What is money?
We all take money for granted and assume we understand it because we have used money to buy stuff all our lives.
If we don’t truly understand money, a problem occurs where we provide the people who do understand it tremendous power over us. That, of course, can be quite destructive.
In theory, money can be anything you imagine. The government could make shares of Facebook, Apple, Netflix and Google money if they chose to. Any commodity could also serve as money. The point is money allows for free trade between people. Historically, almost everything you could think of has acted as money and each form of money has its own unique problems.
Let me provide a very real example from America’s history.
Up until August 15, 1971 the United States was on a Gold standard.
The price of Gold was $35 an ounce. You could take $35 and go to a bank and exchange it for one ounce of gold. However, on August 15, 1971 President Richard Nixon addressed the nation and removed the dollar from being backed by Gold and ushered in the era of FIAT currencies which we have known for the last 49 years.
How did that all work out? We have a large enough sample now to observe some very important markers that once you see them you cannot ever “unsee” them.
On August 16, 1971 the Dow Jones Industrials closed at 888.95. It rallied over 32 points on the news of the U.S. dollar no longer being backed by Gold.
Today it is trading at 27,427.83. The gain in the Dow over the last 49 years has been 2,985%!
Sounds impressive doesn’t it?
But now I am going to tell you something that once you understand, you will never look at money the same way again.
Gold on August 16, 1971 was trading at $35 an ounce. Today it is trading $1900.
The gain in Gold has been 5,429%. Gold outperformed the Dow Jones Industrials Average by 82%.
When you first hear that you’ll think I am just a ‘gold bug,’ and you will be mistaken. Most people never notice the toxic chicanery and the economic sleight of hand that occurred when we adopted a fiat standard.
If in August 1971 you invested $10,000 in Gold it would have a market value today of $540,000.
If on the other hand you invested $10,000 in the Dow Jones Industrials Average it would have a market value of $298,000 thousand.
While this difference is staggering, the point is that up until August 15, 1971 Gold and Money were synonymous. They were not separate asset classes. The first economic observation you can make is that the Dow Jones Industrials Average, which is an Index of the best-performing companies in the United States, has massively underperformed what standard money used to be over the last 49 years. The greatest bull market in stocks has occurred when you price stocks in FIAT. However, when you price stocks in GOLD it is not a BULL market at all. In other words, there has been a whole lot of currency debasement going on!
Let’s ignore the talking heads on TV who fear Gold is a “dead asset” that pays no interest. The data shows in the post-gold-standard world, it’s a far better store of value than equities.
For whatever reason, the mainstream media, the government, the investment banks, and even many Americans, appear to have a hard time accepting this. But the numbers don’t lie. From the time President Nixon took us off the Gold Standard on August 15, 1971, when you price the Dow Jones Industrial Average it looks more like a sideways market with a downward bias.
Please note, this is not comparing The Stock Market to Gold. Instead, recognize that MONEY (which was GOLD), has massively outperformed the best performing stocks in America.
Let’s do a similar calculation with pre-1964 U.S. coinage.
In 1960, a simple loaf of bread cost twenty cents (two dimes).
Today, that same loaf of bread costs almost $3.90.
That is a 1850% increase in price. But now take those exact same two pre-1964 dimes and you’ll notice that because each dime was made of 90% Silver that it has an intrinsic value of $1.97 based upon current Silver prices and the melt value of the coins.
The two dimes would be worth $3.94 and would still allow you to purchase the same loaf of bread with the same coinage and get change back! Once again, the FIAT observed an 1850% increase in prices while the asset-backed currency maintained its purchasing power.
Price is merely a ratio of exchange. Price communicates you will get this amount of an item for this amount of currency. If you price an item in fiat currency that is being devalued every year and possesses no intrinsic value, you and every economist in the world will see a massive loss of wealth and purchasing power. The task at hand is to price all goods and services in terms of other assets that possess intrinsic value to really understand what is causing the price to change.
But here is what economists who believe in the power of Central Planning and Fiat Currencies always overlook and refuse to confront- Those same $10,000 that you could have invested in stocks or Gold, to keep pace with inflation, and maintain its purchasing power over the last 49 years it would have to be worth $64,000 today. If you took that $10,000 of paper currency and buried in a coffee can in your back yard it would have lost over 85% of its purchasing power!
What used to be money, still maintains its purchasing power better than equities and FIAT.
Within these examples lies everything you need to know about Fiat currencies and the source of wealth inequality in a society. Fiat money is literally like an “ice cube” on your personal balance sheet. It melts and evaporates very quickly. The financially literate know this and do not store any of their wealth in fiat. However, the poor and financially illiterate are not aware of this and define “normal” as the prices of everything consistently going up, never recognizing that currency is being debased.
Up until August 15, 1971, money was a good store of value because every dollar could be redeemed for gold. But as the French Philosopher, Voltaire proclaimed 300 years ago, “all paper money eventually returns to its intrinsic value: zero.”
United States $20 Gold Certificate
Realize there have been thousands of instances of paper currencies failing. Over the past century there have been 55 episodes of fiat currencies failing. This is a huge percentage when you consider that the World Bank only has 187 developing countries that it monitors.
Consider the following:
Every fiat currency in the world has the same identical structure:
- They are backed by a government
- They are not pegged to any commodity of value
- Their currencies are all slowly debased by inflation
- The average lifespan of a fiat currency is about 50 to 75 years
- The rate of debasement is set and established by a group of monetary authorities and experts who we are required to trust will manage the value of the currency effectively
When citizens are confronted by this reality, wealthy ones immediately treat fiat currency like a hot potato. They use it to acquire other assets to store their wealth in. Things like real estate, stocks, precious metals, collectibles, art, numismatics, etc. become money magnets to avoid the slow destruction that all fiat currencies eventually face.
