Handling Finances

When I traveled to London, England recently, I found that my money was only worth half what it was in America.  In other words, I got half as much as the same money would have purchased at home.  That got me wondering what my money is actually worth.  My bills claim to be “legal tender for all debts public and private” but what does that mean and why does the same dollar buy half as much (in terms of both goods and British Pounds) in England?

A Brief History of Money

Early currency was simply representative of various goods.  Precious metals were used to represent things like grain or livestock.  The first coins allowed for easier transactions and let merchants travel and do business without having to carry around all their goods.  Coins also allowed for the first accounting system and allowed people to store wealth more easily than maintaining and guarding large caches of food or large herds of animals.  In Europe, gold, silver and copper were used as currency because there was a fixed amount of each metal in the civilization.  A person could be reasonably sure your gold would be just as valuable next year since it wasn’t being mined and so inflation wasn’t much of an issue with the basic coins (though of course commodities would fluctuate in value according to supply and demand).

Coins were a huge innovation, but they were still rather difficult to haul around and trade in large quantities.  Banknotes were issued in China around 1000 AD and were redeemable for coins or goods on a regional basis.  A more universal Chinese currency was introduced around 1250 AD o make long-range trading easier.  At the same time, paper currency and many financial constructs like savings accounts and exchange rates were being developed independently in the Islamic culture.

In Europe, paper currency was somewhat less orderly as governments had a tendency to print more money than they had resources.  In other words, if everybody redeemed their currency, the government would run out of coins and goods promised on the notes.

So what are dollars worth now?

Ever since the United States ended its agreement to convert dollars to gold in 1971, American dollars have been worth only what two parties are willing to exchange for American dollars.  Of course, since the US government only accepts US dollars as payment of taxes, the US dollar will be good to get the IRS off your back as long as the IRS exists (and keeps the current policy).  This is known as a ‘fiat currency’ as the US dollar’s value is defined by fiat.  That’s no small thing, and the perceived stability of the US government is a large part of why many other world currencies are pegged to the dollar and many markets (even overseas) do business in US dollars.

If the US government wanted to spend more money, they could simply print more bills, but the more they printed, the easier it would be for people to get their hands on bills to pay taxes and as with any situation of supply vs. demand, the value of each dollar would decline resulting in inflation.  If the government were to print way too many bills (as in Germany after WWI when huge reparations exceeded the amount of money they could take in in taxes) the bills can become totally worthless as citizens find that their cash is worth more as toilet paper fuel for heating fires than as currency.

It seems weird in a way to be dealing with money that is only representative of future taxes.  While it legally must also be accepted for debts in America (like credit card debt or to settle a resturaunt bill when you pay after you eat) there is no legal reason a supermarket would have to accept cash as payment for food.  Yes, they’ll lose a lot of business if they only accept gold bullion or Euros, but it’s at least possible.

It’s a funny world where we go around exchanging little green pieces of paper, but it’s better than lugging around piles of gold coins.  It’s also much easier to control the supply of US dollars than it is to control the supply and demand of a precious metal like gold when gold can be found and dug up much more easily than in midieval times.  I suspect that in the far future, we’ll do away with paper and coin money altogether and move to an entirely electronic financial system.  We might even end up pegging our monitary system to something that’s useful to everybody — like energy (what good would cashing in your dollars for gold REALLY do you)?  Until then, we’ll just have to keep doing business in our governments’ future taxes and simply be thankful we don’t have to carry around wagons full of wheat, chests full of gold, or strings of rare seashells when we go shopping!

Everybody has their favorite pet theory about why gas prices are so high. It could be the evil excessive profits taken by oil companies, risky speculation by profit-seeking investors, a simple case of supply vs. demand or all/none of the above. It’s very hard to know since most of these effects are unquantifiable and it seems like politics has more to do with a person’s answers than actual facts.
Whatever the cause, high gas prices aren’t as bad as most people seem to think. Here in America, gas has been almost ridiculously cheap compared to the rest of the world. By itself that’s not a problem or anything, but it does mean that we’ve become used to thinking of gas as an abundant and cheap source of energy. We’ve built an entire country with sprawling suburbs and extremely limited train and subway access that heavily depends on cheap and abundant gasoline. We’ve scorned fuel efficiency and invested heavily in the largest, most powerful vehicles.

