My World: What to do with your cash?

I've been reading ZeroHedge again. It's not a good website if you want to maintain your innocent enthusiasm for life in today's world. The posts come from various sources and are relatively sophisticated in financial terms and very depressing in the overall negative view of the economy which is usually displayed.

After having read the most recent news, I was motivated to locate the following definition of various forms of economies:

Today's economy defined:

• Feudalism: You have two cows. Your lord takes some of the milk.

• Fascism: You have two cows. The government takes both, hires you to take care of them and sells you the milk.

• Communism: You have two cows. You must take care of them, but the government takes all the milk.

• Capitalism: You have two cows. You sell one and buy a bull. Your herd multiplies, and the economy grows. You sell them and retire on the income.

• Wall Street's version of Capitalism: You have two cows. You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt-equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred through an intermediary to a Cayman Island company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more.However, all of the funds placed in the care of the company by ranchers to hedge against rises and declines in beef prices are now missing.

We spend our time worrying about the housing market. Will it come back? Will prices rebound and when will that happen? The fact is that the housing market is one element of the national economy. It's a large piece of the puzzle, but it's not going to change without a significant structural revision of the way our government does business at the present time. If we think that simply bailing out failed banks is going to be enough to make times good again, we've got another thought coming.

At the present time, banks can borrow money from the government at a low interest rate and then turn around and invest it in government bonds and receive a higher interest rate back. They are making plenty of money on the split and the federal bank examiners seem to be more in favor of that approach. It's for sure that the banks will be less likely to get in trouble with the Feds, if they don't make any dubious loans to anyone other than the government.

The problem seems to be a systemic one. With recent events, the commodities market is no longer trustworthy as the rules have been repeatedly been bent and broken with no repercussion. Contracts are easily ignored, witness the GM takeover by the government. The bondholders - holding a bond is essentially the same as holding a note - were simply told that they would not be repaid, while a considerable amount of the company was simply gifted to the unions as a reward for political support. This isn't the way capitalism works. It's the way fascist states behave.

I believe that real estate ownership is one place to put your money which is more likely to protect your value against inflation. I realize that the official inflation rates are currently low, but I've read that the current inflation rate is somewhere around 3.5% and it might even be higher, if all segments of the consumer's purchasing were included in the calculation.

A brief review of bankrate.com shows that generally, banks are paying less than 2% on CDs. This means that you're loosing at least 1.5% on your money when it's parked in a CD or savings account. If you manage to purchase an investment property at the right price, you can probably generate some positive cash flow from renting it. Even if property values drop farther, such an investment might make sense. It gets you out of the inflationary loss scenario and into something which will spin off money. This may be even more important if the rumors of the Feds tapping the savings and 401K accounts of the citizens become reality. This sort of event would be less likely to impact you, if your money were safely tied up in real estate, rather than sitting in your retirement account.

Most people think that their personal house is an asset and that money in the bank is an asset. This may or may not be true. The true meaning of an asset is something that puts money in your pocket at the end of the year. A liability takes money out. Using this definition, your low interest savings account is a liability since it is loosing value to inflation. You might as well take the money out and put it in investment property. At least you will have a monthly rent check to show for your effort. Just be careful to arrange things so that the property will spin off cash. It's no fun to have to contribute money to cover a negative cash-flow. Today it's far easier to end up with positive cash flows from investment property than it has been for many years.

Namaste!