Going back in time 30 years before cryptocurrency was developed, the world experienced another shock in the world of finance. President Richard Nixon told the entire world that the United States would no longer tie its currency to gold. Up until that point, traditional currency worked on what was known as the Bretton Woods Agreement – a gold standard. That meant that any currency, including the U.S. dollar, had its value tied to gold. For example, a foreigner could exchange their currency for U.S. dollars and then those same dollars into gold via the U.S. Federal Reserve. It was an effective means of preventing the formation of trade imbalances between global economies. It kept currencies tied to a commodity or fixed value. If a country exports a greater value in goods and services than it imports, it has a trade surplus or positive trade balance, and conversely, if a country imports a greater in goods and services value than it exports, it has a trade deficit or negative trade balance.
Nixon adopted the persona of a dollar protector. He wanted to be seen as someone who fought to create jobs and fought against inflation. In his own words: "We will press for the necessary reforms to set up an urgently needed new international monetary system." But his actions weren't in line with his promises. Nixon was up for reelection, and he pressured Arthur Burns, chairman of the Fed, to ease the country's monetary policy in 1971 to reduce unemployment. How? By printing more money. You see, by stepping away from the previous model, Nixon essentially pushed for a system where the money would float. A floating exchange rate system allows exchange rates to fluctuate until deficits and surpluses in trade go toward zero. On top of that, the Fed could alter monetary policies with ease and ensure that the United States wouldn't have to resolve its trade gaps. If one country didn't print as much money as another, its currency would appreciate or experience inflation from that country. To fix this, a country can turn to escalate the government debt, which is what the United States did. The problem was that it continuously did so over the years. With looser exchange rate policies, the country fostered its economic growth and financed federal budget deficits. deficit As more countries accepted debt to avoid inflation at home, the U.S. kept importing and accumulating debt, mostly from developing economies. The US today is over https://www.pgpf.org/national-debt-clock. $30 trillion based on US Debt has grown faster than the economy, and interest rates have consistently stayed below market levels. The dollar is a hostage of the politicians in many ways, which is quite the turnaround from what Nixon initially sold to his constituents. So, how did the world respond to what's known as the "Nixon shock"? Other countries followed in Nixon's footsteps. More or less, since August 15, 1971, the world dropped the gold standard in favor of fiat currency.
The fiat monetary system implied that money was no longer backed by a commodity, or anything, just an idea, a social agreement. The value of any fiat currency can be easily altered to suit each government's needs. Of course, this value is tied to trust instead of a commodity. When trust deteriorates, it can quickly change the value of a currency. Today, we can see outstanding trade imbalances and continuous escalation of debt. Governments around the world keep printing money, which puts even more strain on the fiat monetary system. This also de-evaluates the buying power of the currency. At some point, it could crack, and the ramifications wouldn't be pretty. Although not enough people discuss this, the rapid adoption of the fiat currency exchange system is one of Nixon's legacies. If you were to trace global debt to one person, it would be the former president. But the real issue is that the fiat model still stands today. Decades later, it's still in place and keeps causing global debt to rise. While it was supposedly an essential change to the world's monetary system, it wasn't a step in the right direction. Perhaps it could've worked, yet it was fueled by deceitful intentions, and the freedom it provided over the value of a currency was grossly mishandled by everyone. The world has been waiting for a fix since early 1972, even if it didn't realize it. Maybe this is where cryptocurrency comes in. It proposes an entirely different model in which countries wouldn't be empowered to promote the illusion of wealth by adding to the global debt situation. But to understand how cryptocurrency can come to the rescue, we should dig deeper into fiat currencies first.
* What Are Fiat Currencies?
Before Nixon's "grand idea," currencies were tethered to physical commodities – primarily gold and silver. Nowadays, the world uses fiat currencies or fiat money, which is tethered to a social agreement and the whims and ideas of so-called experts and political influences. The reality is that fiat currency is backed by nothing. You might say that cryptocurrencies are also a social agreement backed by nothing. But there are many key differences one of which is that cryptocurrencies don’t have an unlimited supply. You can’t print new Bitcoins forever, there is a fixed supply. Its value is not dependent on a centralized government but is rather a currency for the people by the people.
