Tuesday, August 9, 2016

Hostile Cash Environment

At night
When you turn off all the lights
There's no place that you can hide
--Miami Sound Machine

From a personal finance standpoint, I continue to struggle with how much cash to hold. In a vacuum, my preference right now would be to hold a lot of it. High levels of cash provide financial flexibility and freedom. Unanticipated expenses are easy to deal with and economic resources can readily be brought to bear when opportunities arise.

However, it is difficult to imagine a more hostile environment toward cash than the present one. Foolish policies such as NIRP suppress returns on cash deposits far below market, essentially serving as a tax on savings. Risks being taken by banking institutions are far above market. All nations on this planet are printing money to 'solve' fiscal problems.

Extrapolating the current trajectory of this monetary madness leads to the conclusion that the value of cash will continue to decline at relatively 'modest' rates until people catch on to what's going on en masse.

When that occurs, then no one will want cash and we get hyperinflation as people unload dollars like they were hot potatoes. Prices of everything, including hard assets perceived as alternative 'stores of value' for traditional cash, skyrocket.

Needless to say, holding large cash balances in such an environment would be an ill-advised strategy.

It is that scenario, which seems increasingly likely given the foolish policies pursued by policymakers worldwide, that tempers my enthusiasm from building large cash positions. It also keeps me siphoning off more cash than I otherwise would in favor of hard assets such as gold.

position in gold

1 comment:

BDub said...

I have been mulling this over for months now, and though I'm not sure its the right thing to do, I am going to buy a house - usung my savings as a down-payment. At least that way I am holding something tangible.