to banking legislation in the mid-90s, called sweeping, the bank today will keep no more than 1% of the saver's deposit in its vault to meet redemption requests. For assuming this outrageous risk, the saver will receive an interest rate below the real rate of inflation, so he still cannot maintain the purchasing power of his savings over the long run through the use of a bank account. Consequently, it makes no sense to save in irredeemable currency. Temporarily hoarding cash may be a strategic option if you expect a significant decline in the price of other assets, but this is speculating not saving.

Some foreign currencies, usually identifiable by lower market interest rates and current account surpluses, may lose purchasing power more slowly than the dollar. If you are not in the jurisdiction in which they are issued, though, they can potentially be illiquid due to currency exchange and capital transfer controls. As a rule, they do not offer an easy fix to the malady that afflicts all irredeemable currencies, namely debasement through inflation.  

The only currencies that retain purchasing power indefinitely are the monetary metals: gold and silver. The security of these currencies is abrogated in cases where the saver purchases a contractual claim on metal rather than metal itself. Investment certificates, ETFs, and shares in mining companies are normally fully exposed to intermediary risk. For a fund, the saver owns gold or silver only when he holds a stock certificate in his own name and the fund provides verifiable proof that it possesses physical metal, such as with individually allocated serial numbers and vault inspections. Although ownership of gold and silver can prevent a loss of purchasing power, they face moderate liquidity constraints. There are few venues left today for buying and selling physical precious metals and large quantities can be subject to duty when taken over national borders, unlike irredeemable currencies. Confiscation cannot be completely ruled out in the event of a crisis that threatens the existing currency regime. Since demonetization, the state has, in fact, pursued a not very clandestine war on gold. This is a war the state cannot win, but savers should remember that in every struggle, the victor suffers casualties as well.  

The above illustrates that it is exceptionally difficult, perhaps even impossible, to save for the future under the regime of irredeemable currency. This is, of course, not an accident. The regime was designed and is presently managed with precisely this aim in mind. It's not a conspiracy, it's the law.

Steven Lachance
Tokyo, Japan

Steven Lachance is a financial translator based in Tokyo. Over the last decade, he has worked for major European and Japanese investment banks, including Deutsche Bank Group, Commerzbank, Nikko Solomon Smith Barney, and Mizuho Securities.

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