Updated: Oct 4, 2020
There has never been a time in history quite like the times we’re in today. For the first time ever, the US has started and ended a decade without a recession, resulting in the longest expansion in the country's history. But we all knew this wasn't going to last forever right? Whenever we have man in control of interest rates and the issuance of the money supply instead of leaving it up to the free market, there will always be large market bubbles and recessions.
Who is to blame for this? That's an easy answer, the Federal Reserve (Fed). The Fed is a legal private monopoly of the money supply operated for the benefit of the few under the guise of protecting and promoting public interest. At its birth, what emerged was a cartel agreement with five objectives; stop the growing competition from the nations newer banks; obtain a franchise to create money out of nothing for the purpose of lending; get control of the reserves of all banks so that the more reckless ones would not be exposed to currency drains and bank runs; get the taxpayer to pick up the Fed’s inevitable losses; and finally, to convince congress that the purpose was to protect the public.
In other words, the scam could never work unless the FED was able to create money out of thin air that labor didn't go into producing and pumping it into the banks, along with credit and liquidity guarantees, which means if the loans go sour, the money is eventually extracted from the American people through the hidden tax called inflation.. Why does this keep happening? Because “Too big to fail” banks know that if there is a crisis, they will get bailed out and would then be able to start the process all over again.
The process for this is very simple. The Federal Deposit Insurance Corporation (FDIC) has three options when bailing out an insolvent bank; pay off the debt, sell off the debt, or a complete bailout. Large banks get a free ride when they are bailed out. Their uninsured accounts are paid by the FDIC, and the cost of that benefit is passed to the smaller banks and to the taxpayer.
What most people don’t know is that if the economy was left up to the free market (using hard money instead of a fiat currency) to decide its swings, we would never have these exaggerated booms and busts. But don’t try to get a central bankers approval on that statement, that would be like trying to get a king to agree with the concept of a democracy. The free market, if unfettered by politicians and money mechanics, will always maintain a stable price structure which is automatically regulated by the underlying factor of human effort. For example, the human effort required to extract one ounce of Gold from the earth will always be approximately equal to the amount of human effort required to provide the goods and services for which it is freely exchanged.
Central bankers felt that the American monetary supply was crippled by its dependency on Gold and government bonds, both of which were in limited supply. This resulted in America abandoning the Gold Standard in 1971 so that the Fed could print unlimited amounts of money for the government to fund its operations.
Now, let's talk about Gold. When fiat fails (which it eventually does every single time) why do the people always go back to using Gold as money again? It’s because Gold is uniform, portable, divisible, measurable, scarce, non-perishable, and costly to produce. Governments hate having their currency pegged to Gold because it limits their freedom. In a society that uses hard money, the government is reliant on the consent of its population to finance its operations. On a national level, nations using hard money are far more likely to stay peaceful, or to have limited conflict with one another, because hard money places real constraints on the ability of governments to finance its military operations. However, in a society in which capital investments are financed from savings, capital is owned by those with a lower time preference, and they allocate it based on their own estimation of the likelihoods of market success, receiving rewards for being correct and loses for being wrong. But with fiat money, savings are destroyed and capital is instead created from inflationary bank credit, and its allocation is decided by the central bank and it’s member banks. Instead of the allocation being decided by the most prudent members of society with the lowest time preference and best market insights, it is decided by governments whose incentive is to lend as much possible, not be correct, as they are significantly protected from the downside.
Now, lets elaborate on the concept of hard money. Hard money just means “Hard” or costly to produce. Hard money protects value across time and it allows for trade to be based on a stable unit of measurement. The best form of money in history is the one that would cause the new supply of money to be the least significant compared to the existing stockpiles and thus make its creation not a good source of profit. This is true because for something to assume a monetary role, it has to be costly to produce, otherwise the temptation to make money for cheap will destroy the wealth of the savers and destroy the incentive anyone has to save in that medium.
Ok, enough about history, let's talk about the current standing of the U.S. economy and how markets are setting up for a recession and why you need to get out of dollar denominated assets FAST. Given the fact that we’re near the tail end of a historic market expansion, you’ll see that it's harder to find investments that will give you a decent yield (Even Warren Buffet’s Berkshire Hathaway was sitting on $122 billion in cash at the end of June). We’re experiencing a massive trade deficit, the bond market is in a negative yield, we’re $22 trillion in debt, and the personal debt of U.S. citizens is unsustainable. On top of all of that, the stock market is at all time highs as markets are beyond exhausted. Let’s go over why this is happening.
