Day of the Digital Dime

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Indexes
  1. The History Lesson
  2. Today’s Market
  3. Why Own Debt?
  4. The 9th Inning of the Economy

The History Lesson

This article will be covering the way that currency has changed in the past and why it is going to be such a large implication for the future.

To begin it is important to see where we have come from to understand where we are going. Starting with the gold standard we can see the progression forward into the digital age we are now.

The gold standard (a way to back currency like the US dollar to prove it has worth) was started in 1821 over in the United Kingdoms. This standard however was not fully adopted until 1914 after the United States had found enough gold to support the idea of backing fiat (a currency that doesn’t have inherent value itself but is given value due to governments issuing it) currency.

As for the wealth we have had in the past it is difficult to look at due to the many factors such as real estate value, products, things like goodwill in companies, and other fluctuating investments.

An easy way would be to look at the world debt charts. If every dollar had to be backed by the gold standard then that would mean there was a limited amount of wealth that could be shared among the people.

Meaning the pie of wealth had a set amount.

I found a really great article on Market Watch that provided some visuals that are too large to include here but if you want to see how much wealth the current world has, check out the link!

However, in 1933, President Roosevelt took a protective measure to support the banks by not allowing citizens to trade paper currency for gold. This paired with trading in gold that citizens had lying around created a buffer, allowing the banks to hold the people’s trust knowing that they had enough gold to back the paper currency.

The next change was in 1934 when the price of gold went up to $35 an ounce (was $20.67) which increased the Federal Reserve by 69%.

So there was much more “moolah” to go around.

This went all the way until 1971 when Nixon decided to abandon the gold standard permanently. Then bow was tied up as President Ford decided in 1974 to allow US citizens to hold gold bullion once again.

Today’s Market

As I referenced earlier one way of looking at the world’s wealth and seeing its progression is by looking at the world debt charts. You didn’t think that I would say that and then not let you guys see what I mean right?

This is where things get interesting.

The chart below will show the United States national debt to their GDP (Gross Domestic Product — how much we produce as a society) as an example but most countries should follow this same trend to a certain degree.

This chart shows the climb that starts in the 1930s and has a peak in 1945 when WWII ended and then a decline as we paid our debts. Then after there was no gold standard anymore you can see the debt begins to skyrocket.

This graph differs from what some other sources say such as Statista which claims that the national debt to GDP has been around 133% for 2021 and 2022 due to the pandemic.

This means that we as a country can no longer make what we owe.

Not good.

There have been other countries that have had similar issues. Since the end of 2019, six countries (Argentina, Belize, Ecuador, Lebanon, Suriname, and Zambia) have defaulted on their debts.

The United States being a world currency is trying to stay strong but soon some smaller countries that don’t have as strong an economy may begin to call in their debts to ensure their economic stability.

It is a weird thought to think that the United States, an economic powerhouse is in a “belly-up” trend at the moment.

Despite this since the USD is the world currency we are given much more leniency with our debts than some other underdeveloped countries might be. When it comes to who owns most of the United States debt outside of ourselves is a confusing topic for some.

Whenever I ask people who owns the most of the United States debt I always seem to get the same answer,

China.

When in actuality out of the 28.43 trillion the US owes 7.55 trillion is held by foreign countries. These are the top 5 debtors we owe,

  1. Japan: 1.3 trillion
  2. China: 1.05
  3. United Kingdom: 566 billion
  4. Luxembourg: 311 billion
  5. Ireland: 309 billion

Why Own Debt?

When it comes to world debt and why some countries buy other countries’ debt it all has to do with market stabilization and strengthening your own currency. The ability to purchase a world currency like the USD makes exchange rates solid as those two currencies become more intertwined.

Some may ask how a countries currency fails in the first place?

A failure of a countries currency is called a “currency crisis”. Investopedia states what this is in a great way,

These are a sudden and drastic devaluation in a nation’s currency matched by volatile markets and a lack of faith in the nation’s economy. A currency crisis is sometimes predictable and is often sudden. It may be precipitated by governments, investors, central banks, or any combination of actors.

For those that missed one of the key phrases in the middle there, it states that a reason a currency can fail is just due to a “lack of faith in the nation’s economy”.

That is crazy.

So because the United States currency is not backed by anything it technically could collapse if people suddenly found something they trusted more than the US dollar.

Enter cryptocurrency.

If you think you will never buy into crypto currency because of the risks then understand we are already in the digital currency age and your currency could collapse as Investopedia states “suddenly”.

Don’t believe me?

Well, a quick google search will show you just how ridiculous the situation truly is. 92% of the world’s wealth is currently in the digital realm. This means that the paper in your pocket sits somewhere within the remaining 8%.

After abandoning the gold standard we as a world suddenly started valuing things differently. With more pie to go around, everyone had the idea to place a higher value on items as each country agreed to raise the currency levels together.

Almost like agreed-upon inflation to allow the shackles of the gold standard to come off and the “world of debt” to step into the light.

The 9th Inning of the Economy

Okay, so technically speaking we now understand that if there is a small fire it could quickly catch our digital bank accounts on fire despite the supposed protection that we have established for ourselves.

The true question is how to truly protect ourselves from the coming economic storms that seem to be in the distance?

My suggestion is to look for the things that people truly (and I mean truly) place value into. Not the things that Bob next door things will be a good investment. Try and find investments outside your 401K or social security at the end of your life to put money towards.

I’m not saying crypto is where you should go because suddenly people won’t trust the US dollar. What I am saying is to find investments that can bring you a solid base to build your wealth from.

Budget well. Get a savings account for emergencies. Learn good practices as I have previously talked about. Some suggestions are things like a good real estate deal, blue-chip stocks (bought at the right time), gold and silver, etc.

I am not saying to invest all your money into gold as that would be a dumb idea. The principle I am trying to get across is to look at what the big countries are doing to shore up their economy and how we should be doing something similar in our own lives.

I know for my wife and I we want to have a solid emergency fund of a few thousand set aside as well as work towards a property we can turn into an Airbnb for cheap. It is investments like these that will make a difference in the long run when political unrest causes extreme fluctuations and failures in markets.

With the day and age of the digital dime, it shouldn’t be surprising that we are all floating on a sea of trust to keep the economy afloat (trust and promises from the government). But it is our responsibility to create a strong financial future for ourselves by having this as part of our business decisions that help to shape our future.

Anyway now I am rambling but I hope you get the picture.

Catch you guys next time.

- Klassic Finance

Originally published at https://www.klassicfinance.com on February 21, 2022.