Before we begin,
it’s important we differentiate between ‘Money’ and ‘currency’
Money: represents the actual value of goods and services
Currency: is a medium of exchange (promissory note)
Many of us actually refer to the paper in our wallets as money, but in fact all it is is paper (known as currency).
It allows person (A) to trade with person (B). This paper is the common denominator. Without this common denominator (currency) we wouldn’t be able to trade as frictionless as we do today, we would then have to constantly be bartering.
For example:
If person (A) were selling apples and person (B) were selling grapes,
then they would have to exchange one apple for one grape (assuming that they were equivalent to each other).
however,
What happens if person (A) didn’t want grapes from person (B) , but person (B) wanted apples from person (A)?
How would they make this exchange?
Person (A) would miss out on a sale because they didn’t want anything from person (B), and person (B) wouldn’t be able to get what they wanted because they had nothing to exchange with person (A).
It is simple, they wouldn’t be able to exchange any goods or services because there isn’t an agreed upon common denominator that they have collectively accepted.
In this case, this highlights the importance of centralization and the role government plays in economic activity. The common denominator is a country’s respective issued currency, in our case, that is the Rand.
It is important to distinguish the differences between the two because your wealth depends on it.
How do we derive value from currency?
We collectively agree that it has value because it is accepted ubiquitously in our local economy and it’s backed by sovereignty (government).
If I sell lemonade, I will gladly accept paper money (Rand) because I know of someone else who would be willing to accept it from me too, wherever I decided to spend it. (Call it blind faith)
If I didn't know of someone else who would accept it (Rands), then I wouldn’t sell my lemonade in Rands because then where is the value for me? I’d want real money then, not worthless paper.
If no one was accepting the Rand and I decided to accept Rands for my lemonade, my productivity would effectively be stolen then. This is because all those hours I put in to making the lemonade has now just been ‘bought’ with a currency I cannot use.
I cannot get those hours back that I spent making lemonade, and now I can’t even spend those Rands if no one accepts it. (I’ve been robbed of my time and energy)
This is why store of value is important, you will be storing your economic production(your energy) for a later use (retirement) while maintaining its purchasing power relative to other goods and services.
What drives demand for currency?
Our taxes aren’t collected to pay government bills, they are there to create demand for the currency, without demand for the currency (Rand) then no one would accept them.
Think about what happened to Zimbabwe, Venezuela, or Bolivia. Anyone producing anything there (their economic energy) wasn’t willing to accept the local currency because trust was completely destroyed in it.
Demand died for the currency and revenue collection for government collapsed. They then tried to print money (paper) without increasing the productivity to back all this new supply. This led to too much currency chasing too few goods and services - what we know as inflation. (demand pulled)
Anyone that was storing their wealth in the currency of those respective countries were severely affected and saw their wealth evaporate overnight.
All this because they stored their energy in currency and not in sound money.
Revenue and Spending
There is a HUGE misconception that government must collect taxes in order to spend, but this is simply not true. How can a central bank/government, who is the issuer of their own currency, be constrained to what it can spend?
As long as you create more demand for this new currency i.e. increasing productivity, then you can increase the money supply (currency). Inflation would be benign because real wage growth would be higher as the economy expands and produces more things we use.
The increase in the supply of paper money (currency) is met with an increase in the supply of productivity. (Producing more apples, creating more business, etc). Money supply grows to meet demand, if money supply contracts then the economy contracts.
Take a look at the graph below of how our GDP /economy is contracting. Simply, because we are taxed to death and on top of this interest rates will go up. This takes currency out of circulation.
All this dampens investment and actually reduces aggregate demand and stuns economic growth in the process - just to protect our currency - the Rand.
It’s a net-net gain for society if the money supply leads to increased productivity. The only constraint then would be the rate of inflation (how quickly it goes up), which if real wage growth is growing faster, then the economy would be expanding and would be able to swallow price increases.
Global Markets
Because you now understand this, you can then start to understand the macro economy better. The international financial system works in the same way as I’ve described above. (blind faith)
Countries who buy and sell from each other use the dollar ($) as the common denominator for international trade, just as person (A) and person (B) would do in their local economy.
This is why there has been a need for a global reserve currency, it acts as a benchmark to derive value from. It too is being distorted, but that’s an article for another day
What is a store of value?
A store of value can be a commodity or an asset that retains purchasing power into the future. It acts as a vehicle that preserves energy from our past labor, in which we can save, retrieve or exchange. It also needs to be predictably useful when retrieved.
I can’t keep my economic labor in an asset that fluctuates wildly. Today bread costs me 1 hour of labor, but tomorrow it costs me 6 hours. That’s not stable, and it’s why we need stability. Volatility in an asset makes it unpredictable. Volatility is for speculators, not wealth preservers.
Our current system is collapsing and it is why there is so much volatility and frustration globally. It’s like preventing the jenga pieces from falling once they have fallen into your hand.
Let’s look at an example
• 2011 - Bread cost R6
• 2022 - Bread costs R15-R20
If I held my economic output (energy from my labor) in Rand then I would have gotten poorer, because I can buy less now than in the past, as in the example of the bread.
The bread price never changed in that time, what changed was the destruction (value) of the currency buying that commodity. Relative to each other, bread (wheat) was a better store of value than the Rand.
If I had decided to keep my money in a wheat farm or a bread business then I would have been better off than others who decided to keep their money in Rands.
