IOW, if I owe $100K on my mortgage at 6% and have $100K in the bank, if the dollar falls to the point that the cost of lettuce rises to $1000 a head, I can’t buy a lot of lettuce, but I can still pay off my house. That gets me a 6% return over 30 odd years.

In the meantime, if the dollar does NOT fall to the point where lettuce costs $1000 a head (the more likely scenario), I have $100K in the bank earning 4.5%.

Its a little riskier if you DON’T have any debt to absorb the risk of saving dollars, but if you are in that position you are ahead of the game anyway, so I wouldn’t worry too much.

Also, if you have a huge cash reserve, and the dollar tanks to the point where its worthless, you likely have bigger problems on your hands such as wide spread civil unrest, martial law, etc.

Cash always carries the highest inflation risk (except for maybe some kinds of commodities) so FMF is right as far as that goes. And there’s some currency risk thanks to imports and exports. But cash doesn’t carry any principal risk–a $5 bill will always be nominally worth $5. So “riskiest investment” doesn’t really have any meaning until you define your terms. Investment and financial planning are interesting in part because there’s a need to balance different kinds of risk with different kinds of instruments; there is nothing that is low-risk or high-risk according to all definitions of risk. (And to think I despaired of time wasted in those graduate courses in microeconomics.)

Also, I need to re-read the article, but it made me realize the fundamental premise may be flawed. I recall the argument is that as the dollar drops, cash is de-valued. Yeah, but so are all other investments, right? So it’s not even a real argument. It’s a red herring or something. Lame.

Perhaps the post was saying that we are better off not saving a bunch of cash but instead investing our money elsewhere–putting it toward a business, real estate, etc., for example, since a dollar today is worth less than a dollar next year due to inflation.

Just a guess . . .

I do want to say though that there is absolutely risk to keeping your funds as cash rather than investing more aggressively. Inflation reducing your buying power is just as bad as losing money on a stock, either way you can’t buy as much stuff!

I have to try not to laugh when I recommend investments other than savings accounts to people at the bank and they say “the don’t want any risk.” Taking a .35% interest rate guarantees a loss in buying power! While cash has almost no risk of capital loss, what good is it to only maintain capital while your purchasing power is slowly eaten away?

Mike