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My Millionaire Neighbour

Lets say this I had a gold bar worth $1,000,000.00.

Now my home where I live has just regular locks and I just don't feel right about keeping it at home particularly now that I know over 200 people here [listening to this presentation] know that I just blurted out publicly I have a million dollar bar.

Now I considered going to the river and hiding the bar in the security of the bank, but the chances are, since I live in a community of over 120,000 I might be noticed, so I am not sure if I want to do that. Imagine me going to the river with a shovel and flashlight in hand in the middle of the night - No I don't think so.

However maybe my neighbours can help me out - I don't trust the bank. With what's happening lately, would you?

Now my neighbour on by left is a multimillionaire and my neighbour on my right is a Ferrari dealer. [Hey, its my story and I can make it anything I want!]

Well I know that the multi-millionaire has a very secure vault to store his millions so I asked if he would allow me to store another gold bar in his secure vault.

Oh I didn't tell you I had two bars as I went through this exercise before. Here's the warehouse receipt I got for one bar in storage.

As you can see it weights next to nothing.

Now lets say all my rich neighbors do likewise and entrust the storage of their gold with my multi-millionaire neighbour. And lets assume that he ends up having 1000 bars in total in his vault and thus there are a 1000 warehouse receipts floating about in the local economy in the town where I live.

But to continue the story, yesterday I decided to buy a red Ferrari from my neighbor on the right.

So I figured why go though the hassle of running it through my credit card when I could simply give him my warehouse note. He accepted it and you may of noticed my car is parked outside. :-)

Now lets say fast tracking the story that my multi millionaire neighbor to the left turns out to a little bit on the unscrupulous side and slowly over the course of the oncoming year he slyly introduces another 1000 notes into our local economy to the point whereby there is 2000 notes in circulation.

Now let me ask you, "If there is 1000 million dollars of gold in his vault or only $1B then, "How much is each note worth with 2000 warehouse receipts in circulation"? $1million or half a million?

Now let me ask you, "How much would those notes be worth if there was no gold left in the vault"?

If your answer was $0 then in part you understand perfectly how our money system works. The money [the warehouse receipts] has no inherent value in inself save for what other people are willing to accept for value - in exchange for hard goods or services. Should your perception of value change [for example: once you realize that the warehouse receipts can not be exchanged at the storage bank for the gold it represents] then that money is worth $0.

This is what happened when the investment bank Leman Brothers accepted paper securities from another investment bank Bear Sterns. They decided to test its market value and in the end were only able to sell it at 40% of its previous perceived value. This put both of their balance sheets upside down - needless to say Leaman brothers and Bear Sterns are no longer with us. This one move instanstly reduced the value of similar securites world wide and put us into the current financial crisis which we still have not dug ourselves out of. [Caviate: With information I know now - the story regarding Leman Brothers and Bear sterns above may not be entirely true as it now appears they were taken down by unregulated naked short selling - but the main point market value through perception still holds].

"How can that be?' you say. Well since paper is only worth what the market is willing to pay for it - virtually every investment bank in the world lost over 60% of the security value they had on the books.

The lesson here is: Man can change the rules of man but there is no way you can fool mother nature. At the time, prior to Bear Stern's demise, 3 of the top investment banks in the United States held 5 times GDP [the annual value of Global Domestic Production]. Give your head a shake, how can that even be physically possible that 3 investment banks hold that much worth? That is untill you realize it is just a big monopoly game - none of those figures in the legers is real - unless you think it is and accept it for value. The bottom line is, we live in a fiction system which the rules governing value are "gamed" to favor those that know how to play it.

Value - The Value Paper Money Represents

WHAT IS THE POINT? WHAT CAN WE LEARN REGARDING PAPER $?

The whole point of this exercise is the realization that what makes 'currency notes' valuable is the fact that each one of those notes can be exchanged for something of value. The paper in itself be in money or securities are not worth the ink they are printed with. The market or what people are willing to pay for it determines value. In our shallow world perception is everything.

Should that perception change or the market be prone to artificial manipulation by controlling supply and demand we are then in deep trouble because now our fate is at the whim of the market makers. Their interest is short term gain. Our interests are long term. Society requires long term planning to meet future needs. Infrastructure investments and long term contracts that we for society to prosper, cease to exist when dealing with a fickle currency whose future value is unpredictable.

In our fictious example of my gold bars each note or proof of receipt represents its proportional share or value of what is there is in the my mult-millionaire neighbour's vaults. This is analagous to what can happen to a country's currency. The point being that the unit value of money is strictly controlled by the number of notes floating in society.

Whoever prints the money controls the value of money in society - another example of supply and demand. Increase the supply of currency you dilute its unit value. If the entity controlling the printing of currency is not a public entity acting on behalf of the community at large but rather a private entity what do you think is likely to happen? Inherently there is a conflict of interest and self interst always rules out. Lets now look at the United States and then later we will look at Canada as an example of these principles.

US INFLATION

If we look first at the US, it is a fact that since the introduction of the federal reserve system in 1911 the value of a dollar today is only $.04 of the original dollar. That is how the amount of money in circulation has been inflated to dilute its original unit value.

Understanding that I would think you would want to ask yourself how can I maintain the value of the money I presently earn?

SUISSE ANNUITY earning 12%

If you had $10,000 in a a Swiss annuity in 1911 earning 12%. An annuity is an conservative investment that is very stable and maintains its current value.

How much do you think that $10,000 would earn over the course of 96 years asssuming the Swiss Franc kept its relative value?

Well by the rule of 72 that money would double every 6 years or 16 times over the course of 96 years

1-20 2-40 3-80 4-160 6- 320 7- 640 8-1280
9- 2560 10- 5120 11- 10240 12- 20480 13- 40960 14-81920 15-163840 16-327,680

But If its value is only worth 4 cents of its original value in US dollars then dividing 100/4 that means its value in US dollars would be 25x that or $8,192,000.oo in todays US dollars that is IF you had invested your money in a Swiss annuity - not bad eh?

US INVESTMENT AT 12%

Now Using that same scenario what would your money be worth if you kept it in an US Bank?

Well you would have $80,000 in the bank but its buying power in terms of the original value would be $80,000 x 4/100 or only $13,107.20

The difference is phenomenal! $8,178,893

WHAT"S THE POINT? VALUE

Keeping your money in Canada and the US may not be your best strategy no matter what your return for investment here may be IF present value is not maintained.

Now where do you think the banks keep their money? Certainly not in the U.S. or Canada if its not in their best interest.

Now you can continue to hang onto your coconuts here in Canada and the United States and what could be a better place to keep it but in a 401K or an RRSP plan??? ;-)

Are you beginning to get the picture?

Now lets examine something we all take for granted and unless this is changed we are perpetually doomed.

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