January 23, 2022

The value of hard money

It is difficult for the human mind to conceive that a devastating hurricane in the city of Boca Raton, Florida could be caused by a butterfly that has beenpreviously flapped its wings in Buenos Aires, Argentina. We find it difficult to understand how tiny and seemingly insignificant changes in large systems can have complex and disastrous consequences. This is called the butterfly effect.


What if I told you that small changes inour definition of money and how we allow banks to work, and were such tiny butterflies that played a huge role in the chaotic situation in which we find ourselves today ...?

... and what if we compare several small - butVERY important - facts, it can be seen that property inequality as we know it was created almost purposefully and that the lack of connection between the health of the economy and the strength of the stock market is quite logical?

"It is good that the people do not understand the banking and monetary system, otherwise a revolution would have taken place even before tomorrow morning."

- Henry Ford

If Henry Ford lived today, he would undoubtedly be on a par with Jeff Bezos, Mark Zuckerberg, Elon Musk, Bill Gates and the like.

Ford's active use of the assemblythe conveyor belt had an incredible impact on the efficiency of automotive production - where it used to take 12 hours, 1.5 hours was now enough. The introduction of a new method of manufacturing cars, which was about 8 times faster than the previous one, not only stimulated the rest of the auto industry to adapt, but manufacturers of ALL tangible goods followed suit.

We are also indebted to Ford for a 40-hour workweek, because in the 19th century, production workers could work 100 hours a week. Ford was convinced that everyone needs more than one day off and a perfect home life. However, it also led to cost savings and improved capital efficiency, as shorter working hours increased productivity.

Ford clearly saw things differently from the rest of the big businessmen of his day. He was a true iconoclast - a man who always questioned conventional ways of doing things.

As in the case of Elon Musk, critics thought Ford was crazy and would face bankruptcy. That is, he was also, as they say, pressed against the wall.

But now — more than a century later — we regard Ford as one of the most revolutionary — and rational — business leaders of all time.

: thehenryford.org

"Thinking is the hardest work, and perhaps that is why only a few people do it."

These two quotes led me to believe that if Ford lived these days, he would be a bitcoiner. My thesis is as follows:

Henry Ford was certainly right aboutthe efficiency of the conveyor and the fact that the average production worker works too much. A hundred years later, this is irrefutable. However, at the time he introduced these changes, there was a lot of skepticism around him. If we also take into account that he believed that: 1) thinking is the most difficult work and 2) if the people understand how the banking and monetary system works, then a revolution will take place, we can come to the conclusion that he understood something and, if I lived today, I would be an active supporter of a technology like Bitcoin. The only pity is that he was not also a specialist in finance and had no more influence in this industry, given how meaningless everything is here today.

Value or growth: the old approach to investing

In the old world, there were two main types of investors.

Value investors like Warren Buffett and Benjamin Graham made money by determining their own value by first assessing the fundamentals - internal and external:

  • Key metrics such as leverage, return on equity, price / earnings ratios and price / book value and free cash flow.
  • Strengths and weaknesses of top managers.
  • Health and the direction of macroeconomics.

Value investors looked at old companies that were time tested and paid dividends to their shareholders.

If, as a result of their analysis, they came tothe conclusion that the price of the company's shares is lower than their calculated own value, then they bought them and held them until the market correction. Conversely, they stayed away from overvalued stocks.

Growth investors, on the other hand, were looking for companies withupside potential, even if they are overbought by the market. Most of these companies are small, so it took a lot of research to find a good investment opportunity. These growing companies prefer to reinvest their proceeds in the business rather than paying dividends. And since these are small companies, a flood of bad news can mean death for them - as was the case with the dot-com bubble in the late 1990s. Hence, the growth investor must be risk averse.

It is difficult to find an investor who is committed to any one category - investing in value or growth - because everything we once knew about the markets has been turned upside down.

It's worth asking yourself:

Do value investors really believe that the net worth of S&P 500 companies has increased 45% over the past 8 months?

Do growth investors really think this period of lockdowns and uncertainty is the best time to put their trust in small, fragile companies with no government aid?

If you were present during the conversation forBy eating a dinner of a value investor like Warren Buffett and a business angel like Naval Ravikant ten years ago, you would find a stark contrast between their investment theses. Both recognized the banking sector's ability to operate the system (that is, pay low interest rates on savings accounts and lend with the same money at high interest rates). But the difference between the two was that Buffett was betting on it, while Ravikant saw an alternative.

