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.

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?

Sound Financial Management

I'm fascinated with what people say they will do if they win the lottery. One answer I heard recently, from a clerk in a convenience store, was, I sure wouldn't be working here. The part that confuses me is why she is still working there if she doesn't like it. Why is she waiting to win the lottery when she can solve her problem right now? This particular convenience store is an area of Wyoming where jobs are plentiful. She certainly could find a new job if she really wanted one.

Of course, there are some dreams that one may not be able to fulfill without a financial windfall (more likely obtained through hard work and ingenuity than gambling). For instance, I know a man who grew up on a ranch and works in ranching today. He mentioned one time in passing that if he were rich, he'd buy a particular ranch that he knows of and improve upon it. That particular dream is much harder to accomplish than the earlier example of finding a new job.

RateItAll has an interesting list, where people vote for the things they would do if they received a financial windfall. By my count, only 16% of the top 25 answers require a lot of money. The rest are possible to do right now. Of course, many may already be doing the things on the list. They might just be saying, I'll continue my current course but on a larger scale.

This morning, as I read about people winning the lottery, I realized that the question What would you do if you won the lottery is a good one to help set financial priorities. One's net worth isn't as important as the goals one sets. If you have a prioritized list of financial goals, you can pursue those goals regardless how much money is coming in. Sure, some of the lower priority items may never be accomplished during your lifetime, but that doesn't mean you should forget those dreams entirely.

This statement by N. Eldon Tanner summarizes it pretty well (emphasis added):

I have discovered that there is no way that you can ever earn more than you can spend. I am convinced that it is not the amount of money an individual earns that brings peace of mind as much as it is having control of his money. Money can be an obedient servant but a harsh taskmaster. Those who structure their standard of living to allow a little surplus, control their circumstances. Those who spend a little more than they earn are controlled by their circumstances. They are in bondage. … The key to spending less than we earn is simple—it is called discipline.

It seems that these principles have become less popular in recent years. The Federal Reserve's loose-money policy of the last several years has tempted many to use cheap credit to live outside of their means. Lew Rockwell's commentary on Bush's economic address, offers a telling contrast between the two philosophies of financial management, starting with a quote from President Bush:

As uncertainty has grown, many banks have restricted lending, credit markets have frozen, and families and businesses have found it harder to borrow money. Imagine that! We might have to live within our means for a bit.

I suppose the take away message is to prioritize your financial goals and accomplish the ones that are within your means.