There are five types or levels of investors found in the I quadrant.
Level 1: The Zero-Financial-Intelligence Level:
Sadly, in America, once the richest country in the world, over 50
percent of the U.S. population is at the bottom level of the I quadrant.
Simply said, they have nothing to invest.
There are many people who make a lot of money who fall into this
category. They earn a lot—and spend more than they earn.
I have a friend who looks very rich. He has a good job as a real
estate broker, a beautiful wife, and three kids in private school. They
live in a beautiful house overlooking the Pacific Ocean in San Diego.
He and his wife drive expensive European cars. When his son and
daughters were old enough, they too drove expensive cars. They looked
rich, but what they had was bad debt. They looked rich, but were
poorer than most poor people.
Now, they are homeless. When the real estate market crashed, they
crashed. They were no longer able to pay the interest on all the debt
they had accumulated.
When we were younger, this same friend made a lot of money.
Unfortunately, it was his low financial-intelligence level—zero—that
caused him be a zero over the long run. In fact, he is so deeply in debt
that he is really a sub-zero investor.
Like many people, everything he buys loses value or costs him
money. Nothing he buys makes him richer.
Level 2: The Savers-Are-Losers Level:
Many people believe it is smart to save money. The problem is that
today, “money” is no longer money. Today, people are saving counterfeit
dollars, money that can be created at the speed of light.
In 1971 President Nixon took the U.S. dollar off the gold standard,
and money became debt. The primary reason why prices have risen
since 1971 is simply because the United States now has the power to
print money to pay its bills.
Today, savers are the biggest losers. Since 1971, the U.S. dollar has
lost 95 percent of its value when compared to gold. It will not take
another 40 years to lose its remaining 5 percent.
Remember, in 1971, gold was $35 an ounce. Forty years later, gold
was $1,400 an ounce. That is a massive loss of purchasing power for
the dollar. The problem grows worse as the U.S. national debt escalates
into the trillions of dollars and the U.S. continues to print more
“counterfeit” money.
As the Federal Reserve Bank and central banks throughout the
world print trillions of dollars at high speed, every printed dollar means
higher taxes and more inflation. In spite of this fact, millions of people
continue to believe saving money is smart. It used to be smart when
money was money.
The biggest market in the world is the bond market. “Bond” is
another word for “savings.” There are many different types of bonds
for different types of savers. There are U.S. Treasury bonds, corporate
bonds, municipal bonds, and junk bonds.
For years, it was assumed that U.S. government bonds and
government municipal bonds were safe. Then the financial crisis of
2007 began. As many of you know, the crisis was caused by mortgage
bonds such as mortgage-backed securities or MBS, also known as
derivatives. Millions of these mortgage bonds were made up of
subprime mortgages, which were loans to subprime or high-risk
borrowers. You may recall that some of those borrowers had no income
and no job. Yet, they were buying homes they could never pay for.
The Wall Street bankers took these subprime loans and packaged
them into bonds, magically got this subprime bond labeled as prime,
and sold them to institutions, banks, governments, and individual
investors. To me, this is fraud. But that is the banking system.
Once the subprime borrower could no longer pay the interest on
their mortgages, these MBS bonds began blowing up all over the world.
Interestingly, it was Warren Buffett’s firm, Moody’s, that blessed these
subprime mortgages as AAA prime debt, the highest rating for bonds.
Today, many people blame the big banks, such as Goldman Sachs
and J. P. Morgan, for the crisis. Yet if anyone should be blamed for
this crisis, it should be Warren Buffet. He is a smart man, and he knew
what he was doing. Moody’s was blessing rotting dog meat as Grade A
prime beef. That is criminal.
The problem is that these subprime bonds are now causing ripple
effects all over the world. Today, countries such as Ireland and Greece
are in serious trouble, unable to pay the interest on their bonds. In the
United States, governments and municipalities are going broke, unable
to pay the interest on their bonds.
In 2011, millions of individuals, many retirees, pension funds,
governments, and banks are in trouble as the bond market proves
how unsafe bonds can be.
On top of that, rising inflation makes bonds an even riskier
investment, which is why savers who only know how to save are losers.
For example, if a bond is paying 3 percent interest and inflation is
running at 5 percent, the value of a 3 percent bond crashes, wiping
out investors’ value.
China could be the biggest loser of all. China holds a trillion
dollars in U.S. bonds. Every time the U.S. government devalues the
dollar by printing more money and issuing more bonds, the value
of China’s trillion-dollar investment in the United States goes down.
If China stops buying U.S. government bonds, the world economy
will stop and crash.
Millions of retirees are just like China. Retirees in need of a steady
income after retirement believed government bonds were safe. Today,
as governments, big and small, go bust and inflation rises, retirees are
finding out that savers who saved money in bonds are losers.
Municipal bonds are IOUs issued by states, cities, hospitals,
schools, and other public institutions. One advantage of municipal
bonds is that many are tax-free income. The problem is that municipal
bonds are not risk-free.
Millions of municipal-bond investors are now finding out that the
municipal bonds they invested in are in serious trouble. In the United
States, more than $3 trillion is invested in municipal bonds. It is
estimated that two thirds of those bonds are now at risk because these
public institutions are broke. If more money is not pumped in, the
United States could implode from the center as states, cities, hospitals,
and schools begin to default, just as subprime homeowners defaulted
and stopped paying on their home mortgages.
The bond market is the biggest market in the world, bigger than the
stock market or the real estate market. The main reason it is the biggest
is because most people are savers—Level-2 investors. Unfortunately,
after 1971 when the rules of money changed, savers became the biggest
losers, even if they saved money by investing in bonds.
Remember that savers, bondholders, and most people who save
money in a retirement plan, are people who park their money, investing
for the long term, while professional investors move their money.
Professional investors invest their money in an asset, get their money
back without selling the asset, and move their money on to buy more
assets. That is why savers who park their money are the biggest losers.
source: CASHFLOW-Quadrant BOOK