Modern Fiat Money –The Ultimate Fraud



Explanation of Fiat Currency (paper money – not on the Gold Standard)

It is critically important that every person on the planet, especially the youth understands the concept and the role of Money.  This is because that which we call money today is not really money, in the sense that it is no longer a store of value.  It is merely a medium of exchange that will “almost certainly” soon be worthless.  In fact, the currencies currently in use, at the behest of the politicians and bankers, precipitated the current global economic imbalances and looming crisis. As a direct result, Gold & Silver are still in a Bull Market, because the world is at a crossroads.  In this post I discuss Fiat Money and in the next article I address “Measuring Wealth” in a Fiat world and, most importantly, I elaborate on TANGIBLES.

To make it easier, I will explain why – in very basic and detailed stages:

  • Before Coins and Paper Money, Barter Trade prevailed.  Barter of farm produce, manufactured goods, jewellery and, obviously, precious metals such as Gold and Silver.  Remember, essentially the Barter System “mostly” comprises the exchange of effort, typically priced in “Man Hours”.  i.e. The essence of this “Barter” system was that you could not buy something if you did not produce or have something to exchange.  You always had to make a product or offer a service in exchange for the product or service you wanted.  As civilization and the complexity of products and services on offer progressed, Gold and Silver played an increasingly critical role in this barter system.  This was because people often wanted a product and did not have any products or services that the supplier wanted at that moment or if the products the two parties wanted to exchange were of unequal value. Therefore they paid the supplier with Gold or Silver, which served as a universal unit of exchange;
  • Next came coins.  The need for coins arose because not every trader had a scale to weigh raw gold or silver or the means to test its purity.  Therefore, coins were minted that had a specific weight and an implicit authenticated purity (alloy assay).  However, with time, some people would shave bits of Gold or Silver off the edges of each of the coins they handled, and hoard this until they had a fair bit of Gold or Silver.  The result was that with time, coins were no longer round and no longer complied with their original specified weight, which defeated the purpose.  To counter this, the next generation of coins had “reeded” (riffled edges) and laws were passed making it a punishable offence to deface coins.  NOTE! – each and every coin was a Gold or Silver asset that could be exchanged for goods in the Barter Trade Tradition;
  • Next came transport companies and then “banks”.  Moving large amounts of Gold and Silver was problematic due to the risks posed by highwaymen.  In response, transport companies such as Wells Fargo originated that used mule trains, wagons or stage coaches that were accompanied by security personnel to transport the Gold and Silver.  Since these companies needed safe secure offices at the start and end points of their run, where the Gold and Silver could be stored, they also became custodians of money – i.e. Banks.  Sometimes the Gold and Silver were moved from the transport companies to storage “Banks” in the city.  So the first banks were custodians of money for a fee;
    • Note! For ease of reference I may sometimes use Gold as a generic for Gold and Silver.
  • Next came promissory notes.  Any person who had Gold at the bank would write a note to the bank instructing it to “pay to the bearer” i.e. “on demand” a specific amount of his gold as payment for the goods received during their barter transaction.  NOTE! – at this stage, the banks were holding Gold, not money.  The “hand written” notes written on paper instructing the bank to release Gold in exchange for goods bought, effectively functioned like a modern day cheque;
  • Next came Bank Notes.  Effectively, the abovementioned personalised notes were often passed from one person to another or won in a poker game, so the person presenting the note to the bank was not necessarily the original holder.  As a result, banks started issuing notes with standard values, mainly because these were far lighter and easier to carry.  So if a person put – say 50 ounces of Gold on deposit, he would get fifty Twenty Dollar notes as each ounce was worth Twenty US Dollars until 1931.  NB! Each bank would issue its own Bank Notes and each Twenty Dollar note had words such as “I promise to pay the bearer on demand – 1 ounce of gold” or for lesser value notes – “I promise to pay the bearer on demand – 1 ounce of sterling silver” (this is where the UK’s “Sterling” originated – Sterling is 92.5% pure silver alloy).  NOTE!  Each bank would hold an amount of Gold and Silver exactly equal to the amount of Bank Notes issued and if someone withdrew his Gold or Silver, he would exchange the Bank Notes for the metal and the Bank Notes would be removed from circulation, torn up and/or burned.  It is critical to understand that each note in circulation represented real Gold or Silver that was being held in custody for the owner.  The banks were not the owners of the Gold or Silver, they were merely holding it in safe keeping for the owner for a fee.  Therefore, when a man was holding a bank note, he was – in effect – holding “proof of ownership of Gold” and when he gave it to another in exchange for goods, the seller of those goods would now be the owner of that Gold.  Note furthermore, that there was virtually no such thing as credit or interest, there were only bank custody/storage fees.  Instead of credit, people with money used to grubstake entrepreneurs – invest in their business venture – meaning they used to advance them money for food and equipment etc.  In return, they usually became part owners – ie. shareholders – in the venture with the possibility of a pro-rata profit share if the venture succeeded.  Note! Their capital and income were at risk.  Broadly speaking credit and “interest” are a more modern habit that was encouraged to facilitate growth.  Sadly, it also facilitates insolvency of banks, corporations and/or individuals.  So it was that the banks were owned by private individuals and, if they did well, from custody fees and were not robbed, the owners of the bank used to become wealthy and grubstake entrepreneurs.  Equally, if the banker knew of a good investment prospect, he might encourage a few of his wealthy clients to invest money in the venture as they would be indebted to the banker if the investment paid off.  Note, there was no guarantee of a return “of” or “on” investment as the lender would get nothing if the venture failed.  This investment vs credit approach is how the Muslim Sharia banking system works to this day.  Remember, this was an era where a man’s word was as good as his bond and bankers were mostly honest trusted individuals;
  • Now for the sad news – bankers increasingly became dishonest.  First, some banks started realising that their bank notes were being passed from one person to the next without the Gold ever being withdrawn.  They then printed more money than they had Gold on deposit on the assumption that all the depositors would not show up simultaneously to withdraw their Gold and, therefore, no one would ever know.  They then invested this additional “non-gold backed” money in diverse projects.  This was effectively theft, as it meant that if all the owners of their bank notes arrived simultaneously to collect their Gold, that the bank would not have enough to cover all the bank notes and many people would not get the Gold or Silver that was rightfully theirs.  Naturally, all these extra notes enriched the bankers and this system would work for as long as no one became aware of what the banker was doing and for as long as all the depositors did not arrive at the same time to withdraw their metal.  Effectively this was hugely dishonest as the bankers were creating wealth out of thin air, investing that money and earning profits that they were not legally entitled to.  Naturally, some bankers became greedy, took this too far and issued notes in many multiples of the Gold or Silver they had on deposit.  This fraudulent practice became known as fractional reserve banking, as the banks only held a fraction of the Gold reserves they were supposed to in relation to the money they had in circulation.  This is effectively theft of customers’ Gold by the Bankers, because most depositors would not get the Gold that was legally theirs if all the depositors arrived to collect their Gold simultaneously.  NOTE!  It is theft, whether or not the depositors arrive to collect their Gold and it is dishonest since the bankers are enriching themselves at the expense of others;
  • Next came Government Central Banks.   Initially, Municipalities and Governments collected money, comprising Gold and Silver coins and later convertible bank notes, by way of taxes.  They stored this money in privately owned banks and spent it on community projects creating the necessary infrastructure for the citizens to share.  However, eventually there came a time when the dishonesty of private banks had to be addressed and Governments created Central Banks.  They confiscated the Gold and Silver from the privately owned banks, thereby becoming the custodians of the public’s Gold and Silver, and issued Government Currency Bills in exchange.  Remember, as explained previously, the Government was now the custodian of the Gold or Silver of its citizens – it was not the owner of that Gold or Silver.  Again, the notes were endorsed with the words “promise to pay the bearer on demand X ounces of Gold or Silver”.  NOTE! – This system is known as The Gold Standard as money could be converted to Gold and/or Silver).   However, when countries are on the Gold Standard, there has to be strict fiscal discipline for a number of reasons:
    • Firstly new money could only be printed either when the miners had mined new Gold or Silver, or when the country had exported more than it imported and earned foreign currency that they could exchange for the Gold or Silver held by the another country’s central bank;
    • Secondly, if the country’s trade deficit was too big, its foreign trading partners could demand that the deficit should be settled in Gold.  In this way Gold (Wealth) was transferred from the importer to the country that was able to produce more efficiently or cost effectively.  This transfer of wealth left the importer country poorer, which caused its currency to weaken, which, in turn, improved its own competitiveness and enabled it to, in turn, grow its exports.  Contrarily, the exporter becomes richer as it “earned Gold” and so its currency became stronger.  So it was that purchasing power parity was maintained by the exchange of Gold Wealth and improved Manufacturing Efficiency reflected in Export Competitiveness;
    • Thirdly, because there was a specific amount of money, and not an ever growing unlimited supply, there was no inflation and Municipalities & Governments had to stick to their budgets.

This put massive pressure on Governments to properly manage their economies and maintain strict fiscal discipline.  However, this did not suit modern politicians who are using the media, tax breaks, manipulated inflation statistics, social welfare/subsidies, etc. to garner votes, stay in power and enrich themselves.  As a result, elected officials started bending the rules for their personal convenience.  This took the form of increased printing of FIAT money (explained lower down) and DEFICIT SPENDING;

  • In time, this brought about seriously distressing dishonest practices by Governments that included three major aspects;
    • First, Governments adopted Fractional Reserve Banking (explained above) and pushed this to the point where Central Banks only held “at most” 10% Gold in relation to the amount of money in circulation.  This meant that if all the nation’s citizens were to ask for their Gold simultaneously, only 10% would get their Gold.  Remember – “This is effectively theft, since the Gold originally belonged to the citizens, who would now no longer be able to get the Gold that was legally theirs”.  “This was also dishonest since the Government created wealth that did not actually exist”, which enabled the politicians and bankers to enrich themselves;
    • Secondly, the Central banks subsequently abandoned the Gold Standard, thereby disenfranchising the public of any right to claim the remaining 10% of their Gold.  Again this is theft of the wealth of the very citizens the government officials are supposed to be serving.  I stress, this meant that citizens were no longer entitled to claim the Gold that was legally theirs as it had effectively been confiscated by the Government.  In the USA, this happened on a national level in 1933.  However, for the period from 1933 until 1971, there was a sovereign Gold Standard, meaning that foreign countries could still claim payment in Gold.  In 1971, France came to the USA and demanded payment in Gold to settle the USA’s huge trade deficit with France.  Nixon then became famous because he declined, effectively declaring that the USA was bankrupt.  The USA had frittered away its 21 000 ton Gold reserves of the 1950’s and owed more than 38 000 tons – Google “Frank Veneroso Gold Book”.  At this point, the US Dollar and subsequently all currencies in the World abandoned the Bretton Woods system and the Sovereign Gold Standard and became “Fiat Currencies”.  The Latin word Fiat means “let it be done” and paper money is called Fiat currency as it was created by no more than Government Decree “that it would be so”.  Fiat Currency is the term for paper money that is not backed by Gold or Silver and in the history of mankind, every attempt at sustaining a Fiat Currency has failed.  NOTE!- I quote the USA, but all currencies are now Fiat with Switzerland the last to abandon the Gold Standard in 1998;
    • In the same way that paper money is now worthless, all coins used to be made of Gold, Silver, Nickel and Copper, metals that had intrinsic value – Eg. a Silver Crown that was worth 50c in 1950 would contain almost R250 ($20) of Silver today (2017).  Today, all coins are made of plated steel and are worthless.
    • Finally, the ultimate dishonesty of this whole system is illustrated by these two sentences:
      • Originally, with “Real Money”, when you sold something and someone gave you money, you could take that paper money and go to the bank to get your gold – which represented your due -THE OTHER HALF OF THE BARTER TRANSACTION; but
      • Today, with “Fiat Money”, when you sell something and someone gives you money, he has actually given you a worthless piece of paper.  This piece of paper only serves as money for the purpose of facilitating another trade and for as long as people believe in it, as it actually has ZERO value.  It is like musical chairs, with people holding either assets or money and, when the music stops / currencies collapse, those holding paper money will have nothing.
  • There used to be a joke that Paddy got an overdraft at the bank and he was given a cheque book.  After a month or so, the bank manager called to tell him his account was overdrawn, to which Paddy cheerfully replied “no problem, I will come in and pay you with a cheque”.  To the last letter, this is exactly what the US Fed is doing with its Fiat Money System, more blatantly than ever before in the history of mankind, as it is openly buying back treasuries with newly printed costless money.  Confirmation? – Read this really excellent and revealing article by Ty Andros

THIS IS THE TURNING POINT.  Up to this point, paper money on a Gold Standard represented a “REAL ASSET” that could be accumulated as it represented an increase in “REAL WEALTH”.  The day Central Banks abandoned the Gold Standard, paper money became nothing more than a medium of exchange, a piece of paper that facilitated trade and a record that a barter transaction had taken place.  For as long as Governments exercised fiscal discipline, this system worked, but greed intervened, fiscal profligacy prevailed and staggering amounts of paper money were created.  Accordingly, paper money could no longer be relied on as a store of wealth or value as inflation was constantly eroding its value and it could become “TOTALLY” worthless at any time.  This is what happened most recently in Zimbabwe.  It is important to note, that we need paper money (or in future Crypto-Currencies) as a medium of exchange as the big problem with pure barter trade is that each person has to want exactly what the other person has to offer.  Furthermore, in barter trade the values of the items traded have to match approximately as you cannot get half a car as change if the price of the house is equal to the price of 2.5 cars.  Paper money is also more convenient as it is light, transportable and more easily divisible than an ounce of Gold.

