How Much Cash?

I'm out of money, out of hope
It looks like self-destruction
How much more can we take
Of all of this corruption?
--Molly Hatchet

How much cash to hold continues to be a difficult decision for me. In unhampered markets cash is backed by hard assets and therefore a reliable proxy for production. More cash means more economic resources set aside and saved. Those savings can be applied toward future consumption or for investment projects. Although it resembles just a piece of paper, cash in unhampered markets becomes a store of value.

In hampered markets cash is not backed by hard assets. Instead, it is printed by fiat. In this situation cash is an unreliable proxy for production because the quantity of economic resources that can be bought with cash declines as more cash is printed by fiat (a.k.a. inflation). Under fiat money conditions, people are prone to save less because they are hesitant to hold cash that will buy less resources over time. Because cash no longer stores value, people will be prone to consume income rather than to save it, and/or convert cash into other assets (e.g., gold) thought to hold their value and be better proxies for saved production.

Right now I would like to be a significant saver of cash. However, the world of financial repression that we live in has me concerned that saving cash today is an increasingly losing proposition for tomorrow. My cash savings could be indirectly confiscated through inflation as greater supply of fiat currency renders each dollar that I save worth less in terms of economic resources that can be purchased. Indirect confiscation by process of gradual monetary devaluation is why inflation is sometimes called the 'invisible tax.'

I am also increasingly concerned about the prospects of direct confiscation of cash. The situation in Cyprus two years ago showed us that governments might enact capital controls that impair ability to withdraw cash during times of crisis. Worse yet, there is the possibility that physical cash could be banned in favor of purely electronic transactions. That could give desperate governments even more confiscatory control. Cyprus also demonstrated that governments could simply dip into cash deposits and take some. For example, government might expropriate, say, 20% of cash balances to help fund bailout programs in times of 'national crisis.'

The present economic environment, defined by extreme monetary and fiscal policies alongside record leverage, makes me increasingly wary of holding cash. Risk associated with holding cash, as I see it, is extremely high. As such, my cash balances are currently lower than they have been in some time.

position in gold