What is “Money” Afterall?
What is money? I pose this question in light of the current global financial crisis which is increasing inflation all around the world. I mean, many people think that money has this infinite value, but in this era of inflation, should this crisis become a lesson about why one should always convert this “paper” called “money” into something more tangible? something like land, perhaps?
Take the case of Zimbabwe. Let’s say you were a 60 year old Zimbabwean who had saved your whole life and put down $50,000 dollars of “cash” in a bank. Had you let that “cash” sit in the bank, you would have been totally wiped out {today} because the Zimbabwean currency has totally collapsed.
Wouldn’t you have been better off taking that money out of the bank and using it to buy land instead? (assuming you were a black Zimbabweane). At least, with the land, you’d still have something tangible to call your own. Then, if Mugabe dies and the country begins to rebound, you’d have an opportunity to revive this tangible asset called land.
Why is the Zimbabwean Stock Market amongst the best performing in the world today? It’s because if you live in Zimbabwe, you just can’t afford to leave your money in a bank. So, what are people doing instead? they are pushing all their money into stocks, which do give them a tangible piece of “ownership” in specific companies (in Zimbabwe). For example, if you buy stocks of a mining company in Zimbabwe, it may not be worth anything today, but again, if Mugabe dies and the companies fortunes change, the value of your stocks will rise. However, if you stick that money in a bank, you’d be finished financially.
Let’s look at a second example. Our own country of Kenya. What is the inflation rate in Kenya today? it’s around 30%. This means, that if you put $100,000 dollars in a bank account in Kenya, at the end of the year, that $100,000 dollars will actually be worth about $70,000 dollars (if you add in the inflation).
So, again, would it be wise to leave that “paper” in the bank? Wouldn’t you be better off buying land (in parts of the country that were unaffected by the violence?). Or would you be better off buying stocks? (hoping of course, that they give you that “ownership” in something “tangible”). How about taking that money out and buying government T-bonds? The point I’m trying to make here is how inflation can basically destroy your “paper”. Even in America, inflation is now at 12%, meaning any “paper” you have, is going to be worth less (by a good 12).
I was talking to a friend about this the other day and he said that one you should never, ever, leave money just sitting in a bank hoping that it will collect interest. The world economy has become so complex and so integrated, that you have to be able to constantly move your “paper” around and put it into other places that will help you mitigate the effects of inflation and the changing dynamics of this global economy.
The above discussion then veered off into a discussion about real estate. I said to him that the biggest fraud perpetrated against the American people was this idea that buying a home was somehow achieving the American dream. All it did, was give people a false sense of security and drive them more into debt.
He countered, that the bigger fraud was the invention of the 401K: The idea that a company would be held responsible for investing your life savings in a “fund” that would be save, was a flawed concept (as many people are now discovering). The companies that invest your retirement money are not leaving all that “paper” sitting in some lock box bank account. They’re moving it around. Do you know where it’s going? Most people don’t. Wouldn’t we be better off keeping our own money and investing it in something “tangible”? of our liking? Instead of giving all that “paper” to some illusive fund manager, wouldn’t you be better off keeping it and converting it yourself?
Anyway, the discussion ended with a recognition that Kenya was now developing it’s own “credit” society and it’s going to come back and bite them in the ass (just like it did in America and to a lesser extent in Europe).
This is why it’s become so hard to just make “money”. You have to constantly find ways to grow that “paper” since leaving it in a bank is no longer a safe option.
Now go out and buy some land in Zimbabwe…
hhhmm KE,
Interesting Post. I guess what you’re saying is that for money to have real worth, it has to be backed by something solid ?
if that’s the case, then that’s the same argument alot of economists/ professors, progressives and conservatives have been advocating for a long while now in regards to the U.S. Dollar.
This week when Ben Bernanke was asked where this “new money” for the bailout would come from, the guy said from the Fed. Yaani, he’d just print this money from a machine and paper.
I also have a problem with the conventional concept of accepting “money” as a medium of xchange at face value.
401K, Yes, people’s entire 401k’s were just wiped out and I don’t know why it’s not a big story? I mean this system of 401K in the U.S. really got bruised.
About the Kenyan Credit system that’s coming, I think the Pro’s outweigh the cons. We can’t just continue living in a cash only economy.
