With the imminent arrival of my unexpected income tax break (that is, the estimated $600 that will probably actually come in late August after I get around to filing my return), I’ve been wrestling with the dilemma of what to do with this windfall. I want to help out the economy and my country, but the numerous considerations make the best policy less than obvious.
I pondered this for a number of days. It was very hard to reach a conclusion. But after some consideration, I’ve come to the conclusion that the very best thing I can do with my money is to buy gold. My logic follows.
Why would buying gold help the country? Why would it help the economy?
Let’s think about what would happen if I took one of the other options.
Spend it on booze, slot machines and a wild fling in a cheap hotel.
This is a way to give it to the rich and the government. Basically, if you spend it on anything other than an asset, you are really just giving a huge chunk of it to the rich. The rest goes back to the government, just as if they hadn’t given it to you.
Think of a casino. Suppose you had $100 (of your very own money) and you went to the casino and played the nickel slots. What would happen to your money? Very soon it would all belong to the casino. How can that be? Don’t they ever pay off? A nickel doesn’t seem like much and every so often, kachunk, a bunch of them come out in the drawer.
The problem is the percentage. The odds give the house a certain percentage better chance that they get your money than that you get theirs. That percentage advantage to the house is there on each and every transaction. The percentage varies by machine, and ranges up to something like 30%. It might be, say, 2%. Doesn’t sound like much, does it?
Let’s say you played for five minutes and you spun the little dials every five seconds. (Not unreasonable, since it only takes a push of the button—actually pulling a handle takes too long—and nothing should get in the way of the house getting its take.) At a 2% take, after about five minutes of this you’d have about $30 left. You don’t lose 2%. You lose 2% on every transaction. That percentage multiplies each time, the losses growing exponentially, until all your money drains away. I didn’t do the calculations, but I’m willing to bet (not being a betting man, however) that your $100 would long be gone in an hour.
The house’s take has another name. It’s called profit. It’s taken on every transaction. This is exactly what happens to you when you spend your money. The you in this case being the public. It’s largely invisible to you as an individual because you never see the money again. Someone else is involved in the next transaction. But if you could see it from the bullet’s point of view, from the center of the action, you’d see that a little profit is taken in each transaction until all the money ends up going to those who take profits.
Let’s say you pay exactly $100 for a meal, tax included. Some amount of this is the cost of providing that meal to you. The rest is profit, which the business owner and the government split.
A reasonable profit for a business, one that’s healthy, is about 30%. A reasonable sales tax, in a place like California (where I live) is around 8%. (It varies by county here, and a portion of it is shared with the local government. But for simplicity, let’s call it an even 8%.)
What happens to your money if the government and the business owner take 38%? All of your money disappears in less than three transactions. (You being members of the working class, the people who don’t take profits.) The bulk of it goes to the rich, the rest get’s siphoned off for the government to spend.
Of course, the average business makes a profit lower than 30%. I don’t know what the average is. (Maybe one of our economic experts can tell us.) But it doesn’t matter whether their profits are 30% or 2%. If there are enough transactions, all the money ends up as profits.* That’s just how it works.
So, here’s the point. If I spend it on wine, women and song, I’m really sending a percentage to the rich and the government (a higher percentage to the government, usually, if I spend it on booze). What’s left is in the economy until the next transaction, at which time, another chunk of it goes kachunk, to the rich. In the end, it all goes to the rich, even what goes to the government, because the government spends it all, and even borrows to make more so it can spend that, too.
Spending your tax rebate on booze, slot machines and a wild fling in a cheap hotel is the same as giving it to the rich.
The thinking in Washington is that they will give us a bit of our money (they always call it our money) and then we’ll spend it and it will all bubble up to the rich. What will they do with it?
They’ll save most of it. Why spend it? Or, they’ll invest it so that they can increase their profits. They won’t invest all of it, of course, they’ll take a little out and . . .
. . .they’ll spend it. They’ll spend it on frivolous things, as usual. While it lingers at the lower rungs it’s going to be spent on the necessities of life, generally, because the truly poor (with notable exceptions, of course) don’t have a choice. They have to spend it on
gasoline, home heating oil, or food.
It would be nice to think that this would help, in the overall scheme of things, but the problem is that the same thing happens to your money whether you spend it on booze or spend it on ooze. A percentage goes to profits. In the case of ooze, the oil companies, in fact, take a larger than average percentage for profits. And so does the government.
Spending your tax rebate on gasoline, home heating oil, or food is the same as giving it to the rich.
In the end, after sufficient transactions, that’s where it will end up. So, maybe I should
put it in my savings account.
That’s one way to keep it from all going to the rich! I could just save it. No transactions, no profit. It’s mine, all mine!