A fiat currency lacks intrinsic value. Governments issue it as legal tender, which ties it to the creditworthiness of the country behind it. To put it plainly, value comes down to the trust you have in your government. Interestingly enough, fiat currency had been used before. Its origins can be traced back to China in the early 10th century. During that time, the Chinese Empire experienced a long period of high demand for metallic currency. The reserve of precious metals couldn't meet that demand, but people got used to paper drafts. After a coin shortage during the Song Dynasty, people switched from coins to notes. More and more traders would give private notes backed by various monetary reserves, which led to the appearance of the first legal tenders. The De Medici, a very wealthy family in Florence, Italy, was also known for having introduced notes of credit and debt during the 1400s. Paper didn't reach the West until the 18th century. France, the Continental Congress, and the American colonies issued bills of credit. It was around that time that people started talking about the dangers of inflation. The New England and Carolinas colonies experienced bill depreciation coupled with a spike in commodity prices. Yet, fiat money was seen as an excellent way to preserve gold and silver in a time of war. Early in the 20th century, the U.S. Government promised people that they could convert notes and metallic coins into a nominal commodity at any time. Unfortunately, due to the cost of the Civil War, the government didn't keep its promise until the Bretton Woods Agreement came into effect and tied one troy ounce of gold to $35. That is, of course, until President Nixon introduced new economic measures that would see the country, and the world, revert to the fiat money system.
*How it Works
Fiat money is like faith money. Its value is tethered to the trust placed by holders in the issuing government. Today's money is nothing but a storage vehicle for buying power that acts as an alternative to the old barter system. It is, as mentioned earlier, a social agreement. Storing buying power allows people more spending and investing freedom, up to a point. Fiat money relies on the issuing country's economy and governance. Historically, countries that showed signs of political unrest had their currencies weakened and saw inflation rise. One big advantage of fiat money is fostering economic growth by facilitating exchange, being cost-efficient to print, and storing value. Without a doubt, being untethered from commodities that fluctuate in value sounds great in theory. Proponents of the fiat model commend it as it helped manage the 2008 Global Financial Crisis. With that said, financial crises aren't avoidable using this model. The ability to regulate the money supply acts as a doubleedged sword. It can do good, but it can also create a monetary bubble or even lead to hyperinflation when regulated poorly. Zimbabwe experienced this in the early 2000s after the central bank started printing money to fix its economic problems. The hyperinflation reached around 500 billion by 2008. At one point, 100 trillion Zimbabwean dollars were converted to just 40 cents. A similar situation occurred in Venezuela more recently. While tempting on paper, the fiat monetary system is far from a model of efficiency. It relies too heavily on placing trust in the issuing government. Trust that it will make the right economic decisions and implement fair, but safe, regulations. We have been told that the Federal Reserve System is not "owned" by anyone but it exists as an act of congress through the Federal Reserve Act of 1913 to serve as the nation's central bank, which makes it a public organization run by the government. However, most are unaware that the Federal Reserve Bank is both a public and a private organization.
