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This is a simplified version of a very complex topic. What’s written in this article is a very basic understanding to entice you to look deeper into the subject. This isn’t just for this article, but all of the articles that we write on this blog.
The Illusion of Individualism
Everyone is looking out for themselves. This is a basic human behavior and there is no shame in that. Everyone thinks that they’re alone on this financial journey, but they’ll soon find out that they’re not. They are part of a bigger picture that’s meant to keep everyone poor while getting richer themselves. Once the game is figured out – it’s all about positioning and managing risk. Emotions prevent people from making financial decisions and keep people from ever investing in the market. Due to recency bias people are unable to ever invest because they are either too risk averse or scared to lose money.
The Paradox of Money.
The challenge about money is that it’s the same as high blood pressure. You don’t even know you’re dying from high blood pressure or you’re getting poor because it’s a very slow process.
Let’s say one million dollars was ever created and that someone wanted to borrow that same one million dollars that was ever created at a 10% interest rate. That means by the next year that same person would owe one million one hundred thousand dollars. If there was only million dollars ever created then how is that one person, who borrowed that money, ever going to pay it back? The answer is simple – they can’t.
If they are unable to pay this debt back then what happens is that every single interest injected dollar, into the system, will reprice all asset classes accordingly. We have not accounted government intervention such as injecting money through quantitative easing.
The Game of Interest
Any loan ever created has an interest rate. Some of these loans include credit cards, home mortgage, student loans, home equity line of credits, and personal loans. The amount of interest that is generated from all of these loans is adding to the balance sheet on a daily basis. As new interest dollars keep flooding the monetary system - again, everything gets repriced accordingly.
Anyone paying any interest is participating in the monetary game. They are slowly, but surely, increasing the monetary balance sheet. This also leads to inflation as time goes on and makes it harder for anyone that’s not investing to sustain their living.
The Game of Inflation
Inflation is a silent tax that everyonepays. Pre-covid levels of inflation was dependent on where someone lived, but overall on a national level it ranged from 1-3%. If banks during this time offered 0.01% interest rate on all of their accounts, then any savings was being debased by inflation. Why does this matter?
The reason this matters is because any money locked into an asset class would have been a better choice - it would have been growing by 1-3% instead of losing by that same amount. Areas like New York and California grew at astronomical rates and at the same time people around the world were losing by that amount of appreciation.
So Assets… Why Are They Important?
This is the kicker, so focus.
Holding assets is the only way that one is going to be ok in the long term. We have talked about interest and inflation and how anyone that is participating in the game through paying interest on any type of debt. If you know that interest causes inflation and inflation will theoretically grow any asset class. Then you must understand that if you buy and hold assets - over time, you will eventually get wealthy.
The reason why you need to hold assets is because everyone is going to do the work for you. There are millions of people in America. There are people with student loans, home mortgages, and credit card debt. As they keep paying into the system, you will automatically get rich by default because every single dollar that comes from interest will reprice your assets for the future.
To speed that process, you hold assets through debt and pay interest as well. The longer people don’t invest, the more they lose. Assets are scarce - limited amount of equities, land/real estate, gold, and Bitcoin. If all of these asset classes are scarce, and the amount of dollars is infinite through interest and quantitative easing. Then all you have to do is manage risk and wait.
This is the Paradox of Money.
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