If a Dollar Was a Second, Would You Still Trust It?
Let me put it to you like this: If I gave you a million US dollars a day, every day (including weekends), since the day Jesus was born, you’d have less than 3.7% of the total amount of US dollars created since 2008.
Not your problem?
Read on…
The Money Machine
The money you work so hard for, the money you use to buy your groceries and pay your bills, is only useful because it has a trusted value, allowing you to exchange it for something, but what is a US dollar? What gives it value, and how are they created?
The US Central Bank manufactures money out of nothing, and it has manufactured a lot, on average, just under $4 billion a day, every day since the end of the 2008 financial crisis. This is possible because, since August 15th 1971, your money’s value is backed, not by a real tangible asset like gold, but instead by an intangible belief.
A US dollar is created using the money multiplier, the percentage of reserves held by large banking institutions.
It’s made not by physically printing the money but by entries on a ledger, by loans cascading down a daisy chain, hopping from bank balance sheet to bank balance sheet.
This system is called Fractional Reserve Banking, and it’s the mechanism that creates money out of nothing.
The total of all this freshly created money, manufactured by cascading balance sheet entries down a daisy chain, has a name.
It’s called the M1 Money Supply.
And in 2022, it looks like this.
Fractional reserve banking is fundamentally unstable and has to be held together using financial ‘engineering’ by the US Central Bank.
One way the trust in the system is maintained is through FDIC bank deposit insurance. At $250,000 per depositor, it’s an easement for your mind, but, as you probably know, if you go down to your bank and demand your money, you won’t be able to get it unless it’s a small everyday amount because your bank literally doesn’t have it.
Instead, it has an electronic transaction record, 90% of which has been lent to someone else.
The US dollar is already a digital currency. You just didn’t know it.
You might be asking what happens if the banking system suffers a systemic failure; how would FDIC insurance cover everyone’s losses?
Money, as you’ve seen, is based on nothing. That’s not entirely true. It’s based on your belief that your money is safe.
When you believe in something, you trust it, and with your money, you trust your counterparty, your bank, to give you access to it and that they will not default on this agreement. In turn, your bank trusts the US Central Bank to make more funds available in times of financial stress.
Belief and trust in any system, while technically infinite, do have limits. If society is pushed too far, a line is crossed, and confidence evaporates, reducing trust in the system.
If the US Central Bank has to create more, it can do so without limit because money, since August 1971, is not backed by a finite physical asset like gold but by belief.
Since the 2008 financial crisis, the US Central Bank has massively increased the production of money.
They’ve even given it a name.
Quantitative Easing.
Quantitative Easing — Industrial-Grade Money Production
Quantitative Easing, QE, is a technique central banks use to inject money into the financial system; it creates money on an industrial scale.
(This is only possible because money is no longer backed by a physical asset like gold but by the intangible asset of belief.)
The US Central Bank has to balance its QE money-creating process with an entry in its balance sheet. The asset it uses to do this are bonds issued by the US Government.
You’ve seen the increase in the money supply, but here’s the other side of the transaction, the dollar value of the assets held on the US Central Bank’s balance sheet.
At the end of March 2022, the assets are valued at $8.9 trillion.
Is $8.9 trillion extreme, or has it ever been higher?
This chart shows the total assets from the Bank of England going back to 1701, with US data added from 2000.
Is $8.9 trillion extreme? Yes, it is.
There’s another name for a bond: An IOU.
Governments don’t have money of their own. They balance their books using various forms of taxation, direct and indirect, and by issuing IOUs called bonds.
Investors purchase these bonds because they trust the government will pay them back when the bond matures. The thread holding the global money machine together — your relationship with your money, your bank, your country’s central bank, and your government is trust.
Bonds are the price you pay for risk. The higher the risk, the higher the return investors will demand.
As demand for bonds goes up, yields go down, making bonds relatively less attractive as an investment vehicle.
The bond market is many times larger than the stock market, and so what happens to the money if returns on bonds become less attractive?
It flows into another investment vehicle with more attractive returns relative to risk, but the alternative has to have enough liquidity to absorb the money flow out of the bond market.
That vehicle is the stock market.
Losing Your Purchasing Power
How much debt has been created since 2008?
The US national debt in 2008 was $9.7 trillion; today, it’s $30.3 trillion — an increase of over 212%.
Quantitative Easing increases the number of dollars, as shown by the M1 money supply, decreasing the US dollar’s buying power.
Your dollar.
The US dollar has lost 40% of its purchasing power since 1997 — and 97% since 1913 — the year the US Central Bank was created.
Deficit spending is when purchases exceed income, and when government spending exceeds the amount of money the government brings in, it increases the budget deficit. Budget deficits add to the national debt. The national debt, also known as sovereign debt, is how much a government owes.
And the United States owes a lot.
United States national debt is now over $30.3 trillion. It’s such a large number that it’s difficult to compare it to anything and quantify it.
Let’s convert a US dollar into something we can quantify.
Let’s convert a US dollar into a unit of time, a second, and ask, how long is a period of 30.3 trillion seconds?
Ask your family and friends to take a guess.
Expect answers between one year and one hundred years, with a few outliers around one thousand years.
30.3 trillion seconds is 962,172 years.
That’s a massive amount of debt, and now, after converting a dollar into a second, you can see how big this debt really is.
Surely, it can’t get any worse?
As a country’s Debt to GDP ratio approaches 100%, holders of the debt can become concerned that the government does not have the income to pay the debt when it comes due.
When this happens, the creditors demand more for underwriting the risk. Bonds are the price of risk, and as bond investors demand more because of the increase of defaulting on the debt, governments are forced to issue bonds with a higher yield.
As the Debt to GDP ratio goes over 100%, more and more money generated by the sale of bonds goes into rolling over and managing the debt instead of the economy. If taken to the extreme, this is the cause of not just inflation but hyperinflation, a condition that obliterates wealth.
In 2022, the Debt to GDP ratio in the United States is 130%.
Look at a US one-dollar bill and turn it over. You’ll see the words “IN GOD WE TRUST”.
In 2022, when you hold cash, you are trusting that the verb in that statement will not become a past participle anytime soon.
