The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled.

– John Kenneth Galbraith, Former Ambassador of the United States of America

Hard Mode

We are entering what I call Hard Mode. Where the difficulty settings for the world game just went up a notch.

The days of cheap energy and easy credit are over, and the bill is overdue with interest. This doesn’t mean the world is ending. Far from it. Everyone reading this has more power to shape the world than ever before.

Back in November of 2021, I called the top of the market (aka told my wife) and began to sell everything up until the earlier part of this year.

But how did I know what to do? I didn’t, and I can only assign probabilities to things, but you need two things to make financial decisions under pressure. 1. Conviction. 2. A general sense of what in the world is going on. I was lucky (and desperate enough) to study finance in college, and although most of what I learned wasn’t totally useless, a couple things were drilled into me:

1. Market cycles are a natural part of the economy and usually turn over every 7-10 years. We’ve had over 10 years of unprecedented growth, and most savvy investors were calling the market top back in 2018-2019 before COVID. Recessions are not necessarily bad, but the U.S. and the Federal Reserve over-engineered the global economy, and now we’re in completely uncharted waters.

2. It was long expected that the Federal Reserve would eventually have to raise interest rates. The only problem is that they kept interest rates low for too long and raised interest rates when our debt to GDP ratio was too high. With rising inflation, market uncertainty, and a war over our heads, the yield curves inverted, and the stocks just took another nose dive. Risking a period of hyper stagflation (high inflation + low growth).

If you’re saying to yourself, what the fuck does all of that mean, Brian? Well, then, this essay is for you. I’ve concluded that we all need to understand the alchemy of money and use the dark arts for good. To do that, I will break down a brief history of money, how money is made, and how money works in our economy without 1. Boring you. 2. Triggering conspiracy theories about the Federal Reserve, the Jewish people, Rothschilds, Soros, and the Rockefellers.

“If you know how to spend less than you get, you have the philosopher’s stone”

— Benjamin Franklin

The Root of all Evil

“For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows.”

– Paul

1: Debt = Sin

“The root of all evil is money” is a famous saying, but it’s a misquote from the above. It’s the love of money that’s evil. What’s more interesting, though, is that debt in almost all religious texts is equivalent to guilt and sin. In Sanskrit, for instance, debt and sin are the same words. The works of David Graeber really highlight this relationship between morality and debt. That’s part one. Debt = Sin.

2: Credit = Money

Archeological records show that credit was used before any form of money existed. Stone tablets in cities like Babylon were used as a ledger to keep track of what was owed. People were paid in grain and beer. New Year festivities included the breaking of these tablets to wipe debts clean. A clean slate. A jubilee. The word ‘credit’ comes from the Latin verb credere, which means trust or belief. So that’s part two, Credit = Money.

3: Coins = Money

Money was introduced by ancient kingdoms to control trade and finance wars. Since armies needed food and rations, it was easier to issue coins to soldiers so farmers could sell their food instead of having their villages pillaged. A market was born. Money and war have always been linked to each other. Every kingdom issued its own coins to finance wars. One side (heads) was stamped with the sovereign, and the other (tails) featured the currency's value. Gold and silver coins represented stored sovereign value. Thus, coins became money. 

4: Paper = Money

The first banknotes appeared in seventh-century China. Paper money didn’t occur in Europe until halfway into the 17th century. While alchemists were trying to figure out how to create gold out of base metals, the Chinese figured out how to turn paper into gold. Alchemy might have failed to turn lead into gold, but alchemy in another form proved successful. Paper money, in essence, abstracted the value of a sovereign kingdom. Instead of having to carry around heavy metals, it was much easier to issue these notes. Paper came to represent money.

The problem with paper-based money is that it can lead to inflation and a collapse in the currency if it’s not backed by true power or wealth. As Charlie Munger said in the above video, inflation is how democracies die, and it was largely because of the hyperinflation of the Weimer Republic that Hitler came into being.

Paper is poverty. It is only the ghost of money, and not money itself.

– Thomas Jefferson

5: Dollars = Gold

The gold standard was the basis for the international monetary system from the 1870s to 1971. You were able to redeem gold certificates and dollars for gold.

6: Dollars = Fiat

After World War II, the allied nations decided to peg their currencies to the dollar because the U.S. was the only game in the world. This is known as the Bretton Woods System.

Nixon then took us entirely off the gold standard in 1971 to deal with (his own problems) inflation and to discourage foreign governments from redeeming more dollars for gold. The dollar has been free floating as fiat money ever since. Fiat = Faith in the Government.

7: The Dollar = Global Reserve Currency

Currency comes from the Latin word "currere," which means "to run" or "to flow." Today, the dollar is known as the global reserve currency. This means that most international transactions are settled in dollars and that most advanced economies have a reserve of dollars because it is considered a safe haven. The dollar still makes up 41.27% of all transactions, whereas the (RMB) makes up .98%. This means it’s one of the only currencies people trust to transact globally. So if nations want oil from Saudi Arabia, they buy it in dollars. This is why you hear the term petro-dollar thrown around.

8: The Dollar = Global Debt

If you owe the bank a hundred thousand dollars, the bank owns you. If you owe the bank a hundred million dollars, you own the bank.

– American Proverb

Since 2008, the world has gotten addicted to cheap credit and borrowed money like there was no tomorrow. Global debt is at its highest level in human history.

• Global Debt = 3x Global GDP

  The global Debt is more than $300 Trillion. That’s basically more than 3x the world’s annual revenue. This is like having a 30k salary, with a 1-3% yearly maximum raise and 90k in debt that doubles every 5-7 years.

