The Fight for Our Money

Dear Reader,

In a barter system, how many cans of beer is a SINGLE roll of toilet paper worth?

Twitter user @98rocktampabay ran a poll on this exact question at the height of panic buying. What were the results?

37.5% of those polled said they would pay two or three cans. Still, over 35% answered they would pay four cans or above. Not bad considering a six pack of Heineken at Walmart is going for US$10.

Granted, the poll was a small sample. It only took into account 56 votes.

But it’s interesting given that one of the consequences from the pandemic has been more bartering; exchanging a good for another without using money.

People have been exchanging whatever they have for something they need with friends and neighbours.

We’ve heard of barter exchanges and an increase in Facebook groups to barter.

In India, a club is exchanging plastic for hand sanitiser and masks. In turn the club recycles the plastic to make bricks for building.

One reason bartering is taking off is due to empty supermarket aisles and supply chain shortages.

Another is that because of the lockdowns people haven’t been able to work and make an income. They’re using whatever they already have or own to get necessities.

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Bartering was the precursor of modern money

And with all the uncertainty going on people are also hoarding money. There’s a lot of liquidity in the system but people aren’t spending, even with interest rates at 0%.

Bartering was the precursor of modern money. People would trade goods and services for other goods. But as you can imagine, this wasn’t very practical. It took a lot of time. And transport was an issue.

When physical money came about, it made trading easier and faster. You could exchange your coins for anything you needed but it also allowed to store wealth.

We’ve gone from things like shells and salt to paper notes, and then to digits on the screen. Money has now gone digital.

The shape of the money we use may have evolved and changed but the concept is still the same. We still use money in exchange for goods and services.

With bartering, it’s the goods themselves that hold the value.

Up until 1971, paper money was backed by gold. That is until countries asked the US for their gold back and it all came crashing down.

Now it’s based on confidence. The value of the money you see in your screen comes from the confidence that the government will honour their debts. The agreement that the value of the dollar is what they say it is.

But there’s still work and time behind that money to produce it. You likely spend most of your time during the weekday working to get money in your pocket.

What happens though when there’s money for nothing? When there’s no work involved in generating that dollar? What happens to the value of money?

Does a dollar created from typing a few keystrokes have the same value as a dollar generated from producing things?

My guess is that it doesn’t.

There’s a change in the system coming

During the pandemic central banks have printed lots of money to keep the system going. As I’ve written before, this was happening before the virus but the pandemic has only expedited trends.

Central banks did this in a smaller scale in 2008 to stave off the crisis.

But there are always consequences to creating money out of thin air. Inflation may not have shown in consumer prices, but it certainly has in assets like property and the stock market.

The US Fed tried to go back to normal and tried to raise rates but had to backtrack.

We were reaching the end of the line there when the pandemic hit, which was probably the worst thing that could have happened.

The oldest form of money, gold, is already telling you there’s something wrong with this picture.

Gold has gained close to 30% this year against the US dollar, even after the recent drop in prices. Gold has also rallied against the Japanese yen, the euro and the Aussie dollar. Silver spot prices are up even higher, they’ve gained 53% for the year against the US dollar.

On the news this week, investor Warren Buffett bought shares in Canadian gold miner Barrick Gold. Buffett has been a long-time sceptic, but miners are quite cashed up after gold price increases. If anything, this will drive even more investors to gold.

Fed Chairman Jerome Powell didn’t really shock anyone (except maybe the markets) this week in saying the economic path is ‘extraordinarily uncertain’.

We may be looking at a future where rates are kept at lows even if inflation rises. Which would be good for gold…but my point is that the system is broken.

There’s a change in the system coming and this is only the beginning.

Best,

Selva Freigedo Signature

Selva Freigedo,
For The Rum Rebellion


Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.


The Rum Rebellion