I would be able to increase the price of bread at the same rate of inflation, protecting my wealth in the process. This is an example of an investment that would offer a natural hedge against inflation. It might not be as sexy as a 100% return, but you would know that you are preserving wealth and not losing at least.
I’m not saying wheat is an investment we must rush into, it is just used as an example to illustrate that the ZAR (Rand) is not a store of value, it’s a currency. It’s a tool to allow us to exchange with other’s. It’s why people preach;
“Invest, don’t hold too much cash” because
cash loses value in the long term. And those that decide to store economic output in it are robbed by inflation (erosion of purchasing power). Intentionally and unintentionally.
Play the Game
The rich know how to play this game,
they pay their workers in currency (Rand) because it’s an exploitative tool that the elite use to keep the status quo. Our economic production is stolen from us without us even realizing it.
This is why it constantly feels like we are never getting ahead. It’s because we are earning in currency, we are not trading our time for real money but for paper. It is easily manipulated to keep the working class subjected to the elite’s dominance.
Yes, the system is rotten!
Stores Of Value
Now maybe you can understand the inception of bitcoin a bit better. It has the principles of sound money, but it hasn’t stood the test of time yet. Whether it (bitcoin) can stand the test of time - we’ll see, but it’s speculative at the moment. It is considered the savior for many, to escape from this inflationary system that steals and exploits from us.
Bitcoin aside,
because it’s not the only store of value out there, as described above with the bread business. Many inflation hedged businesses don’t worry too much if their costs are rising because they can pass that cost onto consumers by increasing the cost of their product.
They would have to increase the price otherwise they would need to close up shop. Some businesses act as natural hedge against inflation. This is why I like commodities.
Most people who struggle with rising costs are those with no assets that produce no cashflow. They earn in Rands and consume all their surpluses. So when faced with rising costs they have no ammunition to fight it because all they have is currency. And currency my friends, is manipulated to keep the status quo.
Let’s look at some viable options to store wealth
Commodities
Look at acquiring commodities that generate the same promissory characteristics as money/currency. Commodities that people will need in the future regardless of what is happening to the local currency of a respective country.
If you find yourself in a place where the currency is depreciating exponentially then you look for other assets that have promissory features. You grow wealth by taking your currency and investing it into sound money.
You only use currency as a tool to get you to where you want to be.
Some Examples of commodities include:
Marijuana
Water
Land
Electricity
Gold
Coffee beans
Avocadoes
Macadamia Nut Trees
Live stock
All these commodities can be used as a tool to negotiate or even to store wealth. In essence, you would use an alternative value to pay for traditional things rather than using fiat. Currency is just for transactions and will continue to lose value against all these commodities I’ve mentioned.
If the demand for anything is there, then there is a market too. You can literally grow wealth in your backyard by storing excess water, electricity, growing marijuana, or starting a vegetable garden.
So why not try do it?
Why store of value matters in South Africa?
South Africa’s GDP growth is declining, its tax base is shrinking, while simultaneously state dependency is rising. This is a trifactor for wealth destruction and pain.
If the demand for the local currency is dwindling then it becomes a catalyst for a weaker currency and further social unrest as wealth. This leads to wealth getting destroyed or transferred.
This will affect all South Africans one way or another, no one is immune to the effects of a crumbling economy. This is why it is important to choose your store of wealth very carefully.
South Africa’s GDP growth
A lacklustre performance of Africa’s previous biggest economy.
Remember this,
governments only act to hold on to power and never for the benefit of the economy. It’s why Putin stated himself, and I quote;
“Africa is a cemetery for Africans. “How could a cemetery be developed”
Looking Ahead for South Africans
Balancing economic stability won’t be an easy task for the global economy and for South Africa at whole, especially when income dries up and fiscal and monetary policies don’t support economic advancement.
What seems to be inevitable is that,
local assets (Your perceived store of wealth) will continue to lose value in real terms because of bad economic policies and outdated leaders eating furiously from the trough.
Also…..
It’s easy to just blame government, but the answer is more nuanced than that. It is not only government’s fault that we have seen the demise of our economy. We must also understand that they are playing in a world of oligarchies who have the power to collapse economies for their own dominance.
South Africa’s influence in the world is minimal, we are heavily influenced by bigger nations/economies. And if we don’t respond the way investors like, then they shun our already ill economy, adding more pressure to our exiting local problems.
Think of a game of Monopoly, you inevitably go bankrupt and lose the game and someone else takes over your assets. This is how SA could lose sovereignty eventually. This creates an environment where the citizens continue to perpetually work just to survive.
It’s 100% akin to slavery, and all this is happening on a global level with different countries showing signs of their own symptoms and its severity.
Thrive in Chaos
In the midst of chaos, imperialism seekers will be making their moves to control and dictate more. This is why I am going to reiterate '“that it is wise to choose your store of value so carefully”.
I can almost guarantee you that that if you choose currency over sound money you will continue to be perpetually exploited. This is no make belief, friends. Many people aren’t looking to help you, but are only simply waiting to benefit from chaos.
The Hard Truths no one will tell you
Financial control is owned by these oligarchies we always seem to hear about in make-believe sci-fi movies.
Government is inept, yes. But capital is controlled by foreign sources. They control the store of value at a global level and the working class are just cogs in this system, with emerging markets being the hardest hit.
We may think we own our sovereignty until the oligarchies come to feed. But at the end of the day all we are, are soldiers in an economic battlefield trying to survive.
There have always been casualties in economic warfare, and this time is no different.
Watch here: What is a store of value?
See you next week
Stay safe, everyone :)