“Because I Said So!”

That phrase is the bane of many a kid’s childhood memories; here’s how it plays out:

Parent: “I told you not to do that”

Child: “Why?”

Parent: “because you could get hurt so don’t do it.”

Child: “I won’t get hurt playing checkers, why can’t I play?”

Parent: (finally exasperated) “Because I said so!!!!!!”

There were many times when we were kids (and if you’re a kid reading this, it still goes on) that we were told something by parents that we knew wasn’t true, right, correct, proper (etc) and when questioned about it, the parent, lacking proper ammunition, resorted to “because I said so.”

So it’s strange that some experts are perplexed by the 10 year move by many in this world into precious metals. Why? (because I said so…just kidding). ┬áThe problem lies with fiat money – money that has value because government says (fiat) that it does. Let’s take the dollar.

A perfectly worthless piece of paper it is. In the old days, paper money was actually a bank note that represented gold/silver in the bank’s vault. The creation of the Federal Reserve system in 1913, was just a continuation in the line of efforts to use more paper money – which moved through the economy quicker and more easily than gold.

Also, it accelerated the idea of fractional reserve banking (having reserves, usually in gold, now in bonds backed by more paper currency) backing outstanding loans which represent only a fraction of outstanding loans. In other words, they keep $10 in reserves and lend out $100 – the idea that unless there’s a run on the bank, depositors will not come in and withdraw all $10 of reserves.

You and Your Government (I believe you daddy!)

Today, in the purely paper (or electronic) currency world, money is not backed by anything physical or tangible. Let’s revisit the above conversation and change the participants:

You: “why is my money not backed by anything?”

Your government: “because it makes it easier for us to manipulate the money supply and exacerbate boom/bust cycles in the economy.”

You: “but if money were backed by something, it wouldn’t lose value so easily and my cost of living wouldn’t go up. Therefore, if paper money has no intrinsic, why is it worth anything at all?”

Your government: “Because I said so!”

Bottom Line

Your wealth has value because your government ‘says so.’ If you own any cash or cash equivalent asset, then you are, with your actions, believing that statement at full face value, like an obedient child:). Those that do not believe that our currency has value because someone says so, tend to own assets – real or ownership in a business (private or stocks) to protect against debasement (loss of value) of wealth through manipulation and inflationary policies.

Make sense? Comments? Questions? Please share!