Essentially the initial requirement of money was that it must not tarnish and degrade over time, that it should have a high value to weight ratio to make it easily transportable and that is should be easily divisible.  This is why coins were made of Gold, Silver, Nickel and Copper in days gone by.  Paper money backed by Gold and/or Silver was preferred as it was light to transport and easily divisible – Gold and even Silver coins could not be easily used to buy low cost items, whereas Nickel and Copper coins could.  Personally, I can live with metal plated coins, as these represent a small percentage of our wealth, but I cannot accept Fiat paper money in the absence of some system of absolute control over Government statistics and money printing activities.  The primary trouble with Fiat paper money is the irresistible temptation to print and, in so doing, to create inflation – i.e. devalue the paper money.

FINALLY – THE UGLY TRUTH OF FIAT MONEY.  Throughout history, no Fiat Currency has ever survived.  On the other hand, from Daily Reckoning comes the appropriate contrary question: But if gold is the best money, how come we don’t use it rather than dollars?  Lord Rees-Mogg explains: “The problem for gold is not that it doesn’t work, but that it works too well…it imposes limits on human behaviour, and those limits can be resented and rejected. Indeed, it can become impossible for a government to maintain the discipline of gold…”.  For as long as countries maintain fiscal discipline, by balancing their budgets, and trade deficits remain low, the “Fiat” currency system works.  This is because the books can be balanced. ie. The amount spent by Government equals the amount gathered in taxes and/or the amount of goods sold and the amount of goods bought cancel each other out and the countries have been “Paid” in imported goods in exchange for their exported goods.  However, under a Fiat Money Regime, it is too tempting and too easy for a country to run up huge budget and/or trade deficits and simply print money at will & low cost to cover budget and trade shortfalls.  This is especially true since the consequences of deficits incurred today are transferred to future generations so it is unlikely that the current government can or will be held accountable.  This practice of creating money that is not backed by Gold, Silver or Other Assets is classically called Monetisation or more recently Quantitative Easing, which is exactly what Weimar Germany, Yugoslavia and Zimbabwe did.  The problem is that once Governments start printing, it is too tempting and too easy to do so again and, then it inevitably spirals out of control in ever increasing amounts as the currency weakens.  The USA has over the last decade printed massive amounts of Fiat currency, lived beyond its means and run up huge trade deficits.  In fact, the USA trade deficit with the rest of the world is in excess of $20 Trillion – that is a pile of $100 bills twenty thousand (20 000) Km high.  NOTE! That means the USA has imported $20t more than it exported or that the rest of the world has given $20t of goods to the USA in exchange for worthless paper.  Today the USA, UK, EU, Japan etc are all printing money to the point where it can no longer be accounted for and is probably being “Taken” by those in power to enrich themselves as illustrated in this very well researched article by Jim Willie at  The perfect modern day illustration of where this rabid printing of money leads is the Zimbabwe Dollar.  They printed Zimbabwe Dollars to the point where no-one wanted them and only Gold, Silver or “harder” foreign currencies were deemed acceptable, albeit as an illegal black market currency.  This same scenario is currently in the fairly early stages of unfolding in our modern global monetary system.  The more money the USA prints, the cheaper their currency becomes and that makes USA products cheaper into the EU and the rest of the world, which gives the USA an unfair advantage.  To combat this, the rest of the Central Banks of the world have commenced printing extra money to make their currency weaker and regain their competitive advantage.  This has led to a spiral where Central Banks are printing more and more money in a never ending cycle of competitive devaluations that is currently being referred to as a “currency war”.  This could make all paper money worthless if it is allowed to go too far.  The consequence of printing excess money is inflation, which is best explained by a simple example as follows:

  • When you print too much money, you normally get inflation and certainly weaken your currency. It works like this – say two countries each produce a million units of goods and have a million units of currency.  That means that one unit of Good is worth one unit of Currency.  One country then doubles the currency in circulation overnight without increasing the total goods produced – obviously people will be willing to pay two units of Currency per unit of Good instead of one – which is inflation.  Now the other countries that did not increase their currency are still operating on one unit of currency per good, therefore, your currency is now worth half what it used to be, as good for good, we would now be exchanging two units of your currency for one of theirs.  That is why your currency loses value, you become poorer relative to everyone else in the world and you get inflation down the road when you print too much money.  However, the magnitude of the inflation is difficult to control if you continue to print too much money, as there is a lag before higher prices filters through to the economy and a distorting factor called velocity.  Velocity is the rate at which money changes hands and lower velocity = lower inflation, whereas higher velocity = higher inflation.  So, as is currently the case in the USA 2000 – 2012, lower velocity can temporarily offset higher money supply.  In essence, the more you print the greater the risk of things getting out of control, at which point you get sucked into a never ending inflation spiral that leads you to the situation Zimbabwe was in.  Contrarily, for deflation to manifest, there has to be a contraction of the money supply, with central banks raising commercial banks fractional reserve limits on the one hand and literally collecting money and burning/destroying it on the other.
  • The fact that the increase in money supply has been countered by the reduction of the velocity of money is beautifully illustrated in the following two charts:

Today the world has been printing excessive paper money for decades, but particularly since 2008/2009 and even creating it by computer.  In September 2012 the EU and US engaged in QE-infinity, meaning there was no longer any constraint or limit.  This will inevitably lead to inflation in time, which will, in turn, lead to greater amounts being printed (Currently the inflation figures are manipulated lower to obscure the rising prices, but we all know food, fuel and medical costs have more than doubled of late).  However, if all countries are printing money to devalue their currencies relative to the others, there could be no relative weakening of one against the other and therefore no differential price inflation between one country and the next.  If this is the case, the deteriorating value of the global currencies will only be reflected in the rising prices of Gold and Silver which are the only Real money and represent Real value.  This situation where money is printed in such excess will, almost certainly, spiral out of control as the global currencies approach a Zimbabwe Dollar situation, especially the if velocity of money increases and the lag effect comes into play.  I believe the situation will not be allowed to get totally out of control as it did in Zimbabwe before some fiscal sanity prevails and some fiscal discipline is re-introduced by way of a return to some pseudo Gold Standard.  By virtue of the fact that the US Dollar is still the world’s reserve currency, countries with huge trade surpluses, like China, India and Russia will put a stop to it before the value of their surpluses is eroded excessively.  But until then, investors are going to flee depreciating currencies and “Go for Gold and Silver” as the ultimate, time tested, store of wealth in troubled times.


Because the USA has imported $20 Trillion more than it exported, this means the USA has effectively been paying others for imports with worthless paper dollars and running up huge trade deficits.  ie. In a fiat currency regime, the greater their trade deficit, the more products and services they have managed to get for free (contrarily, if there is no trade deficit, the imports would have cancelled out exports and each party would have exchanged products and services of equal value).  Therefore, for as long as their creditors do not spend these dollars in the USA, the USA got their imports for free.  The USA knows this and is blocking China from purchasing huge US organisations, because they are supposedly “strategic assets”.  Furthermore, for as long as these creditors like China and India spend their US Dollars buying the assets of other countries, they have transferred the problem of these worthless dollars to those countries.  Ideally no country should hold onto the dollars as they are rapidly losing value (purchasing power).  It is important to note at this point that the USA has commenced monetising its debt, which means it is printing money like Zimbabwe and the faster they print money the faster it loses value, until finally it becomes truly worthless even for buying assets.  The only way justice would be served would be if everyone spent their dollars buying the assets of the USA, failing which it is musical chairs and some poor sucker is left holding the worthless dollars.  Remember, I refer to the USA as a proxy for the rest of the World, as Japan, the EU, UK etc. are all engaged in rabid printing.

As Thomas Palley, a Washington-based economist wrote last year, – “Printing a $100 bill is almost costless to the US government, but foreigners must give more than $100 of resources to get the bill. That’s a tidy profit for US taxpayers.”  Similarly, John Connally Governor of Texas said to a bunch of European politicians – “The US Dollar is our currency, but it is your problem”.


It is important to note that a Fiat Currency system will only survive for as long as all the people believe in it.  When that belief was suspended in Zimbabwe, people reverted to barter trade and trade in safe currencies like Dollars, Euros and Gold.  If this belief is suspended on a Global basis and all Fiat currencies collapse, people will revert to barter trade and/or trade with Gold and Silver as it was in the first paragraph at the start of this article, since there will be no currency that will be perceived as safe and certainly not one that is big enough to replace the Dollar and/or the Euro.  And so the whole cycle will start again.  Remember, essentially “barter trade” means that people are exchanging “Man Hours” i.e. the value of all products in any new currency will once again revert to the “Effort or Man Hours” required to produce that good – which will be the cumulative labour cost embodied in the production of each product.  Eg. The value of a house is the value of the labour cost of taking iron ore out of the ground, plus the labour to create the steel, plus the labour cost to manufacture the skill saw, plus the labour cost to cut the timber, plus the labour cost to build the house etc.  Therefore, when all currencies collapse and a new currency is introduced, all tangible assets will have a value that will once again be determined by the cumulative labour cost of the product expressed in the new currency.  For this reason, during this period of insane “FIAT” printing, I favour tangible assets like Gold, Silver and Property, which can never lose their “labour” value, over intangible assets like cash, bonds or derivatives.  For this reason I stay away from banks.

Due to the fiscal imprudence of this era, it is a time to own Gold and Silver until the Fiat Currencies have been exposed for what they really are and that is in the process of happening now.  This statement is more true now than it was 20-30 years ago, because the amount of Fiat Money being created is totally out of hand and all economies are experiencing negative growth together.  The USA, EU and Japan have just announced that they will print as much as is needed indefinitely i.e. printing to infinity.  Remember, “ALL” modern currencies are Fiat and the proposed new benchmark currency, the IMF’s Special Drawing Rights (SDR’s), is merely another Fiat currency that will have a value represented by the “Weighted average of the world’s biggest Fiat currencies”.  Already it is impossible to say how much money major economies have in circulation due to manipulation and the fact that money is generated by computer at the stroke of a key, so how are they going to monitor the basket.  Imagine a basket that has to be reset every week or month because the US, UK or EU was continuing to print money at a rabid pace – what a joke – as it completely defeats the purpose, which is exchange rate stability.  Furthermore, as the IMF is managed by the Fiat culprits, namely the USA, EU, UK and Japan, its SDR’s will also be open to manipulation for political expediency and, therefore, in no way represent future stability or absolute fiscal discipline.  Imagine if they all agree to increase their money supply by an equal percentage, that would keep the SDR constant but effectively devalue it against all other currencies.  This excellent article by Richard Mills explains a proposal by Maynard Keynes that could have provided an elegant solution to the above dilemma  However, US Self Interest prevailed over Global Community Interest and this proposal never saw the light of day – until now that is, as the Chinese have tabled it and favour its adoption.  Therefore, eventually there will have to be a reversion to some sort of Gold Standard (see below).  China is accumulating Gold at a pace and has hinted that it will revert to a Gold Standard.  Many other BRIC, Middle and Far East countries are doing the same.  Utah just approved a Gold Standard (31/3/2011), albeit only for Gold coins at face value, which is perfect if the US currency collapses as goods will then be re-priced any way .  Eleven other states are considering similar steps.  I think this is a big deal. The question is – will this spread to other states listed and then to the rest of the world, or is this a once off?

Read this remarkable article exploring Global Political and Economic Governance –

The following remark extracted from almost puts it in a nutshell. Benn Steil too echoed the thinking of Robert Mundell in his speech delivered in 2008: “. . .if you go down the line of currencies around the world, you don’t find many attractive opportunities. And that’s why I say if the world were to give up on Dollars and give up on Euros, they’d probably go back to the old standby, which is gold. And I don’t mean by gold, government run gold standard, like we had in the late 19th century. That’s politically impossible. Governments will never be willing to subordinate their policies to the constraints of a hard commodity ever again… So how could gold make a revival as a sort of international money? Well, we don’t actually need a government run gold standard anymore…since people have always had confidence in gold as a long-term store of value, there’s no reason why it couldn’t play that role.”

