Is It Possible To Have Too Much Money
The monetary policy works by the management of monetary supply to modify the price of asking for a money loan, which is the interest rate. The key for making the monetary policy work is found in the fact that the demand of money depends on the interest rate.
Imagine that someone gives you $1 million and that you have the freedom to do whatever you want with that money. All right, so let’s suppose that you are the saving type of person and that you decide you want to save up every last cent of that money, for at least a year, because you think that this will give you enough time to find a better way of spending it.
The question here is: is it really smart to save up all your money in cash?
Well, my friends, we tell you what, it is indeed NOT the best way to save up money.
Keeping money saved up this way is in fact these days, one of the worst ways of saving money. Why? First of all, money does not produce any interest. Even if you place the money in a checking account, you would only be getting a small interest rate for it. An interest rate of only one percent out of $1 million is $10,000. So why sacrifice them? Even more so, if you use the cash to buy government bonds, you can obtain a five or six percent. This means $50,000 or $60,000 more than you would get then if kept the money in cash.
Obviously the higher the interest rate you can obtain over other assets, the higher is the incentive to turn your money into other assets. In fact, the only thing that can avoid people from turning all their money and wealth into other assets and not having to deal with cash ever is that money allows them to buy things. Besides working that way, money is not any better than any other asset; as a matter a fact, it is worse in terms of interest return rates because the return rate on cash is always zero.
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