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Sound Money Management Practices May No Longer Be Practical

By: Steve Johnson

9/16/2008 - 69 Comments

Last week I read a good article about how to become a millionaire. The ideas were based on living within your means, saving money and investing properly.

The article, Interview with a millionaire, was an excellent example of what to do in a typical economy to become a millionaire. The only problem is that a million dollars is not that big of a deal anymore. The other day I read that there are now 10 million millionaires in the world. The reason is because many of the large nations around the world are increasing their money supplies very fast - resulting of double-digit inflation in many parts of the world.

Saving money is becoming a losing game unless governments return to sound money practices. If you were to follow sound money management practices, like Bill did in the article, you could get wiped out by inflation within the next few years. The recent bailout by our government and the large projected increase in our national debt next year are sure to force the government to continue to print money even faster, resulting in massive inflation. I hate to say it but, if you have money - spend it while it still has value.

Sound money management practices are based on sound government monetary policies. What do you do when you don’t have a sound money policy and the government is stealing through inflation?  Do you just overlook that and hope it goes away?  I’m afraid that is what most people are going to try to do.  During the 70’s the dollar lost 70% of its value. That means if you worked and saved your entire life to get a million dollars in the banks, it would only be worth 300k. In the coming decade, I’m not so sure sound money management practices are going to be very effective. 

The cold reality is that America is headed into a recession with high unemployment and higher interest rates, because of years of living beyond our means – personally and nationally.  The debt to income ratio of America is bad enough to label the entire country’s investments as junk.

Whose fault is it?

Primarily the government; just like every other nation that has suffered from hyperinflation when their government spent them into oblivion. Sure you could argue, like Allan Greenspan tries to, that Wall Street is to blame because they repackaged worthless mortgages and sold them as triple-A investment grade bonds or you could argue that Freddie Mac and Fanny May encouraged the housing bubble by providing banks an easy way to lower their lending standards and given just about anyone a mortgage. Or you could argue that people who bought a mortgage with false income statements or no income statements are to blame. 

But, in the end – None of this would have been possible without the government attempt to plan the economy through the lowering of interest rates by the Federal Reserve and the government supported mortgage entities of Freddie Mac and Fanny May.  The entire financial meltdown and ensuing recession that we are headed into is a grand failure of the government’s efforts to plan the economy, rather than allowing market forces of capitalism to run the economy.

Commodities and Foreign Investments

In light of the current imminent financial meltdown, I’m forced to abandon some of my sound money management practices and put my money into risky speculation assets like commodities and foreign investment.  I would rather invest in America companies and keep my money in dollars, but these have become riskier then the latter. The dollar is teetering on a global collapse as foreign investors consider their options to sell their massive amount of dollars from their sovereign wealth funds in an effort to prop up their economies. The trouble is that we don’t have any money in our sovereign wealth fund to prop up our economy.  We only have a printing press.

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