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Welcome to Money for the Rest of Us. This is a personal finance show on money. How it works, how to invest it, and how to live without worrying about it. I'm your host, David Stein. Today is episode 539. It's titled Resilient wealth in an Era of Infinite Money. Recently I got an email from a listener that asked if the US had a fixed money supply, how would assets behave? Now, money supply is the amount of physical currency. Think US dollar bills, coins. It is checking and savings account balances at banks and credit unions and it's retail money market mutual funds. These are savings vehicles that invest in short term government bonds, treasury bills, and with the Federal Reserve. Now this is just one definition of the money supply. That would be M2M. And that's one of the challenges. When we say, well, what if the money supply is fixed? What's included in the money supply? I wrote about this in our email newsletter last week as I tried to look at the growth in the money supply. With M2 over $22 trillion right now in the U.S. that's the highest level ever. Back in March 2020, it was $16 trillion and half that amount about a decade or so ago. But it's not a perfect measure of the money. For example, there are US dollars floating around overseas that are not included in the official M2 measurement. Now what we know about the money supply is it does need to grow. And this listener's question is, what if it doesn't grow? Or we could say, well, what if it doesn't grow fast enough? There's something called a negative money shock. And, and that occurs when there's not enough money in the economy to facilitate transactions. We saw this in Venezuela during their period of hyperinflation. There wasn't enough money around. People were paying for parking with granola bars. If there's a negative money supply shock, and so there's not enough money relative to the amount of goods available is you get prices falling. This happened in the late 19th century in the United States. It was a period of rapid industrialization. But the us, uk, Germany were on the gold standard, which means the money supply would only grow as fast as new discoveries of gold. There was a lot of discoveries of gold from 1848 to 1855 in the US California Gold Rush in Australia in the 1850s. And so the supply of gold accelerated back then. But in the 1870s-1890s, gold discoveries slowed down. And so that led to not enough money in the US and prices fell. Ideally we live in an economy where the money supply is growing at a rate that meets with the growing population, the desire to spend money to facilitate transactions. So there's essentially enough oil to grease the wheel of commerce. I'll link to a paper, research paper that looked at that period of the late 19th century where we saw price deflation because there wasn't enough gold. And they write, deflation has had a bad rap, possibly as a consequence of the combination of deflation and depression during the 1930s. People think deflation depression, but the economy actually grew during that period of deflation in the late late 19th century. There are some economists, Milton Friedman, for example, suggest that deflation, if it's anticipated, is the result of optimal monetary policy. If the money supply grew not too quickly, but just the right amount, sort of Goldilocks amount, we would see falling prices due to technological advances, due to productivity improvements as companies got more efficient at making things. And if the money supply wasn't growing at 6% a year like it does now, faster than it needs to, we would see price decline. When we get the money supply increasing too quickly, we get inflation, a rise in the price of goods and services, but we also get asset price inflation. When we think about inflation, there are three ingredients that cause inflation. There needs to be too much money, but we also need people wanting to spend that money, their willingness to transact. And then there needs to be enough goods and services to buy. When the money supply increases too fast and there aren't sufficient goods and services, and there's desire to buy goods and services, that leads to inflation. And that's exactly what we saw coming out of the pandemic with quantitative easing, we saw the money supply increase by 40%. Quantitative easing is the process of the central bank essentially creating money that they use to purchase treasury bonds, government debt. And if the government is running a budget deficit, that leads to an increase of wealth throughout the economy and increased money. And if there's capacity constraints, that can lead to inflation. And we saw that with inflation approaching double digits in the US but that money that flowed into the economy didn't just go in to goods and services. It went into stocks, went into real estate, houses. If you look at the price appreciation in houses, they were quite large in 2021, 2022. And all that money was there because there was too much money, and it led to asset inflation. As a small business owner, you don't have the luxury of clocking out early. Your business is on your mind 24, 7. So when you're hiring, you need a partner that works just as hard as you do, that hiring partner is LinkedIn Jobs. When you clock out, LinkedIn clocks in. LinkedIn makes it easy to post your job for free. Share it with your network and get qualified candidates that you can manage all in one place. I know in my profession I've seen how important it is and critical to get the right hire. And LinkedIn Jobs makes that easy. With LinkedIn you can post your job and they have new features to help you write job descriptions and then quickly get your job in front of the right people with deep candidate insights. You can either post your job for free or pay to promote promoted jobs. Get