Stop Saving Money!

There are many financial sins. The most common are taking too much debt, living beyond your means, spending more than you earn, and buying stupid shit. Another commonly quoted sin is NOT saving for retirement. What would you say if I told you that saving for retirement was a losing strategy? The average bank balance of American households is $41,600 as of the end of 2022, yielding an average interest rate of 0.23%. As far as financial sins are concerned, this is one of the most pernicious, because it is executed in the belief that it is a good strategy. In order to understand how bad this strategy is, you need to understand currency debasement.

Currency debasement is almost as old as money itself. The Romans did it by gradually adding copper to silver coins. Nero started the dilution and a couple of hundred years after he started, the Roman silver coin was only 5% silver - the rest of the coin was made up of low-value base metals. In the modern economy, money used to be backed by gold. Gold as a unit of exchange has a few drawbacks, the biggest being its lack of portability. It is not practical to walk around with gold bars in your pocket. It is heavy and not easily divisible. Paper money with small denominations was introduced to address these challenges of portability and divisibility.

The next challenge for the dollar was its adoption as the international trade currency. It was not being used exclusively to settle transactions in the United States - it was being used by foreigners trading with other foreigners, and this led to a shortage of dollars. In 1971, President Richard Nixon moved the dollar off the gold standard and this introduced the world of fiat currencies. Because all global currencies were linked to the dollar at the time, when the dollar moved off gold, so too did the rest of the world. “Fiat” means “by decree”. In simple language, the United States decreed that one dollar was worth one dollar because they said so. This gave the United States the ability to effectively print gold. Although the dollar had moved off the gold standard, it was still the global currency standard and remains the world’s reserve currency to this day. So the dollar moved off the gold standard and became de facto gold. This is the single biggest reason for the financial supremacy of the United States in the world of global finance.

Take a second to look at a one-dollar bill - on the face of it you will notice the words ``in God we Trust”. In July 1955 President Dwight Eisenhower endorsed a law passed by a joint resolution of the 84th Congress, that requires the words ‘In God, We Trust" to appear on all American currency. This came into effect two years after the law was made when it was used on paper money for the first time. After the dollar moved off the gold standard, not only were you required to trust in God, but now you also had to trust the US government. Gold was removed as the backing of the dollar, and the government stepped into its shoes. When John F Kennedy was assassinated in 1963, public trust in the US government was 77 percent. Trust in government began eroding during the 1960s, amid the escalation of the Vietnam War, and the decline continued in the 1970s with the Watergate scandal and worsening economic struggles. Confidence in government recovered in the mid-1980s before falling again in the mid-1990s. But as the economy grew in the late 1990s, so too did confidence in the government. Public trust reached a three-decade high shortly after the 9/11 terrorist attacks but declined quickly thereafter. Today, in 2023, trust sits at 20%. This mistrust in the government is well-placed, especially when it comes to the debasement of money. In order to understand the debasement of money, you need to understand the money supply.

The money supply is the total amount of money—cash, coins, and balances in bank accounts—in circulation.

The money supply is commonly defined to be a group of safe assets that households and businesses can use to make payments or to hold as short-term investments. For example, U.S. currency and balances held in checking accounts and savings accounts are included in many measures of the money supply.

There are several standard measures of the money supply, including the monetary base, M1, and M2.

The monetary base: the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve).

M1: the sum of currency held by the public and transaction deposits at depository institutions (which are financial institutions that obtain their funds mainly through deposits from the public, such as commercial banks, savings and loan associations, savings banks, and credit unions).

M2: M1 plus savings deposits, small-denomination time deposits (those issued in amounts of less than $100,000), and retail money market mutual fund shares. Data on monetary aggregates are reported in the Federal Reserve's H.3 statistical release ("Aggregate Reserves of Depository Institutions and the Monetary Base") and H.6 statistical release ("Money Stock Measures").

Normally, the money supply should increase in line with growth in the economy, because as the economy grows, more currency needs to be injected into the economy in order to help settle the increasing number of transactions in the economy. The problem is that over the last 25 years in the United States, there has been a decoupling of this relationship. The economy has grown approximately 200% but the monetary base has increased by 1000% or 5 times more. This explains why the US stock market has done so well over that period - in fact, from 2008 onwards the correlation between the US stock market and money supply has been relatively strong. All this newly printed money needs to find a home - while some of it went into the real estate market and consumption, a lot of it went into the stock market. This is why people who invest in the stock market pay so much attention to the Fed because the Fed controls the supply of money directly through the printing press and through interest rates. But you need to realize that physical money is only a small percentage (less than 10%) of the total money. Where does the rest of the money come from? It comes from commercial banks and now you need to understand how commercial banks work.

