Yesterday we talked about reserve assets in detail. Today’s topic will be how to strategically warehouse cash.
Let’s start with this – when we talk about cash, we’re talking about fiat currency like US dollars, Euro, yen, and the others.
Obviously it’s a good idea to keep a little bit of cash in the bank at all times. Here in the US, I think it’s wise to have some physical cash on hand as well—just in case we need it in a pinch.
But here’s an important nuance that mainstream finance doesn’t understand…
Holding cash is about pure liquidity… not about stockpiling money. We don’t want to hold the bulk of our money in cash.
That’s why reserve assets are so important. We allocate to gold and Bitcoin specifically to save money.
As I mentioned yesterday, I don’t think we should view gold and Bitcoin as investments that we buy hoping to sell later. Instead, they should be the cornerstone of our asset portfolio.
Gold and Bitcoin are our reserves. We buy them specifically to move out of fiat money and into higher quality assets.
The problem with cash is that it loses purchasing power over time. This is why it’s important to strategically warehouse cash.
Sometimes it loses purchasing power exceptionally fast due to “high inflation”… but it’s still losing value during “normal” times as well. That’s a function of policy.
In the US, the Federal Reserve (the Fed) has a stated policy goal of 2% inflation annually. That means it deliberately wants to cause the US dollar to lose 2% of its purchasing power every year.
Of course, they never say it that way. They pretend that inflation is about rising prices and asset values. But rising prices are just the result of inflation.
Inflation is the act of expanding the money supply. This can be done simply by “printing money” at the central bank. But the current system has a myriad of other more nuanced ways to expand the money supply as well.
The Fed’s open market operations, reverse repo facility, standing repo facility, discount window lending, and its foreign exchange swaps can all be used to inject dollars into the financial system to increase liquidity. Then fractional reserve lending, securitization, and off-balance sheet vehicles at the commercial banks can also increase liquidity in the system, each expanding the money supply.
We should note that all these activities tend to create boom-bust cycles… but that’s a topic for another day. The key point is that cash will constantly lose purchasing power over time for as long as the current monetary system remains in place.
That’s why we don’t stockpile money in cash. It would be like storing water in a bucket riddled with holes. Our purchasing power would gradually leak out on us.
Still, it’s a good idea to keep some cash so that we have liquidity. Here’s what I mean…
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