Friday, January 20, 2012

cash maybe king but it doesn't reign forever

I was going through my coin and banknote collection the other day and realized something: Cash maybe king but it doesn't reign forever. Proof of that was the collection itself. It had 2-peso, 5-peso and 10-peso banknotes. So at some point in the past, these denominations actually had sufficient value for them to be printed as banknotes instead of being minted as coins, which is what we have now. So what happened? Since governments or central banks are able to print currencies out of nothing, hence the term fiat currencies, the ever increasing supply of it causes its value to diminish. That is why our grandmothers always complain about how expensive things are these days because they were able to buy so much more with the same money in their younger days.

What does this mean for investors like us. If you have a bundle of cash now and would not need it in a year or two, please don't hide it under your bed. In three years, inflation would have reduced its purchasing power by 9-12%. Think about it, you basically have the same money but it is as if someone stole a tenth of it. This is a fact that investors, especially those who will stay invested for many years, must remember. We may think that the 1000-peso bill is of value now but, as history shows, that value will diminish over time. So if you want to make sure that you preserve the value of that money in 20 or 30 years, better invest it.

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