Preserving the Value of Your Money
By Alex Hastedt
*Disclaimer: The content of this article is not financial advice. The author will not be responsible for the reader’s investment decisions and choices. It is up to the reader to do their due diligence to research the topics for themselves, understanding the risks associated with trading cryptocurrencies, consulting with a financial professional before making any investment choices.*
We are only 5 months into the year 2020, and already, this year has turned out to be quite the curveball. With the COVID-19 pandemic affecting much of the world, the political and economic climates of the world have heated up to concerning temperatures.
Though the effects of the initial wave of COVID-19 have been a little disconcerting to say the least, it is not uncommon knowledge that many of the consequent aspects have been foreseen and foretold for quite some time.
It has often been said that the year 2008 was a tell-tale sign of what was to come, but the gravity of the situation at hand has been overlooked by many.
From Riches to Rags
World War II has defined so much of what we know as the world today, including the fact that the US Dollar has been recognized as the World Reserve Currency since 1944.
This essentially means that the US Dollar has been the currency by which everything else is measured in terms of value.
Many people, myself included, have never lived in a time where this hasn’t been the case. Unfortunately, because we lack the first-hand experience, a good deal of us are blind or ignorant to the fact that the US Dollar may not hold its value in the coming years.
Throughout history, the world has seen different world reserve currencies rise to power, only to collapse and be replaced by another currency.
Couple this with the fact that, though it may not be entirely intentional, world powers may be working towards knocking the USD off of its global throne by stacking weight in gold.
Now, whether you know it or not, the US Dollar is not backed by gold and hasn’t been since 1933.
The Qualities of Money vs The Mechanics of Modern Cash
History has seen mankind use all sorts of different things for “money” as a medium of exchange.
From the large Rai stones found on the islands of Yap to the paper and metals used today, a few common characteristics can be found.
As mentioned in The Bitcoin Standard, by Saifedean Ammous, for something to be considered a form of money, it must:
- Function as a medium of exchange
- Be able to be adopted and used easily by everyone
- Be able to be sold or exchanged in the marketplace whenever the holder may choose
- Function as a store of value in which its holders can feel confident that the value of its purchasing power remains consistently the same or greater
- Be able to be divided into multiple units, such as the amount of pennies to a dollar, etc.
Okay…But I Didn’t Think Anything Was Wrong With the Dollar?
Looking at the US Dollar from an objective, daily-life point of view, it seems and feels like nothing much has changed, but in reality, the purchasing power of the US Dollar has significantly decreased since the United States abandoned the Gold Standard in 1933.
For starters, we can look at the yield value of bonds offered by the US Government, which allows a person to buy a bond, hold it for a duration of time, and be able to cash it in for (ideally) equal or greater value.
The first chart is the yield on a 10 Year US Government bond. If you are unfamiliar with how to read a price chart, the length of the candles signify the price range (numbers found at the right-hand border) over a given time (found on the bottom border), with the color indicating which direction the price moved (green = up, red = down). Each candle on this chart represents one whole year.
(Chart by TradingView)
You don’t need to be able to read a chart too in-depth to be able to see that the yield of this investment has severely plummeted. Here we are, at the time of this writing, with the yield of a 10 Year US Government bond at $0.62. This is from an all-time high of nearly $15.80 in 1981.
If you notice, the yield dropped from about $4 to $2 from 2007 to 2008 (directly reflecting that year’s financial crisis). Following the yield from 2008 to 2019, the return remains relatively the same…until 2020, where the low hit about $0.35 and has corrected to $0.62 as of this writing.
If you take a look at the 30 Year US Government bond, you will notice much the same. The yield has dropped significantly since 1987, where it once held a yield of nearly $10.25. Notice also, how the yield drops significantly in 2008, with another significant drop in 2020.
(Chart by TradingView)
So why exactly does this matter? Well, at one time, government bonds were considered to be some of the safest investments a person could make because bonds are backed by the government, rather than a bank. By buying and holding a bond for a certain duration of time, the person effectively placed their trust into the government, with the idea that they will receive a return on their investment over some time (10 years, 30 years, etc.).