Since oil takes millions of years to form in any useful quantities, it is clearly a limited resource at the rate we’re using it! I should qualify that — we will never run out of oil altogether, it will just become more and more expensive to extract from the ground until some other form of energy is cheaper. We know we’re going to run out of oil at some point, so clearly we need to prepare well in advance. Except, we’re not remotely prepared. We’re decades away from any other fuel source for our vehicles and that’s assuming significant investment for those decades.

One option that gets thrown around a lot is to allow drilling in X or Y location that is currently being protected for Z reason. This will make the situation worse — prices will drop, investment will drop with it and we’ll be right where we started except X and Y reserves will now be depleted.

An unpopular solution.

Quite simply, we need to feel some pain in order to prepare for the future. When prices are low, some people simply deny that there will ever be a problem, the majority simply doesn’t care as long as their tanks are full and a second minority complains ineffectively that our increasing suburban sprawl and refusal to develop alternative technologies or even simply more fuel-efficient vehicles is just digging us further into a hole. When prices hit $3.00 per gallon in America, the former and latter groups grew for a while and then everybody went back to not caring. Now that gas costs $4.00 per gallon, people are really starting to hurt and put a significant bit of money toward changing our habits now so we can avoid wasting a huge amount of money changing once we’ve exhausted our last reserves and gas jumps to $5.00 or $6.00.

High gas prices aren’t all good — the poorest among us who have no cushion will suffer the most as they have to choose between gas to get to work and food. I certainly don’t enjoy paying twice as much for gas as a couple years ago. At the same time, this is the first I’ve seen long-term efforts to increase the reach of mass transit, to develop electric and hydrogen-fueled vehicles and to actually make token efforts to use currently available technologies to increase fuel efficiency in the average American car.

I won’t claim that the days of the 4-car family or the 1-kid family with and SUV and pickup that gets used once a year are over. Many of us have grown quite accustomed to the convenience of these light trucks even if we could easily do without. I’ve even heard some people who genuinely feel entitled to the affordable use of a Ford F-350 used primarily in a daily hour-long freeway commute. In the end though, we’re just going through the pain at the start of any new exercise routine. It won’t be easy, and it might not feel good at first, but in the end, we’ll stop wasting a limited resource, limit pollution, and save billions of dollars that are currently going toward oil companies and oil producing countries. And hey, if we can avoid pumping up the last of the American reserves in the process, then we might truly become less dependent on foreign oil rather than putting ourselves in a desperate position by using all our oil first.

When I started this blog, my net worth was right around zero, I’d paid off my student loans and had just landed a great new job.  Even with a trip to London, a new digital camera, and the occasional car repairs, our net worth is climbing between $2,000 and $5,000 a month.  While I’m confident this is sustainable, it’s not really how we plan to live long-term.  My wife would very much like to quit her nanny job and volunteer more.  We’re also looking at buying a house and then making, buying and renting children (through pregnancy, adoption and foster care) so we’ll be paying interest instead of earning interest and our costs will increase.  At the same time, if we can continue to save just over $2,000 per month (including part of our house payments that goes toward principal) and don’t turn rabidly materialistic in the next couple of years, I think we’re in good shape to hit this goal.

My net worth is computed very simply.  I add together my retirement accounts and my savings accounts and subtract my credit card debt (which is paid off each month).  In Quicken this is automatic so the only thing I have to do is review the transactions to make sure everything is copacetic.  I purposefully don’t add in the value of our two cars as they’re both worth no more than a couple thousand dollars and we intend to drive them until they’re more trouble than they’re worth.  If I purchase a new car someday I might include it in my net worth, but even then I suspect I’d prefer to treat it as spent money rather than an asset I can buy or sell.  When I purchase a house, that will certainly be included in my net worth.

Quicken doesn’t track all my money as the $500 I’ve put into Prosper isn’t included and my wife has an account she uses for selling Avon that I choose not to track, but overall it gives a good picture of my financial situation.

It’s hard for me to think about reasonable and useful goals more than a few years in advance so I just figured I’d set my first longer-term goal at the arbitrarily significant figure of $100,000.  A little math showed me that I’d hit it by or at least in 2010 if our cash flow stays reasonably static so that’s what I’ll shoot for.  If history is any guide, that’ll be somewhere around half in retirement savings so I’ll have a good start on avoiding dog food when I’m too feeble to play with lasers.