Rethinking Money
What you need to know about how our money works, and how to avoid poverty
Today we’re going to be discussing the one thing that’s driving our current financial markets more than anything else. Inflation.
But before we start, I need to give a little credit to @bgzerotwoone for the twitter thread he wrote about inflation as it got the ball rolling for this article
Most of you don’t know this, but I’m originally an economist. Studied economics & politics at Utrecht University, Durham University, University College London and did a couple of courses at the London School of Economics. In other words, I have studied quite a bit of economic theory. Benjamin’s thread made me realize most people don’t know much about how our economy works and just how bad inflation has gotten. Time to change that. I’ll be doing so by using a metaphor.
Money Flows Like Water
Imagine the entire economic system as a mountain. On this mountain are many trees and plants. At the very top of the mountain sits a central bank. This central bank has a water pump that it can activate to extract water from deep inside the mountain and add it to the eco-climate. Right next at the top are big trees. These trees are the banks and other financial institutions. Right below that are large corporation trees. Then smaller corporation trees. Then small business trees and individual trees.
Now this eco-climate is usually quite stable if left alone. It rains regularly and when it does everyone gets their fair share of water. The top of the mountain gets a little more water, but that water tends to trickle down into the rest of the ecosystem.
The central bank at the top isn’t content with the ecosystem merely being in balance though, it wants it to grow by 2% each year. So it turns on its water pump just enough so that the total water supply in the ecosystem grows by 2% a year.
Naturally the central bank can’t make this new water rain. So instead it just lets it run down the mountain. The big bank trees and mega corporation trees are the first to get the extra water. They absorb a part of it and then the rest of the water trickles down past the medium sized corporation trees and then finally a little bit of water makes it to the small business trees & individual trees.
2008 hits and a massive drought happens. It completely stops raining for months. The central bank is adamant about maintaining growth however, so it turns up the pumps dramatically to keep all the trees watered.
However what happens next is not what was intended. The big bank & corporate trees absorb as much water as they can. Very little water makes it past them and the trees at the bottom of the mountain barely get any extra water.
The drought ends and the rain comes in again. Saving the smaller trees at the bottom, however the big trees at the top of the mountain never let all the extra water run down. Prefering to instead put it all in waterstocks and waterbonds.
To make matters worse. The big bank trees are now so filled up with water, they become too big to fail. If any of these trees were to ever topple over, it would take down many trees with it on its way down to the bottom of the mountain. Creating a major carnage. So the central bank decides to prop up these trees and make sure they can’t fall over.
Down at the bottom, the smaller trees are still getting the same amount of water as they did before the central bank opened up the floodgates, so it would seem like they’re still just as well off as before the drought. However percentage wise, they’ve gone from owning half of all the water, to owning less than 20% of all the water.
There’s been a major water inflation. The central bank says this is nonsense though. Their numbers show there’s still only a 2% annual total water increase.
2020 happens. A huge drought named corona happens. The central bank fears a total collapse so it turns up the pumps to 100. WIthin 1 year, it adds 34% extra water to the entire ecosystem. Again the big banks and corporations slurp it all up and at the bottom the trees only get a measly 1400 cL of water. Still the central bank keeps on telling everyone the waterinflation is below 2% they show charts of waterprices which back up their claims. Meanwhile, trees at the bottom are dying left & right out of drought, even though there’s more water in the ecosystem than ever!
So what happened here?
Well the central bank prints extra money (water). It then hands out that extra money to the bank for a small interest (we’re talking around 0% now). Hoping the banks will lend out that money and thus get it pumped into the economy. However the banks hog the money because they’re scared of falling over (which almost happened in 2008 due to liquidity issues). So none of this extra money actually hits the economy.
Small businesses can’t get any loans. People who put their money in the bank don’t get any interest (because the bank no longer gives a fuck about your 1400 dollars when it just got a free trillion dollar loan from the central bank).
Meanwhile the central bank keeps telling everyone the inflation is still below 2% because the carefully selected range of products they use to measure inflation shows this is true. When in reality, inflation has been consistently been above 5% and is about to go even higher thanks to the 34% increase in money/water this year.
So where is this money actually going and how is it driving up prices when it’s not trickling down to consumers?
Well it is trickling down in some ways. One of those is cheaper mortgages. Only 20 years ago, mortgages would have anywhere between 5 to 10% interest rates. Meaning that if you borrowed 100.000$, you would be paying between 5 and 10 thousand annually in interest alone (the exact figures are a little different but let’s keep this simple).
This made borrowing very expensive and thus mortgages couldn’t be very high. But now interests are down to below 1% annually in many cases. Meaning you borrow 100.000 for your mortgage, you only pay 1000 in interest a year. So naturally what happens? House prices explode. I can’t give you exact statistics for everywhere, but let’s use the Netherlands as an example.
In the Netherlands real wages have not even doubled in the past 30 years. Meanwhile, house prices have increased almost 5x. An average house cost you less than 80 thousand 30 years ago. Now it’s almost 350 thousand. Average wages have only gone from 19 to 36k (and that’s pre-tax)
Yet house prices aren’t used to calculate inflation. Because houses aren’t something you buy regularly. Meanwhile a lot of that extra money that’s being printed, flows into house prices. This creates a huge divide between the haves and the have-nots. If you own a house, your boat gets lifted by the tide. If you don’t, then good luck learning how to swim.
Naturally older generations already own a home, this means that all of the inflation falls on the heads of the newer generation, who are getting shafted.
