It can make you smile, make you cry,
but it can also control entire economies - Money.
This is a sticky subject when we're
steering towards dangerous inflation and recession.
But the clock is ticking.
Are you going to take the time to
understand what money is and how it works?
Or are you going to let yourself just
float along with the whims of the economy?
Understanding money allows you to make more of it.
But yet, if you'd ask a group of strangers what
money really is, you'd get a ton of different responses,
and most of them would be pretty incomplete.
That's why understanding how money works
is essential for times like these.
But why do we need money at all?
Before it was invented, for centuries, humanity
used to exchange goods for other goods,
a phenomenon known as bartering.
This was pretty simple, but it
carried a lot of complications.
Imagine if you were a farmer living
in Mesopotamia around 4000 years ago.
If you needed to buy a lamb from
your neighbor, maybe you'd offer up three chickens
in exchange for his one lamb. I'm just guessing.
I don't know exact chicken - lamb exchange rates,
but that's the exact point.
No one knows chicken-lamb exchange rates,
or coffee cup-Red Bull exchange rates,
or anything for that matter.
The problem here is you need to
offer exactly what the seller wants.
So if he's not interested in chickens or one of them
has a bad wing, you could forget about his lamp.
Just imagine a world without money where you'd
have to barter to buy your laptop or
make an investment in Tesla shares.
If you were a plumber, you'd have to find a
seller of Tesla shares with a dukey lodge in his
toilet in order to get those Tesla shares.
This would be a nightmare, and
large scale economies could never exist.
So first of all, money is a
necessity, and that's why it was invented.
It's universally accepted as a medium exchange.
It works more or less like a social contract.
It has value because society as a whole
agrees this is worth about a dollar.
Let's see how.
Before money was invented,
people moved from bartering to commodities and then coins.
Commodities could have been anything of value.
They started out with really weird objects
like seashells, whale teeth, and dried corn.
But then we transitioned to precious
metals like gold and silver.
This was an intermediate solution
because they acted as currency.
So you didn't need the right seller anymore.
You just needed a market.
Plus, they're easier to store, transport,
and divide than lambs and chickens.
But even that wasn't perfect.
If your currency is gold, it's heavy and you're
limited in how much of it you can supply.
But what if there was something cheap
and easy to carry? - Paper money.
The transition made a whole lot of sense.
But this ease of production had an interesting side
effect because the difference between the cost of producing
paper money, and the actual value is enormous.
Printing a $100 bill only
costs the treasury about $0.15.
Well, it's value, it's $100.
That juicy difference between cost and
value is called Seigniorage, the profit
a government makes from printing money.
The US Mint manufactures money for peanuts.
Then the Federal Reserve buys it at the
much higher face value, and the positive revenue
flows straight into the government's pockets.
The total amount of money in
the world is around $418 trillion.
We can say that money has mainly three functions.
The first, as we've seen, is
to be a medium of exchange.
The second function is to be a store of value.
Money preserves itself better than most physical goods,
like Mesopotamian chicken, so this means it can
easily be stored and used in the future.
The third is to be a unit of account.
We measure the value of things in currency.
It's just easier to understand the value of a car
in dollars rather than cocoa beans or whale's teeth.
This is essential to understand how the
government and the Fed use money to
influence the economy, and this all relates
to your personal wealth and earning potential.
More on that later.
Of course, things have evolved even a step
further than physical cash, and chances are that
most of your money isn't stacked in some
shoe box in the back of your closet.
Your currency is likely in a digital format
ones and zeros in a bank terminal.
Our money system works so well that we're generally
okay with never even seeing the money, and we
trust that it will still be there.
But what if that trust is fading away?
Or worse, what if the value
of that money is fading away?
Our inflation is at a 40 year high.
This hurts everyone, not just the rich.
Now, inflation is a weird word, because when moderate inflation
means that there's a lot of money in circulation, so
it's easy to get loans and spend and invest actually
kind of a good thing when moderate, but when it
gets out of hand, that's when we see severe drawbacks.
According to several economists, we're
marching towards a recession.
Recently, Larry Summers, Harvard economist and former Treasury
Secretary, published a study in this paper.
Summers claims that ever since World War II,
whenever there was a certain level of inflation
combined with low unemployment, just like now,
we went straight into a deep recession.
Now, some people think that this
is the worst time to invest.
Others think this is exactly why you should invest.
And that's just how markets work.
There's always someone betting
for and against everything.
Meanwhile, the government and the Fed are planning
different moves to battle the upcoming recession.
But how?
Well, until 1971, the US dollar was backed by gold.
That meant that the value of the dollar
was linked to the value of gold.
But that also meant the US government
could only print money in proportion to
the amount of gold it physically held.
This makes sense, but there's a major limitation.
It meant that there was a cap on
monetary growth, a governor on the economy.
That was until this guy came along.
The US abandoned the gold standard
and put the economy in hyperdrive,
a grand experiment.
If the world accepts US dollars and the US can
literally make however much of these dollars they like, you
can see how easy it becomes to fund the largest
military in the world or prop up new industry.
So what's backing the dollar now?
There's got to be some reason
we all accept this stuff, right?
There is.
And it's simple.
One word, really. Trust.
There's no precious metal or commodity backing and
guaranteeing the value of the US dollar.
And this isn't just a thing in the US.
It's the same for all
major currencies around the world.
It's only the faith that we have in
the system that gives this stuff value.
It's our belief that people will accept our money and
that in the future, our economy will be strong.
Although it seems positive, this all brings
volatility because governments and central banks are
now free to manipulate its value.
This gives us powerful tools
to generate growth and opportunities.
But it also creates huge, massive risks for countries.