Today – End 2012, we are in a situation where the rest of the world is increasingly Dollar averse, the US is in crisis, Europe and the Euro are in crisis, the UK is in a mess and Japan has the highest “official” debt of any country in the world so the Yen is going nowhere.  In fact, today all the countries are engaged in currency wars comprising competitive devaluations aimed at protecting each country’s trade advantages (current accounts/trade balances).  The latest G20 meeting attempted to stop this currency war, but consensus could not be reached, especially with the USA for whom cessation of its money printing would mean financial disaster in the form of default i.e. bankruptcy.  It is only a matter of time before it all collapses.  Note! The total Debt including future social obligations of the USA, the UK, Japan and many EU countries exceeds 400% of their Gross National Product, whereas the normal bankruptcy threshold is 100% as evidenced by Greece (113%).  Iran and India have just agreed to exchange Oil for Gold – outright barter – and other countries are commencing trading in currencies other than the traditional Dollar/Euro/Pound.

It is equally important to realise that the barter analogy makes it clear that “a country should always be producing something of value that can be exchanged, in order to ensure that that country’s exports balance out its imports”.  After all, you should always have “something” to exchange, otherwise there is no trade – and paper currency is definitely not “something”.  The something could be intellectual consultancy services or labour, but Export Revenue should balance Import Expense.  Any imbalance is unsustainable in the long term, as demonstrated by the USA which manufactured less and less, imported $15 Trillion more than it exported over the past two decades and is now effectively unable to repay that debt.  Now it is only fair that a country like China can get value for its Surplus, whereas currently it is stuck with a depreciating $2Trillion lemon.  This imbalance would not have been possible in the days of the Gold standard as their creditors would have demanded payment in Gold far sooner. This would have weakened the payee’s currency as they’d have the same amount of dollars covering less gold, which would have rebalanced the county’s purchasing power parity.  Instead, the imbalance that was facilitated by modern “Fiat” money could be extended almost indefinitely as the currency devalued to the point where payment in Fiat money makes payment a meaningless exercise.

Ultimately, the new money has to be based on a Gold Standard.  Although there is much talk of a standard comprising a basket of commodities, such as Gold, Silver, Oil etc, this is not practical.  Gold is the only practical benchmark since it has a high value to weight ratio that facilitates payment of national deficits (such as the one Richard Nixon reneged on).  Imagine the transport and other logistics of settling a huge trade deficit with another country in equivalent value of Sheep, Cattle or even Oil, especially if “the country that owes has nothing to give that the owed country wants”.  So! I believe the anticipated currency crisis or collapse will eventually precipitate a resumption of a pure Gold Standard at international level, if only to provide a mechanism for settling trade deficits.  In fact, I believe China, India, Russia, Indonesia, the Middle East, Mexico etc have anticipated this and are already making preparations to that end as their Central Banks are buying Gold at a pace.

Another way of explaining why the Gold Standard has to return is that in its absence, foreign countries are lending money without collateral, which is not fiscally responsible.  In fact, in the modern era, it is patently clear that any sovereign loans to “de facto bankrupt” countries and most are bankrupt, WILL NEVER BE REPAID, so they are merely window dressing to paper over the truth and defer the pain.  After all, in the same way that banks lend money against collateral, tax payers are entitled to demand that their country lends to other countries with some form of security/collateral that their money will not be lost.  That collateral has historically always been and should once again be GOLD!!



A final question is what about the banks.  Banks used to store our monetary wealth and now they do not even want cash.  In the absence of the Gold Standard, they only have two primary functions:

  • They record numerical balances and transfer numerical amounts from one account, bank or country to another.  Imagine a scenario where some password driven global internet software like Google manages all account balances and transfers (as we do on internet banking).  i.e. Essentially, if money used in day to day transactions is merely a medium of exchange, Crypto-Currencies can work, where one exchanges the word money for value credits.  Some computer software like Google can keep track of all our Plusses (value credits/money in) and Minuses (value credits/money out), with the Balance amount of value credits standing against our name.  If you do not have a positive credits balance, you cannot buy – Debt is Dead.  Currently a number of digital Crypto-Currencies like Bitcoin are enjoying a lot of attention.  While these are again merely a Fiat medium of exchange, they do have the added benefit that they bypass exchange controls.  In Countries like China and Chile, they are widely accepted.  However, these are still in their infancy – see my Blockchain and Crypto-Currency article;
  • They provide loans for asset based purchases and this investment role could easily be taken over by internet based investment forums or investment houses like current private equity placement houses.  Crowd funding is also becoming popular, where you post your project on the internet and anyone who likes the idea can buy in for a fraction of the equity with a few dollars.  If a million like your idea, you easily get a Million Dollars.  i.e. Effectively this internet based broking site would introduce investors to investment opportunities, whether those be funding for projects, buildings, equipment or working capital.  Personally I would like all this to be on an equity type basis where the investor gets a profit share for a normal equity investment or a fixed return for Preferential Shares.  i.e. I would like all this credit and interest nonsense to stop as this is what gets most people into trouble.  They must learn to use debit cards and for the rest they must save for what they need, with the exclusion of a house and maybe a car;
  • I have excluded the role currently played by the investment bankers, who invest your monies in equities, as this speculative activity has no place in a commercial bank.

So now that we understand that “Money”, which used to represent “Real Wealth” is now an “Empty Fraudulent Promise”, we need to better understand Wealth and, more importantly, the difference between “Real Wealth and Nominal Wealth”.  This is covered in the next article.

Real vs Normal Wealth – See Tangibles Further Down


In Econ1 Fiat Money, we concluded that Bank Notes no longer constitute wealth since they cannot be converted into Gold and their value is continually eroded by Inflation, so what is wealth.  i.e. They are merely a medium of exchange with temporary value that facilitates commerce.

“Material Wealth” is all the durable “tangible” things, including equity investments that we own in our own name and completely “Free of Debt”.  It is critical that you understand the concept “tangible” wealth, which I elaborate on further down, especially in this time when the Fiat money experiment may be approaching its climactic end.  Money in the bank is mostly not Wealth as it is a claim on your money held by others, its value is constantly being eroded with fiat printing and for the past decade the banks interest paid negative “real” returns.  i.e. If the system unravels, that wealth can evaporate.  However, we need to accrue wealth to provide for our needs in times of crisis and after retirement, therefore, we need some unequivocal means of measuring the wealth we accrue.

Now Wealth may be a broad or abstract concept, so it may help to define it.  I believe that Wealth is only created when you make or create something durable and that “true wealth” can only be defined as ownership of something “tangible”.  That does not mean you cannot make money by creating software that helps people function more efficiently.  Similarly, you can make money if you are a baby sitter who helps his employer have more time to make or create, which means you are facilitating Wealth creation.  The question is how do you invest that money and secure your wealth.  Currently Governments print Fiat money and manipulate statistics to engineer the illusion that they are creating wealth.  This Fiat money is inflationary and that brings us to Greenspan’s famous Quote “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value”, which he stood by when asked, right to the end of his term in office.  Effectively, inflation confiscates the wealth of the majority (95%) and transfers it to the remaining 5% comprising the wealthy, the bankers, and those in power, who together manipulate the system and laws to their gain at the expense of the majority.  That is why the term “Crony Capitalism” was coined.  i.e Governments and Bankers do not really contribute to the creation of “National Wealth”, they can only facilitate or retard the creation of Wealth.  Currently they are engaged in a Wealth Destruction phase.  This is why the shift in manufacturing from West to East, coupled with the rise in Socialist practices in the West (especially the US and UK), confirms that the West is increasingly spending its money on services and entitlements and not on Wealth creation, while the East is creating wealth by making things.  The West is regressing while the East is progressing.  However, the West could recover in a decade or two when its innovation in the arena of countless new technologies overwhelms that of the East.

In order to accrue wealth, we need to work to earn money to live off and save to provide for our old age.  We first use that money to provide for our basic and essential non-discretionary survival needs like a roof over our heads, food, clothing and transport.  Any money that is left after paying for those basic needs is known as “Discretionary Income” as it is income that we have spare for other things.  The decision of what to spend it on is a very important one.  We can spend it on four broad categories, which are as follows:

  • Consumables – that are used up quickly, like cigarettes, booze, extra clothes, entertainment, gadgets, holidays etc;
  • Semi Durables – that last longer, like Cars, Caravans, Power Boats, Hi-Fi Systems etc, that also get used up – i.e. depreciate over time;
  • Durables – that last a lifetime & add to your wealth, like Property, Houses and Furniture, provided you bought really good quality and looked after it; and finally
  • Investments – that add to your wealth, over and above the durables you own.  These can include tangible assets like Gold Coins, Diamonds, rare Coins & Antiques and other collectables that are not used up and that appreciate in value over time, or ownership in tangible assets like shares in companies.

Consumables and Semi Durables add to your lifestyle, whereas Durables and Investments (if properly managed), add to your Wealth.  Consumables do not provide monetary security for when you are old, whereas Durable Wealth does.  Note: If you smoke 20 a day, you smoke away the value of an affordable house during your lifetime.  If you drink a lot, you drink away the value of an affordable home during your lifetime.  i.e. You cannot become an antisocial hermit, but you can often make prudent choices by spending money on accruing wealth rather than spending it on frivolous consumables.

Remember, my first sentence was “Material Wealth” is all the durable tangible assets, including equity investments, that we own completely ”free of debt”.  Now it is also important to learn how to measure your wealth.  On the one hand you may have a property that you think is worth R2m, but you will only know its true value when you sell it, so get a few free valuations and allow at least 10% for overvaluation and sales commissions.  Now let us say that your only wealth is an investment and that that investment increases by 5% per annum.  You may think that you are getting richer, but that is only when measured in “Nominal Terms” ie. “just looking at the numbers”.  But we need to factor in a thing called inflation, which is a measure of how quickly your money is losing value.  This means that if inflation is 10%p.a., your investment is actually delivering a negative return of approximately -5%p.a., which means you are getting poorer in “Real Terms”.   Therefore, you should always measure your increasing Wealth in Real Terms.  Now that is more difficult than it seems, as most Governments are cheating in the way they measure the inflation statistics – see my article on “Poverty and Unemployment are here to stay”.  They are deliberately manipulating the formulae to report a lower figure, since that makes it easier for them to balance their budgets as they can give their employees and all pensioners lower increases than their actual cost of living increases.  So in 2009, the USA reported that inflation was 2% per annum, whereas it was actually closer to 10% per annum when calculated using the formula that was used decades ago – see  This means that people though they were doing well if they earned 4% interest as that was 2% more than inflation, when actually they were earning a real rate of -6% (4%-10%)) or 8% less than they thought.

As mentioned above, Real Wealth is the sum total of our more tangible assets – but to understand this we need to intimately understand the “tangible”.  In my opinion a tangible is something you can touch that has value equal to the sum of all the hours that went into its production.

TANGIBLES!! How to measure your Monetary Wealth

Monetary wealth is difficult to measure during Fiat Currency times, especially when the “official” figures are manipulated to the downside.  Having Trillions of Zim Dollars in 2009 was meaningless as that would only buy you a loaf of bread.  Similarly, a Million US Dollars buys about 97% less in 2014 than it did in 1930.  Also, having huge investments in Banks is worthless if the bank goes bankrupt or uses your moneys for speculative investments – after all, the shares are not in your name.  Even if you owned the shares in your name, that company’s management could be engaged in fraudulent activity – therefore diversification is critical.  Therefore, during these “dishonest’ times, we need to look at ways to protect ourselves from these problems.  As a start, I value my wealth at the end of every year in Swiss Francs, US Dollars, Euros, Pounds and Ounces of Gold, with the objective that my wealth should go up by at least 10% in each currency (more than inflation).

What I am saying is you cannot value your assets in Fiat Money, nor can you presume that you own them if they are not in your name.

I think the only way to value assets is in terms of man hours.  Let us presume that all the world’s Fiat currencies fail in 2020.  At that point, barter trade will once again manifest itself.  What is Barter – it is an exchange of tangible goods that are deemed to have equal value and that value is usually the sum of the effort expended to produce that item, coupled with a premium for desirability.  Eg. If a man can make four chairs per day and another can make one sword per day, arguably those have equal value as each is worth a day’s effort.  However, if the man who makes swords wants to exchange one of his swords for four chairs, the man who produces chairs may not want to make an equal swap if he already has a sword.  Contrarily he may be prepared to give 6 or even 8 chairs if he desperately wants a sword to protect his family.  This means that the value of an item is the sum of the effort needed to produce that item and a desirability premium or discount.  Similarly, the value of a house will be the sum of the effort expended to produce the house.  i.e. The labour hours used to get the iron out of the ground, added to the hours to make the steel, added to the hours needed to make a skill saw, added to the hours needed to cut the lumber, added to the hours needed to construct and paint the house.  At this point, if a new currency is introduced, the value of the house will always be equal to the cumulative total of all the effort/hours needed to build it, times the hourly rate paid in the “new currency”.  This means that the relative value of a house never changes in the long term, although it may fluctuate in the short term.  Note! Profit only comes into the equation if intermediaries are used for the sake of convenience, which is always true as you cannot mine your own ore, make your own tools etc.

