Wednesday, November 12, 2008

Inflation and Financiers

While reading Can Friedman's Money Rule Stabilize the Economy?, I read these paragraphs:

An increase in the money supply out of thin air sets in motion the so-called "counterfeit effect." It lays the foundation for nonproductive activities, which consume and add nothing to the pool of real funding or real wealth. These activities divert real funding from wealth generators, thus weakening their ability to grow the economy.

The diversion occurs once various individuals that are the early receivers of newly printed money are able to push the prices of goods higher. Wealth generators that didn't receive the newly printed money discover that they can now secure fewer goods than before.

Since the Federal Reserve makes money out of thin air by "buying" treasury securities from the central banks, the central banks are the first ones to receive the newly minted money. It seems that others in the finance industry would receive this new money relatively early compared to the rest of the country. So, to what extent does the counterfeit effect account for high wages in the finance industry? It would be interesting to see a study quantifying the size of this effect.

Tuesday, November 11, 2008

Self Insuring for Disability

I'm a pretty cautious person (one might even say risk averse), so I've thought a fair amount about how to provide for my family in case of accident or injury. While preparing firewood this year (as I do each year), I dropped a large log on my left hand. For about two weeks, I wasn't able to type with my left hand. It made me think a little bit harder about providing for my family in the case of disability.

Disability insurance is much too expensive. My goal is to have disability savings worth at least 6 months living expenses. I could save that money in a money market fund, but I know myself and that's too easy to spend. Wherever I put this savings should meet the following criteria. It must:
  1. be difficult to spend
  2. safe through inflation
  3. be easy to sell at any time
  4. predictably retain value
  5. have a low cost of ownership
CDs don't meet the second or third criteria. Stocks don't meet the fourth criteria over short time intervals. Corporate bonds don't seem to meet the second or fourth criteria. I'm morally opposed to Treasury securities. Gold and silver have a fair amount of market volatility, so they might not meet the fourth criteria in the short term either. Precious metals don't seem inclined to the dramatic price swings of stocks though, so they seem a little bit better for what I have in mind.

My current inclination is to use the savings to buy gold bullion from a reputable online dealer. If push comes to shove and I need the money to pay living expenses, I'd sell it piece meal on eBay. That's because the eBay price is routinely higher than the spot price.

So what do you think readers, is that a good way to go? Have I overlooked something important?