The Cult of Money
The definition of a cult is defined as follows:
- 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 sadly 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 the 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 greatest Ponzi scheme. Money needs to be continually printed in order for the game to carry on.
Since 1971 it can be argued that the world economy has developed into an $80 trillion Ponzi scheme.
Alarmed by this history, I have been looking into which strategies a smart investor needs in order to hedge against and benefit from this Fiat arrangement.
Recently, I was researching various crypto currencies.
One option interested me because it is being backed by gold, each ‘coin’ is backed by a gram of gold. With each trade a fee is charged. As the charges are earned, it is used to purchase more gold and thereby make the currency increase in value, backed by a real asset – gold.
As confidence in Fiat currencies declines and regulations increase, it is easy to see why various crypto currencies have become increasingly popular. Bitcoin is the most famous example, but is by no means the only one.
I have also met the founder of a company whose aim is to protect HNWI wealth. He is doing so by keeping wealth in a physical form totally outside of the system.
His analysis of the current economic situation is most banks and currencies are bankrupt. He questions why would you place assets with a bankrupt company or in a bankrupt system?
He has bought some underground nuclear bunkers, and uses them to store gold for HNWIs. It is fully insured and served by its own airline strip. For a minimum of £500,000 in gold, the investor is able to keep a store of wealth entirely outside a risky system.
Like death, we know that the system will fail one day but it could be tomorrow or in two hundred years’ time. So, it does not make sense to hoard all our wealth in a nuclear bunker. This should be a hedge.
Meanwhile, 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 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.
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.
In summary, in order to accumulate and preserve real wealth, one must make the transition from Fiat currency to real assets.
These should include gold, and property. 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.
There still is a chink in the system which can be exploited, which is the home buyers scheme.
The conditions are it is only open to new buyers and home movers. Here the government will give you up to 40% of the deposit money in order to purchase a property up to a value of £600k. The rest of the money will come from mortgage providers.
All that is required is the 5% deposit. This enables one to transform Fiat currency, into a real asset.
It’s not just that this money ultimately does not exist, the majority of the money which does not exist does not even belong to you. It comes from the government and the lending institution.