Most people we know simply accept the idea that money is “money.” Most can’t tell you how money is created or where it gets its value, but most are absolutely certain they know what money is, what it looks like, what it’s used for, and that there’s never enough of it around.
In other words, money has become both a normalized concept in a normalcy-bias system. And as you know, the system, based on a fictitious model of intrinsic value, is a dangerous one. If people simply looked beyond the ‘normal’ reasons as to why there’s never enough money around, they’ll arrive at an ironic truth--that perhaps, it’s because there’s too much of it around.
That last line is enough to make people’s heads spin in confusion.
To help your friends and family see beyond the fog of monetary illusion, perhaps it requires an intervention on your part--one that may help them distinguish intrinsic value from artificial value; sound money from money unsound, yet legalized by the government. Here’s how we would approach it.
Waking Up to Disillusionment
Viewing money clearly and for the first time can be a disillusioning experience. Since money underlies nearly everything in one’s world--from shopping to work to (strained) relationships--waking up to the truth about money can turn someone’s world upside down, especially when they realize that nearly everything they believed in was a concealed falsehood. It’s like seeing the world with fresh eyes.
The process is like being ‘deprogrammed’ from a brainwash that you weren’t even aware took place. So, here are a few tips to help you along in trying to get your friends and family to better understand what money really is and what it isn’t; that certain types of money--coins, paper, digital bits--can function like money, but that money, as an object of security and storage of value, goes far beyond the narrow concept that most people hold.
The Myth of Fiat Money
For people to fully understand money, they have to know something about the history of money--in short, the various forms of money that went into circulation, monetary objects (and systems) that failed, and the kinds of money that retained their values across multiple economic and political regimes.
Invariably, people will come to the realization that fiat systems have generally failed regardless of how many different iterations have been created or resurrected. Next, they’ll easily recognize that precious metals like gold and silver have been valued and traded time and again.
Eventually, this would all point to how the Founding Fathers envisioned money and, more importantly, what money should never become: i.e. what it is now, or “anything but gold and silver” as “legal tender.”
Although many people consider gold and silver as nothing more than monetary relics (or metals for jewelry or industrial production), very few are aware of the status it once held as the only commodities that America’s founders thought worthy of backing US currency.
Such a decision was not to be taken lightly, and it was informed by the fact that, historically, fiat currencies without gold and silver backing failed time and again while gold and silver always remained the last form of money standing. Hence, the term ‘sound money.’ In fact, US dollars were backed by both metals--what’s known as the Gold Standard--until the standard was finally abolished by President Nixon in 1971. It’s also in 1971 when the value of the dollar began to depreciate rapidly and aggressively--losing 84.2% of its value between 1971 to 2020.
Prior to 1971, most currencies around the world were not free-floating or backed by sovereign authority and market value speculation. It’s still a big experiment. It also means that there’s nothing tethering fiat currency to real intrinsic value. Hence, global monetary risks are high.
The Terminal Risk of a Fiat Monetary System
If there’s no real scarcity of supply to stabilize and tether the value of paper money, then there’s nothing to stop governments and central banks from manipulating the money supply; that is, printing money whenever governments have the need to spend.
Of course, the more supply you create, the lesser the value (Economics 101). People who have immediate access to newly printed money--namely governments, financial institutions, and other ‘elites’--will benefit from it the most. Once that money goes into circulation, there’ll eventually be too much money chasing too few goods, hence prices will rise.
This rise in prices is what’s defined as inflation, essentially weakening the purchasing power of the currency (in our case, the US dollar, hence it’s 84.2% devaluation since 1971). In short, the ‘common people’ who are last to benefit from the increased money supply are the ones who will suffer from its dilution the most. That’s you and just about everyone you know. You’re all the last in line.
You might think that the inflation rate creeps up slowly. But what would have cost you $1,000 in 1971 would now cost around $6,330 in today’s money--a 5,331% increase in the cost of goods. Inflation is insidious, and its erosive effects are relentlessly devastating.
