What Happened To Our Savings?

Every year prices of everything increases. Things such as food, power and fuel seem to keep rising with no end in sight. Our wages seem to stay the same and we feel like we are going backwards.

Welcome to the world of fiat currency. Fiat currency is money that can be printed at will by central banks and it does not have to be backed by anything such as gold. As more money flows into circulation the purchasing power of the currency lessens as the supply of that currency increases. This is called inflation, and it acts like a hidden tax that reduces our purchasing power.

Under a fiat currency system those who keep cash or put it in a bank account are actually losing money as the purchasing power decreases. Even if you get bank interest the rate that you get may be less than the inflation rate, and in some countries that have negative interests rates you lose money by having it in a bank account. In most developed countries and bank interest earned is also taxable income which means that it will be taxed at the individuals tax rate. When you combine the rate of inflation and your tax rate together the bank interest will be a loss when you factor in that you have lost purchasing power as well.
Because most people keep their money in a bank they are going backwards financially. This is not sustainable and not the best use of your money.

If you are wondering how this happened and why such a bad system exists then keep reading. In 1971 US President Richard Nixon took America fully off the gold standard. This meant that the value of the money did not need to be backed by anything. Why did Richard Nixon take the US of the Bretton-Woods (partially gold backed) standard? During world war II many European countries sent their gold to the US for safe keeping as they were afraid Adolf Hitler and the Nazis was going to take the gold after invading their countries. After the war, and as the European economies began to recover the French leader Charles De Gaul addressed the nation of France declared that he would get their gold back.
A deal was made beforehand where the US would keep the gold and issue US dollars and that the US dollars would be used as the reserve currency of the world. This is what was known as the Bretton-Woods agreement. After France took its gold back, other countries were wanting to do the same.
The stockpile of gold the US had was depleting and if it got to the point where there was no more gold left and someone else wanted to claim in their bills for gold the whole financial system would have collapsed.
Richard Nixon making the US dollar a fiat currency sent a chain reaction throughout the world because the US dollars printed under the Bretton-Woods system was the reserve currency for a few countries. Each of those countries had to make their currencies fiat as well.
Because of the changes in the US monetary system enacted after 1913 when US President Wilson implemented the Federal Reserve Act the US dollar has lost over 90% of its value.

Unfortunately for most people they try to scrimp and save without realising that it is harming them financially. The rich are buying capital assets as they appreciate faster than inflation so they are able to stay ahead. The more capital assets that they acquire the richer they get.

The history of fiat currencies is not a good one. There have been hundreds of fiat currencies in the past and each of them had been printed so much they devalued the currency until it was worthless. Anyone who held the fiat currency lost out as their purchasing power went to zero. Usually when high levels of inflation occur people flock back to gold and silver as it has historically been the best form of money.

If you are keeping your savings in cash I suggest that you speak to a financial planner to put that money to better use. Ultimately an investor should aim for cash flow as their primary goal.

We are on a doomed monetary system, and when it collapses it will be a world wide event and there will need to be a serious think as to what system should replace it. If you are prepared for this event then it will affect you less, but when multiple currencies fail in quick succession (which they most likely will) then it will be a bumpy ride for everyone. I suggest having some capital assets to protect your livelihood.

*this is not to be taken as actual financial advice because everyone is in a different position financially. This post is purely for educational purposes.