Craziness By The Numbers
It’s hard to escape the financial impact of the current coronavirus pandemic: the big stock market crashes in the beginning of the pandemic, but market all-time highs today.
An unemployment crisis in the beginning, yet we’re seeing a recovery faster than any other time in history.
Gold, silver and bitcoin are at all-time highs and another round of shutdowns are looming for major cities all across the country.
Right now is the most confusing time I have ever lived through in my 73 years on this earth. I’m sure a lot of people are feeling the same way.
At first glance financial struggles appear to be the fault of coronavirus. And that may be why some lost their job or why some 401ks have tanked.
But what’s the real underlying issue here?
There’s a wonderful quote by Albert Einstein that says:
“Let’s not pretend that things will change if we keep doing the same things. A crisis can be a real blessing to any person, to any nation. For all crises bring progress. Creativity is born from anguish, just like the day is born from the dark night. It’s in crisis that inventiveness is born, as well as discoveries made and big strategies. He who overcomes crisis, overcomes himself, without getting overcome. He who blames his failure to a crisis neglects his own talent and is more interested in problems than in solutions. Incompetence is the true crisis. The greatest inconvenience of people and nations is the laziness with which they attempt to find the solutions to their problems.”
It’s probably that you weren’t financially prepared for any disruption to your finances, let alone this monumental stock market crash.
You may have thought you were in a “good enough” position just prior to this pandemic because you had a job and were able to pay all your bills—but, at the end of the day, your income was solely dependent on someone else providing paychecks to you.
In reality, at any time you could have lost your job and ended up in a similar situation: unemployed and unable to pay your bills. It’s just that it’s worse now because jobs are even harder to come by and, well, we can’t really even leave our houses right now.
How would things be different if you had positioned yourself in a way that would make you immune to a global pandemic’s far-reaching economic effects?
First, let’s talk about what has happened with the economy.
Velocity Of Money
There’s a term in money called “velocity of money” and basically it is a measure of the number of times that the average unit of currency is used to purchase goods and services within a given time period.
For example, let’s say you mow your neighbor’s lawn and in exchange he gives you twenty dollars. That currency moved one time.
Now, you take that same twenty dollars and you pay your other neighbor to wash your windows. The velocity of that currency is now two—it exchanged hands twice.
The GDP in this very simple example is $40.
Well, we know that the government taxes production. So the government is going to take their share of that twenty dollars each time it changes hands.
As this twenty dollars continues to circulate the GDP grows and the government still takes their share via taxes. In this example, the government doesn’t need to “print” money, because as money speeds up and there’s more transactions, it creates more taxes.
What we’ve seen during this pandemic is the government printing trillions of dollars because the speed of money has slowed because there’s less production happening.
When The Velocity Of Money Stops
Let’s go back to the example from above. Let’s say your neighbor is worried about what’s happening in the world, and instead of your neighbor hiring you to mow their lawn, he mows it himself.
That means you don’t get his twenty dollars, and worse, since you don’t have the extra twenty dollars, you don’t hire your other neighbor to wash your windows.
So now the money hasn’t moved, our imaginary economy didn’t grow, and no taxes are being collected.
That’s why the government loves debt. You don’t borrow money from the bank to save it, you borrow at five percent to spend it which keeps our economy moving.
Let’s say the velocity of money in real estate stopped because the government outlawed mortgages. Almost nobody could buy a house. What would happen to the price of housing if nobody could buy a house? It would plummet and you’d have what we call deflation.
This is exactly what happened in 1929 as people stopped spending.
The ability to get out of this financial rollercoaster solely depends on velocity of money.
The government on the other hand, thinks the solution to the problem is to print more money. The sad truth is, when the government prints money, it doesn’t help everyone, it only helps the rich.
Don’t Try To Beat ‘Em, Join ‘Em
There’s a dirty secret that nobody is talking about that I’m going to let you in on. Since the last financial crisis in 2008, the only people getting rich by the inflated asset prices like real estate are the rich.
Basically if you’re in the one percent you got rich off the Fed.
So, wouldn’t it make sense to live by the mantra, if you can’t beat ‘em, join ‘em? I think so. It’s what the rich have always done, and it’s what they’ll continue to do.
My real estate advisor, Ken McElroy, is encouraging people to get their cash ready because we will see another real estate crash and bargains will be all around.
Just like I always say I love a crash, the rich shop for bargains that make them richer. They wait for stock market crashes to buy the best stocks at bargain prices. They’re poised for crashes so they can buy real estate at bargain prices. They buy gold and silver, and businesses, at bargain prices.
In my experience, the way you know a crash is imminent is when idiots become “investors.” Prior to 2008, I knew a real estate crash was coming. The euphoria was growing. People with no income and no jobs were buying homes. My apartment houses were running high vacancies. Tenants who could not afford their rent were suddenly buying luxury homes.
You can see this happening today. Think about it. In a global pandemic with millions out of work, real estate is flying off the market. There’s something wrong with this picture.
Rather than try to beat the Fed, join the Fed and play by the rules of the rich. The poor and middle-class toil away for their money, pay more in taxes the more they earn, and then park their earnings in savings and/or retirement accounts. In the meantime, they receive little or no cash flow on which to live while hoping they don’t out-live their retirement.
Doesn’t it make more sense to play by the rules of the rich and invest in assets that are going to go up when the Fed prints more money?
Editor, Rich Dad Poor Dad Daily