1971 may be too far off for some people to imagine, particularly Millennials who weren’t even born until the 1980s, so let’s use a more recent example. If something might have cost you $100 in 2000, then that same product might cost over $150 in 2020. That’s a 52.96% rise in cost (based on a 2.15% annual inflation rate), all because of the devaluation in dollar values.
Image source: smartasset.com
The dollar just lost over 32% of its value since 2000. Soon, your dollars will lose half of its value, and you’ll notice it as the price of goods and services become more and more expensive. In the long run, the loss in purchasing power will significantly affect your retirement in the future, as the dollar continues to fall and the price of basic necessities, healthcare, and other critical needs continues to rise, possibly beyond average affordability.
At this point, you’re probably wondering why governments dilute the value of their money supply by increasing the amount of currency. The answer is simple: it’s a way for them to pay off their debts, similar to the way that some people would print dollars to pay off their debts if it weren’t considered ‘counterfeiting.’ What’s considered counterfeiting to the average citizen is called ‘monetary policy’ on the level of government and central banks. Of course, it’s all at your expense, literally.
So, what’s at the heart of the problem? Is it the political system that enacts certain fiscal policies? Is it the Federal Reserve’s monetary policies? Well, yes, and yes. But the real crux of the matter is the fiat currency system. Without it, we wouldn’t be having most of these problems stemming from currency dilution. And as long as we continue to adopt this ‘experiment’ in monetary policy it’s almost guaranteed that everyone will be experiencing an increasingly perpetual lower standard of living.
How Can You Escape the Pitfalls of Fiat?
Upon hearing these facts and ideas, what’s the next step? The first and most important step would be to help someone see the difference between a) a medium of exchange and b) money as a store of value.
If we were to barter, say, organic produce from my garden in exchange for a few bottles of your homemade beer, the items we traded would be considered our ‘medium of exchange,’ especially if we repeat this transaction a few more times. You view my produce, as I view your beer, as a kind of currency that we’ve set up between ourselves. But neither forms of currency (or mediums of exchange) are money.
Neither my produce nor your beer can be considered a ‘store of value.’ Cash is considered a store of value, but that’s a mistake. Cash is ‘storable,’ but its value--subject to depreciation-- cannot be stored. It’s value ‘decays’ over time.
Money managers will tell you that one way to outpace inflation is to keep your money invested in the stock market. Fisher Investments is notorious for giving this piece of advice. So, in order to hedge against inflation, you have to put your money at risk? Imagine if a bank decided to do that with your savings--that is, put it all in the market to outpace inflation. You wouldn’t want a bank to take such risks with your money. You wouldn’t want to do this with any of the money you’d like to ‘preserve.’
Instead, you’d prefer a kind of money whose value can remain stable or appreciate as the dollar continues to lose its purchasing power. Only two assets can do this: gold and silver. In fact, they are the only two assets--gold especially--that meet all characteristics of ‘sound money,’ that is, money that holds intrinsic value.
Remember: gold and silver can back fiat currency, but fiat currency, which is backed by sovereign authority, cannot back gold or silver. History attests to this: as empires and their various financial systems crumbled, gold and silver have retained their intrinsic value. To this day, central banks across the globe have been keeping or adding to their gold reserves alongside fiat. If gold had no value, central banks would have no need to hold reserves.
Gold and silver are the most trusted form of money because both are the most reliable stores of monetary value.
With that said, gold will likely preserve its value, not only through your lifetime but also those of your family and heirs. Should the cost of living increase as the dollar’s purchasing power erodes, gold and silver--as safe havens and sound money--will continue not only to retain their value but also rise.
Gold and silver are the only assets that can give you capital preservation and portfolio growth simultaneously as inflation erodes the value of fiat currency (or as deflation plunges your rate of income).
Of course, this doesn’t mean you should convert the majority of your dollars to gold and silver. After all, cash is still an important medium of exchange. But it does mean that you should allocate a modest percentage of your cash or equities to gold and silver; at the least, around 30% if not more.
Whatever amount you want to hedge against purchasing power erosion is probably the amount you should apportion. If you need assistance making this decision, contact us here at GSI Exchange.