When it comes to money, more and more people in modern societies are talking about diverse areas. Some debate about the craziness of how most humans define value nowadays. The colour, size and imprint on a piece of paper decide whether it will buy me a jetski or a package of chewing gum. Others complain about how immense the price of chewing gum has increased over the years. There also are people who discuss the potential of bitcoin and other DLT-based (distributed ledger technology) tokens if used instead of fiat money. Now there is an increasing number of highly qualified people who are talking about a topic that includes all the other discussions. It is about a big future financial crisis. If such a crisis occurs, how and why will it happen? In this blog article, we will explain errors in our money system, how we can prevent it from crashing, how we can prepare ourselves financially and more.
Fiat money vs. sound money
Every great nation started with its own monetary system. While many current societies use fiat money for example the Euro there also is sound money. The term “sound money” has its roots in the Roman Empire, which used silver and gold coins in everyday commerce, whether for paying Roman soldiers or buying exotic goods from all corners of the known world. After time fraud and corruption appeared and inflation hit the empire. Other metals were mixed into the coins and the coins were clipped. When the Roman soldiers found out that their coins were not fully made of real silver or gold, their motivation to risk their lives on the battlefield began to leak. This situation applied to most areas of society at that time. As a result, everything fell apart, breaking down into the end of their financial system.
Another historical example is the Bretton-Woods-System that began in 1944 and was a gold-backed monetary system. However, it was not a classic reserve currency. All countries participating in the Bretton-Woods-System agreed to fixed exchange rates to the U.S. dollar. In return, the Federal Reserve committed to exchange dollars for gold at a fixed rate of $35 U.S. dollars per troy ounce to participating central banks. As the US kept on printing more money to make up for wars etc. the U.S. dollar value decreased, resulting in rising inflation. Therefore, other countries did not want to get paid in U.S. dollars anymore but in gold. In 1971, President Richard Nixon stopped the nominal gold peg of the dollar. Since then, more and more money was printed without being connected to a limited resource like gold. Ever since debt has been hitting new record highs every year. With a fiat money system politicians, emperors etc. can create money out of thin air. With a working sound monetary system, the risk of people decreasing the value of money by printing more of it is not given.
Why this could end in a crises
Our current fiat money system has some systematic errors leading to instability. A small part of society makes a big profit out of it but the majority is decreasing in wealth. People work harder than ever but can’t afford a house. For example, when you are rich you have possibilities of investing it into certain asset classes like limited assets and therefore experience its growth of value. People who cannot afford certain asset classes are tied to the same inflationary currency with all its flaws. In 2017 in Germany, the top one percent held about 18 percent of all wealth – as much as the poorest 75 per cent of the adult population combined. For the majority of people, the entire livelihood consists of income. But if the income does not rise in line with inflation the working population will have less money available every year. That’s why a certain percentage of the rich get richer while the majority of society will get poorer and poorer. Explaining this with the roman empire example, roman soldiers are doing overtime hours to earn more metal coins with decreasing silver percentage in them, in order to survive. The rich people who buy these soldiers on the other hand keep real silver at home. They can exchange some of it for the amount of fake metal having the same value to buy more soldiers. Another problem is that money is created only as debt, which means that every currency is related to an interest. That interest has an exponential growth, known as the compound interest. It is not impossible for the real economy to grow in the same way the debt does. We need more growth but the exponential debt grows faster than the linear growing economy. Unfortunately, debt bubbles emerge and expand until they pop. In our recent live show, bestselling author Marc Friedrich even mentioned that everything was inflationary, which is why there was an everything bubble waiting to pop.
Is inflation manifesting itself right now?
After the financial crisis in 2008, central banks all over the world printed money like crazy. Moreover, the key interest rate decreased. As a result the stock prices were decoupled from the real economy (e.g. during Corona we had new all-time-highs for stocks although the global economy was at the bottom and still needs its time to recover). Furthermore, everybody expected inflation because the money was supposed to lose its value due to the excessive money printing. But actually, it was deflationary because that money didn’t come to the real economy but stayed inside the financial area. For example, it went up to the stock market and into real estate instead. This time it is different because we have been seeing governments writing checks to the people and creating fiscal packages worth trillions of dollars so this time there is increasing inflation that directly reaches the people. Therefore the purchasing power has been increasing, leading to increasing consumer prices and the highest inflation rates in Europe and the US for years.
“They can’t go lower with the rates, they can’t print more money, now it’s a game of trust.” -Marc Friedrich
The four ways of saving the system from crashing
According to Marc Friedrich, there are four possible scenarios of how the whole monetary system can be saved. The first one is economic growth. If we reach more growth than debts increase, which would be around five to six per cent more per year, the system could rescue itself. Due to the mentioned exponential growth of compound interest and the linear economical growth, the system would need a change in order for that to happen. The second possibility is that governments and central banks print their way out of unsustainable debt levels and devalue the currency until it becomes sustainable again. In fact, they already reached inflation but they need more. Besides, if society recognizes too high inflation, everyone will invest in gold, digital gold as in bitcoin, etc. which is not in the interest of many governments. The third point, war, sounds absurd to be presented as a solution. Nevertheless, big system changes appear after wars including new monetary systems. The last solution is about a general monetary reset. Many more or less recent blockchain projects have shown us what a great impact this future technology can have, especially when it comes to monetary systems. Bitcoin for example combines three important components a society could benefit from. It is deflationary, decentralized and trustable.
A new monetary system
Looking forward to a possible coming crisis, we have the chance to establish and implement a new monetary system. One big chance we have is bitcoin. First of all, bitcoin communicates the idea that there is better money for us to use. Bitcoin is superior to our fiat system and the central banks. According to Marc Friedrich, it is not just the biggest investment chance in our lifetime but the biggest chance for our world to have a better future. In his opinion, there are always chances in crises and investments should be made in limited assets. Actually everything except paper money. If we have a fair and sound monetary system that is not in control of central institutions, there is less to worry about.
“We need a sound monetary system, independent from the government, independent from Central Banks, limited by math and I think bitcoin is a perfect solution, it came at the right time and is a present of god. […] I think the next monetary system will be bitcoin or bitcoin will be a part of it.” -Marc Friedrich
The greatest reset w/ Marc Friedrich
Learn more about the chances and risks of a coming crisis and gain deeper insights into the topics mentioned in this article. Watch the full BLOCKCHANCE Online LIVE show, where bestselling author Marc Friedrich shares his opinion on the future of our monetary system. BLOCKCHANCE Online LIVE is a regularly hosted live show on YouTube and LinkedIn, where you can ask renowned experts in their field your questions and gain glimpses of our future. Marc Friedrich will also be sharing his insights as a speaker at the upcoming BLOCKCHANCE EUROPE 2021 conference! Get your ticket here and take a deep dive into the universe of future technologies.