The next important consideration is that you cannot attach an “hourly effort” value to many modern investments, such as derivatives, which merely have speculative gambling value.  Similarly, many equities are merely investments in “services” not “assets”, many of which represent payment for “convenience effort” that we can do ourselves if times get tight.  Therefore, one should preferably own “tangible assets” outright (in your own name) and I will call these tangibles.  The best tangible assets are things like Gold, Silver, Commodities, Property, etc as their value can be fairly clearly expressed in terms of hours.  A second tier of tangible assets that that are more difficult to “price” as they have value based on desirability, include such things as Rare Artworks, Rare Coins, Antique Furniture etc., which no longer represent “effort”, but only “desirability”.  I would like to stress that owning a Gold Mine or a share in a Gold mine is a tangible asset, albeit more risky, provided the shares are held in your name.  Similarly, owning a share in a factory that has significant assets is a tangible.  Furthermore, people always need food and clothing, so investing in companies that produce the goods that satisfy these basic needs is frequently a good thing when troubled times loom.  In summary! During these times, one should limit investment in companies that have few assets and only have value based on a discounted income stream.  Naturally, if you have more wealth than you need to retire, any surplus can be used to speculate in shares related to new technologies as these are likely to prosper regardless of the economic times.

The next important concept is your rights to own these tangible assets.  Owning a property in a country that has poor property rights, like Zimbabwe, is the same a owning a mine in a country like Venezuela where all Oil Wells were confiscated.  In the early 1930’s the USA confiscated all Gold bullion coins from its citizens.  NOTE! We are moving into an era where our rights are increasingly being subjugated to the state, supposedly for the greater good of the people – a compelling but convenient lie.

The next important concept is third party risk as other people cannot always be trusted with your money or trusted to serve your best interests.  If I own Gold Coins and hold them in my safe at home, I have control over these.  However, if I pay a third party to buy Gold Coins and ask them to store them for me, I have introduced third party risk.  Recently banks that were asked to store Gold for their customers were found to have leased it out and, in so doing, they introduced third party risk, which is exactly what those investors were seeking to avoid – they did this to make additional profit and still had the audacity to charge storage and insurance fees.

The final concept is diversification.  Just diversifying across a lot of equities is not the answer as most equities decline during major corrections/crashes.  Therefore, the first objective is to diversify between “tangibles” such as Gold, Silver, Property, physical commodities, etc. and “traditionals” such as Cash, Bonds and Equities.  However, in the light of the above analysis, during these troubled times, you need to further diversify your investments in numerous ways with some biases:

  • More investments in Tangibles that you own to avoid third party risk;
  • More investments in “Currency Hedges” like commodities and global export manufacturing concerns to protect yourself against competitive devaluations, of all Fiat Currencies;
  • More investments in other countries to avoid Sovereign Risks associated with one country;
  • More investments in shares held in your own name. Remember basic needs such as discount food and clothing stores.  Right now, Futurism is going to bring about some major paradigm shifts and market disruptions, so I would have some monies in Future Technologies like Robotics, Nanotechnology, Biotechnology etc.  All long term plays, but that is where the future money will be;

i.e. I would ensure that that part of my wealth that I will rely on in my retirement is “secure” and use the rest in more speculative investments.

Bottom line, provided your wealth relative to the average person continues to increase, you are continually better off.  Therefore, if there is a stock market crash and everybody loses 50% of their wealth and you lose nothing as you saw it coming and took precautions, then you are suddenly two times better off relative to everyone else.  The final objective is to accrue enough wealth to provide for a reasonably comfortable retirement.  As you can see, measuring the increase in your Wealth is tricky, and all very well, but now we need to think at how we go about accruing wealth.  That is not covered in this article.

For more info, I recommend regular visits to websites like,,,,,,,, etc.

This 3.5 hr Video explains everything in great detail.  It is an education.

Debt = Future Consumption Brought Forward


“Debt is future consumption brought forward” is a well known economic concept.  Essentially, we have two choices in life.  Either we Save first and Buy later, or we Buy now and Pay later.  Obviously, there is a financial cost to buying now, in that the interest we pay is higher than the interest that we would earn on savings and, during the recent period of super low interest rates it made more sense to borrow, not save.

Fiat money, coupled with ultra-low interest rates made it possible for Governments, Municipalities, Companies and Individuals to indulge in deficit spending to the point where global debt in every category is now maxed out and at record levels by any measure.  This gives rise to a couple of questions, namely what happens when interest rates inevitably start to rise and what happens when debt unwinds (deleveraging).  Below I present a very simplistic chart, followed by an explanation.

Had we stuck to tight budgetary constraints, economic growth would have followed the lower red line.  However, with Fiat Money, Deficit Spending, Debt maximisation, etc. we were able to buy considerable growth for a period, as shown by the rising red dashed line – think 1970 – 2000.  However, we are now at the point where the world is maxed out on debt and growth has at best slowed to resume the pace of lower red line in the upper red line, but in fact growth has slowed and/or stalled because of debt service costs.  The key lesson here is twofold.  Firstly, at some point in the very near future, interest rates are going to rise, markets are going to correct, and we are going to have a significant decline in consumption as depicted by the descending red dashed line.  Secondly, Governments and Municipalities have burdened future generations with debt service responsibilities and costs that can never be repaid.

If you want further insights, the Article Below is a classic from John Mauldin.

Debt Be Not Proud

By John Mauldin | Feb 24, 2015

Debt Be Not Proud
Oh Debt, Where Is Thy Sting?
Debt Is Future Consumption Denied
Deflation Is the Enemy of Debt
The Black Hole of Debt
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Some things never change. Here is Eugen von Böhm-Bawerk, one of the founding intellectuals of the Austrian school of economics, writing in January 1914, lambasting politicians for their complicity in the corruption of monetary policy:

We have seen innumerable variations of the vexing game of trying to generate political contentment through material concessions. If formerly the Parliaments were the guardians of thrift, they are today far more like its sworn enemies. Nowadays the political and nationalist parties … are in the habit of cultivating a greed of all kinds of benefits for their co-nationals or constituencies that they regard as a veritable duty, and should the political situation be correspondingly favorable, that is to say correspondingly unfavorable for the Government, then political pressure will produce what is wanted. Often enough, though, because of the carefully calculated rivalry and jealousy between parties, what has been granted to one has also to be conceded to others — from a single costly concession springs a whole bundle of costly concessions. [emphasis mine]

That last sentence is a key to understanding the crisis that is unfolding in Europe. Normally, you would look at a country like Greece – with 175% debt-to-GDP, mired in a depression marked by -25% growth of GDP (you can’t call what they’re going through a mere recession), with 25% unemployment (50% among youth), bank deposits fleeing the country, and a political system in (to use a polite term) a state of confusion – and realize it must be given debt relief.

But the rest of Europe calculates that if they make concessions to Greece they will have to make them to everybody else, and that prospect is truly untenable. So they have told the poor Greeks to suck it up and continue to toil under a mountain of debt that is beyond Sisyphean, without any potential significant relief from a central bank. This will mean that Greece remains in almost permanent depression, with continued massive unemployment. While I can see a path for Greece to recover, it would require a series of significant political and market reforms that would be socially and economically wrenching, almost none of which would be acceptable to any other country in Europe.

Sidebar: Japan would still be mired in a depressionary deflation if its central bank were not able to monetize the country’s debt. As Eurozone members the Greeks have no such option .

However, the rest of Europe is not without its own rationale. To grant Greece the debt relief it needs without imposing market reforms would mean that eventually the same relief would be required for every peripheral nation, ultimately including France. Anyone who thinks that Europe can survive economically without significant market reforms has no understanding of how markets work. Relief without reforms would be as economically devastating to the entirety of Europe as it would be to Greece alone. Ultimately, for the euro to survive as a currency, there must be a total mutualization of Eurozone debt, a concept that is not politically sellable to a majority of Europeans. (The European Union can survive quite handily as a free trade zone without the euro and would likely function much better than it does now.)

Kicking the debt relief can down the road is going to require a great deal of dexterity. The Greeks haven’t helped their cause with their abysmal record of avoiding taxes and their rampant, all-too-easily-observed government corruption, including significant public overemployment.

In this week’s letter we will take a close look at the problem that is at the core of Europe’s ongoing struggle: too much debt. But to simply say that such and such a percentage of debt to GDP is too much doesn’t begin to help you understand why debt is such a problem. Why can Japan have 250% debt-to-GDP and seemingly thrive, while other countries with only 70 or 80% debt-to-GDP run into a wall?

Debt is at the center of every major macroeconomic issue facing the world today, not just in Europe and Japan but also in the US, China, and the emerging markets. Debt (which must include future entitlement promises) is a conundrum not just for governments; it is also significantly impacting corporations and individuals. By closely examining the nature and uses of debt, I think we can come to understand what we will have to do in order to overcome our current macroeconomic problems.

Now let’s think about debt. EELCO NOTE!!  From the article, concepts to take away include:

  • Debt is future consumption brought forward; and therefore,
  • Debt is future consumption denied (as it was brought forward).
  • What is not said but maybe implied is that You can issue “X” amount of Debt to bring “X” amount of consumption forward, but it is a one-time event – i.e. that block you brought forward remains static if your total debt remains static. To bring more consumption forward, you need to issue more debt.  Therein lies the rub – it can only be done in a Fiat environment, never under a Gold Standard.  You can have the benefit once, but not on a continuous basis.  Therefore, in my opinion, Debt Extension can be used as a tool to stimulate the economy when times are bad , but must be reined in when times are good so that the tool is once again available for future use in times of crisis.  That is where the current Fiat strategy has gone wrong.  They did not rein it in, so they had to issue more debt every time times got tough – on top of the constant increase driven by deficit spending.

Debt Be Not Proud

Debt is future consumption brought forward, as von Böhm-Bawerk taught us. It is hard for me to overemphasize how important that proposition is. If you borrow money to purchase something today, that money will have to be paid back over time and will not be available for other purchases. Debt moves future consumption into the present. Sometimes this is a good thing, and sometimes it is merely stealing from the future.

This is a central concept in proper economic thinking but one that is all too often ignored. Let’s tease out a few ideas from this concept. Please note that this letter is trying to simply introduce the (large) topic of debt. It’s a letter, not a book. In this section we’ll deal with some of the basics, for new readers.

First off, debt is a necessary part of any society that has advanced beyond barter or cash and carry. Debt, along with various forms of insurance, has made global finance and trade possible. Debt fuels growth and allows for idle savings accrued by one person to be turned into useful productive activities by another. But too much debt, especially of the wrong kind, can also be a drag upon economic activity and, if it increases too much, can morph into a powerful force of destruction.

Debt can be used in many productive ways. The first and foremost is to use debt to purchase the means of its own repayment. You can borrow in order to buy tools that give you the ability to earn higher income than you can make without them. You can buy on credit a business (or start one) that will produce enough income over time to pay off the debt. You get the idea.

Governments can use debt to build roads, schools, and other infrastructure that are needed to help grow the society and enhance the economy, thereby increasing the ability of the government to pay down that debt.

Properly used, debt can be your friend, a powerful tool for growing the economy and improving the lives of everyone around you.

Debt can be created in several ways. You can loan money to your brother-in-law directly from your savings. A corporation can borrow money (sell bonds) to individuals and funds, backed by its assets. No new money needs to be created, as the debt is created from savings. Such lending almost always involves the risk of loss of some or all of the loan amount. Typically, the higher the risk, the more interest or return on the loan is required.

Banks, on the other hand, can create new money through the alchemy of fractional reserve banking. A bank assumes that not all of its customers will need the immediate use of all of the money they have deposited in their accounts. The bank can loan out the deposits in excess of the fraction they are required to hold for depositors who do want their cash. This lets them make a spread over what they pay depositors and what they charge for loans. The loans they make are redeposited in their bank or another one and can be used to create more loans. One dollar of base money from a central bank (sometimes called high-powered money) can over time transform itself into $8-10 of actual cash.

A government can create debt either directly or indirectly, by borrowing money from its citizens (through the sale of bonds) or by directing its central bank to “print” or create money. The money that a central bank creates is typically referred to as the monetary base.

Debt can be a substitute for time. If I want a new car today, I can borrow the money and pay for the car (which is a depreciating asset) over time. Or I can borrow money to purchase a home and use the money I was previously paying in rent to offset some or all of the cost of the mortgage, thereby slowly building up equity in that home (assuming the value of my home goes up).

