Savers Are Losers. Learn To Short The Dollar Instead.
Of all the asset classes, the stock market is probably one of the least difficult in which to earn a profit in relationship to the economy.
When the stock market goes up we can buy stock, and when the stock market goes down we can short stocks.
Traditionally, shorting a stock is positioning yourself to make money when the price falls.
But the same can actually be done with the falling price of the dollar—you can short the dollar using stocks.
Rich dad explained to me that our currency isn’t an instrument of equity, but instead an instrument of debt. Every dollar used to be backed by gold or silver.
Today, every dollar is an IOU guaranteed to be paid by the taxpayers of the issuing country.
As long as the world has confidence in the American taxpayer to work and pay for this IOU called money, the world has confidence in our dollar.
If the key element of confidence suddenly disappears, the economy comes down like a house of cards.
The Dollar Is Going To Go Down In Value
Money is something that holds its value, which is a different concept from currency, which is a representation of that value. When the U.S. went off the gold standard, U.S. dollars really stopped being money and became a currency.
Money is something that keeps its value. Currency fluctuates in value, and the US dollar has kept losing value since 1971.
The simple definition of inflation is when prices rise and the purchasing power of a currency drops. It means that you can buy less with your money than you used to be able to.
All economies experience inflation (and deflation) at some point.
After the last financial crisis, the U.S. government began a program of quantitative easing (QE), aka printing money. As a refresher, QE is when the Fed bolsters its balance sheet by buying treasuries to keep interest rates low. It’s like if you or I printing dollars to pay off our credit cards.
Today, savers are losers.
The bank pays you a lower interest rate on your savings than the inflation rate. In essence, this means that your money in the bank loses more value than it gains over time. It’s a losing proposition to save. The dollar you save today will be worth less a year from now. This is why I say, savers are losers.
It is not a judgement on the person who saves, it is a reality in regards to their finances. They lose financially while the banks and the rich win.
Entrepreneurs and investors put the dollar to work for them. They understand that in order to be of value, a currency always needs to move. Let me use a simple illustration to help explain…
Electricity travels by way of currency. If you plug something into your wall, the electric current flows through the cord and powers your device. In order to exist, a current needs to continually move. Its sole purpose is to move from one place to another, where it provides its value. It has no value in and of itself. In fact, if a current stops moving, it dies.
In the same way, money is now currency. It is only valuable if it moves into something of value. If it sits still, it eventually dies.
What Is A Short?
In investing, you’ll often hear people using jargon like short and long positions.
As a general rule, if the fundamentals and technicals suggest that something is going up in value, you want to own it. When investing, owning something—anything—means you are in a long position.
This holds true with anything you buy and take ownership of:
- If you buy some gold you are long gold.
- If you buy some stock you are long the stock.
- If you have U.S. currency in a savings account you are long the dollar.
Taking a short position is less understood and even misunderstood by the average person. Andy Tanner, my advisor on paper assets, explains the three facts of taking a short position like this:
- You are going to position yourself to make money on something that is falling in value.
- You are going to sell something that doesn’t belong to you.
- You are going to change the order of buying and then selling—to doing the exact opposite. In other words, you are going to sell something first and then buy it later.
If you think something is going up in value then we can enter a long position by purchasing the item and then exit that long position by selling the item. So it does make a little bit of sense that if we believe the item going down in value that we should enter a short position by selling the item and then exit the short position by buying the item back.
But how does someone sell something they don’t own? The answer is simple: First borrow from one individual and then sell it to another individual to enter your short position.
Short The Dollar
As I said above, in a short, you are going to position yourself to make money on something that is falling in value. In this case we’re looking at shorting the dollar.
There are four steps to shorting the dollar. I’ll use real estate for my example:
Kim and I borrow money to purchase real estate. That’s step one—borrowing cash.
Step two, we take that money and buy an asset, in this case, real estate.
Step three, every month we collect income via rent that is paid.
Step four, we pay back the loan with that income, which is worth less than when we borrowed it.
This works for shorting the dollar since the dollar we borrowed is cheaper than when we borrowed it, we made money on something losing value—the dollar.
Now, can you short the dollar with stocks? Yes.
Like the real estate market, the stock market allows ample opportunity to use good debt.
As stock investors, you can take advantage of something that is called a margin account. Buying stock on margin allows you to leverage your money in a way that’s a little different than how a real estate investor would use a bank loan.
In my opinion, intelligently leveraging money with good debt is something that should be respected rather than something that should be feared.
Leverage is the fastest way to build wealth, but it is also the most dangerous. We often say debt is a lot like a loaded gun.
If you use it without training and education, terrible things can happen. If you use it correctly and with your education, it can be a great tool.
Just as a word of caution, this information isn’t to be taken lightly. I don’t expect that after reading this, you’ll be running out and shorting the dollar using stocks.
But I do hope that this sparks your interest for learning more.
Editor, Rich Dad Poor Dad Daily
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