Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [103]
How did this happen? For most of this century, Washington has pumped money into the economy by keeping interest rates low. Easy money tempts crooks. Speculators and fraudsters had a party. Regulators became enablers. Cheap money fueled bad lending, including predatory lending, and cheap money expanded the housing bubble.There are genuine victims of predatory lending.The war on poverty became a war on the poor. Those victims face crushing debt, a weaker dollar, and rising prices. Now even the average American is the victim of bad policies combined with widespread financial crime. Most Americans feel the negative wealth effect of rising prices, falling home values, and tighter credit. Consumers cut back on spending while struggling with higher food and gas prices. Bailouts of poorly regulated investment banks and corrupt mortgage lenders mean Washington is printing more money, which weakens the dollar. Inflation adds to the misery. Americans feel poorer.The United States is in a recession combined with stagflation.
Washington is supposed to provide a strong national defense; but we were attacked from within our own borders—sometimes by those charged to protect us. Washington failed in one of its most important duties.Washington failed to protect our money.
What is money? Money is a store of value. It does not matter whether we talk about gold coins, silver, diamonds, bearer bonds, pieces of paper with pictures of dead presidents, salt, cacao, tulip bulbs, or a signed check. We accept these things as money, because we have a common agreement (or hallucination) of their value.
Our idea of value changes as circumstances change. If crops fail and I am starving, I’d prefer to stockpile wheat rather than gold. If you have no wheat, I would prefer to have gold than take your credit, since it will be easier for me to convert gold into food than to convert your credit into food. We invented money to enhance our probability of survival. The best money is an abundant store of value measured in a standard and reliable manner. When anyone—especially someone we elected to a position of authority—messes around with the value of money, we should all take it very seriously. Homeland security requires a secure homeland currency.
There are three basic kinds of money. The first is commodity money, something usable that humans value. Children quickly grasp the concept of commodity money the first time they swap toys. Commodity money is gold, silver, rice, wheat, oil, salt, or any number of usable goods. Beads went out of fashion as currency in the United States soon after Europeans used them to purchase Manhattan from Native Americans. Gold is still in fashion because the global community agrees it has value. The gold standard was dissolved in 1971, but before that, Europe relied on it both officially and unofficially for about 900 years. Central banks still stockpile physical gold. Gold is still considered a benchmark, even though it is no longer the standard.
Warren invests in businesses that make things that people use and that are unlikely to go out of fashion (for a long time). For example, people enjoy eating Dairy Queen’s ice cream treats, and human taste buds are unlikely to evolve to new preferences in our lifetime.
Credit is the second kind of money. Most of us have checking accounts. People who accept our checks assume our credit is good enough that the check will clear. Our assets in the form of checking deposits back our check, and the currency in our checking account