In extreme cases, hyperinflation
can cause devastating effects.
Absolute mayhem.
Take Venezuela.
It used to be the wealthiest country in Latin America,
thanks to the fact that it sits on one of
the largest oil reserves in the entire world.
But too much of a good thing isn't always great.
They were too reliant on oil.
And when prices went up, the
country had an economic boom.
When prices declined, it was disaster.
These surges happened a few times in their
history, but when oil prices dropped worldwide in
2014, shit really hit the fan.
With the economy in rapid decline, President
Maduro decided to try and save the
economy by printing more money.
This worked in the past, and all they needed
was faith, and they could make it through this.
But faith was gone.
Faith is the number one currency, remember.
By 2019, consumer prices went up by 65,000%.
and their money was essentially worthless.
And this isn't the only case.
In Zimbabwe, inflation was so high that prices doubled every
24 hours for a period of time and the country
even issued a bank note worth $100 trillion.
That's 14 zeros.
And in those days, that would get you a bus ticket.
Obviously, those are extreme cases, but economists
are always worried that inflation might get
out of hand, even at lower scales.
So should we expect a recession
or are there opportunities ahead?
First of all, the entity that's responsible
for monetary policy isn't the government.
It's not the legislature, not the
judiciary power, it's the central bank.
The idea is we want to keep our
money independent from the quarrels of politicians.
Not sure how well that works, but that's
the idea anyways, the central bank decides whether
to turn on the money printers or not.
In the US, this is called the Federal Reserve, which
is probably the most powerful institution in the world.
In Europe, it's the European Central Bank.
The Fed affects just about every aspect of our lives.
That's because they control the levers of
employment, interest rates and the money supply.
Understanding these levers will help you understand the
economy and how you can earn more.
To put simply, the Fed can either
increase the amount of money in circulation
or they can make money more expensive.
This changes the money supply.
In practice, the Fed decides whether or not
to buy securities like US Treasury bonds.
To understand this, we need to reframe our minds.
Because when you go to the store and
you buy a gallon of milk, you purchase
it with money already in the money supply.
That money was someone else's before it was yours,
then it was yours, and now it's a store's.
When the Fed buy something like treasury
bonds, they're actually placing completely new money
into the economy, meaning there's now more
money available to trade for everyone.
It's an injection of brand new cash.
Then, when the economy is getting a bit
too hot, the Fed will reduce these purchases,
reducing the injections of new cash.
These actions either make money
cheaper or more expensive.
The more money there is, the cheaper it becomes.
But that's not their only tool, because
the Fed can also change interest rates.
And this has a butterfly effect.
Commercial banks borrow money from the Federal Reserve.
So if the Fed charges a higher interest rate
to commercial banks, these banks will then charge a
higher interest rate to us when we borrow money.
This is exactly why high growth companies
see huge changes in stock price when
interest rates change, because high growth companies
typically operate on a ton of debt.
When you have a ton of debt, a 1% change
in interest rates can completely change your business strategy.
And that's why their stock
price can change so dramatically.
So the question is, can the Fed fix the
economy and reverse the trends in the short term?
Probably not.
And here's why.
Current inflation is caused by
several external factors.
When the pandemic hit, there was a period of time
when no one was spending more than they had to.
We were unsure what was going to happen
and this was terrible for the economy.
It triggered a series of events.
The Fed in March 2020
reduced reserve requirements to 0%
for commercial banks.
This meant that banks were no longer
required to keep any cash on hand.
This allowed banks to freely lend money
to individuals as much as they wanted,
which means more money in the economy.
Then governments began injecting massive amounts of cash
into the economy through stimulus plans like the
$1.9 trillion bill in 2021.
Even more money into the economy.
All of these measures helped the economy.
and meanwhile the stock markets started to
recover and generated some growth and opportunities.
But not always well.
Labor shortages and physical resource shortages caused
the production of goods and services to slow,
and then came war and sanctions.
This caused a spike in the price
of oil and gas worldwide, increasing the
cost of regular business even further.
So we have more money than ever.
But goods and services are harder
and more expensive to obtain.
This is a classic supply and demand graph.
When you have more demand than there is supply,
prices have only one way to go, up.
Prices going up is just another way of saying
the value of the dollar is going down.
That's inflation.
It's anyone's guess as to when or how the supply
and demand graph will settle back down to normal,
and let's face it, we have
no control over that anyways.
But we can take individual action.
I was recently going through Warren
Buffett's annual shareholder meetings and I
came across something really interesting.
Buffett said there are two ways to
protect yourself from inflation and monetary risk.
The first is your own individual skills.
Buffett stated that if you have a skill, whether
that be writer or plumber or anything, you will
always be paid in proportion to the value of
your service within the entire economy, no matter what
the currency of that economy is.
And this makes sense.
Let's say inflation doubles overnight.
A business's problem is now worth two times more
on paper, and you can now charge the appropriate
economic rate based on the solution to that problem.
Skills scale up with inflation, at
least in the long run.
Basically, Buffett is saying skills pay the bills.
And the second way to avoid monetary risk, according
to Buffett, is by investing in wonderful businesses.
His thought process is that businesses
in high demand are just that.
They're in high demand.
No matter what the currency is, people will trade
some proportion of their labor for that thing.
His example, like always, is Coca Cola.
So if, let's say you're willing to trade five minutes
of your time for a Coke today, there's no reason
that wouldn't still be true if our currency was instead
gold bars or Bitcoin or anything else.
So it's important to remember that
currency is a store of value.
It's not value in and of itself.
The way that you win the game of
money is by finding a way to disproportionately
create a high amount of value.
If you can create real value, if you
can solve problems, you will earn money no
matter which format that money is in.
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I can't believe that the story
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