Safe Investments Like CDs & T-Bills Are No Longer Safe

June 7th, 2007

Conventional wisdom tells us that the safest investments are CDs and T-Bills from the United States Government. People scream about the risks associated with the stock market and other investment vehicles and how you should play it safe and hold T-Bills and CDs. This may no longer be the case. The United States currency, like many other currencies, is a fiat currency. The US dollar is nothing more than a peice of paper - and unknown to many people, it is not backed by gold. This is perhaps the root of the problem that is starting to occur.

For the last several years the United States government has been running massive deficits. As a result of the deficits, the United States has had to print massive sums of money. The US is printing so much money that it stopped publishing the M3 index which tells the world how many dollars are in circulation. It probably stopped publishing this report because the true number would shock the world and possibly collapse the US dollar. The main recipient of these new US dollars is China which has saw its reserves grow from $1 trillion to over $1.2 trillion in just a few months, a pace that is unheard of. It took decades to get to $1 trillion and now only a few months to grow to over $1.2 trillion. The Chinese have recently signaled that they are going to diversify away from the US dollar, an obvious sign of disgust over what is occuring with the currency.

In the first part of this year so far the US dollar has depreciated in value significantly when compared to other currencies. It has dropped 8% against the Canadian dollar. If the US government continues to spend as much money as it is, this trend will only worsen. Interest rates on CDs and T-Bills are sure to rise if the US wants to avoid further declines in the US dollar, but this action will hurt the US economy - the double edged sword. US dollars are, in theory, infinite; The government can print as many as they want. The resources that dollars buy are finite and limited. You can’t just keep printing a infinite resource to buy all the finite resources. It just won’t work. That is why all fiat currencies may be doomed to failure. A return to the days when currency is backed by gold/silver and other finite resource may be inevitable.

Challenging the crowd can be difficult but how safe can holding US dollars be when the US dollar is on course to collapse if it were to continue this path for too long? Remember, money is nothing but a promise- it is not a valuable resource that will feed you, put a roof over your head, or help you out in any way if people were to stop accepting it. Holding US dollars for the promise of getting a few percent return isn’t acceptable. Yes, your principal is gauranteed and you will get a couple of percent interest, but it’s nothing more than a gaurantee to lose money after inflation is factored in. A gauranteed loss isn’t “safe”.

Want to play it safe? How about you pay off your debt and start living within your means. Want to play it safe with your investments? Invest in companies that will survive recessions but still grow during good times. Buy businesses, property and resources and enjoy life. Gauranteed losses aren’t safe, they’re stupid.

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