17th September 2019
The definition of a cult:
- a system of religious veneration and devotion directed towards a particular figure or object.
- a person or thing that is popular or fashionable among a particular group or section of society.
Both definitions can be applied to the object known as money.
There is a religious like devotion to the pursuit of it and it is unarguably very popular amongst society. Often it is used as a yard stick for judgement of one’s character.
In the same way religious beliefs can cause one to act irrationally and even immorally, money has the same effect on the psyche.
Symptomatic of a cult is also the phenomena that something has value because everyone in the cultish circle believes it has value.
This is also the truth about currency.
There is no intrinsic value to currency. If we examine the ten, twenty or fifty pound note we find the words ‘I promise to pay the bearer on demand the sum of X pounds’. This is based on the old system of promissory notes which means they should be backed by something. However, you will be disappointed if you try to cash your notes in at the Bank of England for a portion of gold.
Traditionally a £5 note was backed by 5 gold sovereigns. Now it is backed by nothing. It exists and is accepted because we have been herded to accept this as valid currency.
In the US, on the 23rd December 1913, the Federal Reserve Act was passed, under president Woodrow Wilson, which took away the ability to print money from the people to a group of private individuals.
In his own words, he writes:
I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world — no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.
This kind of currency is called a “Fiat” currency. “Fiat” means an “authoritative decree”, hence the use of the word “Fiat” to describe the issuance of currency.
There is no backing for what is known as Fiat currencies. Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity. It survives because of two reasons: firstly, that the powers that be tell us it’s real, and secondly, we all accept this fact. If someone invests and accepts a currency to be real then it becomes so.
President Wilson was not the first president to dabble in Fiat currency. It had been adopted in 1862 and US currency was no longer backed by gold. However, Congress did limit the amount of money in circulation to $347 million.
It was not just the Act of 1913 that changed everything. In 1971, the US came off the gold standard entirely. If you chart US inflation history, this is when currencies around the world, starting with the US currency, became increasingly worthless.
In effect, what has been established is the world’s greatest Ponzi scheme. Money needs to be continually printed in order for the game to carry on.
My observation is that the best way to benefit from this Fiat currency driven system is to seek assets that are genuinely limited by supply. This means that the investor positions himself in a place where inflation and debt drive demand up while supply is fixed. In this scenario, in the long run, as long as the entire system does not collapse, prices will go up.
These should include gold and property.
Seek, therefore, mature cities where planning regulations are tight and byzantine, land scarce and the political climate unable to deliver a revolution in housing supply. Also pay close attention to the long term demographics such as population and the number of persons per household.
This is why London, in spite of periodic blips, has been a rich den of deals for five hundred years.
Gold is a firm hedge against Fiat currencies, as it has been used for millennia, and its use as an instrument of trading as been around longer than any Fiat currency in existence.
Property is the other obvious real asset. It has the added advantage of being able to generate a monthly income which gold does not.