How to financially prepare for an uncertain future? — part 2

How to financially prepare for an uncertain future? — part 2By Rob on The Capital“People do not understand our monetary system. If they did, there would be a revolution before tomorrow morning, as the modern banking system manufactures money out of nothing.” — Henry Ford & Josiah StampIn my first article, I laid out the foundation upon which a critical view of the current financial system is built. When you update the catchphrase “follow the money” into “follow the gold,” it becomes apparent that throughout history gold has played a crucial role in geo-financial power shifts from the UK to the US and now into China. We also saw how the current system is destabilising with increasingly severe crises and countermeasures and how central banks across the world are anticipating this by rapidly accumulating gold supplies.It already makes sense for any person who wants to secure his wealth long-term to own a bit of these shiny yellow rocks. Naturally, more questions arise:Where and how do I buy gold?How much gold should I buy?Can’t gold drop in value?How do I store gold safely?is gold ethical?But before we jump into answering practical questions, it is of paramount importance that we fully grasp the why of this all. Because the nature of the problem is so fundamental, it is not solved by owning some rocks. It will require a greater mentality shift, which is the deeper intent of these articles. If it makes anyone rich in the process, that’s a nice little extra, but I personally believe:If we are to be part of the solution we must learn to shed the greed that is part of the problem.Soft moneyFiat currencies as they exist today, like the US dollar and the euro, have become increasingly soft. Fundamental properties like supply and interest rates are being adjusted by central bank policy as they see fit. An increase in the total amount of money has led to a decrease in purchasing power as newly created supply extracts value from already existing money. We need to realise that prices going up is directly related to money losing its value. Every time a central bank decides to print more money to stimulate the economy, the money in our bank accounts loses some of its value.The more common term for money losing its value is inflation.If you had $1000 in 1913 you need to have $26 162 today to match its value. Since its inception, the euro lost 85% of its value against gold.The other main driving force behind the increase in the money supply is fractional reserve banking. This practice aims to stimulate the economy by freeing capital for lending. Simply put, if a bank has €100 it is only required to keep a certain amount of money in reserve, say 10%. It can lend out all the rest (€90). This borrowed money can be put in another account where again its bank is only required to keep 10% and can lend out the remaining €81 and so on. Using this technique, the initial starting capital of €100 is able to create €900 in circulation. Notice that the borrowed money doesn’t really exist. If all people involved would withdraw their money, only 10% would actually get it. In reality, it’s not as bad as it sounds. It’s worse.The actual reserve requirement for European banks is 1% since 2012, for American banks it is effectively 0% as of March 2020.Hard moneyHard money is defined by its reliable store of value as a “safe haven” asset. Looking at the current total amount of gold (nearly 200 000 tonnes) and how much is added by yearly mining (about 2500 tonnes), it is relatively stable with a yearly supply increase of about 1,5%. Related and more important, however: gold’s purchasing power has been stable for hundreds of years.In order to maintain a reliable store of value, a stable supply is key.How to financially prepare for an uncertain future? — part 2 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