Wealthology

by Akinaw Bulcha

  We don‘t have to deprive ourselves in order to become financially independent. If we use your mind, we can create a balanced approach that‘ll get us where we want much quicker than we thought possible. We can either be a Mike Tyson or 50 Cent—it‘s all a matter of perspective.

  It"s amazing how fast later comes when you buy now! ~Milton Berle

  Your Loving Uncle, Akinaw.

  What’s Your Store of Value?

  Dear Kidus, One of the risks of creating business ideas is being copied by imitators. If you were to visit downtown LA‘s Fashion District, you‘d see a lot of imitators. But what I once discovered was that they‘re not even that good at imitating.

  Years ago, I bought a copy of Michael Jackson‘s Thriller album from a street vendor in LA. I opened it, popped it in my car‘s CD player and couldn‘t believe what I heard. Michael Jackson was singing in a Puerto Rican accent! I‘d been swindled.

  Now, it‘s one thing to be cheated on a $10 CD but quite another to lose thousands of dollars. Our nutconomy is structured in such a way that we squirrels don‘t see how we‘re being cheated of a part of our nuts. Someone who had a million dollars nine years ago would‘ve lost 35% or $350,000 of their wealth due to the dollar‘s loss of value (caused by the Fed and government spending of course).

  I repeatedly stress the need to understand how government affects our nutconomy because it can affect our lives in ways we might not see. Unless we understand what it‘s doing, we can‘t protect our store of nuts. We must, therefore, understand the real value of money and what government does to it. We must know the real nature of money. We must know the original nature and purpose of money in order to avoid being cheated.

  After all, the reason I had a nagging suspicion I was hoodwinked on that Thriller album was because I knew what the original album sounded like. I knew M.J. never made a ―Puerto Rico Unplugged‖ CD.

  Warned Since 1776 As I said, we must learn capital management to preserve, protect and compound our seed money (principal) so that the passive income we generate from it can grow beyond what"s needed to pay for our living expenses. The bigger the fruit tree, the more fruit it will yield. We can never be financially free unless our living expenses are less than the passive income we earn from our assets.

  But we run into a huge problem in our quest for financial freedom: The value of the money we use to buy the assets that create the passive income which buys our time freedom, depreciates. And if our money is worth less, so is our passive income since it‘s also paid to us in money.

  The process of compounding interest is slowed down or even reversed if we don‘t do anything about the dollar‘s devaluation. In the example above, I said if we held $1 million in cash for the past eight or nine years, you would have lost $350,000 in value.

  Q: Where does the value go? A: It‘s spent by the government. How the government does this is best described by the father of economics, Adam Smith, in his book, The Wealth of Nations (first published in 1776):

  For in every country of the world, I believe, the avarice and injustice of princes and sovereign states, abusing the confidence of their subjects, have by degrees diminished the real quantity of metal, which had been originally contained in their coins. The Roman As, in the latter ages of the Republic, was reduced to the twenty-fourth part of its original value, and, instead of weighing a pound, came to weigh only half an ounce. The English pound and penny contain at present about a third only; the Scots pound and penny about a thirty-sixth; and the French pound and penny about a sixtysixth part of their original value. By means of those operations the princes and sovereign states which performed them were enabled, in appearance, to pay their debts and to fulfill their engagements with a smaller quantity of silver than would otherwise have been requisite. It was indeed in appearance only; for their creditors were really defrauded of a part of what was due to them. All other debtors in the state were allowed the same privilege, and might pay with the same nominal sum of the new and debased coin whatever they had borrowed in the old. Such operations, therefore, have always proved favourable to the debtor, and ruinous to the creditor, and have sometimes produced a greater and more universal revolution in the fortunes of private persons, than could have been occasioned by a very great public calamity (Ch. 4).

  Did you pick up what he was putting down?