If you dig a bit deeper, you will find that under the Federal Reserve Act of 1913, the key components of a Federal Reserve System are:
Within the Federal Reserve, the Board of Governors, Board members, and general staff are all civil service employees, or public servants working for the government. At the same time, the Federal Reserve stockholders are privately owned banks. These 12 regional Reserve Banks are chartered as private corporations. This means that the Federal Reserve is run by public servants to benefit privately owned organizations! Let me repeat this, these 12 banks are private corporations. The Federal Reserve System is owned by its member banks, and each of these 12 regional reserve banks originally ponied up the capital to keep it running. The Federal Open Market Committee (FOMC) - Composed of the Federal Reserve Governors and the Federal Reserve Bank presidents, is charged with conducting monetary policy. So, who are the players that own shares, receive dividends, and have control over these 12 Banks? Based on the Freedom of Information (FOI) request made by an “Institutional Investor” in 2019, we find that some of the shareholders are Citibank, with 42.8% of the shares, followed by JPMorgan Chase Bank, Morgan Stanley Bank, and Morgan Stanley Private Bank with around 32.9% shares. Other holders are foreign banks like HSBC Bank USA, London-based HSBC Holdings PLC, Deutsche Bank Trust Co, etc… Those who own shares in the “Federal Reserve Bank” receive dividends. There are Central or Federal Reserve Banks all over the world with similar structures, which are owned indirectly by private corporations. But of course, we are led to believe that these private organizations always do what is right for their people first before the financial interest of their shareholders. Wouldn’t there be a conflict of interest when private organizations are involved in monetary policies?
I shall let you ponder that for a moment. Can we trust governments to make the best decision regarding the value of a currency? History shows us that's not the case. Thus, investing in fiat money is neither sustainable nor wise in the long run. Every time the world has used this model (of printing money), it didn't yield positive results in the long run. After all, if you blow a balloon too much, it will explode in your face! That's why cryptocurrency proponents subscribe to the idea of a decentralized global financial system. Currently, the money system and the taxes we pay seem to be designed to create wealth for only a few individuals, the elite, or silent rulers of this world. You just need to see how much the elite and corporations pay in taxes to see the massive discrepancy between the working class and those that control it. Money doesn't need to be backed by a commodity either as they are also based on a social agreement with a perceived value. But we can't have countries printing it on-demand either because it can depreciate. In a way, cryptocurrencies govern themselves, or better yet their holders govern them and validate the existence of each coin and how it exchanges hands. No one can interfere and say otherwise.
* The Multi-Trillion-Dollar Debt Bubble (That Nobody's Talking About)
Early in 2021, the Federal Reserve and SIFMA reported that U.S. companies were at the peak of their debt. The amount totaled well over $10.5 trillion, which is a staggering figure. Going back to 2008, the U.S. experienced a huge blow to the economy. The primary reason was a series of bad real estate loans. Brokers and banks handed out loans without security which led to many businesses crashing almost overnight. The fall from the grace of financial giants like Goldman Sachs, Lehmann Brothers, Merrill Lynch, and others sent financial ripples across the world. Banks declared insolvency, insurance companies collapsed, and many investors lost all of their savings. People started feeling insecure about the entire financial world, not just the U.S. economy. Large companies no longer had the borrowing power they once did. At least 60 hedge funds declared bankruptcy in the United States, along with 21 banks.
The total loss on the global economy? Around $50 trillion. One of the biggest problems was the fiat currency model. The United States is among the world's leading debtors, even though its currency is essentially unsecured since untethering from the Bretton Woods gold standard. Investors from all over the world looked to the United States as it promised one of the safest rates of return, particularly through bonds. Yet the base rate dropped from 6.5% to 1%, sparking the need for a new offering. The drop prompted investors to stop putting their money into the market because of the uncertainty surrounding bonds and stocks. People needed safer options. Large investment banks made their fortunes by selling mortgage-backed securities as safe assets with good returns. With the housing prices going up, investors flocked to the U.S. real estate market. Other commercial and financial institutions from around the world jumped on the bandwagon and offered loans in the same sector. People wanted to fulfill their American dream once they saw the low interest rates. Sadly, it only added fuel to the fire. The historically low-interest rates in the U.S. kept people's hopes of becoming homeowners alive. After all, it's part of the American self-image. But something interesting happens when creditors are protected by the state. Should a borrower go into insolvency and can't continue their payments, the state reimburses the financial institution that issued the loan. This approach led to many American real estate projects having financing despite lacking capital resources.
