How to financially prepare for an uncertain future? — part 1

How to financially prepare for an uncertain future? — part 1By Rob on The Capital“The best way to make sense out of change is to move with it, and join the dance. Because life isn’t about waiting for the storm to pass, it’s about learning how to dance in the rain.” — Alan Watts & Vivian GreenWe are living in unprecedented timesLet’s take a look at the past to realise where we are right now. For thousands of years, people have used precious metals like gold and silver as a medium of exchange and store of value. With the rise of more practical paper currencies, we could always exchange our fancy papers for gold and vice versa.For a long time, you could get 1 ounce (28 g) of gold for just $35 which was determined by the Bretton Woods system in 1945. At that time we declared the US dollar as the world’s reserve currency. World War I and II gave rise to the US as a lender which saw its gold supply double from 1914–1944 due to the wars.That system lasted until 1971 when the convertibility of the dollar into gold was ended with the Nixon shock. We now have “fiat” money, which only has value because the government says so.The word fiat originates from Latin “fiat lux” meaning “let there be light.”Before the US dollar, the UK Pound Sterling was the world’s reserve currency after the Napoleonic wars in 1815. A hundred years later, the UK and other European countries had to abandon the classical gold standard in order to pay for the two World Wars. They nearly bankrupted themselves, which paved the way for the US dollar to rise.Today, China’s Renminbi is emerging as a lender to Asian and African countries just as the US dollar emerged to challenge the UK Pound Sterling. Over the past 20 years, China’s gold reserves more than quadrupled. Granted, any number from China should be frowned upon as their metrics have become the object of policy which decreases the value of the metric itself (Goodhart’s law). China’s gold reserves are estimated to be significantly higher. Russia, Iran, India, and South-Africa share the desire to break free from the US dollar by also rapidly increasing their gold supplies.This begs the question: why are central banks across the world increasing their gold supplies?The current system is destabilisingA financial crisis is the collapse of a complex dynamic systemA financial crisis is like an avalanche, an earthquake, or a volcanic eruption, which is basically the release of energy. Imagine plugging a volcanic eruption. The release would be stopped but the built up energy would still be there. These collapses are nearly impossible to predict. You can’t tell which snowflake will trigger the avalanche. What central banks do when handling a financial crisis is put a brick wall in front of the dynamic system collapse by flooding the system with money, but the unreleased energy is still there.Central banks have 2 main weapons in dealing with a crisis: lowering interest rates and printing money (aka quantitative easing). Ideally, after a financial crisis, central banks would return interest rates to normal, so when the next crisis hits, they can stimulate the economy again (by lowering interest rates to make money cheaper). This has not happened.The latest financial crises were increasingly severe, requiring more drastic measures every time, without returning to normal:1998: 14 regular banks bail out a hedge fund (LTCM).2008: Central banks bailout regular banks ($700 billion in the US) and lowered interest rates to near zero.2020: the US Corona crisis stimulus package already far exceeds the 2008 bailout at $2.3 trillion.The Corona virus recession will not cause another depression, but it might just trigger it.There are countless more numbers, graphs, and historical analysis which I hope to bring up in future articles. We haven’t even touched on fractional reserve banking, the ghost of hyperinflation, derivates, and asset bubbles all over the place. All points in the same direction: we can’t continue down this path. Money is losing its meaning. This quote summarises it painfully obvious:“If something cannot go on forever, it will stop.” — Herbert SteinHow to financially prepare for an uncertain future? — part 1 was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.
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Author: Rob