  In case you didn‘t, historians have recently uncovered a long lost letter Smith had written to Thomas Jefferson about money. Because he wasn‘t writing the letter for publication purposes, he was very informal in his use of language: What up T?!

  Man, I heard ya‘ll thinkin bout insurrectin against his royal pomp and circumstance King George. Yo, I knew what that was about—you Americans don‘t like nobody foolin with ya‘lls money. I don‘t blame you though, despite what people be thinkin, I know it aint just about no tax on some tea. Shoot, I‘m an economist, I know this is some real stuff, some real economics are involved.

  Look, no one likes it when people be playin with their money. But you know what? King Georgy got another way to get that money man. Let me break it down to ya by tellin you a story of what happened to me the other day that just ticked me off man.

  Well, you know how I like to look good right? That‘s just how I roll. So I took my wig down to that shop WigPro on 116th and Vine to get it patched up. I drop it off and tell the dude, ―I‘ll catch ya later.‖

  I return a few hours later and you wouldn‘t believe what this fool was tryin to do. Man, he had the nerve to try and give me back a wig that had less hair than the one I dropped off! This fool was out of his mind! I was like, ―Yo, I didn‘t leave my wig up in here with a bald spot in it. Why you tryin to hussle me man? Just give me back my full wig!‖

  But you know what T? That had me thinkin about you boys in America. Ya‘ll need to make sure ya‘ll use money that can‘t be counterfeited by the government. Governments always be tryin to pull one over on you. Just like that fool at WigPro, they can take a full head of Wig and try to give you back an old one with hardly any hair in it.

  Governments always be doin that. You know these fools have been diluting money since days of Caesar? Towards the last days of Rome, their money called the As was only worth like 24% of its original value. That‘s not all though…it used to weigh like a pound but in the end, it weighed half an ounce!

  Ain‘t nothin changed though T, ain‘t nothing changed. I was complainin bout how expensive everything was in my hood cause our pound is only worth like 30% of what it used to. But then I went over to my aunt‘s castle up in Scotland and you know what? Their pound be only worth like 36% of what it used to be. I also got a letter from my buddy Pierre up in France and he tells me their money only be worth 66% of what it used to.

  But you know why them princes be doin this right? Cuz they can buy all the bling they want on credit man. They‘re ballin out of control T. You should see the diamonds—the rocks they be given their ladies. And you know what they do when they gotta pay they creditors? They just melt down the gold they got, put some crap in it as a filler and give the unsuspectin lender less money back without their knowledge. That ain‘t right.

  Look T, I‘m a smart dude and all I gotta say is this: ya‘ll better make sure that future generations of your peeps be havin some kind of money these princes can‘t counterfeit. Even if you use gold, you‘ll need to use ridges around coins to keep people from dilutin it. Good luck!

  P.S., Hey T, word on the street is that you…uhmm…how do I say this? Let‘s just say that I heard you acquired a taste for darker berries. Is that true? Hit me back.

  Your boy,

  --A. Smith. Okay so I forged the letter. You got me.

  I wanted to do so because we‘ve somehow forgotten how crucial an understanding of money is to understanding economic activity. Investors usually think about types of assets like stocks, bonds, real estate but usually forget to think about money itself (currency). We should consider it as an investment.

  The starting point of investing should be
an understanding of how different types of currencies affect our financial goals. Millions of people want to buy their time freedom by being financially free; the sooner they understand the true nature and use of money, the sooner they‘ll achieve it. Saving wisely, as you‘ll see, is not just about quantity, it‘s also about quality.

  “Most of our assumptions have outlived their uselessness.” ~Marshall McLuhan.

  Why We Need Money To understand money, we must start with the basics because it‘s so important in understanding everything else. A first question to ask is, ―Why do we need money?‖ What is its purpose? A: Since all commerce is based on a trade, money just makes trading easier.

  Imagine how difficult business would be without money. Let‘s say you grew wheat for a living. In order to buy other things like milk, you‘d have to trade wheat directly for it. You‘d have to pack your truck and aimlessly drive around trying to find that one dairy farmer who needs wheat.

