Play Pretend

FIAT Money is worth something because the Government says it is worth something. It is worth something because we all agree to play along. The adult version of play pretend. Interest is the price of money. In most countries, that price is set by the Government. The can't be too silly about it, because other Governments set prices too and exchange rates mean you can go play a different game if one game gets too ridiculous.

Inflation is the reminder that money is just a game. Ask anyone who has lived through periods of inflation about how much pocket money they got (if they were lucky enough to get pocket money). I got my age. R7 when I was 7. R8 when I was 8. It seems South African parents in the 80s were fond of R2 as the currency to get kids to do chores. Making breakfast, mowing the lawn, taking out the rubbish. Good luck trying to get a kid to do that for R2 now. When the Rand (R) was initially introduced in 1958, it replaced the South African Pound at a rate of R2 to one pound (£). Me thinks maybe those parents got a pound when they were little terrorists.

If you hold cash, it won't be 'worth' as much in the future. This is a way of getting people to spend their money and keep the wheels turning. 'Financial Repression' is when the Government sets the price of money below inflation. This means that in reality, you are paying people to borrow money from you. The *REAL* interest rate is the *NOMINAL* interest rate (the number you see) less inflation. Money should cost something, but should doesn't pay the piper.

A *REAL* asset, is something that actually has a job. Real assets provide some protection against inflation. If you own a thing in the real world that does something, its price will tend to go up with inflation. That is what inflation means. Money buys less real stuff. So if you own real stuff, inflation has less of an effect.

My personal preference is to get my money a real job. I invest in Equity. Equity is a share of ownership in a real underlying business. By buying shares in 20-25 companies, I am getting my money 20-25 real jobs. If those businesses create value, then my money will grow. If they don't create value, my money won't grow. But it will be protected (somewhat) from the mood changes of Government.

A Productive Asset is something that grows in value because it generates something real. That something real can be sold for cash. The magic happens when that cash actually buys something else that is real rather than cash. If it is a factory, perhaps the cash is reinvested in a bigger factory. Maybe the factory is big enough already, and the cash gets a job in another Productive Asset. The key is that value is being created, and any cash generated is reinvested.

Reinvestment is the key to the real game. Money is just a way of keeping score.

South African Money