If you dine with them today, historywill be completely different. Both Buffett and Ravicant acknowledge how fragile the banking system is. However, Buffett sold many of his old stocks and bought gold, and Naval became a big supporter of Bitcoin.

Two bright minds, seeing the same problems as Henry Ford (banking and monetary systems), came up with two different - and at the same time, awkwardly similar - solutions.

How did we get to this point?

I will answer: We do not know what money is.

What is money?

: Unsplash

First of all, money is not a creation.governments, but a belief system. They arise in any trading society as the most salable commodity - something that everyone is ready to accept in order to get closer to their ultimate goal.

For example, I’m fine if I’m paid a Tesla Model Y for a year, but I’ll still prefer $ 50,000 in cash.

Therefore, the task of money, like any othera tool on the planet - saving us time, just like cars, trains and airplanes do, allowing us to travel long distances faster than on foot.

However, not all money is created equal.

The most "hard" money that we prefer to use in the exchange of goods and services has three properties:

1. A store of value. This property is the most important.A store of value implies the ability to store value in the future. In short, when we work, we agree to trade our limited time (through labor) for something we know will be valuable in the future. That is why, other things being equal, we would prefer to receive payment in something non-perishable and rare (like gold).

2. Medium of exchange. The next most important property of money is itsthe ability to facilitate the exchange of goods and services. By itself, this property is useless. For example, it is easy to exchange pieces of paper, but they are also easy to produce and counterfeit. However, the most common means of exchange today are fiat currencies like the US dollar, euro, or Chinese yuan. It is much easier to exchange light bills than heavy gold bars. Therefore, paper dollars appeared - to represent a certain amount of gold, for which they could initially be exchanged.

3. Unit of account. Finally, when (and only when) did the money reachmass use and have become the most popular medium of exchange, they can become a unit of account. So instead of saying a new iPhone costs 4 goats, 500 chickens, or 1/4 of a used 2009 Honda Civic, we can simply say it costs $ 750. Once money has become a store of value and exchange, one can start talking about dividing it into smaller units (such as cents) or aggregating them into larger units (such as a hundred dollar bills).

Before money was invented, we relied on barter. An example of barter is the exchange of five chickens for one goat, which is highly ineffective.

Therefore, three thousand years ago, the Chinese tried to use shells as money - it was a commodity that they purchased WITHOUT intending to consume it.

: Wikipedia

Cowrie shells were used as money in African and Asian countries along the Indian Ocean coastline.

However, the problem with shells was that there are many of them.That is, they were not rare and could depreciate in the blink of an eye. In fact, shell fever was common. For those who kept their wealth in shells, it meant watching how for the savings that you have been saving all your life, it suddenly became possible to buy only one lunch. Moreover, shells can very easily shatter into sand.

After several more centuries of trial and error with other forms of money such as salt and copper, we eventually stumbled upon gold.

Why gold?

: Unsplash

We came to gold and reached around itgeneral consensus, because it is the rarest monetary metal known to man. Besides being rare, it is also expensive to obtain. Consequently, gold holders need not fear any supply shock in the future that would devalue their wealth. Gold supply has historically grown by only 1-2% per year.

Also, unlike oil, cotton or salt, gold cannot be “used up”. Once it has been mined from the ground, it will not go anywhere - no matter how hard you try.

Also, gold is the most recognizable and durable of all monetary metals. It shines beautifully AND does not corrode.

Moreover, central banks hold tons of gold.They stock up on it because they understand how valuable it is as insurance that has no counterparty risks. When the economy goes bad, gold usually rises in value. Therefore, it is called a “safe haven” asset.

Finally, gold has been used as money since 700 BC. NS. If it has been valued for 3,000 years, then do we have the right to believe that it will not be appreciated for another 3,000 years?

History of the gold standard

Since 1879, the United States has largely adhered to the gold standard. The dollar was 100% convertible to gold, so one could go to the bank and exchange an ounce of gold for $ 20.67 (or vice versa).

However, about every 10 years, there was a seriousrecession. Therefore, in 1913, the United States created the Federal Reserve System (FRS) to smooth out the economy when the threat of hyperinflation or recession arises. In essence, the dollar was made backed by gold, not 100%, but 40%, which made it possible to stabilize the monetary and financial system.

In 1933 g.During the Great Depression, virtually everyone tried to exchange their paper money for gold. This posed a problem because the banks did not have enough gold to meet the demands of depositors.

President Roosevelt - unwilling to admit it -decided to confiscate gold from the population under the pretext that stockpiling it slows down the economy. By forcing everyone to exchange their gold at $ 20.67 an ounce, Presidential Executive Order 6102 officially ended the US gold standard.