Oh Debt, Where Is Thy Sting?

Let’s start with a simple analogy and then get more complex. When someone borrows money, they agree to make principal and interest payments over time. For instance, $25,000 borrowed at 5% interest over three years to pay for a car would require a monthly payment of $749.27. Not a problem for someone making $100,000 a year ($50 an hour) but a serious, almost impossible commitment for someone making $10 an hour. After taxes, the car payment would gobble up almost 50% of that person’s income.

All but the most disciplined of us have encountered the unpleasant reality of running up too much credit card debt, typically when we were young. For those outside the US, credit card interest rates can often run 18% or more, and the penalties for late payment can increase the net amount substantially and cause the interest rate to be jacked up even higher. The unpleasant reality of paying far more in interest each month than you are paying on the principal can be quite the eye-opener.

Sometimes debt can be overwhelming. In many countries, individuals can file for bankruptcy and get relief from their debt (as well as losing any remaining assets). In the middle of the last decade, the US bankruptcy laws were changed to make it more difficult to declare bankruptcy. As the chart below shows, bankruptcies fell precipitously but are now back to where they were just a few years before the law passed. Clearly the financial crisis contributed to the new steep rise in bankruptcies. (The 2005 spike in bankruptcy filings was from people rushing to file bankruptcy ahead of the new law’s taking effect.) The vast majority of bankruptcies are now filed by consumers, not by businesses. In 1980, businesses accounted for 13 percent of bankruptcies, but today, they are just 3 percent.

Personal bankruptcies can happen for all sorts of reasons, but in the US they are caused primarily by overwhelming medical expenses, accounting for around 60% of bankruptcies (depending on the year). Other causes are (in order of prevalence) job loss, out-of-control spending, divorce, and unexpected disasters.

Bankruptcy is designed to keep people from being literal slaves to debt. We have come a long way in our civilization from the days of debtor’s prisons. Texas actually wrote into its constitution that a debtor could not lose his horse, tools, or homestead, the principle being that a person needed to be able to move on from bankruptcy and make a living. That sort of basic protection has since evolved nationally into a rather complex but reasonable system for letting people move on from untenable financial situations.

I say that we’ve come a long way from debtor’s prisons. There is a qualifier to that statement. In the US, student loans cannot be discharged in bankruptcy. They are with you until you finally pay them off. In Spain, you cannot get out of a mortgage debt through bankruptcy. Even though the bank can take your home from you, you are still obligated to pay the debt forever. There are exceptions to bankruptcy protection everywhere.

Debt Is Future Consumption Denied

Why go on and on about personal bankruptcy when we are talking about government debt? Because the same principles apply, with a few caveats.

Governments have outright defaulted on their debt nearly 300 times in the past few hundred years. Spain is the all-time winner, with six defaults in the last 140 years and 12 if you go back to 1550. Italy and Argentina have made a sport of defaulting this last century, if you count monetization as a form of default, which it is. While I can find no statistics, inflation and loose monetary policies have almost surely destroyed far more buying power than outright defaults have.

There are times when a government simply cannot pay its bills and must either default outright or change the terms on its debt, just as individuals do.

If an individual or corporation or country has a significant amount of debt and their income drops by 25-30%, it may become impossible to pay that debt and also cover the necessities of life. Greece, as a current example, has not really added to the outstanding total of its debt over the past three years since its last debt default; but the growth of the country (and therefore of its tax revenues) has collapsed by about 25%. Even if tax collection can be improved, the interest rates Greece is forced to pay today may make the repayment of the country’s debt untenable.

Debt is future consumption brought forward into the present, but a corollary is that debt is also future consumption denied. If you will have to pay both principal and interest on debt in the future, then you are setting aside and spending money on debt service that is no longer available for current consumption. And, yes, that debt service goes to bondholders, but their return of capital does not necessarily express itself in consumption or further lending.

Further, when economies are debt-constrained, capital looking to be invested in fixed-income assets finds fewer creditworthy opportunities available and begins to take lower interest payments in a search for yield. The current low-interest environment is not just a product of the Federal Reserve and other central banks; it also stems from a lack of demand from creditworthy borrowers.

Dr. Lacy Hunt of Hoisington Asset Management has been documenting the drag on growth that overindebtedness creates. He recently wrote (emphasis mine):

Poor domestic business conditions in the U.S. are echoed in Europe and Japan. The issue for Europe is whether the economy triple dips into recession or manages to merely stagnate. For Japan, the question is the degree of the erosion in economic activity. This is for an economy where nominal GDP has been unchanged for almost 22 years. U.S. growth is outpacing that of Europe and Japan primarily because those economies carry much higher debt-to-GDP ratios. Based on the latest available data, aggregate debt in the U.S. stands at 334%, compared with 460% in the 17 economies in the euro-currency zone and 655% in Japan. Economic research has suggested that the more advanced the debt level, the worse the economic performance, and this theory is in fact validated by the real-world data.

There are a host of reasons for debt-related economic drag, but the primary cause is that the debt was of the nonproductive kind. The debt was incurred primarily to fund current consumption, whether to pay benefits or for defense spending or what have you.

Deflation Is the Enemy of Debt

Deflation is the general condition where prices go down. This can be caused by increased productivity or decreased demand. We all like it when the cost of our latest technological goodies and indeed everything else we buy goes down. We are generally not happy when the economy falters and prices fall because of slack demand. One of the primary debates among economists is whether economic slowdowns are caused by insufficient demand or insufficient income and productivity.

There have been periods in many countries when there has been economic growth in the midst of general price deflation, but we more typically think of deflation as occurring in periods of economic retreat. Recessions – and certainly depressions ­– are almost by definition deflationary.

In a growing, increasingly productive world, the trend for prices should be down, that is to say, deflationary. But that assertion assumes one necessary condition: a stable monetary base. Proponents of a gold-backed currency point out that gold offers a stable monetary base, while fiat currencies are subject to expansion or contraction by central banks and governments. It is often said that all fiat currencies will eventually explode or implode in value, but that is not necessarily true. A carefully constrained central bank and government will maintain the value of a country’s money. Think Switzerland (the primary example, but there are others). The value of the Swiss franc in relationship to currencies around the world has continued to rise even as the Swiss economy has grown, and their standard of living is among the highest in the world. (Of course, as the Swiss have learned, an overly strong currency can be problematic, too, in this era of intensifying curre ncy wars.)

But while a generally deflationary environment reduces the prices of things we buy, it does not reduce the cost of servicing debt – quite the opposite. Deflation is the enemy of debt. The obvious example, currently, is Greece, as noted above. The deflationary depression the Greeks are in has increased the value of their debt in relation to their income, even though the nominal value of the debt has hardly risen. And because they have not had the benefit of an increase in buying power (stuck, as they are  with the euro as a currency and having no control over Eurozone monetary policy), deflation has ravaged their economy.

To put it in personal terms, if your real income drops 25%, then whatever debt service you’re carrying will be a correspondingly larger portion of your income.

In a world where incurring government debt is allowed only when and if that debt is deemed productive, deflation would not be a problem, as incomes would rise with increased productivity. But debt that is nonproductive will grow in absolute cost to an economy in periods of deflation.

One can argue with John Maynard Keynes, and I do so rather aggressively at times, but he did have some valuable insights. If an economy is in recession, the government can lean against the drag on demand by increasing spending. That of course means increasing debt, and Keynes argued that government should borrow and spend in times of recession. Governments everywhere have taken that dictum to heart.

What they have ignored is his second point: a government should pay back that debt during the good times that follow. That discipline allows it to borrow and spend again in when recession recurs. The very concept of a balanced budget is now considered anathema in much of what passes for academic economic circles. It is perjoratively labeled as “austerity.” As if balanced budgets were the cause of economic pain and suffering…

Following the historic budget compromise between Clinton and Gingrich, the United States began to run actual surpluses in the late 1990s, and indeed we were talking about what would happen if we eliminated government debt altogether, so rapidly were we paying it down. The surpluses were accumulated during a rather remarkable economic time. Then the Republican Congress, aided and abetted by George W. and Karl Rove, came along and squandered that surplus. Dick Cheney famously said that deficits don’t matter, in defense of the Bush administration’s policies of cutting taxes and increasing spending in order to curry favor with voters. (Refer again to the quote from von Böhm-Bawerk at the beginning of this letter.)

Absent those large increases in debt and deficits, the Obama deficits, while violating the rule of only accumulating debt for productive purposes (to mention only one violation of principle), would have been manageable in the grand scheme of things. But we are now rapidly approaching a time when debt will once again become an important issue in the US, as it was in the ’90s. Too much debt will become an ever larger drag on the US economy, just as it already is in Japan and Europe.

This rising debt in the US and around the world is one of the primary reasons that central bankers fear deflation. A little inflation plus a little GDP growth helps reduce the overall burden of debt in an economy. While central bankers everywhere seem to think that 2% inflation should be a target, many of them would accept a somewhat higher number. I personally take issue with the 2% figure, because that’s an inflation target that will reduce the purchasing power of any saved dollar by 50% in 36 years. A 2% inflation target is essentially a tax on savings and investment, no matter how you look at it. In a low-interest-rate world, 2% inflation means conservatively invested savings are losing buying power every year. But a little inflation does make debt more manageable, and central bankers seem to be more concerned with making sure that debt can be serviced than that savings can earn an adequate return. Current central bank policy is tantamount to financial repre ssion of savers and retirees.

Neo-Keynesians would argue that debt and deficits are not a problem, in that the central bank can ultimately monetize the debt if necessary. And they point to Japan, whose central bank is doing just that. They look at our own national balance sheet and GDP numbers and ask, so what’s the problem?

But debt is future consumption denied. If you monetize your debt beyond the real growth rate of the economy, then you are reducing the value of your currency and thus reducing your potential future consumption. The fact that this reduction doesn’t happen all at once and may not happen in the immediate future does not remove the reality. In the fullness of time, quantitative easing will result in the reduced buying power of the US dollar.

Yet the US monetary base has expanded significantly, and there has been no real increase in inflation, and the dollar is actually getting stronger. “So what’s the problem?” Mr. Krugman asks. Inflation is brought about by not just an expansion of the monetary base but also by a stable, concurrent rise in the velocity of money. It’s complicated, I admit. I have devoted more than a few letters to the concept of the velocity of money. The current period of low inflation has been caused by a rather dramatic fall, over the last eight to ten years, in the velocity of money. As I predicted almost five years ago, the Federal Reserve was able to print far more money than anyone could imagine without the threat of inflation rearing its head.

The problem is that the velocity of money is a very slow-moving statistic. It is what we call mean-reverting, in that the velocity of money can’t rise to the heavens unless you have a Weimar Germany-type situation, and it can’t fall to zero. It oscillates over long periods (think decades) around an average or mean. Right now the velocity of money is falling, which allows the US Fed to have a very loose monetary policy without having to worry about inflation. When the velocity of money begins to rise, the Fed will have to lean against what could quickly turn into soaring inflation with a tighter monetary policy than it otherwise would have, because of its recent, extreme episodes of quantitative easing. Think Paul Volcker in the early ’80s, turning the screws on 18% inflation. That was not exactly a fun time.

Of course, economists think that we can avoid any big mistakes. But sadly, there is no such thing as a free monetary lunch. Today’s quantitative easing (in a period of reduced velocity of money) will mean tomorrow’s much tighter monetary policy – or much higher inflation. Or both.

The Black Hole of Debt

Debt, when used properly, can overcome obstacles to productivity and bring on a warm day of sunshine, fostering life and growth everywhere. But if debt increases too much, just like a massive dying star it can collapse upon itself, explode like a supernova, and become a black hole instead, sucking in all the life around it.

Without a massive increase in debt, present-day China would have been impossible. Clearly that debt has improved the life of its citizens. But in recent years China has used debt to maintain a strange new form of growth and is increasingly using debt to build and consume, heading toward an ever less productive outcome. As in many other places in the world, each new dollar of debt is producing less in terms of GDP growth.

There has been a massive explosion of global debt since the beginning of the Great Recession in 2007. Normally, after a banking and financial crisis, one would expect a period of deleveraging and a reduction of debt. This time is truly different. Next week we will look at the actual growth of debt around the world and what it has accomplished.

Have a great week, and if you are in the northern hemisphere, try to stay warm.

Your thinking about debt and productivity analyst,

John Mauldin

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Bitcoins / Crypto-Currencies and/vs Blockchain

Econ4 – Bitcoins / Crypto-Currencies    and/vs    Blockchain

“Tell me about Bitcoins?” has become a tricky question to answer briefly so I decided to elaborate in writing.  One cannot discuss Crypto-Currencies without discussing Blockchain, since it is Blockchain technology that makes Crypto-Currencies secure.  Therefore, I am going to address Blockchain technology before discussing Bitcoin.

