Does it make sense to hold cash?

Feb 2, 2015

- By Bill Bonner

Bill Bonner
Rivas, Nicaragua

Dear Diary,

The Dow lost 251 points on Friday. Gold was flat.

What's ahead? Up? Down? Our best guess is that we'll have more up and more down in the months ahead. Pressure on both sides is increasing.

On the downside is the collapse of oil, the lowest interest rates in history, and the slowest rate of growth of world trade in 35 years. On the upside, US stocks are still near an all-time high, Fannie Mae is offering mortgages with 3% down, and the bank of Draghi is pumping more credit into the world economy at the rate of 60 billion euros per month.

Actually, we don't know which of these things should be on the downside and which should be on the upside. The whole economy has been turned on its head so often, we no longer can tell down from up.

So, we're on our way to Costa Rica. We spent the last two weeks on the ocean. Now, we're headed to a lake.

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Last week, we met with a group from our Family Office project. On the table was the question: what should a multi-generational family do with its money now?

Several answers were proposed. Among them was a surprising one...at least, surprising in the context of the last 40 years, during which it lost about 90% of its value.

"There's a Motel Six on the road that I take when I drive to work," explained our old friend Rick Rule. "To give you an example of the real inflation that ordinary Americans face - as opposed to the numbers given to you by the Bureau of Labor Statistics - the Motel Six took its name from the fact that you could get a room in the motel for just $6.

"The chain was founded in the 1960s. Now, I drive by and I've seen a number of priced advertised. But none of them are anywhere near $6. I've seen $49 and $59. I've even seen $69.

"Either the motel is 10 times as good as it was in the '60s...or the price is 10 times higher. I doubt that the sheets are any nicer or the beds are any more comfortable. And I know the rooms are about the same.

"So, I think the real cost of living is substantially higher than the BLS admits. And if prices are 10 times higher than they were in the '60s, you probably would have lost a lot of money if you had been holding cash for the last 4 decades."

"Probably" is a word that can't be overused in the financial world. Even a simple calculation of how much prices have risen over the last 4 decades needs a cautionary adverb. Maybe. Could. Perhaps. Around. About.

Here at the Diary we use these words whenever we wish to express doubt or imprecision. Probably, too, is a handy way to tell you not to be too sure.

Not only are we unsure about how much consumer prices have risen in the 45 years since the 1960s - between 10 times and 15 times gives you a good range -- we're also unsure about how much you would have lost had you held cash. Because it depends on what kind of cash you held. And how you held it. If you had held cash in its most traditional form, gold, you be ahead of the game. While the price of a night at Motel 6 may be up 10 times, gold has risen 30 times.

Meanwhile, Chris Hunter presented a chart showing that dollar cash was one of the very worst things you could have done with your money for a long period.

And yet, what does Rick suggest you do with your money? "Cash!"

Over the long run cash may be a loser - no need for a 'probably'. Hold cash and you give up whatever gain you might have made from putting it to work. That foregone gain is a cost. So is the loss of purchasing power to consumer price inflation. Those losses are what it cost you to hold cash in dollar form.

"Cash tends to lose you money," Rick concluded. "Still, there are times when it is the best performing asset in your portfolio.

Cash may be especially unhelpful when credit is expanding - as it has for the 40 years. But it may be especially useful when the credit contraction begins.

"Not only that. Cash settles your nerves. I sleep better when I have a lot of cash."

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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2 Responses to "Does it make sense to hold cash?"

yogendra pal singh

Feb 2, 2015

Absolutely right. Cash is a medium, currency , for daily house hold activity. That is the end of it. BUT it must be available for OPPORTUNITIES.
Gold, Stock &Real estate are commodities for surplus Cash.
One has to be alert & intelligent, in touch with economic development to avail potential opportunities to one's financial advantage.
Same has been well illustrated Bill Bonner.

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a n choudhary

Feb 2, 2015

The erosion in value is almost 100 times in Indian Rupee as against 10 in $ in over the same period united states.

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