Borys Bradel's Blog
Money over time
Tags: investing May 10, 2009
Money is one of those interesting topics that's rather difficult to understand. There are a large number of different aspects to it that need to be understood, although it boils down to there being actual money large quantities of which are printed by many governments, assets that have some price, and promises to pay. Three questions come to mind, what, how, and so what.
What exactly are these three things?
Well, the governments print money, which then is used by them to buy whatever they want and to take the possessions of citizens (by a combination of inflation and taxation, basically making old money worth less by printing lots of new money and then collecting taxes on everything). People produce things, interact, and trade with each other, thus creating assets that have some price. Banks and investors take the money and lend it out with interest, thus creating promises to pay (nicely described on the Market Ticker here).
How are these three related?
I haven't figured that out, and there probably is no precise answer.
What are the important effects of the relationships?
Well, for that, there is a precise answer, although probably everybody has their own. My answer is that the important effects define how well off people are. Basically, for doing some work, how well are people rewarded from that point onwards. And the relationships indicate that people are not doing very well.
I base my answer on the 10 year rate on Bank of Canada bonds, which indicates how well people can save, the DJIA index, which indicates how well people's assets are doing, and the inflation reported by shadowstats.com, which shows how quickly money is losing value. Yes, the comparison is not perfect, although it'll have to do.
For people to be rewarded, their savings and assets should be large, and their money should not be losing much value. Unfortunately that is not happening in the recent past.
In the last 30 years of the previous century (and millennium) from January 1970 to December 1999, the average 10 year bond rate was 8.73%, the average DJIA return without dividends was 9.03%, and inflation was 6.53%. That is pretty good, although taxes do make the picture darker.
The new century (and millennium) is not pretty at all. In the 8 years from January 2000 to December 2008 the average 10 year bond rate was 4.93%, the average DJIA return without dividends was -4.41%, and inflation was 10.5%. Basically, most people are not doing very well.
There should also be information about people's average hourly income, however, for most, the picture of that is probably more bleak than the above information.
Food for thought.
Copyright © 2009 Borys Bradel. All rights reserved. This post is only my possibly incorrect opinion.