It was nevertheless convenient for America, as it allowed its central bank to print unlimited cash to meet needs during World War II.

Interesting to read: Bitcoin as the new gold standard for millennials

Bretton Woods Agreement

Participants of the Bretton Woods Conference. : gerchikco.com

In 1944 g.At the end of the war, representatives from 44 countries met in Bretton Woods, New Hampshire, and raised concerns about the financial system. Some leaders were worried about the stubbornness of the gold standard, while others were concerned that countries would devalue their fiat currencies in order to boost exports.

Since the United States owned 2/3 of the world's goldreserves, the remaining 43 countries agreed to peg their currencies to the dollar. The dollar, in turn, was pegged to gold. This was the Bretton Woods agreement.

However, the agreement did not last long. In 1971, the US budget deficit widened so much that President Nixon decided to abolish the convertibility of dollars into gold.

That is, for about 50 years we have deviated more and more from gold-backed money - the official cancellation of the Bretton Woods agreement was only the last nail in the coffin.

The consequences of giving up gold

For centuries it has been said that an ounce of gold can buy a decent suit. A hundred years ago, a decent suit cost just over $ 20 and an ounce of gold was $ 20.67.

: Medium

Today an ounce of gold is worth roughly $ 1,700. And the men's suit ... about the same.

Screenshot of an online store with men's suits. : Medium

That is, the dollar is worth 98.7% LESS than in 1920. A reliable store of value, you can't say anything.

The ratio of the US national debt to GDP exceeded the level of the Second World War ...

The consequences of the coronavirus pandemic will be stronger than the crisis from the Second World War. : voxeu.org

Income inequality has increased dramatically ...

The moment Richard Nixon canceled the gold standard peg. : Zero Hedge

You involuntarily ask yourself: this is how it should be, or is there something wrong with our current monetary system?

Finally, I would like to refute the myth that"Stocks only go up." If we measure the stock market in terms of rare money that has been used for the last 3000 years, and not in those that are not rare and have been used in this capacity for only about 50 years, we get the following:

S&P 500 index, measured in gold (per ounce). : Lin Alden

... in contrast:

S&P 500 index, measured in US dollars. : Lin Alden

Obviously, with this estimate, the income of the richest 1% - those who benefit from inequality in wealth - will return to the level of a hard monetary standard.

Banking system: pyramid

Since 1971the American dollar is backed exclusively by "complete trust and respect" for the American government. That is, no one else can exchange their dollars for gold - you just need to trust that the banks will be able to return your money to you.

When I say that the banking and monetary system is a pyramid, I am not exaggerating. I really think so. In all senses.

According to the US Securities and Exchange Commission, a pyramid scheme is an investment scam where contributions from new entrants are commonly used to pay old ones for recruiting those new ones.

The pyramids have a tiered structure with new entrants at the bottom and those at the top receive most of the money.

The only difference between this and the banking system is that the latter is legal.

Let me explain:

Banks accept your deposits and lend to others at their expense. Those who take out loans with your money must pay interest on them.

Thus, fractional banking leads to a situation where two people own the same thing - which clearly violates ownership.

However, banks cannot simply lend out all of theirdeposits. In the unlikely event that all of the bank's depositors want to withdraw their cash at the same time, there are back-up requirements to accommodate requests and prevent a run-in to the bank.

Thus, historically, the amount that banks could lend was limited by so-called reserve requirements.

Recently, reserve requirements have ranged from 8% to 14% of liabilities.

Let's say you received $ 1000 from your grandmother.You decide to put them in the bank. If the bank's reserve requirement is 10%, that means it will hold $ 100, and the remaining $ 900 will lend to accredited investors willing to pay the top bank - not you - the highest interest. The bank can take 10% of these loans. In return, you - downstairs - will be paid by the bank on your savings account a measly 0.5%.

This is the pyramid. And by the way, in 2020 the reserve requirements dropped to 0%!

Until ZERO!

Monetary system: property infringer

: Politico

Over the past year, all of us have met memes on social networks.about the "money printer". It's good that this time around, the monetary stimulus went straight into the hands of the Americans. Because historically they only made the rich richer and the poor even poorer.

It is called The "Cantillon effect".

According to the Cantillon effect, the income of those whogets the newly created money first grows, while the purchasing power of those who get it last falls due to consumer price inflation.

