The law of supply and demand governs the balance that must exist for a healthy financial ecosystem. When it is the season for tomatoes, their price drops until the harvest is over. When winter comes, the demand for coats and other winter outfits rises.
However, a phenomenon began to appear centuries ago when merchants decided to entrust their gold to bankers, thus avoiding transporting the valuable and heavy metal during long journeys. Instead, carrying certificates of deposit that could be converted back into gold at a later stage. The method was refined to the point of seeing fiat money emerge.
Over time, the technique was extended until finally in 1971, then-President Nixon of the United States cut off any relationship between fiat money and gold. From that moment, the concept of finite values disappeared and this is how the purchasing power of money entered its terminal phase. And it is that under those rules, you no longer need to have precious metals, or stocks.
In a finite world, the true value became seemingly infinite. Understanding this reality becomes much more difficult when terms such as QE, inflation, treasury bonds, currency issues, brokers, and leverage, among others, are part of the daily glossary of financiers and economists subjected to this zombie economy.
What are you talking about?
I know, it's a lot to digest! But let’s proceed in parts. Together we will understand the whole mess of words and why it’s important for us to know this information.
The law of supply and demand
Clothing is a great example to illustrate this. Most of you have gone shopping at the beginning of summer and you realize that there are a lot of winter clothes on offer at low prices! In winter this happens the other way around. Could it be that stores think you're going on vacation to the opposite hemisphere? No! This is the law of supply and demand. When you need something and many people also need it, it becomes scarce, therefore the price goes up, contrary to what happens when you change to the next station, according to the example.
I will save a bit of this topic for later, when we start talking about why I believe bitcoin is going to end up being valuable and relevant for the future economy.
We traditionally understood as "fiduciary" the money that was backed by the confidence that there is a central bank ready to maintain value and convertibility for the indicated amount. When I was a child, the banknotes had the word gold inscribed on them, since I am from Colombia, they said 100 pesos gold. That meant that he could go to the Banco de la República and ask for the value of that gold ticket.
After World War II, the United States of America agreed to guard the gold and stated that each ounce of gold was to support $ 20. Accordingly, each dollar-backed currency would have its gold equivalent.
A change of rules
On August 14, 1971, Richard Nixon announced to the public that the dollar was no longer linked to gold, with which the fractional reserve monetary system was applied, and essentially applied to the world economy. What a villainous trick! Although the proletarian mass did not realize what this would entail, and in fact even today most do not realize it.
What happened at that time is that the money was no longer backed and turned into gold. Finally, it became illegal to possess gold and by decree the first official inflation of the current monetary system became effective. They paid $35 for every ounce to physical gold holders, punishing anyone who refused to turn over their possessions.
Oh, but they did a good business. I pray at 20 dollars and the State pays you 35, you are winning, right? Well, no! Currently, gold is reaching 2000 US dollars, which indicates that its price is clearly above devalued bills that do not even correspond to the price of the paper on which they are printed.
Counterfeit stocks, securities, metals and raw materials
Thanks to the development of the pseudo-capitalist economy, the same fractional reserve system began to be applied to the other financial markets.
A person in his right mind would say, How is it possible that oil reaches negative values, and how is it possible that the banking system charges you interest for saving money? Although it sounds far-fetched, the unbridled issuance of currency, coupled with policies that benefit a small number of people/entities in the form of free money, is collapsing the current financial system.
Let's start with oil. Do you know how many barrels of oil the planet stopped consuming thanks to all this huge crisis of Covid19? Although I don't know the exact answer, I can tell you that the world stopped like a plane in flight. Cars stopped roaming the roads, planes stopped flying the skies, and the world at large cut spending by a fairly high percentage.
Clearly a raw material surplus originated in the case of oil, but the issue goes much further. It is speculated that for every barrel of oil there are some 500 shares that represent it. These shares are sold through brokers, whom I consider to be licensed scammers, hundreds of times representing the same barrel, and if we multiply that by the millions of barrels produced in the world, we will be able to understand why their values are facing the instability seen during this year 2020.
And with negative interests, what happens?
When there is a liquidity crisis, sometimes due to a lack of monetary speed (the rate at which money is spent and circulates through the economy), banks create strategies to promote consumption. The credits fulfill the function of forcing said circulation. When the economy slows down, banks lower interest rates, seeking to increase customers' consumption with a credit card, managing to circulate more money through the economy.
The problem then is for savers, who will see a sharp decrease in the interest received on their savings. Additionally, due to the fractional reserve system, banks only retain a miserable percentage of cash, known in my country as a reserve requirement.
Cantillon effect analyzes one of the great disadvantages of this system. Money cascades to the privileged class that should theoretically pass money on to society through entrepreneurship and work for citizens. Unfortunately, this is not the case in real life, but that money goes to the companies (generally fraudulent) of these people.
It is fully verifiable that oil extraction through fracking has been at a loss for years, in view of oil prices. Likewise, companies in the technology sector such as Airbnb, Uber, and WeWork, among others, issue constant losses. However, we can see them on the charts going up and up for no apparent logical reason.
This has to do with the issuance of money that is destined to the repurchase of junk shares, with which they keep the dying economy. It's akin to holding a broken inflatable doll through an ever-higher injection of air.
QE or Quantitative Easing
As an additional measure to solve the liquidity crisis and given that the most select group of trust money accumulators has trillions of dollars in large vaults (only Warren Buffet claims to have 137 trillions of dollars in cash), the federal reserve in the United States of America, a customary measure called QE (Quantitative Easing) or Quantitative Easing is already implemented. That is, print money and sell it in the form of bonds to countries and companies with the aim of increasing cash flow. What about these measures considering that the endorsement of such money has absolutely no value? What is going to happen when humanity learns that if that fiat money were backed by gold, the ounce would exceed $ 500,000?
Bitcoin: 21 million and now!
If at this point you still trust those forms of money, I think it's not worth reading the article's conclusion. In 2009, a computer scientist or a group of them launched an open-source protocol on the internet. Under a planned process of progressive circulation that would gradually mix with the economy thanks to its functions such as third-party acceptance, divisibility, portability, and incorruptibility.
This protocol, known as Bitcoin, is widely accepted and recognized by many people. Most of them arrive listening to the story of a few visionaries who filled with dollars in a few years thanks to the large price increases that the currency has had during the past 10 years.
Sadly, the vast majority of those people still don't understand the importance of finite assets, but rather measure bitcoin's value based on its price. Big mistake! This hypothesis becomes noticeable when they neglect their private keys or leave the money in the exchanges. Worse still, many gamble at virtual casinos known as officially "Brokers" with those who are constantly at risk.
Will humanity learn to value scarcity in an infinite world? Time will tell!
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