NB! Bitcoin is not Blockchain and Blockchain is not Bitcoin.  Blockchain technology is a software platform something like Microsoft, Apple or Java, on which Bitcoin runs.  However, Bitcoin served as a wonderful marketing tool for Blockchain technology as it brought it to everyone’s attention.  In fact, of late there are many companies pushing and developing Blockchain technology and most have at least one Crypto Currency with which to reward the people (miners) who process the transactions.

Blockchain – worth understanding as this technology is becoming pervasive

So what is Blockchain?  There are those who say Blockchain is the disruptive / breakthrough technology of the century (on par with the internal combustion engine).  Considering the breadth and variety of technological breakthroughs we are currently seeing, this is a bold statement.  The Blockchain concept is simply a decentralised ledger / record / book keeping system.  Each ledger entry is recorded at a series of increasingly big and expensive “interconnected” computers located all over the world – think subcontractors.  See the decentralised picture below – Banks centralised.

Blockchain                                        Banks

NB!  Imagine Blockchain, but with a thousand nodes each connected with the other.

Effectively each transaction gets recorded in a block, but one needs to picture a number of blocks in the chain – with numerous transactions creating new blocks.

Below a simplistic explanation of how each block in the chain above works:

  • Different transactions are combined (Tx0 & Tx1), encrypted into a “Hash” and these Hashes are, in turn, combined and encrypted into a Tx Root. The Tx Root is where the transaction records are stored in the block.  The block has:
    • Hash – this is simply the encrypted “tracking number” that links each block to the previous block – i.e. These Hashes hold the chain / sequence together;
    • Tx Root – the above encrypted record of the transactions in the block;
    • The Nonce, which is defined by Wikipedia as:- The “nonce” in a bitcoinblock is a 32-bit (4-byte) field whose value is set so that the hash of the block will contain a run of leading zeros. The rest of the fields may not be changed, as they have a defined The Nonce of this block provides the encrypted tracking number or “Prev. Hash” for the next block;
    • Time Stamp. Each block of transactions that is processed by any one computer has to be verified by other computers before it becomes a legitimate block.  This verification process creates the Time Stamp, which is critical as it locks the transaction record for posterity;
  • Finding and verifying transactions is called mining and anyone can become a miner, which underscores the decentralisation and transparency. There is a normal financial incentive comprising a small “buy/sell” commission for the brokers who help you buy or sell the Crypto Coins.  However, in addition, there is a lucrative “Bitcoin” / “Crypto Currency” mining reward for setting up the “mining / node computers” that process the transactions.  These need to be increasingly big and fast because only the first to verify the transaction gets rewarded.  Let’s say you go to a broker to buy Bitcoins.  He earns his “buy/sell” commission when he posts the transaction on the Blockchain network.  One of many node computers compiles numerous such transactions in a block and verifies these, for which they are rewarded by the Bitcoin / Crypto-Currency software with newly created Bitcoins / Crypto-coins.  Eg. The Bitcoin system allows a total of 21 million Bitcoins to be created.  Wikipedia definition: Bitcoin. 12.5 bitcoins per block (approximately every ten minutes) until mid 2020, and then afterwards 6.25 bitcoins per block for 4 years until next halving. This halving continues until 2110–40, when 21 million bitcoins will have been issued.  Each of these computers is linked to the Bitcoin / Crypto-Currency network that distributes the verified transactions to all the other computers.  The decentralised network now comprises 10 000 computers, which means the entire chain is stored on 10 000 computers.  All this is managed by the “lay people” node owners and monitored by a Peer to Peer internet protocol that entrenches transparent security.  Some of the ledgers are open for scrutiny, which means you can see the history of all transactions and scrutinize any one, with only the account number shown and not the identity of the account holder (in the case of Crypto-Currencies).  Other ledgers are hidden – read not open for scrutiny;

NB!  The following Blockchain evaluation has a Crypto-Currency bias, particularly i.r.o. aspects like anonymity.  For other applications the Blockchain software would be tailored to reveal as much as is deemed desirable for that particular application.

This means is that for Crypto-Currencies like Bitcoin, the Blockchain is a “public” and extremely diversified ledger, whereas for other applications it would be a “private” and less diversified ledger – that is not so electricity intensive (more about that later).

The Pros & Cons of Blockchain for Crypto-Currencies are as follows:

  • Free of Government interference:- While each of the “node” computers may be located in any country, they are merely “another keeper of records” for a Blockchain network software that has no domain as it resides in the ether of the internet.  The amazing thing about this technology is that “There is no domain to attack, so Governments cannot shut the Blockchain network down”.  e. Nobody can freeze your account/wallet, nor can they shut down the interconnected web of nodes.  Shut down one computer/node and it makes no difference as there are hundreds more that have recorded and stored the same “entire” chain transaction history.  Contrarily, with a Bank, there is a Centralised Computer with a Network to the branches, all of which can be hacked or closed down.  NB! Governments can interfere with and regulate the brokers who broker the transactions in your country;
  • Access:- Bitcoin / Crypto-Currencies are easily available to everyone with access to the internet and payments can be made online;
  • No borders:- Due to the fact that it resides on the internet, the Blockchain enables crypto-currencies like Bitcoin to facilitate transactions anywhere in the world – i.e. money can be sent anywhere and nobody can stop you.  NB! Again, you could make a Crypto-Currency payment directly to a private person for a house, but Governments can regulate the brokers that convert Crypto-Currencies to local currency or visa-versa;
  • Low transaction costs:- Potential for far lower transaction costs/commissions compared with banking transaction fees. However, Bitcoin transaction fees have become pretty expensive at over $20 per transaction, which precludes use in cheap retail transactions – not a problem for large transfers;
  • Ease:- International transfers are far easier and less time consuming than with banks THE BLOCKCHAIN KEEPS EVERYONE HONEST, AND A WHOLE LAYER OF BANKING / BUREAUCRACY IS REMOVED, LOWERING COSTS.” — PAUL VIGNA;
  • Quick transactions:- International money transfers would happen in minutes or eventually seconds instead of the current 3-5 days – during which time the banks earn interest on your money;
  • Cut out the middle man:- Blockchain will in most cases cut out the middle man and allow the transaction to be concluded directly with the end user.  This should bring about considerable cost reductions, more efficient service, less room for errors and time saved;
  • Anonymity:- The transactions are anonymous – no one will ever know your name or address. e. No third party risk, or risk of identity theft from banks.  NB!  Many Crypto-Currency transaction amounts are visible to all, but nothing more – some of the new Crypto-Currencies do not show amounts;
  • Security:- The key advantage of Blockchain technology is that the records cannot be tampered with and effectively your account cannot be hacked provided no one has your password. The reason for this is that every time you try to change anything in a past block, the Nonce/Tracking code to the next block would have to change all the way up the chain, so everyone would immediately know.  Furthermore, you would have to hack every one of the ten thousand decentralised computers all over the globe, where the transactions are duplicated / stored, failing which reconciliation discrepancies arise;
  • Trust/Honesty/Dishonesty:- There is a permanent record of anything that was recorded on the Blockchain – do something bad and it will be recorded for posterity – applies more to other applications.  Therefore, one of its most attractive qualities for any other applications is that the data cannot be duplicated or altered, which means “TRUST” is absolute.  In our current monetary system double counting is a huge problem – see minutes 15-22 at ;
  • Transparency (of origin):- One has a transparent record that cannot be tampered with. Imagine a world where everything is on a Blockchain and these Blockchains talk to each other.  You buy “organically produced food”.  You would be able to track back the transaction chain to see if the farmer bought fertilisers, if the processor bought additives, preservatives and/or colourants, etc. right to the retailer;
  • Smart Contracts:- Currently a lot of the excitement over Blockchain is about a concept called Smart Contracts.  Etherium developed smart contracts, a concept now being copied by others, where the contract’s compliance criteria and payment terms are entered, where-after Blockchain monitors and manages the contract from ensuring that all parties comply, to automatic payment on compliance – i.e. nobody can renege on payments fairly due;
  • Problems:- There are currently (mid 2017) at least three big problems that need to be resolved if Blockchain applications for Crypto-Currencies are to succeed and become widely adopted. The “First” is transaction speed, in that transactions should ideally happen in less than a second if retailers are to adopt the technology, since payment should be as quick as when it is done by Credit Card (Currently miner verification takes 3-10 minutes).  Imagine a queue of customers at the till when each transaction takes 10 minutes to process.  The “Second” is scalability in that future platforms should preferably be able to handle say 100 000 transactions per second, which platforms like Bitcoin cannot (they’re doing <30 t.p.s.).  The “Third” is that transaction costs need to come down if Crypto-Currencies are to be widely adopted by any and all retailers for any and all retail transactions, as the costs are currently prohibitively high for small retail purchases (Bitcoin went up from 50c to $20);
  • Electricity problem:- Currently Crypto-Currency Miners are using warehouses of computers, insane amounts of electricity and need to operate in low power cost environments.  What happens when they are processing millions of transactions per second?  Their electricity requirements will be off the charts.  This will also impact on their transaction costs once the full quota of each Crypto-Currency has been mined and they are no longer rewarded for mining.  This “High Power Consumption” can only be resolved with next generation computers such as Quantum Computers – even currently emerging Teraflop Computers may not be the solution as this industry’s demands grow;
  • Miner Reward problem:- Currently miners are rewarded with Crypto-Currencies like Bitcoin.  What happens when the maximum of 21 Million Bitcoins has been issued – they will have lost their incentive to mine and will want to be rewarded with higher transaction costs?;
  • The future:- Blockchain technology is likely to become pervasive as it provides an absolutely secure record keeping system for almost any information in any industry or activity.  Most banks are looking at moving onto a Blockchain platform for a secure ledger.  However, Governments, States, Municipalities, Manufacturers, Retailers, etc are also looking at it.  There is talk of holding / managing elections on Blockchain with voting via smartphones – imagine hack proof verification where you can only vote once, etc.  They are talking about having all public records like property registers on the Blockchain with lower transfer / transaction costs.  Probably estate agents would be able to change the property register – because the transaction has to be verified by another.  Bottom line, there is almost no business that would not benefit from Blockchain technology to securely keep its records with lower costs.  I think almost everything will eventually be recorded on Blockchain systems, which are likely to eventually all link up.  It should be noted that Blockchain will result in many people losing their jobs as it cuts out the middle man and, therefore, it will result in higher unemployment;
  • BLOCKCHAIN CONCLUSION: Blockchain technology is initially likely to be most disruptive in areas where the “trust relationship” has been broken, or where record keeping discrepancies are common / problematic, such as in Banks, Investment Companies, Brokers, Public Service organisations, etc. However, over time it is likely to be used for almost everything, such as keeping “all” personal, health, etc. information about every person in the world, because that information will be “cast in stone”.  This could work to our advantage as Advertisers, Researchers, etc. could be willing to pay for our data.


NB! Crypto currencies are in their infancy and therefore risky.  The hype and volatility create a risky environment at present and many smaller/later currencies collapsed with the recent correction, which is still likely to go further below $6 000.

Bitcoin – Ether, Ripple, Litecoin, Monero, etc. – over 1 400 Crypto-Currencies

Top 10 Crypto-Currencies  True as at mid-2018. Also check out BitPesa, a brilliant Kenyan banking/transfer/payment equivalent and Wala’s Dala.

Remember, every loyalty program is just another form of Crypto-Currency and certain chain-stores could set up their own “in house” Crypto-Currencies.  However, I will focus only on actual “global” Crypto-Currencies rather than Loyalty Rewards.

NB! Crypto-Currencies only reside on the internet, in that you can never hold a Crypto-Currency in your hand.  i.e. You buy a Crypto-Currency with one local currency and then go to another country where you exchange your Crypto-Currency for that local currency.  Alternatively you transfer the Crypto-Currency to another person, retailer or organisation on the internet, either by way of a Crypto-Currency transfer to pay for goods or services, or by way of a Crypto-Currency debit card that does the transfer.  There is little doubt in my mind that Crypto-Currencies are here to stay.  However, Crypto-Currencies are still in the “immature technology” stage and the dominant players that emerge when the technology has matured are unlikely to be all those who are around today.  There are the aforementioned logistical and developmental challenges that are currently being addressed like transaction speed, scalability and broader acceptance by retailers etc.  Furthermore, the broader public’s knowledge, understanding and adoption of this technology is in its infancy, so education and trust have a long way to go.  Finally there is the question of whether or not there will be legislation that will come to bear on brokers, retailers etc.

