An explanation of why society is itching for money but producing less value.
Something is wrong. We can all feel it, consciously or subconsciously. There is great unrest, insecurity, and strife. Things are getting more expensive, and everyone notices. Social structures are unraveling. War is on the horizon. There is a crisis of meaning, purpose, and comfort due to the inability of the laymen to meet his needs now and effectively plan for the future.
This is not the result of a single person or event. This is a result of a structural failure of the way we exchange value with one another. By design, the whole world is intentionally short dollars on a massive scale. This fundamental problem will define the next decade of our economic and social lives.
First, let me explain what it means to be “short”. Being short is a type of investment where the investor will profit if the value of the underlying asset falls. By going “short”, an investor bets that whatever they are shorting will get less valuable into the future. The word short also has a second meaning, which in this situation serves as a double meaning. It means “to not have enough”. If my bill is $100 but I only have $80, I am short $20. These two meanings are not inherently linked, but in the case of the dollar, they are systemically intertwined in a way which will create a nasty feedback loop.
Let’s examine the context of the first definition — to bet the value of something will go down.
Our world today is incredibly finance-dependent. People do not store large amounts of value in currency alone. Nobody uses their money as money on large scales. Instead, the standard modern wisdom is to store value for the future in:
- Real Estate
- Equities (stock market)
- Bonds (debt instruments)
For the first two, the understanding that you are short dollars is very straightforward and obvious.
While houses should be a consumption good which are used to provide shelter to people, a huge percentage of the housing market is made up of “investment properties”. In this situation the owner doesn’t live in the home, but instead rents it to someone else and tries to gain value through the price appreciation of the property and a margin on the rental income. Commercial real estate can be even worse — the owners of the property are rarely the occupants and huge players will make bets on the value of these properties going up. If you are invested in real estate, it is in your interest to see the price of your asset go up. However, the truth about real estate is that it (net) degrades in real value over time. Houses fall apart, buildings need maintenance, natural disasters occur, and property taxes slowly siphon value. The real way that real estate goes up in price is not by fundamentally becoming more valuable. Instead, it is due to the value of the currency it is measured in going down. If you own real estate, you are likely betting on the continued diminishing value of the currency.
With equities, it is a similar story. While there are lots of great companies which produce profit for shareholders, most equities are not held due to any fundamental desire to invest in a specific company. They are held because people want a way to store value and get more dollars. Giant pension funds, private wealth managers, and individuals all blindly invest in index funds of the top 100, 500, or 2000 companies in a passive, price-insensitive manner. There is no consideration for price per earnings ratios, the future outlook of a specific company, or even the products or services they provide. All that is considered is the desire to store value over time. Since baskets of equities have stored value significantly better than the dollar over the past few decades, almost every retirement plan has a huge reliance on their continued outperformance. If you own stocks, you are likely betting on the continued diminishing value of the currency.
Bonds are a bit different. Bonds are just debt contracts. They are a promise that if you buy into the contract now, you will have your investment returned plus interest in the future. Since bonds are denominated in dollars, you would think that if anything, a bond holder would want the value of the dollar to go up. And that’s true to an extent, but it breaks down very quickly in practice. If the dollar gets too valuable, it becomes incredibly unlikely that whoever they lent money to will be able to pay them back. For the bond issuer, there is a huge incentive to repay the bond holder with devalued dollars. Producing real profit and earning the dollars to pay back bond holders is hard, but it becomes easier if dollars are artificially easier to acquire. So even if the bond holder wants the value of the dollar to increase, the issuer wants the value to decrease, and they have a parasitic relationship where they usually come to agree on a slow, controlled decrease.
Aiding this is the fact that all of the people who own real estate, equities, and the even the government itself are borrowers (which is effectively equivalent to being bond issuers) and are lobbying for their debt to become easier to repay. Practically speaking, if you own bonds you are likely doing so with the understanding that the currency will become less valuable in the future.