three times more qualified candidates. At the end of the day, the most important thing to your small business is the quality of candidates. And with LinkedIn you can feel confident that you're getting the best. Based on LinkedIn data, 72% of small businesses using LinkedIn say that LinkedIn helps them find high quality candidates. So find out why more than two and a half million small businesses use LinkedIn for hiring today. Post your job for free@LinkedIn.com David that's LinkedIn.com David to post your job for free. Terms and conditions apply. At the beginning of the year I got an email from a listener, Al that talked about this and this huge increase in the money supply. And in his perspective he was asking and his thesis was the increase in the money supply, when it increases that rapidly, it actually can lead to greater wealth inequality. And I looked for some, some evidence of that and there were a couple research papers that I found that looked at that and they both concurred. And I'll link to the papers that quantitative easing does lead to greater wealth inequality due to asset price appreciation. Now one paper looked at the cutting of interest rates providing that additional liquidity. It did help employment which helps individuals across different wealth levels and income levels. There's also what they call the mortgage refinancing channel, the ability to refinance mortgage at low interest rates that that can have an equalizing effect. But they found that the asset price appreciation overwhelmingly swamped those two areas. And so we saw greater wealth inequality. That first paper was written in 2017. There was a second paper in 2022 that also pointed to the benefit from of lower interest rates of helping everyone. But again the price appreciation in other assets, including the stock market cryptocurrency that that effect was very large and it led to higher wealth inequality. We can see that in studies that the Federal Reserve has done and I'll link to one, we can go back to 1989. And the top 1% of households by wealth controlled roughly 25 of the wealth. The bottom 50% had 3.4% of the wealth. And if we take that to Today, the top 1% control over 30% of the wealth and the bottom 50% 2.5% of the wealth. Let's put that another way. The bottom 90% of wealth holding 90th percentile and below controlled 39% of the wealth in 1989. And it's only 33% of the wealth today. So we have more we inequality. And that's because partially wealthier households were more likely to own stocks these other assets over time. And that benefited them as their wealth grew, partially due to the dramatic increase in the money supply, with the money supply growing faster than it needed to over time. Now we also have income inequality. And if we look at a breakdown of wealth by different income levels, back in 1989, the top 1% by income controlled 16 and a a half percent of wealth. And today that top 1% by income, they control 24% of the wealth. And then if we look at the bottom 40% by income, they controlled 11% of the wealth back in 1989. And now it's around 7.4%. So we see even income inequality has increased. But if we just look at wealth levels by income that has become less equal over time. The overall wealth levels have been and the studies show that one reason is quantitative easing. The massive 40% increase in the money supply led to asset price inflation, which benefited wealthier households more than it and benefited less wealthy households. Now that's not all that drives it. There is positive skewness. What I kind of think of as the Taylor Swift effect. That Taylor Swift is a billionaire after her recent concert tour. Incredibly talented. But in the age of the Internet, networking, etc. The most successful artists earn substantially more than the median artist because the ability to spread their work for people to share it, their work gets amplified. And that's what positive skewness is. It's a power law. The we see it in wealth distribution, partly due to asset price inflation, but just how the economy works in terms of the ability for a message to be amplified. It allows the winners to take an ever greater portion of the spoils of people's income. And that's okay. That would happen whether the money supply was growing too fast or not. But it's these other things that is a function of the money supply growing too quickly due to central bank manipulation of the money supply. Where central bankers have said U.S. federal Reserve can create an infinite amount of money if it wants to. And the problem is it's not tied to the real economy. It impacts a real economy, but there isn't any cost to doing that. When we think about how most money is created, most money is created through bank loans. And banks can create the money because they make a loan, they put a loan receivable as an asset and then they make a digital deposit, they change the numbers and then a checking account. But the borrower has to expend energy over time to repay that debt. And so most of the time they're conscientious borrowers because they have to give up their life energy to repay the debt so that that monetary expansion tied to loan creation is tied to the real economy because there's a cost there of life energy, of individuals and business workers to repay that debt. The gold standard, despite all its flaws, was tied to the real economy because it cost energy and effort to find the gold. The downside to the gold standard is, as we discussed, the gold supply didn't necessarily grow as quickly as it needed to to meet the desires for transactions. And that led to some deflation. So we know then that if the money supply stayed fixed, we would see falling prices. If the money supply just grew at the optimal rate, we would see prices fall due to increased productivity, increased efficiency, and that would be fine, that would be normal. It's just that we're not there because in some regards, central banking is very, very difficult. We've talked about how they try to set the right policy rate to encourage borrowing, to expand the money supply. But they have this QE shortcut where they can try to lower rates, longer term rates even faster, increase the money supply even greater to get this positive wealth effect, and try to combat financial crises that way. But it leads to asset price inflation which leads to higher wealth inequality. Before we continue, let me pause and share some words from this week's sponsors.
