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‘Nothing safer than cash’ statement is wrong

Posted by John T. Reed on

The November 26, 2018 Businessweek quotes Founders Space CEO Steve Hoffman, a Silicon Valley venture capitalist, as saying “There’s nothing safer than cash.” Businessweek made that sentence a call-out in the article.

He’s nuts. In high inflation, cash and dollar-denominated assets become worth less or just plain worthless. Cash is great in deflation like the Great Depression, but not in either type of monetary crisis.

True of pennies and nickels, not other types of cash

There is arguably true that there is nothing safer than U.S. pennies and nickels. They rise in melt value during inflation and hold their value during deflation because they are fiat money with the words “one cent” and “five cents” on them. They are the only asset I know of where you can win but you can’t lose. They are better than other coins including precious metal coins because their current melt-value-to-face-value ratio is higher than any other circulating coin on earth.

But Silicon Valley executives don’t say that because it sounds kooky. And they are more about peer pressure than independent thinking.

Two-way-indexed assets

There are other assets like real estate, commodities, forever stamps, a mild climate, a convenient location that I call two-way indexed. They tend to hold their value after adjustment for inflation. In other words, if you own them free-and-clear and we get hit by inflation or deflation, you neither profit or lose in a real (adjusted for inflation) sense. 

One-way indexed is better. That is what U.S. pennies and nickels are. Their dollar value rises when inflation drives up the value of the metal in them, but their dollar value does not fall when the dollar value of the metal in them falls. You can always take them back to the bank and get 100% of your money back. If you buy zinc, copper, or nickel ingots instead of pennies or nickels, they will go up and down in inflation and deflation respectively.

Pennies and nickels do not go down in dollar value unless there is some sort of devaluation proclaimed by the U.S. government. To this day, you can still turn in a $20 gold piece minted in 1830 and get $20 in paper currency. That coin is worth at least $1,281 today so it is unlikely we would have that much deflation. But that coin has never been devalued. 

The U.S. did go off the gold standard in 1933 and again in 1971, but that was not the same as reneging on the promise that a penny is worth one cent.

Value in use

There is also value in use as opposed to dollar value. If you own a free-and-clear house, you can live in it during both hyperinflation and deflation, each of which is irrelevant to your living in the house. The house is no less or more a house because its dollar value is fluctuating. 

Same is true of a conveniently located house that enables you to travel cheaply to where you need to go on a daily basis. Personal property like cars or computers also provide value in use although they depreciate more in real terms than real estate or mild climate or convenient location.

How to Protect Your Life Savings from Hyperinflation & Depression, 2nd edition book

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