Where did my money go?

After college I worked for a BioTech company in the Napa Valley. My husband and I were just starting out and we wanted to be as smart as possible with our money. I opted into my employer’s 401K retirement program and made the maximum contribution. When I left a year later to be a stay-at-home mom I had a total of $4772.70 in my retirement account, which I rolled into an IRA. I split the total evenly between two mutual funds so I could rate their performance. One was aggressive and one was more conservative. I was sure the aggressive fund would perform better. It didn’t. Neither one did very well. But, mutual fund hindsight is 20/20.

Whenever I got a statement, the value of my account always seemed to hover right around $5000. The high of my account corresponded to the high of the market at the end of 2007. Since my account was showing a small gain it never occurred to me to look more closely at the economy overall. It got up to $5663.38 at the height of the market.

Since setting up my IRA account I heard about and started to read a book about money called, “The Creature from Jekyll Island”. The name sounds like horror fiction since it always makes me think of Dr. Jekyll and Mr. Hyde.

Money has always seemed to me an overly complex subject, but reading about its history suddenly put it in a light of simplicity and clarity. I learned about the gold standard and how it created some of the most prosperous and longest lasting economies in the world. For example, the Byzantine Empire flourished as the center of world commerce for 800 years with the gold standard at its economic bedrock. The Founding Fathers were careful students of History. They included in the Constitution that only gold or silver could be used as legal tender (Art. I Sec. 10 Cl. 1). Historically gold is the most secure store of value because it has intrinsic value. One downside is that gold is heavy and cumbersome to carry around to make day-to-day transactions. As a solution paper certificates were issued which represented a specific weight of gold held in the bank safe. The certificates themselves were only as valuable as the paper they were printed on. The value was not in the bank note, but in what it represented. When we went off the gold standard in 1971 people still had all the same paper in their wallets. However, since then the price of gold has soared. Is it because gold is more valuable? No, it is because our dollars are less and less valuable. Without a standard the Fed can print more and more dollars and dilute the purchasing power of every other dollar in circulation.

Paper money has value because we think it does. After reading that part in the book I went shopping at the mall. The woman in front of me paid in cash. I actually laughed out loud when the cashier pulled out her special pen to make sure the bills weren’t counterfeit. Oh my GOSH are you SERIOUS!?!?! It’s ALL counterfeit!!! I didn’t say that, of course, but the reality of that fact just struck me as a darkly hilarious irony. Yes, you check that money. Make good and sure it’s not fake!

Have you ever wondered why on the news when somebody finds some hidden store of cash they always say something like, “Back in 1940 when they hid they money, it would be the equivalent of hiding X amount of dollars in their wall.” That X amount of dollars is always some astronomical amount and much more impressive than what was actually found. The reality is that while the cash was walled up in the house hidden from everyone, it was being stolen. How? In the absence of a gold standard, there is no way to protect savings from confiscation through inflation.

Armed with a new understanding of money, value, and fiat currency I went back and looked at the price of gold and the value of my retirement account. When I opened my account with $4772 gold was trading at $274.05 per ounce. The value of my account was 17.415 oz of gold. At the height of the market my account was up to $5663.38. An ounce of gold was worth $724.75 meaning that the value of my account had fallen to 7.814 ounces of gold. Up in dollars, but down in purchasing power. Then the economic crisis happened. I have my own opinions about the driving force behind the crash, but that is another topic altogether.

Today my account is worth $3532 and gold is trading for $935.50 an ounce. The value of my retirement account has fallen to 3.776 oz of gold. I’ve already called my CPA who said that if I withdrew the money I would only get 40 cents on the dollar of what’s left after government penalties and taxes. That’s a 91% overall loss. Lovely. It occurs to me now that it is incredibly easy to put money into a 401k but getting the money back out again is quite the fiasco…even when you have reached the age of retirement. So much for being smart with our money.

I am a huge advocate of saving, but given what I know now about the loss of value over time I would NEVER save in dollars. Let me illustrate why. Today 17.415 oz of gold would be worth $16,291. Let’s be clear. It’s not more money. It’s the preserved value of my labor and represents the EXACT SAME purchasing power.

Unfortunately, inflation does not only affect savings and retirement funds. As the value of the dollar plummets, people who have negotiated salaries whereby to support their families are being compensated the same amount in dollars every month, but they have less and less in purchasing power until their next pay raise. All the while people think that milk and bread are getting more expensive.

As the government passes more bailouts and trillion dollar stimulus packages, remember they are not borrowing money from the Fed. The Fed is simply printing more money out of thin air and stealing the purchasing power from everyone in America with a dollar. From now on my husband and I WILL be doing the smart thing: saving in gold and other real assets with intrinsic value and opting OUT of the 401k plan. An ounce of gold is still worth an ounce of gold.