Funds and Galore

Introduction

I urge you to read Part 1 of the article “Inflation-Driven Price Increases Pt. 1” before reading this article.

Thank you. To recap the first article, where we left off from Part 1 of “Inflation-Driven Price Increases,”

we mentioned what the Treasury and the Federal Reserve are responsible for in our monetary system.

---

Financial Bubble: Inflation Part 2

Now, back to how the government monetary system is built up like a Ponzi scheme:

There comes a time when the US government needs money; what they do is take a loan with the Federal Reserve.

Then, what happens next is that the Federal Reserve prints out the money, gives it to the government,

and in return, the Treasury prints out an I.O.U (I Owe You/government bonds) and hands it back to the Federal Reserve, promising to pay it back.

With this liquid cash, the government uses it to fund wars, healthcare, education, reduce unemployment, etc.

While the government is doing that, the Treasury and the Federal Reserve work closely to sell off the I.O.U’s at auction

to other retail investors (individuals like you and I) and other countries’ central banks.

How Will the Government Pay Back the Loan?

The problem is if the government uses money that is loaned out from the central banks to pay bills and previous loans,

how will the government plan on paying off the current loan plus interest?

What they do is they borrow more money to pay off the current loan plus the interest,

and they keep repeating this vicious cycle over and over again.

E.g.: The government borrows $1000 from the Federal Reserve then the Treasury will hand out an I.O.U (receipt/note) back to the Federal Reserve.

On the IOU it states that the government promises to pay back the money plus interest.

The government uses the money to stimulate the economy and when it comes time to pay back the loan

they take an even bigger loan again from the Federal Reserve again to repay back the original loan ($1000) plus interest.

They do this over and over, getting into more and more debt.

It is a giant Ponzi scheme because you can never pay it off; it always requires the government to go deeper into debt.

The reason why other nations and retail investors invest in government bonds is that they are known as “low-risk” investments.

---

It’s not as if the government will vanish with your investment or fail to pay out dividends due to liquidity issues, right?

Governments have some degree of control over the money supply, so investors can be assured they will receive their money back.

---

This is how today’s Monetary system operates: The American government gets money (debt) from the Federal Reserve,

in return, the Treasury hands out an I.O.U to the Fed.

Let’s say the government gets $500 billion debt from the feds, legally American government can use this newly created money

to buy oil from the Middle East, gold and Platinum from South Africa, or machinery and mechanical appliances from China.

---

Next, foreign central banks like those in China or Japan (who invested in U.S. government bonds),

instead of converting their dollar profits back into their respective currencies—since doing so would cause

the value of their local currency to rise (leading to deflation) in relation to other currencies,

making it less desirable for trade—reinvest these export profits in the United States by purchasing government bonds.

In return, they receive an IOU from the US Treasury.

---

Three countries that own the most U.S. government bonds:

1. Japan held $1.15 trillion in treasury securities – Jan 2024
2. China held $797.7 billion in Treasury securities – Jan 2024
3. The United Kingdom held $753.5 billion in treasury securities – Jan 2024

This increase in government debt and the act of printing money and running trade deficits are some of the reasons why prices have been raising over the years.

My grandfather used to tell us that back when he was still working he used to spend only R20 on groceries.

Today (2024) the average price of groceries in South Africa is R3,618 per month.

---

Back in the 80s, my grandfather was the only one with income. He worked at Anglo Gold mine

in Vaal Reefs (North West Province), as it was known at the time, and his salary was enough to support my grandmother, my mother, and her two brothers.

Today, households find it difficult to get by with just the salaries of both partners or parents due to inflation.

---

Most people can experience this loss of purchasing power but at the same time, they do not understand how it works and why it happens.

By now you should have a better understanding of how inflation works; you are more aware

now about these government obligations that affect your life. Later I will share ways that can help you hedge against inflation (coming articles).

The average price of brown bread was R2.68 (2003) and now the average price is R17 and R13 for standard bread.

Today partners/parents have no choice but to get into debt in order to cover their basic needs.

This turn of events can leave them with little to no savings and find themselves in large sums of debt

because of a decrease in purchasing power.