  The first farmer you meet doesn‘t need wheat. A second dairy farmer only buys organic wheat at his local Whole Foods Market. A third farmer has a wheat allergy! What do you do?

  If you had money, you could buy the milk you needed and sell your wheat to someone else later. Money is, then, just a ‗medium of exchange‘.

  In order to make trading possible, money had to have value in itself. Before the days of a paper money dictatorship, gold was seen by free people everywhere as that thing that had this intrinsic value.

  People didn‘t have to worry about whether the fisherman, rancher or dairy farmer would find value in the gold coins that they were offering in trade. People have always valued gold.

  “Money was never a big motivation for me, except as a way to keep score. The real excitement is playing the game.” ~Donald Trump

  Cortez Loved the Bling Bling Gold spontaneously became money because everyone thought it was valuable. It was natural to use gold as money; that‘s why economists refer to gold as natural money.

  No government had to force people to accept gold. People throughout history have been willing to risk their lives for gold. All the explorers we learned about in history class were driven by a desire to find their pot of gold.

  Here‘s what the great Adam Smith had to say about their motives: 1. They wanted the bling: “Nothing less precious than gold seemed worthy of their attention.”

  2. They all wanted the bling: “All the other enterprises of the Spaniards in the new world . . . seem to have been prompted by the same motive.”

  3. They looked everywhere for bling: “It was the sacred thirst of gold that carried Oieda, Nicuessa, and Vasco Nugnes de Bablo, to the isthmus of Darien, that carried Cortez to Mexico, and Almagro and Pizzarro to Chile and Peru, [Antonio Banderas to Los Angeles and Aunt Jemima to North Carolina].

  4. Is there any bling in the house?: “When those adventurers arrived upon any unknown coast, their first enquiry was always if there was any gold to be found there; and according to the information they received concerning this particular, they determined either to quit the country or settle it.”3

  I love this historical account because it shows just how much people naturally valued gold. The first question explorers would ask when arriving at a new land was whether there was gold there, if not, they‘d split.

  “A strong passion for any object will ensure success, for the desire of the end will point out the means.” ~Henry Hazlitt.

  The Dollar Technically speaking, the dollar is not money because paper has no value. So why do we use paper money? We use it because we‘re forced to. Why force people to accept paper money anyway? Doesn‘t that peak

  your curiosity? Why would the government make the use of any other currency illegal if people want to use it? Don‘t we live in a free market system? If you can choose who you do business with, you should be able to choose the money you accept in trade.

  One reason is this: If people had a choice, they wouldn‘t necessarily use the dollar. They‘d choose to use something that held value. They‘d choose something not just backed by ―the full faith‖ of our government. Over centuries, different civilizations have used different things like silver, copper, salt and gold as money—but never paper.

  A second reason to force citizens to use only the dollar is to make confiscating the public‘s wealth much easier for the government. If they try to counterfeit money and people had a choice of currency, they would just start using that other currency. And if the government tried to counterfeit that new currency by printing it, then the market will pick yet another currency and so on. You can‘t pin citizens down to one currency and dilute it without force.

  Adam Smith pointed out that when governments skim off the top, they‘re ―abusing the confidence of their subjects.‖ That‘s because the squirrels in the olden days had no idea their nuts were being counterfeited. For the most part, most people today have no idea that it‘s happening even though more information is available about how the monetary system works. And the ones that understand monetary policy are beginning to understand that the government may never stop printing money to pay for its expenses. At this point, the most important difference between gold and paper money can be made clear.

  3 The Wealth of Nations, Chapter 7, Part One If you think about it, it‘s weird for people to exclusively use one currency that its government has complete control of. Think about how risky that is for a moment.