Most people believe that banks work on the basis of money in and money out. In other words, if someone deposits $1,000 into their account earning an interest rate of 2%, it will then be lent out to someone who needs $1,000 at an interest rate of 10%. The bank makes a profit of 8% (the difference between the 2% paid and the 10% charged). Now we enter the world of fractional reserve banking. Until March 2020, banks were required to maintain only 10% of their deposits in reserve. This means if they had $1,000 in deposit, they could lend out $10,000. Where does the extra $9,000 come from? Banks can create it. We need to go back to the fact that most money does not exist physically - it is a number on a screen. When you log into your bank account, you would be a fool to believe that physical money is sitting in your account. It is nothing more than an accounting entry. Banks can create loans with the touch of a keyboard. For example, a mortgage loan to buy a house. Mark is a client of bank A and he wants to sell his house. Fred is a client of bank B and he wants to buy Mark’s house. Let's say the purchase price is $500,000. When the transaction is completed, bank B merely enters into an accounting transaction. Fred has a debt of $500,000 that he needs to pay over 20 years, and Mark sees a credit of $500,000 in his account. Banking is nothing more than the exchange of rights and obligations between banks. Bank B promises to pay $500,000 to bank A at any point in the future. As scary as this may seem, it got scarier in March 2020 with COVID. As the global economy shut down, global economies were brought to the precipice. Never before in modern economic history have we seen something like this. Governments all over the world scrambled to find ways to inject liquidity into the economy. They turned to the most powerful money creation institutions - commercial banks, and they found an easy way to increase their money creation - the elimination of the reserve requirement. In March 2020, that 10% reserve requirement was scrapped meaning banks could create an infinite amount of money. Under the old system, they could create $9,000 from $1,000. Now they could in theory create one million (or more) from that same $1,000. They obviously did not, because they are not careless.

So, what does this have to do with saving money? The United States is currently increasing the money supply by 7 percent every year. That means the half-life of money in the US dollar is 6 years. In six years, the US dollar will lose half of its value. That $41,600 average savings sitting in the average account of the average US household will have the same purchasing power of $20,800 in 6 years. If you are living in a less developed country, it is likely the debasement is more than 7% which means the half-life of money is less than 6 years. It could be 5,4 or 3 years. If you are living in Argentina, Venezuela, or Zimbabwe, half-life is counted in days, weeks, or months. That is scary mathematics.

So what do we do with all this information? The approach is twofold - we need to find assets that will grow at rates in excess of the erosion of fiat money, and secondly, we need to find a new currency that cannot be debased like fiat currencies. The first goal has existed for as long as we have understood inflation. You may have heard the term “real returns' '. Real returns are inflation-beating returns. If inflation, or debasement, is 7% and your investment yields a return of 10%, your real return is 3%. From a purchasing power point of view, you need to subtract the devaluation (7%) from the return (10%).

So let's take a second to think of money inflation and debasement. What would happen if instead of the Roman emperor, an average Roman citizen started to mint his own silver coins? Given that the value of the silver was more or less the value of the coin, there would be much financial incentive for him to embark on this scheme. But let's say this citizen does exactly the same as Nero and starts to mix copper with silver. There is a word for this, and the word is counterfeit. Counterfeiting is so prevalent that it has been called the world's second-oldest profession. A common practice in the times of silver coins was to shave the edges of the coin and use these shavings to produce new coins. With paper money, creative people worked hard to recreate dollar bills. So grave was this crime that Benjamin Franklin had the phrase "to counterfeit is death" on the bills. Can you see the double standard? Why is it in order for governments to effectively counterfeit money, but a crime punishable by death in colonial times if a private citizen embarks on the same practice? Governments have absolute power and this allows them to conduct this activity. The problem is that most people are not aware of what is happening under their noses, because the debasement is slow and gradual, but when compounded over time, the impact is substantial. Extreme debasement as is happening in Venezuela and Zimbabwe is clear to the naked eye. A loaf of bread that may cost $1 at the beginning of the month, may cost $10 at the end of the month. But a debasement of 7% per annum will see the process of the loaf of bread move only a few cents in the space of a month. Humans are not good at noticing small gradual changes. Our caveman's brains are designed to only identify drastic threats and dangers - like a large herd of hormonal wooly mammoths stampeding towards your hunting party.

So, where do we find these debasement-beating assets? What is the best-returning asset over the past 10 years? According to data calculated by Finbold, investors who bought $1 worth of Bitcoin in January 2013 when the digital asset was trading at $13.30 would have seen their investment grow to $1,766 as of February 2023 when the asset was trading at $23,500. That is a compounded annual return of over 100% which easily outstrips any other asset. So that is the first hurdle. The second hurdle is how we find a currency that will debase at less than 7 percent. When you buy the stock market, and you are a US-domiciled investor, your investment will devalue by 7 percent. The great thing about Bitcoin is not only the sound investment thesis it presents in dollars but the fact that it is denominated in its own currency that has been programmed to debase at less than 7%. Bitcoin supply is capped at 21 million. We are currently sitting on 19.3 million mined coins, and the supply is increasing at under 2 percent per annum. As mining difficulty increases, so too will this increase trend lower until it reaches zero at the time of reaching the 21 million cap which is expected to happen in 2140. So not only are we beating the 7 percent debasement, but we are also denominating the investment in a currency where the debasement is trending to zero which means the real and absolute return is almost the same. This makes Bitcoin an almost perfect inflation-beating investment in relative terms.

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