2020’s yield for a 30 Year US Government Bond saw a low of nearly $0.80….That’s right….An 80 cent return on a 30-year investment. Think about that….
The Elephant in the Room
While the US Dollar does meet the previously listed criteria of money, ditching the Gold Standard has had severe consequences.
For starters, it has allowed the US Government to spend well beyond their means, relying on the Federal Reserve’s printing presses to mint more money into existence every time the economy needs a bailout.
But if the economy was strong, we wouldn’t need bailouts, right?
So what gives? What in the hell is going on?
Smoke and mirrors, but to understand how the magic trick works, we need to dig a little deeper and look at a few correlating aspects.
A Gang of Banks
The Federal Reserve is in charge of controlling the money supply in the United States, but it is not a part of the US government.
So who runs the Federal Reserve? Though the Federal Reserve claims to not be owned by any person or entity, the reality is that control lies with a conglomeration of banks.
The United States had seen a few economic crises before the creation of the Federal Reserve, with J.P. Morgan (the person) bailing the country out with his own money in 1883 and 1907.
In 1910, a highly secret meeting was held by representatives of some of the largest banks to create a plan to present to Congress. This was going to be their solution to their economic problems, but they knew that nobody would vote the plan into action had they knew that the plan was written by the banks, for the banks.
Finally, in 1913, the Federal Reserve Act was passed, effectively giving the Federal Reserve (an independent entity, not Federal in any way) control over the nation’s money supply.
The Gold Standard
Initially, because the US Dollar was backed by gold, the circulating supply of money directly reflected the amount of gold the US government held in its reserves.
Due to the economic strains of the Great Depression, the US Government abandoned the gold standard in 1933, as US citizens were hoarding gold.
This, in turn, allowed the Federal Reserve to inflate the supply of money well beyond the country’s reserves of gold because the Dollar was no longer tied to the value of gold.
Furthermore, in 1944, due to the Bretton Woods Agreement, many countries had the value of their currency pegged to the exchange rate of the US Dollar to gold. This does not mean that the US Dollar was backed by gold, only that a currency’s value was worth as much as the cost to exchange the USD for gold.
The quasi-Gold Standard didn’t last too long, as in 1971, Nixon put an end to this, effectively cutting the last ties to the Gold Standard, leaving the US Dollar, and many other currencies, as free-floating currencies, backed by nothing.
Since the Federal Reserve’s power to create more money was no longer restricted by the Gold Standard, the Federal Reserve became free to print as much money as the government needed.
But I Thought Inflation Was Good?
When I was growing up and going through school, I distinctly remember being taught that inflation was a good thing and that it was the Federal Reserve’s way of keeping the economy healthy by “stimulating” the markets.
A fundamental aspect of our economy seems to be built on the very notion that if there is a problem, creating more money will alleviate the situation.
The reality of the situation could not be further from what I had initially thought to be the truth.
I had lived my life without ever once questioning how money works, trusting that it would always be able to pay for the things I needed to pay/be paid for.
Consider This….
Ever wonder what gives something its value?
By taking a look at the most basic, objective point of view, we can see that one-of-a-kind items generally tend to be highly valuable, as do items that are very scarce and rare.
It also stands to reason that items in which there is a massive quantity in existence tends to be less valuable. Why? Because you can get them anywhere!
This same principle applies to money. The more money there is in existence, the less valuable it becomes. Especially so, the longer it remains unbacked by a valuable asset.
When you take into account that the US Dollar is backed by no more than the peoples’ trust in the US government and that the fiat money will be able to do what it says it does (sufficiently act as money whilst retaining value), it becomes seriously troubling.
It is undeniably especially troubling in these trying times as the Federal Reserve injects hundreds of billions of dollars into the economy, effectively diluting the purchasing power of the US Dollar even more.
But there is another aspect that completely blew my mind that plays an important role in this whole debacle.
Making Bank
Have you ever stopped and wondered how it seems that banks have an unlimited amount of money?
In truth, it is because they do, as long as you keep your money in the bank.