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My son Brett shared an interesting monetary experiment that I had not heard of. It's called Demerge and it's an idea of a currency that gradually loses its over time, not due to inflation, it's just, it has an expiration date. Maybe think of it like a gift card that expires. What would you do? You would spend it. And the whole idea of a demerge currency is to encourage spending more transactions, higher velocity of transactions, rather than hoarding of the money. Now, in some regards because of inflation, that discourages hoarding also. But that's because the money supply is growing too quickly. With Demerge, it happens because the money expires. This is good because if the money is expiring, there's less of it. So it helps prevent deflation, it increases velocity, encourages spending. It can reduce the hoarding of cash, but it's not very popular. People don't like that the money they have is losing value and it can be difficult to implement and to enforce. And so this is sort of a theoretical experiment. It's kind of been done locally at times, then a local economy, but it isn't something that's been expanded dramatically. Ultimately there are many types of money, different monetary experiments, but it all comes down to trust. David Graeber in his book debt the first 5,000 years wrote, the value of a unit of currency is not the measure of the value of an object, but the measure of one's trust in other human beings. When I look at the decade plus, I've been doing money for the rest of us. My background is traditional finance, but when I see the rise of stablecoins, of Bitcoin, of cryptocurrency, it, I already knew that money is absurd, that it, it depends on trust. But the actual mechanism, when you think about we just trust these digits, call them US Dollars. The need for a central bank to basically be a lender of last resort to, to keep people due to depository insurance from, to Prevent bank runs because money at the bank, at a commercial bank, in a checking account, that's private money. It's a private liability. We only trust that money because the government provides insurance to protect us. And so the idea of bitcoin, once it got more familiar with it, and I've held it for close to a decade, I tried to buy it back in 2012, but it was just a monetary asset that people were starting to trust more. And as they have trusted it more, its value has increased, but it's, it's still digits. It has a benefit in that there's a fixed supply of it. And if we actually use Bitcoin, and we never will in terms of use it as money because it's infinitely divisible, we could, it could be essentially, it could almost be like the perfect money if it didn't appreciate so much, if it was a little more stable. And as institutions have come to accept Bitcoin or invest in Bitcoin more, we're not seeing quite as much volatility. But in theory, under and I'd done early episodes on this, if Bitcoin was used as money, we would see deflation. And I suggest that that would be bad. But if it was expected deflation. So it wouldn't be a money negative money supply shock because it's expected people knew it that the economy would actually function with Bitcoin, except there wouldn't be a necessary lender of last resort in terms of the Federal Reserve. And that's why fiat currency is the default money. That's how we pay taxes. But I don't necessarily cryptocurrency as a rule any more absurd than fiat money because it comes down to trust. Earlier this week I was reading about when the US went off the gold standard. So the gold standard is when a currency is backed by a certain amount of gold. And since the Great depression from the 1930s to 1971, one ounce of gold was worth $35 $35 per ounce. And central banks, after Bretton woods agreement regarding the monetary system coming out Of World War II, other central banks could exchange dollars with the Federal Reserve and get gold in return. So the US Dollar was backed by gold. The problem with that is that requires discipline by governments not to create too much money because otherwise if there's too many dol government want to. They don't think the dollar is no longer isn't worth $35 per ounce of gold. That it's. It's actually got. The dollar's been debased. It's worth $45, for example. And so the, the gold, the gold stock in the US started to decline. In 1960, there was 32 billion dollars of US currency in circulation and 19 and a half billion dollars of gold. By 1968, the US gold stock had dropped at 10.4 billion even as the supply of US do increased over 50 billion dollars. And this was due to government programs, it was due to the Vietnam War. There was too much money relative to the stock of gold and in some ways relative to the supply of goods and services available for sale. And so inflation was running 5, 6% per year and the administration could see that there would be no more gold at the rate that it was leaving. And so August 15, 1971, President Nixon gave a speech and he pointed out in the previous seven years that one international monetary crisis every year he blamed it not on the working man, as he put it, not on investors, real producers of wealth, but he felt it was due to speculators