When Savers Lose

Saving is a cherished virtue. It signifies self-discipline, self-control, and delayed gratification. When you save in times of plenty, you suffer no lack in times of famine. However, savers can lose if they save the wrong thing.

Saving money is one of the cornerstones of achieving financial freedom. You can hardly lose when you save money. The problem arises when you save currency thinking you are saving money. To the average person, there is no distinction between money and currency, for an investor, there is a world of difference. Money retains value, currency does not. If you save currency, you are holding onto an item that depreciates. It is worth less and less the longer you hold unto it.

Way back in school, we were taught the functions of money, principally as a means of exchange and a store of value. As a store of value, money is gold denominated. The value of a nation’s money was directly linked to gold reserves that the nation has. In the US, the gold was kept in bullion form at Fort Knox, hence the saying – all the gold in Fort Knox. The moment the gold backing is gone, it is no longer money but currency or funny money.

This is how it worked. Right from ancient times, real money was always tied to gold. The more gold you have, the more money in circulation and vice versa. Gold and money were virtually one and the same. At the end of World War I, Germany lost the war and one of the terms of surrender was the payment of reparations to the victors – the US and its allies.

When Germany ran out of gold, the German government started printing paper currency (not backed by gold). Inflation got so bad that a pair of shoes was reportedly sold for 32 trillion marks (a recent example of paper currency going crazy is Zimbabwean dollars). A story is told of a woman that went to a bakery with a wheelbarrow load of money to buy bread. She stepped inside, and by the time she came back, someone had stolen her wheelbarrow and left the money behind (meaning the wheelbarrow was more valuable than the pile of cash). This set the stage for the emergence of Hitler.

Towards the end of World War II, the Bretton Woods system was adopted in 1944 which made other nations adopt a monetary policy that maintained the exchange rate by tying its currency to the US dollar backed by gold. The price of gold was fixed at $35 per ounce. This means that if a nation has 1Million ounces of gold, it could print $ 35 million in paper money. Money was tied directly to gold and was interchangeable. Consequently, money does not lose value. You can take it to the bank, and come back for it twenty years later. It will still be worth its value in gold. That is no longer the case.

In 1971 President Nixon took the US off the gold standard and unilaterally terminated the convertibility of the dollar to gold. From that day, the dollar stopped being money and became “fiat currency” – backed by nothing but the promise of the US federal government. Without a gold backing, the cash you spend is being printed on demand. That is why you hear stuff like “This is worth so much in 1995 dollars”.

The dollar loses more than 90% of its value every 40 years. The naira loses more than 90% of its value in ten years or less. That is why the price of real estate goes sky-high so fast. The currency is losing value. If John and Peter get paid the same amount of bonus at work and John keeps the money in the bank while Peter buys real estate, Peter will be richer than John in five years. If you save currency, you lose. This is when savers lose.

Nations now print currency when the need arises. They run out of cash, they print more (if individuals do that, it is illegal and is called counterfeiting). It is no longer backed by gold. It is worth less and less as more currency is churned off the government printing presses. To win in the currency-saving game, you have to save currency faster than the government is printing it. As more currency is pumped into circulation, more cash is chasing fewer goods giving rise to inflation. In developed economies, inflation mainly affects assets (real estate, commodities, etc) while consumer prices remain stable.

Under the current circumstances, saving currency that is losing value is hardly the wise thing to do. If you were living in Zimbabwe in the days prices of goods doubled every 24 hours, and you will need storehouses to stock virtually useless paper. It got so bad the paper the currency was printed on was more valuable than the value of the currency.

Smart investors do not save currency (funny money). They turn their currency into assets – precious metals like gold, silver, etc, real estate, and anything that increases in value. That way, they not only retain value but actually increase it. So rather than keep your savings in cash which gets wiped out by inflation, turn your cash to real money which is gold, or any other asset, especially the type you can easily convert to cash the moment the need arises. If you save currency, you lose. This is when savers lose.