So, the entire financial system, high net worth individuals, pension funds, private investing funds, and the government itself are betting on the value of the dollar going down. Through their actions and investments they are generally shorting the dollar. But what’s up with the second definition? If everyone is betting on the dollar being less valuable (which manifests in continued increases in dollar supply) why do people also not have enough dollars?
Aside from various other reasons why real estate, equities, and bonds are poor store of value vehicles, a big problem with all three is the barrier to entry. If you start working today and have $0 to your name, you will have an incredibly hard time building the savings to own a property, building a portfolio of equities, or saving over long periods of time in high quality bonds. Your wages will very likely not keep pace with the rate that the price of these assets increases. Houses may go up 8%, stocks 10–12%, and your wages will move 5% annually (on net) if you’re lucky. Bonds have a different tradeoff. High quality debt usually has a long time period before maturity and low rates of return which are unattractive to the average person. So ultimately, it becomes harder and harder for new market participants or poor individuals to get on the ladder of traditional assets.
Because of this reality, many people give up on saving altogether. Instead of saving for an education, a car, a home, or a big investment in a company, people will borrow from the bank. In some cases, you may need as little as 5% (or even 0%!) of the value of what you’re purchasing in cash to receive a loan for it. But being a borrower means that you are literally short dollars. Just like in the bond scenario, someone who has a mortgage or a car payment wants to repay in cheaper dollars. They are also being charged an interest rate which is artificially set by the central bank and often is unsustainable.
Due to both of these factors, poor people who do not own assets become in dire need of dollars to service their debt expenses. And there is not enough money for everyone to repay their debts plus the interest in the system. New money is created through lending, but the creation never includes the interest. Since the amount of interest due doesn't yet exist in the money supply, everyone becomes obsessed with getting more dollars as a matter of survival. No longer can you reliably work, save, and own. Instead, people are trapped on a treadmill of debt where they constantly do not feel like they have enough to meet obligations and maintain their standards of living.
You’re either rich enough to short the dollar, or you’re so poor that you are constantly short dollars. But either way, you’re short.
The conclusion that everyone is fundamentally short dollars is a scary one, because there is no natural way for this problem to be resolved. In a sane world, all the bad borrowers would default, unprofitable companies would fail, prices of real estate would crash down, and the system would correct itself. But as we saw in 2008, the system has been declared “To Big To Fail”. This is made even more true due to our governments crippling reliance on borrowing to pay its bills. Luckily for them (and not for us) we do not live in a sane world. We live in a world where the problem of everyone being structurally short dollars will be resolved by simply creating more dollars and devaluing them, in line with the needs and expectations of the market and government.
This “solution” is a self-fulfilling prophecy where the dollar is doomed to become increasingly less valuable as debts are repaid and equities rise. The poor people who are short dollars will continue to have an increasingly hard time getting them, while the rich which own assets (and the power to create dollars) will have their value relatively preserved. This culminates in what we are starting to see today — social unrest, the politicization of money, the degradation of the culture, and ultimately either a revolution which institutes a new system of money, or a socialist decline where the majority of people are dependent on freshly printed state money for their survival.
In the best case, the revolution will be silent and bloodless. A new money will win in the free market and overcome the old through a battle of ideas, and we can then start rebuilding our economic framework around it.
In the worst case, great destruction will occur to the livelihoods of everyone as the dollar slowly and violently decays. Nobody will know the root of the problem, and conflict and division unseen since WWII will take place. People will rally around strong, charismatic leaders who promise to fix all their problems through a socialist/nationalist state, only to be led to pointless, horrific wars and famines.
I cannot predict the future. But I do know that the choice is still firmly ours to make. We can change history now and choose to take a new path which separates us from the mistakes of our ancestors. Or we can be doomed to repeat the past and suffer the consequences of a society where everyone is short their currency. I hope that we can get on the right path, and understanding why we are all structurally short dollars and what can be done about it is an important first step.