That is, printing money leads to an increase in asset prices.(for example, stocks, bonds, real estate, etc.). These assets are owned by the rich, not the poor. The poor, on the other hand, keep mostly cash, not assets. Before the money reaches the poor, they watch food and gas prices rise while their incomes stay the same. Now they can afford LESS than before.

Monetary stimulus is also a hidden violation of property rights, as it diminishes your piece of the wealth pie.

Imagine that you own 5% of all Americandollars in circulation, when suddenly the Fed decides to double the supply of dollars, and the US government decides to spend the new money ineffectively (as usual). Now you have the same amount of dollars, but your share in the total supply of dollars has decreased to 2.5%.

It's like you own a five-room house, but every 8-10 years one room is destroyed.

Real robbery.

American debt crisis

: Unsplash

If the entire US national debt is evenly divided among the taxpayers of the country, then each will owe $ 190,000.


As the population ages and social welfare spending rises, this dizzying figure is set to rise as well.

Prior to the cancellation of the Bretton Woods Agreement, the United States hadstrong and balanced budget. There was a time when the United States produced more than it consumed. But the baby boomers and the "quiet generation" (born 1928-44) abused it.

“Spending less than you earn” is the foundation of personal finance ...

But this rule only applies to individuals and small businesses. Large corporations are routinely supported by government.

However, all this does not change the fact that sooner or later we NEED to face this problem face to face - we will not be able to postpone it forever.

With a debt to GDP ratio of 130%, we have three options:

1. HARD ECONOMY. This is when government spending decreases and taxes go up. In the short term, this will lead to an increase in unemployment. However, in my opinion, it is very unlikely that we will go this way.

2. HARD DEFAULT. This is when the government refuses to pay its debts. This will wreak havoc in a global economy dependent on the US dollar. In my opinion, this is also unlikely.

3. SOFT DEFAULT. This is when the government will pay its owndebts, devaluing their currency and therefore devaluing their debts in real terms. In other words, it will start the printer to solve its problems. While on the one hand it would make his debt cheaper, on the other hand it would be a blow to the face of everyone who kept their wealth in cash, government bonds, and deposits.

The most likely path we will take, which most experts agree with, is a “soft default”. This means the following:

Money will become much cheaper than it is now.Citibank considered it very likely that the US dollar would collapse by 20% in 2021, due to the rapid growth in the speed of circulation of money thanks to massive vaccinations and economic recovery.

In a world plagued with oversupply, it is best to bet on rare assets like gold, silver, and bitcoin.

Gold is the rarest asset we know ofexisting in the world. However, we do not know how rare it is. For example, NASA recently discovered an asteroid that contains metal worth 10,000 times the size of the entire global economy in 2019. In addition, Russia recently opened the world's largest gold mine in Siberia.

That is, gold is the rarest that we know on planet Earth. However, it is not guaranteed to be rare. Do you know what it is?


: Unsplash

Until now, I haven't said a word about Bitcoin. However, it is most directly related to all this, as it prevents abuse.

Yes, it is a complex, slow and cumbersome technology.

However, it is of course rare and has provablylimited supply - which was unfamiliar to humanity until 2009. Nothing - except for a successful 51% attack, which no one has managed to carry out so far - can change that. Such an attack is highly unlikely since Bitcoin is a worldwide decentralized network. And it becomes even less likely as adoption (and therefore decentralization) rises.

In addition, Bitcoin prevents all outrages,described above. That is, he represents the transfer of power from the elderly in wigs, the 1% of the richest and largest corporations to the common people. And it is better than gold in every way, except for two aspects: 1) market capitalization and 2) age. This is nicely summarized in the following Bitcoin vs Gold comparison by Tyler Winklevoss:

Bitcoin Gold
Rarity Fixed Rare
Durability Program Material
Portability Can be sent anywhere over the internet, just like email 25 pounds per bar
Divisibility 0.00000001 bitcoin Ounce
Storage Digital wallet Safe or vault
Complexity of counterfeiting Overly expensive, hasn't happened yet Difficult but possible
Adoption Market cap $ 1 trillion Market cap $ 9 trillion

By the way, if these assets are swapped in terms of market capitalization, one bitcoin will be worth $ 500,000 ...

"History repeats itself twice: first as a tragedy, then as a farce"

I don’t know who said that. But Henry Ford gave us an honest warning a hundred years ago:

Once in the not so distant future everyoneThe "awakened" American realizes how corrupt our banking and monetary systems are. And when the people find out how much they are being infringed upon, a revolution will take place even before the next morning.

Bitcoin revolution.

Facebook Notice for EU! You need to login to view and post FB Comments!