A borrower can cancel a normal mortgage whenever they want. They can wait until the interest rates drop and use a cheaper loan to cover the previous one. It's something that creates the perfect conditions for a process of continual debt. Borrowers end up getting higher and higher loans at the bank's recommendation in a never-ending debt loop. Commercial banks went on to buy money from the Fed at a 1% interest rate, only to give it out as low-interest loans to companies and private individuals. However, the demand for these credits significantly reduced savings deposits and the need for capital. Banks would also have to commit to covering potential defaults using their capital resources. But because this could force banks to keep too much unemployed capital, they used various loopholes to get around the issue. Thus, commercial banks got crafty with making their bank loans tradable securities and began pawning them off to investment banks. In financial terms, this process is named risk transfer. The result was the creation of newer credit securitizations and derivatives. Think of it like this.
A seller will transfer a debt claim to a buyer. The buyer can then refinance the purchase through securities. However, these deals involve guarantees of payment flow to cover the refinancing. The sole purpose is to protect banks from defaults. A bank can sell debt claims and cover themselves as the investor takes on the risk and the loan through securitization. Banks become akin to credit brokers in this scenario. This concept was nothing new. Risky credit disguised as asset-backed securities were prevalent even at the start of the 20th century.
President Franklin D. Roosevelt created the Federal Housing Administration, which was a national financing program for homeowners that followed this model. Thanks to this financing program, by the 1960s, around 60% of Americans could call themselves homeowners. Another result of the FHA program was that mortgage-backed securities became popular investment choices – not for their profitability but their perceived low risk. This attracted the attention of more private financial companies that, over the years, issued numerous bad loans. In 1997, J.P. Morgan (one of the Share Holders banks of the Federal Reserve) created a new financial instrument. It was insurance that could transfer the risk from banks to investors – the Credit Default Swap (CDS). What happened was that lenders who had doubts could safeguard themselves by paying premiums in insurance. This "revolutionary" financial instrument had a flaw. It wasn't so much investing, it was gambling. With the CDS market unregulated, lenders were betting on the insurance as there was rarely any certainty of credit default. By using derivatives and CDSs, financial institutions could speculate to a greater extent. You might ask yourself, “Why is this important?” The capital market of CDSs sits comfortably at around $60 trillion on a mere $5 trillion insured. Thus came the era of writing off bad loans through the new financial instrument – the CDS by J.P. Morgan. Of course, factcheckers mention that there is no connection between J.P. Morgan having a big stake in the Federal Reserve Bank and its influence on its decisionmaking process. This apparent conflict of interest only created more market-wide confusion as to who issued insurance and for what risks. By that time, variable interest rates had become the newly marketed product. It made it easier for financial institutions to work out the number of premature callings.
At the peak of the real estate boom, you would see more of these variable interest rates as Adjustable Rate Mortgages (ARM). The hook was attractive enough – get the same low-interest rate as you would for a fixed-interest mortgage. That said, the rate wouldn't be valid after the second year of the credited duration. Going into the third year, mortgage rates increased with the LIBOR rate. That means adding the issuing bank's interest rate to the initial mortgage rate. Around 2003, both rates were quite low compared to the rising property prices. The rates kept growing between 2003 and 2006 until even borrowers with good credit started having problems making their payments. Even so, the market demand was still high, and President Bush promised to finance buyers with low incomes. The regulations around mortgages became even looser. People who couldn't afford anything before (not even a fridge) could suddenly access funds, regardless of the property. These were known as NINJA loans, which stood for: “No Income, No Job, or Assets”. By 2006, many borrowers defaulted, and many houses ended up in foreclosure sales. The housing prices went down. Simultaneously, older securities couldn't produce returns. With cash flow problems, many investment banks couldn't get rid of their packages, and debts kept piling on. Here's the main takeaway here. The trillion-dollar real estate bubble was a catalyst for far greater events. Initially, it looked like a real estate crisis, yet it transformed into a global financial crisis. The effects of the 2008 GFC are still felt today. An air of uncertainty and insecurity remains.
