Currency is Not Money
Currency is Not Money
September 25, 2018
If we were to hold up a $100 bill and ask, “What is this?” invariably there would likely be a chorus of voices calling out, “Money”, then mutters of disbelief when our response would be, “No sorry, that’s not correct”.
Well if that “Franklin” isn’t money, then what is it? It is ‘currency’, a medium of exchange representing an amount of government-backed value that can be freely exchanged for goods and services in the good old U.S. of A. Well, okay, you say. Then what is money?
In the purest sense, the word ‘money’ is actually purchasing power – the ability to take a measure of stored, generally-accepted value, (whether dollars or clam-shell wampum) and exchange it for an equal-valued item or service desired. The reason I call your attention to the difference between currency and money is that this is essential to knowing why we save and invest for the future. It is also critical to understanding why, despite the anxiety that may be part of investing, we shouldn’t just stuff our ‘currency’ in the mattress or all in bank certificates of deposit and believe that our ‘money’ is safe. The currency units (dollars) in the bank may be safe, due to guarantees by the Federal Deposit Insurance Corporation (FDIC), but even then, our currency dollars are leaking purchasing power every day.
In the early 1980’s, a depositor might have earned about 15% on his bank CD investment. Sounds wonderful, right? The problem was one of context, because inflation (loss of purchasing power) was just over 10 percent in 1981. So really, the CD-owner’s nominal purchasing power may have only increased by about 5% (pre-tax, of course). Depending upon that particular individual’s tax bracket that 5% increase in purchasing power may have been reduced by another 1.5% due to Federal/State taxes on his interest, bringing his net gain to about 3.5%. Nothing to dismiss, of course, but not quite as juicy as that original 15% either.
So when we are making contributions to our IRA’s, our 401(k) accounts and college savings accounts, we are deferring current consumption at today’s purchasing power in order to create greater purchasing power that we want (and need) in the future. And in order to maximize our future purchasing power, we ought to be investing in things that have at least a fighting chance of outpacing the ravages of inflation over time and help our limited savings grow. This is the reason that, (in line with our ability to tolerate the volatility) some portion of our investments ought to be as “owners” (shareholders) of companies, not just as lenders (to companies or banks) through bonds and other forms of “fixed income”.
With investing, one size doesn’t fit all, so your neighbor’s tolerance for risk in stocks and stock funds may differ from yours, as does his/her goals and objectives. The point here is to encourage all to understand a core concept of why we invest our money. It’s the added purchasing power we seek to combat the erosion of inflation over time and it’s really not a matter of choice, but of necessity.