It is also difficult to save when the government levies high taxes. This one of the reason why most marriage’s end up with a divorce (Money Problems)

How Hyperinflation Destroyed Nations in The Past 100 years

Now let us take a look into hyperinflation in depth and also look into countries that have spiraled out of control

due to excess spending and debasement of currency.

What we have learned so far from the Romans is that excess spending and increasing money supply can lead to tremendous consequences.

What I do not understand is why doesn’t the government elites learn from history?

Why do they always repeat the same mistakes- it seems like they never learn from the past mistakes of previous rulers.

In 2023 the US inflation rate was 3.4%. In South Africa the average inflation rate was 6.0%.

these figures let us know the health of a country. High inflation rates = price increase.

A low inflation reading indicates that a country’s economy is healthy and prices are more or less stable.

When monthly inflation is above 50% that is when we have Hyperinflation. Now let us look into some of the countries that have experienced this nightmare:

The Collapse of the German Economy Through Inflation

Picture going to a restaurant, and the price of your meal is $23.98 USD. By the time you finish eating,

that same meal costs about $80 USD. Imagine going outside and seeing people carrying large sums of money in wheelbarrows to buy goods and services;

well, this is what Germany experienced during the Weimar Republic.

Germany experienced severe hyperinflation during the Weimar Republic, an event that continues to impact the nation’s

economic policies and the mindset of its citizens today. This historical trauma is openly expressed by many Germans,

influencing contemporary economic behavior and policy. Some Germans believe it is better to spend

their money immediately, fearing it might lose its purchasing power again. They recognize that modern currency lacks intrinsic value, unlike goods and services.

From 1919 to 1923, the German government was running trade deficits. Their revenue was only a quarter of the amount they needed to finance their debts.

Remember earlier when I said that when monthly inflation is above 50%, we have hyperinflation?

Well, Germany’s monthly inflation rose to a staggering 29,500%. In 1919, the price of a loaf of bread

cost 1 mark (German currency). By 1923, that same loaf of bread cost 100,000,000,000 marks.

The middle class watched as their savings went to zero (nothing); money that took many years to save became worthless overnight.

People who had positions in life that provided a stable income, like nurses and teachers, were not able to take care of themselves plus their families.

Most workers were often paid twice per day because prices rose so fast; their wages were worthless by lunchtime.

Factories started to close, unemployment started to rise.

It even got so bad that businesses stopped taking money; instead, they would rather trade with appliances that suited their needs.

In 1914, 1 USD = 4.2 Marks.By 1923, 1 USD = 4.2 Trillion Marks. This shows that overprinting affects everybody.

In 1924, the situation was stabilized by a new currency that was backed by solid assets. The problem is many middle-class people by this time had all lost their savings.

The Collapse of Zimbabwe’s Nation Through Inflation

Zimbabwe’s hyperinflation disaster is the most recent to date. Zimbabwe has experienced the second worst

inflation to date and the first of the 21st century. Zimbabwe’s monthly inflation was 76,600,000,000%. These events occurred during November 2008.

During this time, a 30-pound bag of potatoes cost 90 million Zimbabwe dollars in the first week of March; the same bag later amounted to 160 million.

In November, a bag of sugar cost 90 billion Zimbabwe dollars. Salaries of unskilled workers were 200 billion Zimbabwe dollars, equivalent to $10 a month.

That is how much people lost their purchasing power.

In 1980, Zimbabwe gained independence. This led to Mugabe being president.

He then sought to acquire white people’s land without compensation through the land reform Act that began in the 80s .

Subsequently, he influenced policies to establish Zimbabwe as a one-party regime.

Robert Mugabe then used the influence of the central banks to make it possible to fund new investors by printing money,

and he gave this money to new black individuals who had little to no experience.

Then, boom, the agriculture sector suffered, exports decreased, and the government ran larger deficits to keep up with debt . People suffered.

The elites of Zimbabwe started printing more money to keep up with debts, then boom, the economy collapsed.

Nations like the Roman Empire, Greece, Germany, and Zimbabwe all experienced the same fate.

When the balance of goods and services is unbalanced, it can lead to catastrophic outcomes.

Printing money hurts the economy, and yet we are in the biggest financial bubble that nobody sees. Who knows which nation will experience this next?