A second trick central banks love using to hide real inflation numbers, is using technology commodities that have deflating prices. Look at TV’s & computers for example. 20 years ago, flatscreen TV’s and computers were new technologies. They were very expensive to buy. A flatscreen in 2001 could easily set you back 1000’s of dollars. Today you can get a good one for 300$. A good gaming pc in 2005 could set you back 3000$. Today a top of the line gaming pc is around 1500-2000$.
So naturally, central banks love using exceptions like TV’s and computers to make it look like prices are decreasing. Oil is another example of something that is used tactically, but that one is a little more complex so let’s not go into it.
On to the second water-catcher
Another place where a lot of the water/money is flowing, are stocks and bonds. Governments are borrowing money at a rate never before seen (except during extreme times like World War 1&2). Stocks are at all time highs even though the fundamentals are weaker than they have been in years. But the water/money has to flow somewhere and stocks & bonds are one of the few places it can flow to easily.
But even that has a limit. A limit that we’re reaching right now. Governments can’t borrow infinite amounts of money and stonks can’t keep going up forever, so we have a problem. Major central banks like the US, British and EU central banks are pumping up oceans worth of extra water. Water that has no real place to go. So what will happen next?
To be honest, I’m not sure. The easiest guess would be that we’re heading towards a Weimar republic like situation where you’re paying 20 billion dollars for a loaf of bread, but I personally don’t think that will happen. What I do think will happen instead, is that banks and huge corporations will keep growing, whilst the little man stays the same size. In other words, your wealth is being stolen from under your feet. They keep the system running by stealing all your money and giving it to the too big to fail banks at the top.
But even that has its limits. Eventually nobody will have any water/money left to steal. When that happens, the gig is up. All the big bank trees will come crashing down and they’ll take everything that’s on their path with them.
Blackpilled Doomposting
Oh why thank you Niels, this really makes my day. Knowing that the entire system is one huge inflation tidal wave waiting to come crashing down on us!
Well yes hate to be the bringer of bad news, but the tidal wave is coming, and for most people, it isn’t going to be pretty.
So the big question is, what can we do to avoid this tidal wave?
Well there are a few things that are relatively safe or smart investments right now. Note that this isn’t legal financial advice and any investment you do is at your own risk.
But that said, here are the things I would put my money in right now if I had to (and believe me, I’ve already done many of the things I’m about to tell you)
First of, stocks: Stocks will at least for the foreseeable future keep going up because the central banks keep pumping them up like crazy. I can’t tell you about any individual stocks, but taking out a general S&P500 buy isn’t a very bad thing to do right now.
That said I never liked stocks and they are unreliable. When the crash happens, don’t be surprised if 30% of your value or more gets wiped out in a single day. Stonks are first to go up, but they’re also the first to go down. You have to actively manage them and learn when to exit the stock market.
Secondly, precious metals. Gold & silver won’t make you rich, but they have the great benefit of being assets that you can hold in your very own hands. It’s not a bad idea to buy some physical gold or silver right now as they can’t really inflate the total quantity of either (they can’t magically increase the amount that’s mined each year by 100%)
Thirdly, real estate. House prices will keep on rising hard in the foreseeable future. In the Netherlands for instance, they’re expected to go up by 10% the next year. Neatly riding the wave of inflation. Buying a house won’t make you rich, but it will protect you from inflation.
But for all 3 of those things, you’re already a tad late to the party. Banks and individuals have started hoarding all these things since 2013.
So what is left for you to invest in?
One word, Crypto.
Now I admit crypto can be a bit volatile. I’m not going to burn myself by telling you what coins to buy (I will say my main position right now is in Ethereum, but don’t take this as trading advice as it might be different tomorrow and I’m not the biggest crypto expert out there).
I don’t have any coins to shill, but I do predict that crypto as a whole will grow exponentially, as trust in fiat currency falls exponentially. They’re going to have to print more and more money to keep things going. This year the US is printing 3-8trillion dollars. Next year it will probably be above 10 trillion. Inflation will accelerate, the only thing I see outpacing it in the next 5 years, is crypto.
Right now even big corporations and the big banks are embracing crypto. Why? Because even they know fiat money is becoming a huge joke. They have so much of it, they have nowhere else to put it. Houseprices can’t grow that much faster than wages and stocks are becoming one big casino. So crypto is the only thing that’s a safe hedge to inflation for them.
So if you haven’t yet, I suggest you get yourself some crypto. Again I’m not a financial advisor, I can’t tell you how much money to put in what kinds of coins, but I do suggest you become literate in crypto trading and put at least a percentage of your money in it.
All you need is to get a wallet and convert some fiat into your coin of choice. If you only want to invest in the most well known coins, I suggest you get yourself a www.coinbase.com account as that’s (in my opinion) the easiest one to work with by far.
If you want to get more into alt coins and get deeper into trading, www.binance.com * is my favorite to use. If you want to get really degenerate and focus on the newest and smallest coins out there to go for those sweet 10x returns (huge gambling, I don’t do this myself) I suggest you check out Kucoin: www.kucoin.com
*the binance link is a referral. If you use that one, you and I will both receive a 10% kickback from the commission fees you pay on binance. Meaning you only pay 90% of what you’d normally pay and I get the other 10% of what you’d normally pay. Making it a win-win situation for both of us.
Both the coinbase & kucoin links are non-affiliate
Hope this was informative. Till next time,
Niels