There are two major problems with this, one public, one private. On the public side, it doesn’t do much for the economy. It creates a small surplus of funds for the bank, which will lend it out, possibly to someone to buy a house. This increases the money supply and can result in additional jobs. So, saving it isn’t a loss for the economy, but it doesn’t add much immediate stimulus. It is, however, better than spending it as viewed from the point of helping the fundamentals of the economy.
On the private side, it’s hard to save it and get enough interest on it to cover inflation. And, with the massive borrowing, public and private, over the Bush Years, we can be sure of inflation. We’ve already had it. If you don’t believe me, just compare your dollar with your euro. (I’m calling it "your" euro for poetic effect only, because, I’ll wager, you don’t own any euros. Except for Jerôme, of course. And, oh, yeah, you probably have invisible euros in various funds that have been hedged.) You will find that the dollar has declined precipitously against the euro. This is hidden inflation, inflation hidden from the American public, but real inflation nevertheless. (That is, the real inflation rate isn’t close to 4%, it’s close to 64%.)
Saving your money, at any accessible interest rate, is the equivalent of letting it evaporate. And on top of that, it does nothing substantial for the economy.
So, I could put it in my savings account and hope that I can buy a cup of coffee with it after I retire. Since I’m old (relatively), I think I can beat the odds. If I put away $600 right now in a money market account, I believe that in another ten years (when I reach retirement age) I’ll still be able to buy a cup of coffee with it. What I’m really betting, of course, is that the economy doesn’t entirely collapse (like it did in the early 20th century) and take my financial institution with it. If they are in business, and reasonably healthy of finance, I sincerely believe that I’ll be able to withdraw enough money to buy a cup of coffee when I retire.
It’s just not the best strategy, I think. I should try to beat inflation, so maybe I should
invest it in the stock market.
Oh, that looks like a lovely idea. I’m told if I mind my money carefully I can still make a killing in the market regardless of whether it goes up or down. Knowing that it’s headed down, in fact, might be an advantage. The problem is that I don’t have a lot of spare time to mind my spare money in the market. And, of course, the market is notoriously risky. Over time, we’re told, the market always goes up. The problem is that it’s the market going up, not the stocks in the market. Any particular stock can go down, and it can continue to go down, in fact, it can go flat.
Meanwhile, there’s this little thing called the percentage. That’s what you pay on every transaction. That percentage goes to the house, excuse me, the brokers, which means that it ends up going to the rich.
So, on the whole, putting my money into the market is equivalent to kissing it good-bye.
It just makes you want to
convert it to dollar bills and stuff it into your mattress.
(See "put it in my savings account", above.)
The sure-fire way to beat inflation is to move it out of the U.S. In other words, I could
find a nice fund denominated in euros and invest it.
There’s a small problem. This doesn’t do any good for our economy and it doesn’t do any good for the country. But it’s good for me and I did invest in euros. I can’t afford to lose all my money, even if the U.S. economy tanks. But I’d rather not do that with my $600 that George Bush wants to give me.
And, of course, even if I move the money out of the U.S., I’m taking a risk on the global markets, and who’s to say that they won’t go down the tubes if there’s a big recession in the U.S.?
That leaves just one thing to do:
Buy gold.
How does this help the economy, nay, the country? It doesn’t, directly. But indirectly it’s the very best thing to do.
That’s because it’s neutral. It doesn’t affect the economy or the country one way or the other. In some sense, it just takes that money and lets it sit there, doing nothing, for however long I hold it. The economy will continue to suffer. In fact, with a little money taken out of circulation, it slows down the economy. On the other hand, it fights inflation, because it isn’t being used to drive up the price of anything. Other than gold.
And that’s exactly what we need. We need for everyone to simply take the money right out of circulation. After that, the government will get around to doing what it really needs to do help the economy because it won’t have any real choice. The tax rebate will be a bust.
That means that the government will need to get real. It will have to fix the structural problems. It will have to do things like end the war. It will have to balance the budget. It will have to put a cap on the number of jobs going overseas by fixing the international trade agreements so that companies can’t get cheaper labor or less expensive parts by ignoring labor laws and environmental laws. Maybe they’ll adjust the income tax code so that the people our country has made superrich pay us back for providing them with the markets and infrastructure to make that money.
Maybe someone will even suggest spending a little on that infrastructure, here in this country. (What? A Republican did that?)
So, I’m going to buy a big block of gold with my rebate. Then, once a month, I’m going to get it out, along with my microscope, and just peer at it shimmering there on the slide.
---
* Technically, there’s always a residual, because the percentage profit is generally less than 100%. But I suspect that some magic actually vacuums up the last cent. Perhaps The Grinch steals it in the middle of the night.