Instead of just waiting and blaming governments, people should use that energy to look for ways to protect themselves.

That’s why financial knowledge is important. In the next coming articles, I’ll touch on how you can protect yourself from being wiped out.

Conclusion: Inflation-Driven Price Increases Pt2

The government’s reliance on debt and money printing poses significant risks to individuals and economies.

Instead of waiting for governments to take action, it’s crucial for individuals to educate themselves

about financial matters and take steps to protect their assets.

In future articles, strategies to safeguard against financial instability will be explored.

Take control of your financial future by gaining knowledge and preparing for potential economic downturns.

FINANCIAL BUBBLE : Inflation Part 1

Inflation is something we all feel because it affects every one of us. The thing about inflation driven price increases

is that if you are not prepared for it, it can wipe you out in the long run.

Over the years, we’ve seen inflation rise through the roof, whether it’s through petrol prices, food commodities, or interest rates.

So it boils down to one thing:

what is inflation? How can I make sure I don’t fall behind? What causes prices to rise? I’ll explain everything you need to know

about inflation and how governments can lead their nation’s economy into hyperinflation.

Inflation’s Impact: Rome’s Economic Demise

To understand how inflation gets out of control, let’s dive back into history so that I can point out the events that led to the collapse

of the economy of Rome and what central banks of today are doing that is similar to Rome, which also led to their economies to collapse.

Inflation occurs when there is more money supply than there are goods and services produced. There needs to be a balance between

the money supply and goods and services to maintain the system. The more money that circulates in an economy, the more worthless it becomes.

In the early years of the Roman Republic (around 178 years), there weren’t any signs hinting that there was inflation during the time.

The fact that they were using gold and silver coins as their currency was the reason inflation was under control. In the early 218 BC,

Rome went to War with Carthage, leading to the Second Punic War.

By this time, the Romans needed money to fund a war so they needed to find a way to solve this problem.

It was either to cut payments to soldiers, which could be dangerous because it can result in them taking unpredictable measures, or they could increase their money supply.

They increased the money supply. What they did was deficit spending (creating more money) by melting the coins (gold and silver)

they took through taxation and adding more cheap base metals like copper to create more coins (decreasing the purity of their coinage), increasing their money supply.

This caused inflation and also caused the purchasing power of Romans to decrease because the new coins they made

had contained less gold and silver and more copper and bronze, making it less desirable to trade with.

The Law of Scarcity: How Abundance Dilutes Value

As the Romans continued to debase their currency (lowering the value of a currency),

they began coming up with loopholes to increase their money supply.

One of the ways was through coin clipping: which means cutting off a piece of a precious metal coin like silver.

By gathering enough, you would be able to create a new coin.

What the Roman government did was to cut off the edge of a coin whenever a Roman citizen would enter a government building,

save those clipped-out coins, and create new coins, expanding the money supply. With more coins in circulation, this gave the government the power to spend more.

This addictive habit of increasing the money supply that continued to expand and expand can only lead to disaster.

The consequences of the decisions that the Roman officials took didn’t happen immediately; it took time to mold.

These unprecedented actions were the reason wealth was robbed from the citizens of Rome because their purchasing power decreased due to price increases.

This would eventually lead to occasions whereby soldiers would protest demanding an increase in wages due to the worthlessness of their coins.

Eventually, prices of goods and services started raising rapidly, and the government also started increasing taxes on the citizens

to try to control the situation, but this failed.

Eventually, the bubble burst, and Rome was hit by hyperinflation, which wiped out the middle class and the poor people

and also affected the wealth and lifestyle of the affluent.

For example, there was a time when 1 pound of Gold = 50,000 Denarii (Roman currency); around 50 years later,

1 pound of Gold = 1,200,000,000,000 Denarii (42,400% hyperinflation).

To explain this hyperinflation, I will use the USA and South Africa. A VW Golf 7R car = R695,000 with a 42,400% hyperinflation,

the same car would cost R295,336,000. A loaf of Albany bread = R20; with a 42,400% hyperinflation, you would have to pay R8,480 for a loaf of bread.

If your dream house costs $387,000 with 42,400% hyperinflation, you would have to pay $164,088,800 for the same house.