We’ve already covered how the Fed prints money so that the Government can fund its operations. This “Free” money is being pumped into the stock market resulting in a huge speculation bubble. In addition to that, most companies, maily FAANG (Facebook, Apple, Amazon, Netflix, Google) are constantly buying back their stocks due to their dividend reinvestment programs (DRIP) which are continually driving up prices. And the cherry on top is the fact that the coronavirus is spreading more across the globe everyday, causing massive selloffs and people not spending as much money. Why is spending so important? When society spends too little, producers reduce their production, they fire workers which increases unemployment, resulting in a recession.
So you’re probably asking yourself “Where can I park my wealth so that it’s safe and producing yield?” My opinion, I would recommend allocating a large chunk of your wealth into cryptocurrencies and precious metals such as Gold and Silver. We’ve already talked about Gold and how its properties make it hard money, but let's briefly talk about cryptocurrencies and the blockchain.
Cryptocurrencies have generated the highest investment returns out of any asset in history and it’s still just the beginning. On top of that, blockchain technology is spreading across a plethora of industries. This is happening because the use cases for a transparent, verifiable register of transaction data are practically endless — especially since blockchain operates through a decentralized platform requiring no central supervision, making it resistant to fraud.
To bring things full circle, let's discuss private and public ledgers. A private ledger is basically a confidential book of accounts of who owns what, when. A public ledger is essentially the same thing except that it’s public for everyone to see. A bank uses a private ledger for its accounts and settlements can take days, while blockchain technology is a distributed ledger representing a network consensus of every transaction that has ever occured in close to real time. Also, lets not forget that the banking business is a monopoly, which means no competition, and if you think you won’t ever have any competition, why would you be in a rush to innovate your technology?
Banks now are scared because blockchain technology is threatening their business, resulting in them dumping billions of dollars into R&D so as to avoid being left in dust by this new technology. At the first Bund Finance Summit on 10/28/2019, Huang Qifan, vice chairman of the China International Economic Exchange Center during his Blockchain speech said, “In the process of combining with finance, the massive amount of information, computing power, and consensus mechanism possessed by digitalization can greatly improve the efficiency and security of financial services, and reduce the operating costs, bad debt ratios and risks of financial institutions.” This brings me to the grand finale of this article; let us finally discuss how China is planning to put an end to the US dollar.
China has been heavily mining and hoarding Gold for the past couple of decades and they're now sitting on approximately 20 tons of Gold! While the date is uncertain and delayed due to the spreading of the coronavirus, The People’s Bank Of China is planning to release a Gold-Backed crypto-currency. Max Keiser of Bitcoin Capital was quoted saying “If China does launch a Gold-backed cryptocurrency it could be the end of the world as we know it for the current global reserve currency which is getting devalued by the day.” In thinking from the perspective of China, the perfect time for the release of a successful Gold-backed cryptocurrency would be during an economic recession, just as Bitcoin was released during the 2008 recession, aiming to be a hedge against government controlled fiat currencies. Given the context of this article, it should be very clear why it could spell the end of the US Dollar if China successfully releases a Gold-backed cryptocurrency, so let me now elaborate on my idea of a Gold-backed cryptocurrency introduced into the world.
Ever since 1933 when Executive Order 6102 was signed by President Franklin D. Roosevelt making it illegal to hoard Gold certificates, bullions, and coins, the purchasing power of the dollar has gradually been going down. While the dollar was backed by Gold before the US abandoned the Gold Standard, the US was still doing fractional reserve banking which allowed banks to loan out more money than they had in Gold reserves, leading the inevitable “Run on the bank”. Blockchain technology could solve this problem because the public would be able to see in close to real time, the exact reserve ratio making it harder to keep fractional reserves, keeping governments honest. Given all of Golds great properties to make it the best form of hard money, it does have one major flaw that can be solved with cryptocurrencies and blockchain technology.
Imagine if I wanted to business with you from the other side of the planet and we decide to transact in Gold. I would have to figure out how I’m going to get my Gold to you! Gold is expensive, risky and time consuming to send across the world whereas cryptocurrencies (ex. Bitcoin) has all the Hard money properties Gold has, except it can be sent anywhere around the world immediately. This would tremendously improve global commerce while also allowing the two billion people in the world who don’t have access to bank accounts (mainly because banks can’t profit from them) to participate in the global economy because all you need is a smart phone to access your cryptocurrencies!
In closing, a survey done in June 2019 by the Moscow based cyber-security firm Kaspersky Lab showed that 81% of the global population have never purchased cryptocurrencies, while only 10% of respondents said they “fully understand how cryptocurrencies work.” Having that said, I’ve just shared some info with you that not a lot of people are aware of, so what are you going to do with it? Blockchain technology is the future of business and technology, so it would be wise to position yourself appropriately so as to avoid the possibility of having a chunk of your savings destroyed forever. On that note I’m going to end this article with one of my favorite quotes; “Always be willing to see the truth, especially when it shows up your weakness.”