There has to be easier and more effiecient ways of determining borrowers credit risks without much hassle. Ever tried buying a house in kenya ? tHE PROCESS IS QUITE TEDIOUS, and a credit system could alleviate many of those outdated procedures.
I’m so much for the credit system, HOWEVER, It has to be safeguarded and implemenetd with utmost vigilance.
I thought this has always been the case.
I remember vaguely studying something like this in my Economics lesson – that Gold determines the value of money.
What is the Gold Standard?
Is it not true that Central Banks have Gold in their vaults that determines the value of the money in circulation?
The resident economists should enlighten us on this matter.
JOSH,
I don’t know about central banks in other countries, but here in the U.S. The dollar is taken at face value, it’s not backed by gold or anything of similar value. Most people are not aware of it.
The U.S. Central Bank, yaani Th Fed, is not even a government entity, It’s a Private corpration that reports profits, It’s sharholers are the huge banking institutions, most of them based in Europe.
The U.S. currency / dollar system is just money printed from thin air- literally, they stopped following a gold standard in the U.S. long time ago.
The gold standard makes sense, coz basically it means that a central bank cannot issue more money than it has gold deposits in it’s vault to back that money up.
MZEIYA,
You are right.The US Dollar is NOT backed by Gold anymore just the face value.But interestingly,The FED RESERVE BANK of NY holds more gold bars than any other vault on the planet.And it all belongs to other Countries’ Central banks (may be Kenya’s too).I guess they trust that if it gets stolen,the US govt.has enough chapaa to cover for it.I wish you see how they handle it in the vault.Old school Kienyeji….including weighing it with 1700s weights and carrying it in wheelbarrows…I kid you not.Each bar is worth a couple $ millions.
MZEIYA,
And if a central bank of a country requests some bars,or some gold needs to be transfered,they dump it in an armored truck like potatoes.I know this sounds far-fetched but when I saw the documentary it never made sense either.
Interesting post. But in the end let’s remember the fact that an African is more like to be less-informed, and probably the average African would think you are crazy if you were to tell him/her his/her bank might not be safe.
Hey astute business men were caught off-guard with this crisis.
Dee:
What is the name of that documentary you saw and do you have a link to it?
Dr. Ethiopia:
I think Africans are perhaps better informed because they are more used to financial crisis and because they have absolutely no trust in their governments. So, they know those banks in their countries are too corrupt to be trusted. Americans have never had to confront this kind of corruption before (unless they were alive during the 1930’s and the depression).
Africans will buy land and cows and goats. I think they may actually be much more aware of the “value-less” nature of “paper”.
Allow me to generalize for a moment; how many average Africans have bank accounts, let alone cash reserves? The figure being thrown around sometime in the middle of this year was 19% ‘banked’ population in Kenya, and that’s said to be among the highest on the continent. And that’s since the end of the last century but one. Most of our populace is trapped in the struggle for survival, and the fight for land. If at least 70% of the population depends on agriculture, they have some sort of access to land. I think the thing to do now is to make finance work for agriculture.
Sorry to digress from the topic but I found this quite interesting. This entrepreneur needs to be supported. It is these kind of people who become the Bill Gates of this world:
http://www.nation.co.ke/News/-.....index.html
KE,
I don’t have a link yet but was a show on tv. I think discovery channel relating to GOLD and its relation to world’s economy.Contact them.In the meantime I will do research on it.Be back at ya!
DEE,
hhhmm wow, didn’t know the NY FED is that kienyeji. Then does that mean most countries trust the NY FED with their gold bars as oppossed to the swiss banks? I thought the swiss banks is where most countries, especially African ones kept their gold bars or surplas ones ?
or is it just the crooked dictatorsand looers who bank in swiss ?
anyone who can elaborate further ?
KE interesting article. Basically you are saying people should diversify, to be able to buy that land, you need money in the first place but at the same time dont leave that money in a savings account ( 0.2% interest) atleast put it in a CD ( around 3 %). I would say buy /build property, invest some money in the stock market, and put some in Bonds and T bills depending on your age and risk tolerance.
Mzeiya, I think the reason US investors use offshore banking in Swiss banks is to avoid taxes. As for African ones, I would say corruption, to hide money.