  You could wake up broke because other people have lost confidence in the dollars you hold in your pocket. We either trust politicians or we trust in gold, there‘s no middle ground. So far, the market has trusted the government‘s handling of our nation‘s wealth. But more and more investors are becoming frightened about our national debt. If enough people realize our government has no intention of stopping the massive printing of money, the dollar could become worthless overnight.

  Investors don‘t understand that the U.S. is caught in a debt trap just yet. Our financial risk is that enough investors find out we are stuck in such a trap.

  If money isn‘t backed by a thing of real value, we‘re at the mercy of other people‘s perception of what they think the dollar is worth, that thing in our pocket we‘ve worked so hard to get. Money is supposed to be a store of value. That‘s what makes us agree to give up our time for it. When a retiree thinks of her retirement fund, she should see it as a reflection of the value she‘s provided to society during her working years. It‘s been earned.

  But because the value of paper money is elastic, the government can step in and ask, ―Has it really been earned? Just because you‘re retired doesn‘t mean we can‘t tax the pay you earned 20 years ago.‖

  Government is the only power that can erase the value of the work we‘ve already put it. And it has the power to erase the entire value we‘ve created through decades of hard work. The collapse of the value of the dollar is a possibility.

  Right now, the dollar‘s value is hanging by a thread. All that‘s required for it to collapse is some catalyst, a trigger. Napoleon once said there‘s ―a thin line between the sublime and the ridiculous.‖ We‘ve recently seen this to be true. We woke up one day and Greece‘s debt problems (an economy the size of one large U.S. city) caused a worldwide selloff and a large drop in the Euro‘s value.

  In May of 2010, the stock market dropped a thousand points in a single day because of a computer glitch but three months later, the market hadn‘t fully recovered. Holding on to cash is therefore a very risky proposition in many different ways when compared with gold—something all people everywhere have always valued.

  “If you were to stash away a shoebox of money for 5 years, would you choose to fill it with gold or with dollars?” ~Ron Paul.

  Invention of Paper Money

  If you recall the chart of gold prices from an earlier letter, from 2000 to 2010, gold appreciated more than any other investment class. From 2001, the price of gold has gone up by 400%. If your dollars were backed by gold, they would have also appreciated by 400%. So the cost of everything in
the economy would be 400% cheaper due to the dollar‘s increased value.

  Think of what this means for people living through this recession. Imagine how far unemployment benefits would go if healthcare, gas, education and food were 400% cheaper. Health insurance premiums would be $37/month on average and gas would be $0.70 cents/gallon.

  It‘s not always easy to explain how our paper money makes us poorer, but it should be obvious by now that we"ve made the worst trade in the history of mankind by using paper money not backed by something of real value. So why do we have paper money if it has so many obvious drawbacks?

  Reason One : Paper money was invented to allow governments to finance wars. All wars have been financed by debt because it‘s extremely costly. During the American Revolution, Congress created the Continental to finance its war with England. During the Civil War, Congress went off gold and issued Greenbacks to finance its war with the South. To fight the Vietnam War, we printed a huge amount of money.

  But why print paper to fund war anyway? Why not just raise taxes? Well, because if we had to pay for wars upfront, we‘d only fight the necessary ones—defensive wars (an inconvenience for the State and war profiteers).

  Reason Two: Paper money allows corporations to get cheap credit. Money is like every other product in the marketplace. If there‘s too much of it, it becomes less valuable (cost of borrowing goes down). If there‘s less of it around, it becomes more valuable (cost of borrowing goes up).

  So when wealthy industrialists urged Congress to create the Federal Reserve System, they were really interested in reducing their borrowing costs by making credit more available. But what‘s made cheap for some in an economy is always made more expensive for others.

  The Central Builder Here‘s how it works. Imagine if all the renters in Los Angeles decided they wanted to reduce their rents. And in order to do so, they convinced Congress to fund the building of two million apartment buildings. The cost of rent would fall by 80 or 90% due to the two million new apartment buildings.