Bitcoin is one of well over 1 400 Crypto-Currencies, albeit the biggest, each of which has the following characteristics:

  • One may own a millionth of a Bitcoin – i.e. Bitcoins are infinitely divisible, so they could be used for anything, no matter how insignificant.  The value of a Bitcoin should stabilise once there are 21 million in issue.  However, at present the value can fluctuate massively as it is susceptible to speculation and manipulation.  If Bitcoin were the only Crypto-Currency, its value could escalate hugely as the 21 Million would be desired by say 1 Billion people.  However, there are now many Crypto-Currencies.  i.e. The more of these that become “accepted”, the greater the number servicing the market and, therefore, the greater the extent to which each is shared / diluted and thus devalued;
  • The great advantages or Crypto-Currencies are:
    • You can take money offshore, without having to bother with foreign exchange and other government controls like tax clearance certificates. The risk of financial loss due to volatility can be countered by only holding the Crypto-Currency long enough to make the transfer to another country – i.e. you only hold it for a day or two;
    • Safer than a bank? With the advantages listed further above;
    • Progressively more retailers / merchants / municipalities will in future accept Bitcoin and other Crypto-Currencies, especially if transaction costs are kept low – which many are working on. Some countries show greater adoption and others lower adoption;
    • Currently their value is escalating so they are perceived to have investment value – which is not true. Actually their value is currently driven up by mere speculation, not investment demand.  That value is irrevocably tied “only” to the belief in the system.  When that belief fails, the Crypto-Currency fails much like the Zim Dollar failed;  HOWEVER:
  • Every Crypto-Currency is arguably just another Fiat Currency like the Dollar, Euro, Yen, etc. Worse still, you cannot hold Crypto-Currencies in your hand.  This means it is not a true store of value but merely something that facilitates transactions, particularly international transactions.  NB! When currencies were on the Gold Standard, they could serve as a store of value;
  • Adoption is a bit of a problem. Gradually, as Crypto-Currencies become more sought after, more and more retailers, municipalities, etc. are opening their doors to accepting Crypto-Currencies – including in the USA.  Switzerland (Zug’s Crypto valley) and Singapore are the adoption leaders.  However, as more Crypto-Currencies are launched, there will be a limit to the number of Crypto-Currencies that they can accept – like they do not accept all credit cards.  NB! The Crypto-Currencies are already launching debit cards;
  • Every week there is another ICO (Initial Coin Offering), as someone hopes to get rich if “his” Crypto-Currency is properly adopted by the markets like the top Crypto-Currencies. However, this just adds another Crypto-Currency to an already long list of Crypto-Currencies and “if anyone can create that value, there is no value”.  NB!  There is nothing to stop you from creating your own Crypto-Currency provided you have the IT Geek skills and sufficient capital to develop the software.  e. The more Crypto-Currencies there are, the greater the risk that Crypto-Currencies are discredited as there are many that will fail.  NB! Some of these ICO’s are outright scams;


  • If you register with a Crypto-Currency like Bitcoin, you get a secure Bitcoin Wallet. Think of this as your account at the bank.  However, this wallet has a password (private key number) that is unique for that wallet and:
    • You should never lose this password/key, as you cannot get it back. If you lose the password/key, you have lost your Bitcoins or other Crypto-Currency.  There is no link that says “forgotten your password? – click here”.  This “key/pin/password number” should also be recorded somewhere safe for your dependents or others in the event of your death – eg. A confidential closed envelope attached to your last will and testament, failing which your Crypto-Currency is lost into a black hole of unclaimed Crypto-Currencies;
    • You should never let the broker hold this password/pin/key as his system could be hacked and then you will lose your Crypto money;
    • You should never store this password on your computer or cell-phone as they could be hacked and then you will lose your Crypto money;
  • Mistakes! Reversing transactions requires agreement of the other party, which could be impossible if you do not know who that mistaken recipient is;
  • Crypto-Currencies are extremely volatile – at least until the technology has matured and been widely adopted – i.e. you can make money fast, but you can also lose money fast due to speculators manipulating these markets;
  • My biggest question is what happens when 21 million Bitcoins have been reached and the miners no longer have the incentive to mine/manage the nodes/system. At that point they will have to raise transaction costs, which is the opposite of what we want;
  • A second problem is the scale of mining operations. Currently, with low adoption the miners are using insane amounts of electricity.  Imagine what happens when they are processing millions of transactions per second;
  • Pyramid System? Currently there are many Bitcoin and other Crypto clubs where you can invest in the Miners (people who process transactions and earn Crypto-Currencies) and you get that Crypto-Currency as a reward.  In my opinion there is a high risk/probability that this is a pyramid scheme.  This could easily be true as they could use the Rands/Dollars others invest to buy Bitcoins and pay you a dividend in Bitcoins.  NOTE! I am not saying that the Crypto-Currency is a pyramid scheme, but that the clubs where you invest for a “high” “promised” Crypto-Currency return could easily be (most likely is).
  • Other risks?


NB! It is very likely that most countries will eventually set up their own Crypto-Currencies, however, there will be nothing to stop them from continuously adding new currency, which brings us back to another Fiat Currency.


This picture that did the rounds when bitcoin was rising 5-10% daily tells the story (see link) – few people understand Bitcoin, but everyone is an expert and everyone is getting in on the action.  Pain inevitably followed.

Both Blockchain and Crypto-Currencies are in their infancy and there will be a shakeout.  It is unlikely that the majority of the current players will be around in the future.  Furthermore, eventually 4 or 5 or 10 Crypto-Currencies will emerge as the major players, in the same way that we have 4 – 5 – 10 major players in the Credit Card arena.  Therefore, you need to be aware of all the above considerations when choosing your Crypto-Currency and you should be willing to dump one Crypto-Currency for another as new dominant players emerge.  NB! Volatility will persist for as long as Crypto-Currencies are in their infancy.

Why own Crypto-Currencies?  You have money outside the system that can be taken anywhere.  You buy with US Dollars, go to Aus and sell for Aussie Dollars without any Forex controls.  Secondly, over time, a good Crypto-Currency is likely to appreciate, whereas modern currencies inevitably depreciate.  This implies a bias to depreciation, compared with the current bias in favour of inflation as they print ever more Fiat money.  Finally, money in Banks can be frozen or confiscated a-la Greece, become worthless a-la Zim, be taxed or stolen by hackers, mismanaged by bad bankers/brokers, etc.  Therefore, there is no doubt that Crypto-Currencies have a place in the future and at this stage Bitcoin and Ether (Etherium) seem to be two of the emerging giants.  If say 2 -10 of the biggest are adopted and the rest fall by the wayside, I presume that the value of each Bitcoin/Ether/Other coin will appreciate considerably for the next years.

Crypto-Currencies are here to stay, but still in a state of flux.  If you are wealthy or young and want to speculate, put some money in Crypto-Currencies, although it is a speculative bet that it will go up.  In the long run we will all have Crypto-Currencies, but do not put all your eggs in one basket – only a small percentage of your wealth.

The question now is which of the Crypto-Currencies will prevail.  One of those currently on the table, or will they be new ones.  Those that are currently popular are Bitcoin, Ether, Dash, Litecoin, Ripple, Z-Cash, Monero.  I quite favour the latter two which are both covert, but I do not think they have solved all the other problems.

Remember, if you only want to move cash out of a country, the price is not a big deal, since you buy today and sell tomorrow, so there may be little impact from volatility and you could time that work in your favour.  Volatility hits those who hold.

Links to other articles on Crypto-Currencies – or Google yourself if you wish:

This one is one hour long, but very good – pretty much a “Must see”:



John Mauldin’s video

Securing your wallet

Things you need to know

Learning about

Lay explanation of “How interest rates impact on Equities, Bonds & Property” and the outlook for the WAY FORWARD?

Econ5 Lay explanation of “How interest rates impact on Equities, Bonds & Property”  and the outlook for the WAY FORWARD?

When I speak of interest rates, I am actually referring to 10 year Bond Yields, as 10 year Bonds have always been deemed “risk free” investments on the assumption that Governments cannot go bankrupt (false with Fiat).  Historically yields on 10 year Sove0reign Bonds have been the market’s mechanism for pricing in the market risks of their respective countries.  Now it is important to know that when Yields go down “over time”, Bond, Equity and Property prices go up and vice-versa – explanations further down.  On the chart below we see that Yields went down for 36 years from 1980, resulting in the multi-decade Bond, Equity and Property market booms that we are now familiar with.  However, yields made a double bottom in June 2012 and June 2016, which implies that the bottom is in and yields are likely to rise for the next 10-20 years, during which time the above markets are likely to perform poorly.  Below we see that Yields have broken above their 36 year red resistance line, which is a big deal, so we should see yields make a confirmed trend breakout to the upside in the next two years.  Why 2 years?  Because I suspect equities may crash in 2018/ 2019 which will cause yields to drop to the red line one last time.  A triple bottom?

If I am right, Inflation and Yields will rise while Equities, Bonds and Property prices will perform poorly in the next decade.  However, if markets crash and bonds cannot properly fulfil their traditional “safe haven” role, we have to ask what will – Gold?


Interest rates inversely impact on Equities in the longer term, in that Equities go up when 10 Year Yields go down and vice versa.  The explanation is as follows:

  • Let us imagine that the US 10 year Bond Yield is 3% (Feb ‘18) and that inflation is 2.5%. This means an investor is not beating inflation after tax, so the investor decides he needs to invest in Equities to get a return that beats inflation.  However, because Equities are more risky than Bonds, the investor demands a risk premium of say 2%, which means he wants to invest in a company that yields a 3% + 2% = 5% Return on Investment (ROI).  The Earnings per Share (EPS) divided by the price of that share represents the ROI or the yield of that share;
  • Now let us imagine that company X’s Shares are valued at $100 and that its EPS is $5 per share, which means it yields the required 5% ROI sought by the investor, so he buys the shares;
  • Now for the sake of this exercise, let us imagine that the Risk Free Rate jumps from 3% to 6% “OVERNIGHT”. Suddenly the investor can get a better yield from Risk free bonds and considers selling his shares.  However, the new buyer re-values the return he wants from Company X as follows:-  the revised Risk Free Rate of 6% + 2% Risk premium = 8%.  Therefore, he says he is prepared to pay at most $5.00/8% = R62.50 per share.  In fact, he would probably look at the impact the higher interest rates are going to have on the company’s earnings and, let us suggest, he concludes that the earnings are going to fall to $4.50, in which event he would only be prepared to pay $4.50/0.08 = R56.25 per share;
  • Conclusion: Company X’s share price almost halved when the Risk Free Rate doubled, which confirms that share prices go down when interest rates rise. Based on this and the above chart, this means that Equities would suffer materially if interest rates were to rise materially for a considerable time.  It should be noted that when markets rise rapidly, investors will price in lower EPS returns in the expectation of higher Capital Appreciation Returns.


The pricing mechanism for Bonds works exactly the same for Equities, in that Bond Prices go up when Bond Yields go down and vice versa, because you are paying a sum of money for an asset that has to yield a market related return.  However, the determination of the appropriate yield has two scenarios, one of which is tied to short term factors and the other of which is tied to long term trends as follows:

  • Short term factor: When markets correct “materially” and there is a flight to the safety of Risk Free Bonds, that demand causes Bond prices to rise and Yields to fall, regardless of any long term trend bias. This is because traditionally Bonds have been the “safe haven” / flight to safety destination for capital when Equity markets are overpriced or correcting.  e. Investors would rather have a slightly negative after tax return than a significant loss as and when markets correct/crash;
  • Long term trend: In the long term there is a strong correlation between Interest rates and Inflation, mainly because investors always want to earn at least as much as the inflation rate after tax. Above we saw that interest rates fell for 36 years at a time when inflation fell to the point where Central Banks were facing the risk of negative inflation (deflation).  Amongst the reasons for this drop in inflation, were cheap imported product from the East and Technology driven efficiencies.  However, currently inflation and interest rates can hardly go lower and are likely to rise.  In fact, in the last few years, both inflation and interest rates have started to rise;
  • In summary and regardless of the above scenarios, if we pay the Government $1 000 for a Bond that yields 3% ($300 per annum) and overnight that yield goes up to 6%, we would only be able to sell if for $500 – i.e. $300/6% as that is the revised return investors would expect. The opposite is also true; if we pay the Government $1 000 for a Bond that yields 6% ($600 per annum) and overnight that yield goes down to 3%, we would be able to sell if for $2 000 – i.e. $600/3% as that is the revised return investors expect.  This confirms the inverse relationship between the yield and the price, but it is a pretty simplistic example because aspects like time to maturity changes the pricing.