speculating on the currency. And so he did three things. He ended the convertibility of the US dollar to gold. And his didn't even mention the word gold in his speech. But he closed the gold window, said it was temporary, but it was permanent. Foreign governments could no longer trade US dollars for gold. Now the dollar was too strong. Fischl rate was too strong relative to gold. And he said, Nixon says let's lay to rest the bugaboo of what is called devaluation. That wasn't what they were trying to do was to devalue the dollar. Well, he said they weren't, but truly they won. They were because they felt the dollar was too strong. They would like it weaker, but they also didn't want to lose the gold. So they did two things. They put a 10% tax on imports to discourage imports buying foreign goods so that dollars wouldn't flow out into the rest of the world and keep the dollars at home. And then they did a 90 day wage and price freeze. And he again it said it was temporary. It says to put the strong, vigorous American economy into a permanent straightjacket would lock in unfairness. But this Republican president put 10% tax on imports, tariffs closed the gold window and froze prices and wages for 90 days. And surprisingly, the next year inflation came down. It was only 3.3% in 1972. The dollar weakened relative to gold. It was worth $38 an ounce. And then it went up to the mid-40s. And it all seemed like it worked well until we got to the mid-70s and inflation spiked because it was a type of straitjacket because the economy will adjust due to the money supply jacket just bottom up decisions by masses of people and businesses. They ultimately prices adjust to increases in money supply, asset prices, do goods prices and that's, that's the magic of a dynamic diverse economy. And I have a lot of sympathy for central bankers and government officials because it's very difficult to figure out the, the, the correct policy rate. And it's easy to fall into the temptation of, of quantitative easing because there isn't a direct relationship between the money supply and inflation. There can be a super long lag because it isn't just the money supply. It depends on the willingness of households and businesses to spend and the supply of goods and services. Which is why the QE after the great financial crisis didn't lead to inflation, but it did in 2020-2022 because of the supply constraints and the even more massive increase in the asset price inflation. So what do we do? Well I can tell you for the past three years I've been trying to write a book about this, thinking about how do we manage in a world where money is so absurd and there's an unlimited amount of money and how do we compare that to wealth? Wealth not just being monetary assets, but wealth being abundance, having what we need and what we want, including time, freedom. And I spent so many hours working on it and I could keep working, I continue to work on it. And it's been helpful as I do these podcasts to kind of work through, think about it. How do I make this simpler? Understand. But one thing we can do is we can own real things. We know the money supply will continue to increase faster than the supply of goods and services. And so we want to own assets that can protect us. That can be real estate, it can be stocks, it can be monetary assets like gold and cryptocurrency. Things that will can either have the pricing power to so the cash flow stays up with inflation or the supply is scarce relative to unlimited dollars. And so you'll get the price appreciation that way way so he can own assets can also and this is harder. We can grow our income at different sources of income. And this is, this is this particular challenge right now, particularly if you're just entering the job market due to the impact of AI. What jobs will be replaced by AI? How will they be replaced? I don't have a good answer for this other than use AI. Figure it out. And in my belief is that in an age of AI, that authenticity, authority that's what what people will trust. We're getting multiple queries a week for AI companies that want to take our corpus of knowledge, our authority, our authenticity and use it to build an AI that they benefit from. And we don't want to do that. We're exploring, well, how maybe we can create our own AI sort of chatbot for our premium members to better answer their questions based on the 10 plus years of material that we have have. So that's one thing we're exploring. But we can grow our income, diversify our income, get the education and then try to stay nimble as this AI driven economy evolves. And then we can protect against the downside with some type of buffer insurance and emergency savings. But there are no easy answers other than at least if we recognize that money is trust, there's an infinite amount that trust can dissipate. So we need to own real things, cash flow generating things. We need to build our resourcefulness in terms of of building our income. We need to protect against the downside with buffers and don't focus on wealth in terms of just money. Focus on abundance, our freedom, our time. How do we want to expand that life energy? Do we want to expend it purely focused on earning money when the central bank can create an unlimited amount? We want to definitely quickly convert that the money we earn into real assets to protect us against the debasement of currency. Those are some thoughts on building resilient wealth in an era of infinite money. Thanks for listening. You may be missing some of the.
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Everything I'VE shared with you in this episode has been for general education. I'm not considered your specific risk situation. I've not provided investment advice. This is simply general education on money investing the economy. Have a great week. Sam.