This is how the Roman Elites stole the purchasing power of its people and eventually collapsed its financial system.

Rome: How Inflation Shapes Our World Today

According to Britannica Money.com, today’s monetary system is backed by nothing besides governments’ promises. Currencies that are in circulation globally, whether it’s Euro, Pounds, Rands, or Dollars, are called fiat currency.

The existence of fiat currency came after former US President Nixon took the dollar out of the gold standard in 1971. This is the same thing Rome did when they debased their currency, by increasing their money supply.

The Romans took out the intrinsic value out of their currency by adding copper in gold and silver to increase the money supply. US President Nixon took out the intrinsic value out of the dollar by removing it from the gold standard.

The problem with government is that they like to say one thing and end up doing another. President Nixon stated that the suspension of convertibility of the dollar to gold would be a temporary thing that will be in motion for only 90 days.

Today marks the 53rd year since Nixon removed the dollar from the gold standard. If you want to know the value of your local currency today, you would need to measure its relation with another country’s currency most preferably the dollar.

A country with a good economy typically has a more dominant currency than a country that is suffering from economic instability or inflation rates.

(we will be able to see the relation in currencies once we get into technical analysis when trading the forex market).

In today’s economy foreign central banks have procedures in place to be flexible to adjust with the fluctuations of the dollar

because like I said every foreign currency is measured against the dollar.

One of the key things to keep in mind is that if the American financial economy collapses, it will affect every country around the world, especially the US country.

Let me explain why. I agree with blockworks.co This monetary system is built up like a Ponzi scheme.

Before you attack me, allow me to explain how so. A Ponzi scheme is basically the continuous efforts of gathering

bigger and bigger pools of investors to pay off previous investors.

For example, Jane convinces investor 1 to invest $500 and promises to give him a 70% interest,

then Jane gets investor 2 and convinces her to invest $1,000 and promises to pay 70% interest.

With Investor 2 money, Jane uses it to pay investor one’s initial investment plus 70% interest, which would be $350 (interest), then she will keep the rest.

Then eventually, she will have to find another investor to pay off investor 2 plus interest, and so on and so on

until eventually it comes a day where Jane won’t be able to find new investors and the bubble collapses

or when it comes a day whereby all investors want to cash out at the same time.

Before I show you the similarities (covered in part 2: Inflation Driven Prices) let me explain briefly these 2 departments

so that you can understand broadly my comparison. The US Federal Reserve, also known as the Feds, is the central Bank of America.

The Feds are responsible for how much money is circulating in the economy that is ready to be spent on goods and services,

this is known as monetary policy. This gives the Feds the power to control interest rates and the state of health of an economy.

The Department of Treasury is responsible for fiscal policy. Fiscal policy is basically the use of taxation and government spending to influence the economy.

End Part 1: Inflation Driven-Price Increases

Rome was one of the most stable cities in the Mediterranean before the outbreak of the second Punic War. The war tested too much for Rome financially.

Their financial situation was so bad that they did not have enough reserves in their treasury.

This resulted in the Roman official to take action by debasing their currency much like what United States central banks did in 2008

to prevent America’s biggest banks from almost collapsing the global financial system.

Yes, I will also be discussing the 2008 crisis, but not in the series of Inflation, I will cover on a different article so stay tuned.

So to continue- Rome not being able to finance the war started the early practices of “printing money”

debasing their currency to increase the money supply which eventually caused high records of inflation.

By identifying the root problem to the collapse of the Roman empire we can see the same that is been done today.

Inflation we experience it year in year out never once have you had the price of bread for example went down from $5 to $2

but you are accustomed to hearing, “Wow I don’t think I will be able to make my groceries this month the way prices are so expensive”

or “sorry darling mummy cannot afford to buy your favourite meal at Mac Donald’s anymore.

In the present day, it holds significance for individuals to grasp the concept of inflation and strategies

for safeguarding their wealth against erosion of its purchasing power.

Fortunately, you’ve landed in the right spot. Here at Funds and Galore, we are committed to enlightening our eager community about various methods to shield their wealth.

It’s crucial to bear in mind the timeless wisdom often echoed by economists such as Milton Friedman:

the persistent presence of inflation whenever there’s an excess of money pursuing the same pool of goods and services.