Fake Assets vs Real Assets
In economics, Gresham’s law is a monetary principle stating that “bad money drives out good”. Gresham’s Law has been in effect since humans began valuing money.
Back in Roman times, people used to clip silver and gold coins. Clipping coins meant that people would shave a little bit off the coin before handing it to someone else. So the coin began to lose value.
The Roman people were not stupid and soon noticed that the coins were lighter. Once the Roman people knew what was happening, they hoarded the coins with high silver and gold content and spent only the lighter coins. That is an example of bad money driving good money out of circulation.
To combat this clipping of coins, the government began distributing coins with reeded, or grooved, edges.
That is why coins of value have tiny grooves on the edge. If a coin had the grooves filed down, a person knew the coin had been tampered with. Ironically, it is the government that does the most clipping of the value of our money.
In 1965, Gresham’s Law began working in the United States when the government stopped producing coins with silver in them.
In other words, the government began producing bad coins, or coins without any real value to them. Immediately, people began hoarding real silver coins and spending the debased or fake coins.
That was the year I began going to the local banks in Hilo, Hawaii, turning in dollar bills in exchange for rolls of dimes, quarters, and half-dollars.
I would go home, unwrap the rolls of coins, pull out the real silver coins, and return the silver coins with the copper tinge on the edges to the bank. It was not long before I had a large cloth bag ﬁlled with real silver coins.
I do not know why I made a habit of exchanging dollars for rolls of coins and then saving the real silver coins. But I did. I left for school in New York and never saw my bag of real silver coins again. I’ve always wondered if my mom spent that money, those real silver coins.
Fake Money Floods In
In 1971, the United States began flooding the world with fake money—bad money. It makes more sense to borrow today and pay back with cheaper dollars tomorrow.
The U.S. government does it. Why shouldn’t we? The U.S. government is in debt. Why shouldn’t we be in debt? When you cannot change a system, the only way to succeed is to manipulate it.
Because of the 1971 change in money, housing prices have soared as the purchasing power of the dollar has plunged.
Stock markets rise because investors are seeking safe havens for their dollars. While economists call this inflation, it’s devaluation.
It makes homeowners feel more secure because their home’s value appears to go up. In reality, the purchasing power of the dollar goes down as the net worth of homeowners appears to go up. Higher home prices and lower wages, however, make it harder for young people to buy their first home. If young people do not recognize that the rules of money have changed they will be far worse off than their parents as the U.S. currency continues to devalue.
Fake Assets vs Real Assets
My rich dad thought the relationship between the income statement and the balance sheet was everything. He would say, “How can you understand one without the other? How can you tell what an asset or liability is without the income column or the expense column?”
He would go on and say, “Just because something is listed under the asset column does not make it an asset.” I think that statement was the single most important point he made.
He would say, “The reason most people suffer financially is that they purchase liabilities and list them under the asset column. That is why so many people call their home an asset when it is a liability.”
If you understand Gresham’s Law, you can see why such a seemingly minor oversight can cause a lifetime of financial struggle instead of financial freedom.
He would also say, “If you want to be rich for generations, you and the ones you love must know the difference between an asset and a liability. You must know the difference between something of value and something of no value.”
I Bet on Real Assets
In 1996, I founded a gold mining company in China and a silver mining company in South America. Both companies eventually became publicly traded on the Canadian Exchanges.
I formed gold and silver mining companies then because I believed that gold and silver were at “lows” and were set to come back up. At the time, gold was around $275 an ounce and silver was around $5 an ounce. If I’d been wrong, I would have lost the mines.
I was confident about gold and silver because I wasn’t betting on them. Rather, I was betting against the dollar and oil. In 1996, oil was about $10 a barrel, and that seemed low. I suspected that the dollar was strong, and I believed it would drop when oil went higher. I felt the conditions were right for a massive change in the markets.
I’m confident that those conditions haven’t changed. With the current national debt, balance of trade, and the impact of the pandemic, the dollar is growing weaker and oil is going higher. That’s why I recently bought more gold as well as more silver—to bet against the dollar and oil yet again. So far, I’ve been pretty accurate.
What the Future Holds For Real Gold and Silver
Investing in real assets, like gold and silver, is a solid financial strategy. Gold and silver are finite resources. The government can’t create more whenever they want to.
They are also true money, meaning they have intrinsic value and can be used to purchase other items that have value.
Gold has been valuable throughout history. The value of currencies used to be determined based on the amount of gold the government had stocked away. It’s familiar, safe, and it will always be valuable.
As a consumable commodity, silver is just as valuable as gold. It is used in the manufacture of things such as computers, cell phones, televisions, light bulbs, cars, mirrors, medicine, and water purification.
There’s more gold in the world than silver. With the growth of emerging countries, the demand for silver should increase, even as the supply is dwindling. It stands to reason that the price of silver should increase as the demand increases.
Editor, Rich Dad Poor Dad Daily