• Rising Debt-to-GDP Ratio = 135% and Rising 

  Government debt, as a % of GDP for the G7, seven of the world’s most advanced economies, as of this year in 2022, is 135% over their collective GDP and rising. Compared to 87% in 1995.

  

The Gravity of the Dollar/Debt is Destroying Currencies Everywhere Besides the U.S.

The dollar seems to be eating itself in a confounding chain of events. Not only has our purchasing power decreased precipitously, but the world is in so much debt that nations like Japan have to sell their U.S. bonds to support and prevent their own money from crashing. This is a textbook definition of a doom loop. The opposite of a flywheel effect. The dollar will become worthless by the next century if this keeps up.

How Money is Created Today: Credit & Debt

The word "money" comes from the Latin word "monere," which means "to warn."

Ok, how are “they,” the older people in charge, allowed to do this? Through something so fucking boring that it makes CNN look like EDC.

There are two ways to increase the money supply:

1. Monetary Policy, aka Credit: The Federal Reserve and its banks have the power to increase the money supply. This is known as printing money. Low-interest rates are called cheap credit because they promote banking activity. 

   As a very important source of strength and security, cherish public credit. One method of preserving it is to use it as sparingly as possible.

   – George Washington, in his Farewell Address, September 17th 1976

2. The Government’s Fiscal Policy, aka Debt: The government can spend more than it earns on social programs. This is known as running a budget deficit.

   “A national debt if it is not excessive, will be to a national blessing. 

   – Alexander Hamilton, in a letter to Robert Morris, April 30th, 1781

We should all be thankful that these mechanics exist, but these levers were not used as carefully as once warned. In fact, these mechanisms have become agents of wealth destruction.

1. Easy Credit to Banks: Since 2008, the Federal Reserve has created an artificially low-interest-rate environment for almost 12 years. This was both unnatural and unprecedented. The Fed purchased trillions in government and corporate bonds in 2008, driving the yields of these securities to historic lows. These low yields pushed banks, investors, and speculators into equities. This fuels bubbles, inequality, and inflation. Banks should not buy securities; they should funnel money into productive use for the more essential parts of the economy.

2. Enormous Deficit Spending: We haven’t had a budget surplus since 2001. In fact, U.S. Government Debt is up 492% from 2007. The U.S. went from $4.8 Trillion in public debt in 2007 to over $28.4 Trillion in 2021. The 10-year interest costs on this debt alone are forecasted to be over $5.9T. That’s more than what our government can gather in an entire year. Servicing this debt could cannibalize future infrastructure, healthcare, and education investments.

This is why fiscal and monetary policy should be objectively leveraged for the greater good, but in political reality, they have been fused together to support corporations and campaign elections. As a result, we now live in a warped, non-reality-based financial system.

I sincerely believe…that banking establishments are more dangerous than standing armies and that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale.

— Thomas Jefferson

If it feels like our grandparents are taking money out of our piggy banks to fund their retirements, you’d be only partially correct. It’s more like they’re using the nation’s money printer to fill their piggy banks. Then they’re using the nation’s credit card for all their expenditures to fund their lavish lifestyles. Only we are left with the bill that’s so insanely large that we can’t even afford the interest payments. This makes the balance grow even faster than our ability to earn enough money to pay off the principal, so what they did was sign away all of our future (depreciating) dollars we earn as generational collateral to fund an even more expensive, one-time retirement plan so that they’re not accountable for any of the spending. A triple-decker loan on all of our collective futures, making student-loan cancellation look like a bad tip on their restaurant bill. Leaving us tied to these super-sized debts and submerged underwater in their sea of inflated assets. Oh, they also want us to execute their will to be buried with their piggy banks so their drug-addicted heirs can fight over the scraps. This is like tying a kid’s feet to cement, throwing them overboard into the ocean, and telling them to catch up to their speedboats in a race to their islands.

Over the past few decades, we have monetized non-money assets because our money has been so bad. Because our cash constantly devalues. This is a hot potato, so we try to get rid of it. We then put a monetary premium on expensive assets. This makes it less accessible for people who want to use those assets for utility value. So, for example, if I don’t know what to do with my money, I buy a second home, and I treat that as an investment; if enough people use that practice, it bids up the price of homes and therefore makes buying a first home inaccessible to someone who literally just wants the utility value of a home. The same thing for stocks; we bid up the valuation of stocks. Because I’d rather store my money in a diverse portfolio of stocks than in dollars and treasuries.

– Lyn Alden

The Supply & Demand of Order

Two dangers constantly threaten the world: order and disorder.

– Paul Valéry

The world is in a strange loop. Ask any investor, and they will tell you that this is the most confusing macro environment that they’ve ever had to deal with. COVID, the war in Ukraine, rising inflation, civil wars, revaluation of stocks, staggering debt levels, climate change, accelerated technology trends, an energy crisis in Europe, a real estate collapse in China, and a population bomb in Japan. The rich are eating the poor. The old feasting on the youth by borrowing unconditionally from the future at the expense of the young and the yet-to-be-born.

What is to hinder them [government officials] from creating a perpetual debt? The laws of nature, I answer. The earth belongs to the living, not to the dead. The will and the power of man expire with his life, by nature’s law… We may consider each generation as distinct as a nation, with a right, by the will of its majority, to bind themselves, but none to bind the succeeding generation more than the inhabitants of another country.

— Thomas Jefferson, in a letter to John W. Eppes, June 24, 1813