However, the financially illiterate, unaware of the dangers associated with fiat currency, leave their wealth in cash only to see it evaporate like an ice cube on a hot summer’s day by the monetary experts. This debasement is not an act of God, it’s not merchants raising their prices haphazardly, it’s not speculators betting on a lower currency value.
It is policy.
Just a few weeks back Fed Chairman, Jerome Powell made the following statement:
“Many consider it counterintuitive that the Fed would want to push up inflation. However, inflation that is persistently too low can pose serious risks to the economy.”
When a nation’s top central banker tells you they have to increase the amount of debasement of the currency that needs to occur, it’s probably a pretty good idea to pay attention.
While the purpose here isn’t to promote fear, there are very consistent and predictable patterns which have occurred in all hyperinflations. You can look at them like a controlled demolition that has lost control.
First, government spending gets out of control where 40% of the nation’s deficit is used to pay interest on the existing debt, and spending as a percentage of GDP is over 80%. The United States has been here since 2012.
Second, The Central Bank of the country is forced to purchase up the government debt as other bidders stop purchasing the countries debt obligations. The United States did this in April of 2020. Interest rates are so low on U.S. Debt that our Central Bank is the only entity purchasing Bonds at government auctions. Would you invest in a Ten-Year Bond yielding .6% when the Chairman of the Federal Reserve is telling you that they are going to target a 2% inflation rate?
Let’s be clear, the U.S. Dollar is the Reserve Currency of the world. If the dollar fails, so will every other nation. But hope is not a strategy. When the Chairman of the Fed tells you debasement will accelerate, it’s important to understand what that means in terms of whatever wealth accumulation plans you have.
Third, in all instances of hyperinflations when a sovereign currency loses 20% of its value in relation to other sovereign currencies within a period of a month this is where the public stops using that currency and a quick evaporation of value occurs. For example, the Venezuelan Bolivar has been in a free fall for 8 years. However, in May of 2013 it lost over 20% of its value against the U.S. Dollar in one month. From that point forward, confidence in using the Bolivar has completely failed.
Lastly, employee wages become indexed to something more stable like gold or a foreign currency and employees in a worst-case scenario request payment on a daily basis.
I share these horrific realities with you because they are all a far cry for the Federal Reserves projected inflation rate of 2% in the United States. What skeptics of the Federal Reserve believe is that playing with inflation is like playing with fire. The damage can be irreparable and when confidence is lost in the currency, it’s literally game over.
Here are a handful of the most notable hyperinflations which have occurred in the last century. Please note they all started with a printing press that the government thought they could control.
Hungary: August 1945 – July 1946
Daily inflation rate: 207 percent
Prices doubled every: 15 hours
Zimbabwe: March 2007 – November 2008
Daily inflation rate: 98 percent
Prices doubled every: 25 hours
Yugoslavia/Republika Srpska: April 1992 – January 1994
Daily inflation rate: 65 percent
Prices doubled every: 34 hours
Weimar Germany: August 1922 – December 1923
Daily inflation rate: 21 percent
Prices doubled every: 3 days, 17 hours
Peru: July 1990 – August 1990
Daily inflation rate: 5 percent
Prices doubled every: 13 days, 2 hours
Nicaragua: June 1986 – March 1991
Daily inflation rate: 4 percent
Prices doubled every: 16 days, 10 hours
Venezuela: January 2013 to Present
In 2013, Venezuela entered hyperinflation. The inflation rate reached 274% in 2016, 863% in 2017, 130,060% in 2018 and 9,586% in 2019. Since 2016, the overall inflation rate has increased to 53,798,500%.
Every transaction that has ever occurred attempts to drive home the definition that price is merely a ratio of exchange between two items. What every hyperinflation demonstrates is that value evaporates when you measure the value of an asset with a currency that is being debased. These debasements can take centuries in some instances. The 1913 dollar for instance has lost almost 99% of its purchasing power.
The best plan for traders moving forward is first to be aware of the dangers entailed in holding fiat currencies when debasement is announced.
When President Richard Nixon removed the U.S. dollar from gold convertibility on August 15, 1971 the age of international FIAT was ushered in. He sounded very confident and self-assured in his announcement.
The results speak for themselves.
A loaf of bread costs 1,850% more than it did in 1960. Why? Currency debasement.
The answer for traders is to recognize that inflation forces all market participants into a shorter and shorter investment horizons with whatever economic decisions they make.
What has proven to be the greatest store of value over the last decade?
Bitcoin, Gold, and High Tech Stocks.
The volatility we have witnessed so far in 2020 has devastated most retirees, savers and investors. Following conventional advice is likely a recipe for negative returns. The average person has seen their nest egg decimated as financial wealth evaporates. But Power Traders focusing only on short term trends in the FAANG stocks have done amazingly well.
That’s why you have to decide—right now—how you’re going to play your cards.
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This is the power of artificial intelligence in action.
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Whether you are applying it to a broad market index like the S&P 500 Index and the Dow Jones Industrials or to an Individual FAANG stock or Gold or Bitcoin.
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We live in very exciting times.
Consider that the recent stock market implosion has erased trillions of dollars from cumulatively from people trading accounts. However, it has made a handful of traders fabulously wealthy.
Debates will continue for hundreds of years as to why the recent implosions occurred. However, the only thing a great trader is concerned with is PRICE.
Stories are designed to capture the imagination. Traders need to focus on the probabilities of making the right move at the right time
Currency debasement is no longer a theoretical argument. It is a transparent government policy. Position yourself accordingly.
Remember, artificial intelligence has decimated humans at Poker, Jeopardy, Go! and Chess. Why should trading be any different?
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Think about these things as you Scrutinize Money.
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Make it count.