As a result of the GFC, Bank loans are subject to greater scrutiny now as the application process is stricter, particularly concerning long-term packages. You have to jump through some serious hoops to get approved. Even if you succeed, your investment vehicles are limited. As it stands, the current financial system isn't sustainable. The same mistakes and over-extensions, by financial institutions and investors alike, keep repeating themselves in cycles. Why? Because human nature has not changed. One of the main drives of human behavior is greed and power. That's why it is time to introduce something completely new and more efficient while stepping away from the fiat model that has failed the global economy on numerous occasions.
* Cryptocurrency is the New Wealth Building Tool
While there's risk in anything, cryptocurrency has an advantage – it's adaptable and based on an ever-evolving technology trying to fix real-world solutions. In contrast, fiat money is a flawed model that time and time again reinforces the risks that borrowers incur. So, let's look at why crypto is a powerful wealth-building tool for the modern age. Being an Early Adopter Has Its Advantages As mentioned in the previous chapter, there are striking similarities between cryptocurrency and the introduction of the internet. The craze it generated was fueled by new technology. This was the mid-1980s and the nineties. Website development was on everyone's mind. Ideas kept coming out of the woodwork, and it didn't take much to raise capital. Everybody was excited. As an early adopter of internet development, you would have either been a programmer or a website builder. Those were the direct contributors to the innovative side. However, some investors saw an opportunity and bought stocks believing that those companies had bright futures ahead. And as they invested early, they benefited greatly. The dot-com bubble burst in 2000. But what happened in the aftermath? The bad ideas crashed and burned while the solid companies remained on the market. Many of them would go on to build the future and shape the online space we're all familiar with today. Soon after the bubble burst, companies like Amazon, eBay, Google, and Yahoo took center stage. Through numerous technological improvements and great leadership, these companies survived and thrived. These businesses were at the forefront of innovating in the online space. They created communication platforms, navigation systems, and digital marketplaces.
Early adopters in these companies are people who never have to work for a living ever again. It may sound cheesy, but they're rich, super rich. And being an early adopter doesn’t mean investing when the bubble started. Early adopters are also investors who got into the game in 2002 when the dot-com bubble ended and its negative effects on the market diminished. They were the ones that bought when everyone was selling. That's the key thing to remember, and here's why. What you saw in the early 2000s as web developers you now see in blockchain developers. JAVA programmers of old websites are now represented by open-source coders. But what happened to college dropouts who started an internet-based business on a Commodore 64 computer? You see their counterparts involved in various Initial Coin Offerings. Some might say that we are in a tech bubble, and the technology of the moment is blockchain - that this bubble will burst sooner rather than later. If everything keeps following the blueprint of the dot-com bubble, then why not expect a similar outcome? Even if that were to occur, this means that after the bubble blows up, new opportunities will rise as they did after the dot.com bubble. There are currently many cryptocurrencies that are focusing on developing real-world solutions to problems that have been plaguing society for many years. We can already see less inclination to fund crypto projects without proof of concept. It's no longer easy to raise hundreds of millions for something that has only a 50/50 shot of succeeding or showing some innovation. Right now, you're in an ideal situation to distinguish the big players in crypto from the amateurs. You'll see who emerges stronger after the market adapts to this new technology and what new organizations will come forward after having learned from past mistakes. Being an early adopter of crypto will enable you to invest in the likes of Amazon, Facebook, eBay, and Google in the crypto space. The value of a crypto coin can still skyrocket, as cryptocurrencies become more adopted by a wider audience. But the amount of money you can make by investing now in contrast to when they become mainstream investment assets and accepted currencies is staggering. Imagine buying Apple in 2004 when it was only $0.50 (instead of $170). This is where some altcoins are now. Or better yet, imagine Bitcoin Pizza Day Laszlo not buying those two pizzas and keeping his Bitcoin all of those years. The difference is in the hundreds of millions of dollars.