When you deposit and hold your money in your bank account, the bank takes that money and loans it out to other customers, effectively creating money out of thin air through the process of interest payments.
This process is called fractional reserve banking, and it allows the banks to only have to keep a certain percentage of the actual bank’s holdings in the vault, allowing the bank to expand their assets far beyond their means.
If you can’t read between the lines, this essentially means that the money you have in your bank account is largely just numbers on a screen, because the bank is not required to have the actual amount of cash on hand to back their customers’ accounts.
Perhaps the scariest possibility of this whole scenario is the fact that banks could have a very hard time (if not collapse) if the people decide to take their money out of the bank, especially because not all of the money is there.
Conclusion
So, the US Dollar is backed by nothing but trust, and the more of it there is, the less valuable it becomes…yet the Federal Reserve and the banking systems endlessly create money…What can be done to protect your wealth in times of economic crisis?
Traditionally, gold has been known as a safe-haven asset that would always be able to retain its value. However, with the creation of Bitcoin, humankind is offered a modern alternative to the benefits inherent in holding gold.
As opposed to the inflationary aspects of the US Dollar, the Bitcoin protocol contains a deflationary model, with the creation of new supply decreasing over time, thus ensuring that there will never be more than 21 million Bitcoin to ever exist.
On May 11th, 2020, the Bitcoin protocol will undergo a “halving” in which the supply/creation rate of Bitcoin will be halved from its current rate.
This halving mechanism effectively means that Bitcoin will remain scarce, as 80% of its total final supply is already in circulation, with the remaining 20% or so to be slowly put into circulation, with lasting until somewhere around the year 2140.
Theoretically, due to the inherent deflationary nature of Bitcoin, the value should remain stable or higher (when compared to the USD). However, we are still very early in Bitcoin’s time frame, and even though the price does see volatility, the current prices are likely to be massively undervalued, as greater public adoption, as well as higher inflation rates, will only drive the price of Bitcoin higher.
What does inflation have to do with Bitcoin’s price? Remember earlier when I said that the US Dollar is used to measure the value of something?
The price represents the purchasing power of the US Dollar against Bitcoin. The higher the price, the higher the buying power of Bitcoin. This comes with a higher demand for Bitcoin, but a lower purchasing power for the US Dollar, as it costs more dollars per Bitcoin.
The reality of the situation is that the prices of everything will rise as more money is introduced into the system because the purchasing power of the dollar becomes diluted every single time more money is made, with the circulation of money largely reflecting the nation’s debt overall, as fiat money is little more than an IOU in today’s terms.
(Chart by TradingView)
(Chart by TradingView)
What About Gold?
For centuries, gold has been a great safe-haven asset and continues to be to this day. Unfortunately, when it comes down to it, gold is much harder to use as money, as large quantities become difficult to transport, and gold is not easily divisible (for instance, if I wanted to break an ounce of gold down into smaller amounts — and have it be at the exact weight — I would have a very hard time without the proper tools).
Many people seem to be divided into camps between Gold and Bitcoin. If it is such a big deal, why not own both? Diversifying the portfolio is one of the smartest things a person looking to invest could do as it ensures that the value of the portfolio is tied to multiple assets instead of one or a few.
Plan Wisely
With the US government handing out so much money during the COVID-19 pandemic and given the actions of the Federal Reserve, as well as the consequences of inflation, it only makes sense to buy even a small percentage of Bitcoin, even if only as a hedge against the inflationary nature of the US Dollar.
Many people before us have harkened about how the financial system would fail. If the money you have in your accounts should become worthless, having a hedge is perhaps the smartest thing you could do.
Band-aids get old and gunky after a while and depending on the wound, sometimes a new band-aid is needed, and other times, the injury requires a closer look and different treatment.
The band-aid of 2008 is starting to gunk up, and the fractional reserve banking model has created a bleed of overleveraged debt that will need to be paid somewhere down the line, yet the Federal Reserve has diluted the power of the USD so much that said debts will likely never be paid.
No system can create and spend beyond its means without expecting serious repercussions. If people should decide that the US Dollar is no longer valuable, it won’t be.