I think we all understand that rising interest rates translate into rising mortgage payment and vice versa.  Therefore, if interest rates rise considerably, mortgage payments rise considerably, which makes property less affordable.  i.e. When interest rates rise property prices fall and when interest rates fall property prices rise.  However, what normally happens is that there is a lag, in that property prices do not respond immediately to the upside when interest rates peak and start to decline, nor do they respond immediately to the downside when interest rates bottom and start to rise.  The reason for the lag after the peak is twofold, namely the fear that they will continue to rise and the fact that they have to fall materially before the high mortgage payments that stretched owners once again become affordable to the point where they have disposable income.  Contrarily, the reason for the lag after the bottom is twofold, namely the expectation that they may go lower and the fact that people’s disposable income and ability to pay their mortgages get squeezed gradually as interest rates rise.  Therefore, property prices only really started to rise a few years after interest rates start to fall and only start to stagnate/fall a few years after interest rates start to rise.  Simultaneously, the cost of replacement (building costs), will impact on property prices, in that there are times when it is cheaper to build than to buy and vice versa.  Finally the capital gains affect the market.  By this I mean that during periods of high inflation the property price is implicitly rising, although you would only really be able to reap that benefit by selling when interest rates/inflation begin to fall materially, as that suddenly makes the mortgage repayments and the property affordable.  Based on the above chart, my expectation is that Property prices will stagnate about now – 2 years after the interest rates bottomed.  However, they may start to fall if inflation/ interest rates start to rise significantly in a few years.


It should be noted that when inflation rises, interest rates usually follow:  This is because investors are re-pricing bonds on the basis that the after tax Yield should be at least the same as the inflation rate, failing which investors lose money.  Normally this does not work perfectly as the official inflation rate is manipulated to the downside.  Furthermore, many Pension and Investment funds have to keep a certain percentage in conservative Bonds, which puts downward pressure on rates.  Consequently, in real life 10 Year Bonds seldom yield an above inflation after tax return.  In addition, interest rates usually lag rapidly rising inflation because investors are always playing catch-up.  This is why during periods of high inflation, one has Negative Real Returns – i.e. after tax interest yield less than inflation.  This is exactly the time when Gold does well. We had such a period of high inflation leading into 1980, which was accompanied by surging Gold.  We again had a period of NRR from 2001 to 2011 as Equity markets corrected in Real terms for over a decade, while Bond Yields gravitated to Negative and Near Negative territory.  This was accompanied by rising Gold, until 2011, where-after Equities started offering stellar Real returns and Gold entered a healthy / overdue corrective phase.  However, at some point confidence in Equity markets inevitably diminishes when these become patently overbought, which again shifts sentiment towards the safety of Gold.  We see the early stages of this process starting after Dec 2015, when Gold Bottomed and commenced rising, because inflation started rising and perceptions were rising that the Equity Bull was “long in the tooth”.  i.e. If rising inflation continues to manifest and interest rates follow inflation higher, this would be bad for Equities, Bonds and Property as they would all yield Negative Real Returns for a considerable time.  This would, in turn be wonderful for Gold.  Deemed to be true by the author as at end 2017 / early 2018.

Accruing Wealth

INV1 Accruing Wealth

Accruing wealth is never easy.  Paradoxically, we spend a lifetime accruing wealth and almost no time learning how to look after it.  Instead we delegate this task to a broker and blame him when the portfolio loses money.  This is counterintuitive since you can delegate a task, but you cannot delegate responsibility.  Therefore, you should at least understand basic investment terminology and strategic concepts.

NOTE! We all need a broker, but we should take extreme care to pick a good one and, at the very least, we should broadly understand what he is talking about.

Unfortunately, brokers are notorious for presuming past performance equals future performance and not adopting defensive strategies when market valuations are extremely high. Furthermore, incentive bonuses have introduced an era where the decisions made by brokers and managers are motivated by bonus maximisation at the expense of investor returns.  i.e. Almost no one has your interests at heart

Understanding the basics starts with listening.  When everybody is talking about how well they are doing in the markets, start thinking about becoming defensive.  When everybody is talking about staying out of the markets, start thinking about getting in.

Strategic concepts include the following:

  • Do not put all your eggs in one basket – not even with one broker;
  • Markets rise about 2/3rd‘s of the time and fall 1/3rd of the time. Then they are rising, you can be more aggressive, but when they are toppish you should become progressively more defensive;
  • Defensive investments include Cash, Bonds (Treasuries), Gold, Silver, etc.;
  • Aggressive investments include Property and Equities;
  • The younger you are the more aggressive (risky) your strategy can be. The older you are the more conservative (defensive) your strategy;
  • Compounding is a great force. Leave the interest and dividends in to increase your portfolio’s growth.
You have been robbed and are being screwed


It is official.  You and your forefathers have been robbed for the past 40-50 years, unless you belong to the super wealthy.  Gradually, 95% of people in the US, EU, UK and the rest of the world, have been impoverished.  The proof is outlined below these two famous quotes.

THOMAS JEFFERSON: Former president of the USA: 4 March 1801 – 4 March 1809.

“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property – until their children wake-up homeless on the continent their fathers conquered”.     And:     ”The issuing power should be taken from the banks and restored to the people, to whom it properly belongs”.  MY NOTE! These reflect the Fiat reality today.  This reflects the reality today as the Federal Reserve is owned by the bigger private banks.

ALAN GREENSPAN: Former chairman of the US Federal Reserve Bank said in 50’s:

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. … Deficit spending is simply a scheme for the hidden confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard”.  MY NOTES! At the end of his term in office, Greenspan confirmed that he stood by every word of this quote.  Today Fiat money, deficit spending and escalating debt at are the sovereign norm.

In the early 1900’s, the Gold Standard prevailed.  It was abandoned worldwide during the course of the century, in favour of Fiat money that could be printed at will, to facilitate deficit spending.  This resulted in rising inflation, which Governments covered up by manipulating the figures, which led to the impoverishment of the masses as explained below.  I quote statistics from the US, but all countries have engaged in these blatantly criminal practices.

First, let us look at the “actual” cost of living increases.  If you Google “Chapwood Index”, you will find that the actual inflation rate experienced by the working and middle class, these past few decades, was closer to 10% as shown below.  One can find similar conclusions, that are based on historic formulae and not as current, if you Google “Shadowstats Alternate Data”.

However, the Politicians have a vested interest in suppressing inflation for reasons outlined further below.  Accordingly, Governments, at the behest of politicians, use countless blatantly dishonest tactics to supress inflation.  For more on this, see “Shadowstats Alternate Data”.  Here we see that the official US Core inflation rate, as depicted by the red line below, averaged closer to 2% for the past 30 years, a full 8% lower than actual cost of living increases.

Now you may ask why Governments would choose to manipulate inflation figures, and what are the consequences?  Politicians, adopted Fiat money and manipulate official statistics for a wide range of extremely selfish reasons, including the following:

  1. Politicians were impatient of the Gold Standard, which imposed fiscal discipline in the form of properly balanced budgets. Accordingly, they abandoned the Gold Standard in favour of Fiat money, which allowed them to print money and spend “virtually” at will.  This allowed Politicians to perpetually spend more than the fiscus collected, in order to make themselves look good, while enriching themselves and their cronies, which gave rise to words like Crony Capitalism and the Corporatocracy.  They did this because deficit spending allowed them to buy votes by increasing entitlement spending for public servants and voters.  Unfortunately, this led to rising Government debt to the point where it will never be paid, effectively burdening future generations (our children’s children);
  2. However, rampant printing inevitably leads to rising inflation, which they suppressed by manipulating the statistics. Lower inflation had numerous advantages and consequences, as illustrated below:

a. It made GDP growth look better than it was, which increased the chance of their re-election. This was because “Real” GDP is the nominal growth in economic activity, after adjusting for any reduction to compensate for inflation.  Consequently,  GDP growth has actually been negative since 2000, despite what Governments tell us, as reflected in this chart from “Shadowstats Alternate Data” at

b. This, in turn, made budget deficits less severe, because wage, salary and pension increases were lower than they should have been if people got the correct “cost of living” adjustments. On the Chapwood Index website they state “the inaccuracy of the CPI began in 1983, during a time of rampant inflation, when the U.S. Bureau of Labour Statistics began to cook the books on its calculation in order to curb the increase in Social Security and federal pension payments”;

c. This, in turn, impoverished the masses, since they got a 2% increase, instead of a 10% cost of living adjustment. Consequently, most people became as much as 8% poorer every year.  Over time, the cumulative effect of this was that single parent labourers could no longer properly support their families as they could in the past.  Accordingly, over time, the spouse was sent to work and frequently both partners were compelled to work two jobs.  Today even families with double+ incomes are struggling to make ends meet.  This, in turn, also limited parental supervision of children with many negative consequences, particularly on the discipline front.  There are numerous articles, charts and websites that highlight the fact that people earn are “at least” 50% less well off than their forefathers, in real terms.  In fact, they are probably closer to 75% less well off;

d. Worse still, these sub-par increases also meant that people on social security and pensioners were increasingly unable to make ends meet. Accordingly, they had to work longer, which precluded their jobs from becoming available to the younger generation.

3. It is important to remember that, the increase in people who could not make ends meet increased the demand for welfare. This worked in the favour of Politicians, because more people on entitlements meant more votes from those who were beholden to the Politicians:

4. So now we are back to the statements of Alan Greenspan and Thomas Jefferson. This hidden but actual inflation has impoverished the masses while enriching the wealthy to the point where fewer and fewer people own ever more of the world’s assets and property;

5. However, it all gets worse. Due to rising Government Debt, Governments have a vested interest in supressing debt service costs, namely the interest they have to pay.  Accordingly, they are now buying their own bonds in order to artificially suppress interest rates, which is why interest rates are now at or near historic lows.  In fact, many countries now have negative interest rates and the amount of Bonds yielding negative returns will easily double to 50% of global GDP when next the markets correct;

6. This, in turn, means that pensioners cannot survive on their lifelong savings and the public at large have no incentive to save. Meanwhile, Politicians keep suppressing interest rates, while encouraging us to keep consuming and getting further into debt, to keep their illusion of growth going;

7. Worse still, the super low and negative interest rates meant that pension funds could no longer earn adequate returns without adopting increasingly risky investment strategies in a search for higher returns, failing which they become actuarially insolvent. This can only end badly, as pension funds are supposed to adopt conservative strategies and now, if markets crash, they could end up losing massively.  Most pension funds are already actuarially insolvent, as evidenced by the fact that they are already either reducing pension pay-outs or raising the age of retirement.  Imagine what will happen this time around if markets crash and pension funds lose excessively;

8. Investment funds in general are also engaged in adopting riskier strategies in a search for higher yields. This too cannot end well;

9. Finally, there is an insidious relationship between the big Banks and Corporations, and the Politicians, aka the Corporatocracy, that enables them to lobby politicians to pass anti-competitive legislation. This makes it increasingly difficult for capitalism to function as small competitors who could rebalance the market pricing mechanism, are prevented from doing so.  Again, this pushes up the costs to all but the rich, at the expense of the majority.

Incentive bonuses

It is my contention that Incentive Bonuses are one of the greatest evils around.  In the past, people’s loyalty to the company and desire to serve their customers was unquestioned.  If they worked well, they earned a bonus comprising a 13th or 14th cheque.  Today, incentive bonuses are linked to profitability and share performance, to name but a few.  Accordingly, senior banking and corporate executives increasingly adopt short term strategies and dishonest practices, that enhance their bonuses at the expense of both their customers and their shareholders.   Goldman Sachs was fined when it was found that they were round tripping shares between in-house policies in order to boost administrative commissions.  Morgan Stanley and Deutsche Bank were fined for holding futures contracts instead of physical gold, as promised, while charging storage and insurance, which re-introduced third party risk just when customers were trying to avoid it.  There are literally hundreds of such examples of banks manipulating prices and interest rates for their own advantage and to the detriment of the man in the street.  Similarly, companies give their employees 2% increases in line with official CPI figures, while hiking prices by considerably more thanks to anti-competitive practices, which again enriches management.


The working class and the middle class are being impoverished, for the benefit of politicians and those in the upper 2-3% income bracket.   In addition, the Politicians, Banking and Corporate Executives of the biggest corporations are screwing you while they entrench and enrich themselves.

I would love any comments, feedback and especially suggestions of new topics.


My book Technology Tsunami Alert will be published mid-2020.  It didn’t start as a book, but as I wrote, I had a growing urge to warn as many people as possible about the breadth and depth of disruption in the near future, so that they become aware of the risks and opportunities and are able to choose a better future.  See website at, or, you can contact me via my website at, which is more about investment.

Disclaimer!  The content of this report represents the opinions of Mr Lodewijks, who is a retired Civil Engineer with diverse interests.  Where applicable, the content should be deemed informative guidance to get the reader thinking and not specific advice.

Mr Lodewijks is not a qualified Investment Advisor.  His investment reports aim to educate and help investors understand investment considerations and strategies.  As trading and investing in any financial markets may involve serious risk of loss, Mr. Lodewijks recommends that you consult with a qualified investment advisor.

Eelco Lodewijks

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