Things I Wish I Learned Sooner: How Money and Economics As We Know Them May Become Our Ruin
I will start by dropping some mind-blowing statistics and then make use of these numbers in just a minute.
- The US printed 23% of all dollar bills in circulation in 2020.
- 80% of all US cash has been printed in the last 22 months (as of March 2022).
- The nickel in US coins is now worth more than the coin itself.
This sounds scary, doesn’t it?
Let me elaborate on why this is important.
Money 101
Money is linked to trust and the belief that it has value.
Human energy and the value one creates through it is represented by the amount of money one receives for it.
In the past, it was commodities or other papers. Money is a medium of exchange because it is a good that one acquires only to exchange it later for other goods.
It allows us to trade, it allows us to develop the division of labor, which would not be possible at any sophisticated level without money.
So if we live in a small society of 10 people, think of all the things we can produce. There isn’t much value we can create to differentiate us and hold strong positions in trade.
If we are in contact with other societies that have more people, then the possibilities for specialization increase.
Each of us produces one tiny thing and they trade this thing for all the things they want.
When we specialize, we become more productive, because we make things we are good at. A market is just the name for the naturally occurring phenomenon of people voluntarily exchanging things, at any scale.
Capitalism and markets are not something that requires a central planner or a government official to make happen. Capitalism is exactly what happens when people are left to their own devices.
Our cognitive abilities allow us to develop the tools we need for
production. Making spears to hunt was the first capital good, so we constantly accumulate capital in these types of forms.
Money is what allows it to really scale up.
It allows the division of labor and allows the market system to grow.
Secondly, that money is a mechanism to store value in the future.
Money is our most advanced and best technology for transferring value into the future. We find things that are difficult to produce and better preserve their value for the future.
As globalization progressed, we had to act more clearly and effectively.
If you buy a national currency, like the USD for example, you are betting that the US economy will flourish in the future and you can trade with it.
What History Teaches Us
Most of the money is data on a computer.
The next logical step would be to make this data more effectively.
This would mean sending money faster, securely, from anywhere in the world, without the intermediary of banks.
Everything is invented and lent a value to create clear value.
We best take a look at the history of money and economies to understand how we might proceed with all this information at hand.
In the past, there has been a constantly changing world order between the leading economy and the emerging economy, both fighting for the economic superpower of the so-called reserve currency.
This refers to a currency that is universally accepted around the world and since 1945 the United States dollar has been the reserve currency.
When the system was first introduced, it served to keep the prices of capital goods such as oil and gas, as well as exchange rates stable, knowing that no matter what currency you had and held, its value was always pegged to that of the U.S. dollar.
Reserve currencies like this don’t last forever and a change takes place in a big cycle. This begins with the new world order, which last occurred in 1945 when the United States became the reserve currency after World War II.
Before that, this title was held by the British pound, which lasted 105 years after the French revolution, followed by the Netherlands, followed by Spain and Portugal and Venetian gold, and so on.
Isaac Newton himself pegged the value of the British pound to gold but with the First World War, the Bank of England ordered to confiscate all gold and replace it with papers.
The gold was sent to the USA to finance the war (war without a real goal).
Only one-third of the bonds were bought by investors because the general consensus of the population was that this war reaps no benefits for Britain whatsoever. The rest of the bonds were bought by high bank officials with credit from the bank itself.
You can’t have a permanent war without fiat money and no fiat money without war.
Under the gold standard, the government could not print gold and had a budget.
It had a certain amount of gold and you could not increase it infinitely.
So they couldn’t tax the population at will and it’s very difficult to take it from people; you knock on doors and search all the houses to see where they hide their gold, it’s very complicated.
On the other hand, if you gave them paper money, which was the case in 1914, you could just print their wealth through the money, and that changed everything when it comes to war.
That’s why the 20th century was the century of total war because, under the gold standard, governments fought until they didn’t have their own gold anymore.
Under the fiat standard with paper money and credit money, governments fought until they ran out of liquid wealth in the hands of their citizens.
With the understanding that reserve currencies do not last forever and change every 100 years or so to make way for a new world order, with the transition taking between 10 and 20 years.
This money regime can be replaced by something new at any time, as history shows.
An Outlook On The Future
The effect of all this is that it is now much harder for anyone to provide for their future anywhere in the world.
So how do I get the equivalent of the old gold coin that I can just put under my mattress and expect it to still be there in 10 years?
You can’t really beat the increase in value of the things you actually want to buy, like the price of good food, the price of good real estate.
Most investment professionals fail at that, so what hope does a doctor or an engineer or a scientist or an athlete have?
Investing is hard and saving should be easy, because saving is essential to us as a civilization, and the fiat system took that away from us.
It then forced everyone to become an investor or rather a gambler.
You want to make sure, you can still have it in 10 years, and you can only do that if you balance your job, free time and knowledge about monetary policy.
However, nowadays everything is so complex that you have to learn about the Japanese central bank and the commodity markets and what is going to happen with copper, oil, wars and foreign policies.
Going back to trading gold is not manageable because of this global complexity and so many factors influencing it.
The world has become too fast to safely transfer gold and control its authenticity.
We are currently facing unprecedented consequences because of our past economic decisions and will surely feel the impacts sooner or later. According to Ray Dalio, a new Reserve Currency will rise and a wealth transfer is going to occur.
We don’t know for certain how China, Russia, the US, War or Bitcoin play into this scenario but I sure hope, it won’t be too brutal.
Until then, start educating yourself and others, focus on the little but important things in your personal life and try to adapt to whatever may be coming.
I know this sounds all doomsday-scenario-ish but parts are already in motion and while this definitely won’t be the end of the world, we may see a longer recession in the upcoming years than anticipated.
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