By JP Cortez
Financially prudent individuals set aside surplus funds to protect against unforeseen expenditures. This way, when faced with loss of income, house repairs, car trouble, or anything else, they will have a buffer against unanticipated downturns.
In the same vein, almost every state in the United States has established a “savings account” for government operations. Primarily to mitigate a decline in tax revenues that comes alongside economic slumps, states have created so-called budget stabilization funds – colloquially known as “rainy day funds.”
Every state takes a different approach to budget stabilization funds, from the mechanisms by which they are funded, to the caps placed on balances, to the manner in which the funds can be allocated. If a state can put funds aside during years of increased revenue and growth, said state will be better equipped to handle a decrease in tax revenue, an environmental incident, or some other surprise.
But simply plowing rainy day funds into Federal Reserve Notes (commonly referred to as “dollars”) or other paper instruments is taking an entirely new gamble – inflation.
It is unwise to store large amounts of cash for extended periods of time because of constant and intentional devaluation of the Federal Reserve Note. This tax on savings is known as inflation. It works on both the micro and the macro level. For the same reason an individual would be remiss to hold his or her entire life savings in cash for the duration of his or her entire life, a state would be remiss to hold large amounts of cash for extended periods of time.
One Tennessee lawmaker named Representative Bud Hulsey (R-Kingsport) understands the risk involved in long term storage of Federal Reserve Notes, and he has proposed to do something about it by introducing House Bill 0777. House Bill 0777 is a measure that calls for the treasurer to invest at least 40% of the reserve for revenue fluctuations in gold bullion or other precious metals bullion.
The Tennessee Department of Treasury’s stated mission is “to enrich the lives of Tennesseans as a national leader in public financial stewardship.” To hold only Federal Reserve Note instruments as financial insurance, particularly over long term periods of time, is both irresponsible and inherently at odds with Tennessee’s mission statement.
Unfortunately, most state governments, pension funds, and individual investors remain vulnerable to inflation risk.
Conservative investors who are concerned with preserving capital are typically drawn to things like U.S. Treasury bills. They exhibit low volatility on a day to day basis – even as their low yields will almost certainly fail to keep up with inflation over time. Losing money gradually is still no way to preserve capital.
Any individual or organization that has the long-term objective of maintaining the purchasing power of its holdings must include gold and silver in its asset mix. It’s true that precious metals spot prices won’t necessarily hold steady over any given near-term period. But the longer the time horizon, the more reliably gold and silver will keep pace with inflation. The longer the time horizon, the riskier holding onto dollar-based IOUs becomes.
It may be easy to predict what the value of the dollar will be next week. But in 20, 50, or 100 years? There’s no telling. The only truly safe bet over a multi-decade period is hard money in the form of precious metals.
from Gold Silver Worlds http://goldsilverworlds.com/gold-silver-experts/time-hedge-state-reserve-funds-gold/