Thursday, April 23, 2009

The biggest problem with fiat

... is that the average person thinks nominally. If the central bank inflates the currency through debt monetization and it trickles through the system in the form of higher prices and higher wages, the average person simply sees the higher wage and tends to forget about the higher prices. Average person does not know that he/she got the short end of the printing press.

This is why I look at monetary adjusted returns on the S&P 500. After inflation, stocks have returned zero. They do provide a dividend cash flow, but they are not necessarily good ways to create wealth. Wealth is created through purposeful effort. Securities are pieces of paper that represent claims on future earnings and therefore are stores of wealth rather than creators of wealth. By the time a stock is issued to the public, most of the returns have already been earned by the entrepreneur that started the enterprise.

Public companies to me are a way for people to make a lot of money by taking risks with other people's money. It's been happening for years and it's gotten especially bad since 401(k)s are required to go into some security on Wall Street. This will continue until people realize that they have been played by legions of Harvard MBAs playing combat economics.

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