Bad Money Chasing Good

We have all heard phrases like "throwing money down the drain", or "good money chasing bad". The real secret to making money in the "modern" economy is to ensure your bad money is chasing good.

This past week, an elderly family member of my wife passed away. His assets remaining at the end of his life? Zero!

How can that be in a country as rich as ours? This man worked productively his entire life. He saved. His home, when he still owned it, was free and clear. His savings, at one point, were in the six figures. Yet he died broke, having lived financially responsible. Or so he thought.

The main culprit? He held bad money. At a young age, when he was taught lessons about money, he was taught to save dollars. When he was a child, this was good advice. At that time, the U.S. dollar was backed with gold, with gold being good money. So saving dollars throughout the 1930s, 1940s, 1950s, and 1960s would have been prudent. When it was backed by gold, the dollar's value remained constant relative to all other goods and services. Good money retains value.

But on August 15, 1971, that same dollar became bad money. That was the day President Nixon took America off the gold standard, and the dollar was backed only by a promise versus something real or good. See President Nixon's comments in this brief video here.

Since 1971, the dollar's value has been decimated. Each passing year, the dollar becomes worth less, and at a faster and faster rate. Eventually, it will not only be worth less, but will also become worthless.

If the dollar is worth less this year than last year, it will take more of those dollars to buy the same things. In other words, the price of things in dollars rises. Another word to describe rising prices is "inflation".

The following chart of inflation since America's founding shows clearly what happened in 1971 and since:

With the U.S. Dollar losing value every day, does it make sense to save value in dollars? Of course not! The dollar is bad money, meaning it does not retain value over time. Why would anyone invest in something that decreases in value? Because of this, and the lack of financial awareness, good hard-working people die broke, passing nothing on to the next generation.

The challenge we all face is that the only legal tender in the United States is the dollar. When we go to work, dollars are what our paychecks deliver. When something is purchased, it is purchased with dollars. We are forced every day to transact in dollars that by design decrease in value. We are forced to accept and use bad money.

Good money retains value. So to retain and grow wealth, we need to exchange our bad money for good money, or something more valuable than money.

What constitutes good money? I mentioned precious metals above, specifically gold. With only slight fluctuations, gold has retained its value consistently for over 6000 years. Priced in ounces of gold, things 2000 years ago in the Roman Empire cost the same or slightly more than those same things today. Over time, prices should come down slightly due to better manufacturing techniques and processes. In a properly managed economy supported by good money, a slight deflation is normal.

Another excellent form of money that holds its value is Bitcoin and similar cryptos that have a fixed quantity ever available. Because of increased demand as more entities adopt Bitcoin, its value has actually increased significantly. Eventually, this demand will stabilize, but there are likely several more years to go before that occurs. At the end of the day, there will only ever be 21 million Bitcoin produced, and with a growing world population, demand will by default increase, whereas with gold, nobody knows the full supply.

Transacting with these alternate forms of money is challenging because either the merchants don't accept them in payment for goods and services, or because they are not legal tender. But they can be used as a store of value that will keep up with inflation.

Stocks and real estate can also be used as a store of value, so long as the asset is conservative and has a set of features causing it to retain value. The advantage of these types of assets is that they not only retain value, but they also throw off an income by paying a dividend or rent. Famed investor Warren Buffett is a huge fan of dividend paying stocks that produce income, versus a bar of gold buried in the ground that produces nothing.

At the end of the day, if you want to retain and build wealth over time, you must frequently exchange your income of bad money (dollars) for good money (precious metals, Bitcoin, stocks, or real estate). Or as famed Rich Dad Poor Dad author Robert Kiyosaki would say, constantly "Buy Assets" that retain value and preferably also throw off income.

Ensure your bad money chases good money, and never exchange your good money for bad money.

If you need bad money to buy something, borrow the bad money using your good money as collateral, then pay back the bad money with even less valuable bad money over time. By not selling the good asset for bad money, you also avoid capital gains taxes on the good asset.

Yes, in the modern economy, borrowing your way to wealth is a viable strategy if you are conservative in the approach. Best of all, anyone can do this.