Foreword:
I've had the pleasure of knowing Johan for some time now (14 years) and have found his insights and guidance invaluable. Throughout this time his judgement and analysis regarding not only personal development but also the striving for seeking truth at the heart of human existence is refreshing and has much depth to it.
Johan has decades of work experience with such giants as City Bank and Anglo Platinum. Not only are his years of experience with these multi nationals invaluable, but he has also been instrumental in the South African mint, doing all manner of work, managing and directing the manufacture of South African currency. Needless to say, no one has more insight into the very nature of economics and business than the "Honey Bear " and and I can't wait to share his article with you.
Enjoy!
Leo
What is happening to money?
We are all familiar with money, being exposed to it (or the lack thereof) on a daily basis. Because of this, we may assume that we all know what money is…but do we?
- Money facilitates honourable and destructive objectives, paying for food and education to drug trafficking and war with seemingly equal ease;
- To many, hoarding money through whatever means seems to be life’s main pursuit;
- As a result, any action is sanctified by this most desirable result, even destroying entire civilisations or planetary ecosystems in its pursuit;
- Vast fortunes are made by a select few through stock market investments and valuations, only for hundreds of billions to be lost overnight;
- If it is this volatile, how valuable is it really? How real is it?
- Indeed, the question still confronts us: what is money?
Classic financial theory will say that money is:
- The dominant carrier of value created and exchanged in the economy;
- By extension, it is also a store of this value, imposing the need for money itself to have enduring value;
- It is the unit of account in exchange and record keeping, as well as the standard for how much ought to be repaid in deferred settlements;
Physical currency is not money, but rather a symbol thereof, having taken many forms throughout history, from seashells to the currently dominant digital forms.
Global economic systems
We all are continuously affected by global economic systems, which seemingly dictate life on planet Earth. Current trends in the economy mandate a fresh look at how we define and use money in our ongoing quest to define a more equitable and sustainable way of living.
Comprised of banks, governments, private sector corporates and SMMEs, interactions between these role players define what we can and cannot accomplish. One might even say that humanity is in service of the economy it created, which seems appropriately unpalatable for the stark reality it represents, as recently observed by the renowned global economist Thomas Piketty.
Given this realisation, many people have wondered:
- Is continuous economic growth (and therefor growing amounts of money) as measured by GDP, the ultimate pursuit of human society?
- Will the current economic philosophy of maximining “utility” serve the needs of humankind and planet Earth, its inescapable home?
- How safe is the banking system and the currently dominant concept of fiat money? (More on fiat currency a little later.)
- Is the end of money (not just its currency representations) as we’ve come to know it in sight?
- Will the dramatically growing credit bubble and exponentially increasing financialisation it supports lead to the destruction of the current world economic order?
Banking industries as engines in global economies
Modern economic life – and the use of money - is unimageable without services provided by the banking sector. Banks are the collective (cold) heart that primarily control fiat money supply through credit extension and pump financial means through the economies of the world.
Do we ever pause to think:
- How safe is the world economy in the hands of the modern banking sector, given the financial shock of 2008 during which more than US$15 Trillion was destroyed, leaving thousands homeless and destitute?
- What has been done to prevent similar future disasters?
- Is credit extension the best way to fund progress in developing countries, as they contribute towards global prosperity?
- Can the modern banking sector be entrusted to invest the more than US$200 Trillion under its control in support of sustainable development in pursuit of global economic goals, or
- Will self-serving profit maximisation without fear of consequence shape their agenda?
Financialisation and the growing credit bubble
The world has experienced the fastest, most broad-based rise in debt accumulation since the second World War. Gaining ever more momentum during the past decade, it topped US$ 225 Trillion by end 2021, exceeding 320% of global GDP. This was the highest on record in modern peace times - and that was before the COVID-19 pandemic struck.
Despite this unprecedented rise in debt, global GDP is faltering. Really? Where has the money gone?
- Global stock markets are buoyant, posting ever-higher valuations, despite falling economic growth, revealing that most of this “quantitative easing” (read money printing through debt issuance) has found its way to the stock market, not those in need of financial relief;
- Unrealistic market valuations of primary technology stocks (such as Tesla, Apple and Amazon) fell by more than 60% during 2022, wiping more than US$ 2.5 Trilion from their market market value. Some context – this is more than seven times South Africa’s GDP, prompting inquiring minds to ask how much of it was real to begin with?
- What does this suggest about the behaviour of banks and their regulatory bodies, the world’s Central Banks, or the real value of the money they control, when they can risk and lose so much, and for what purpose?
- Can monetary policy still be effective in regulating economic activity in the face of record low interest rates, which in some cases have breached negative territory?
- Will the world economy be able to service the debt once the inevitable inflationary pressures demand a hike in interest rates, as has started to occur during 2022?
Fiat currency
The currently dominant form of money in the world is fiat currency, thus named after the Latin denoting a decree “it shall be”, issued by and expressed in the currency of the sovereign State issuing it. Theoretically, any sovereign State can “print” unlimited amounts of money by simple decree.
This form of money has zero intrinsic value. In plain English it means the currency has a value because the government of the issuing State says so, implying a non-impeachable trust being afforded it by the people using it.
Given where the world’s monetary systems are today, many are calling this unconditional trust into question.
The relative value of one currency compared to another was meant to reflect the degree of relative trust placed in these governments by “outsiders” trading the currencies against each other. The relative performance of one economy against another therefore becomes part of the debate, if we assume that its performance is a function of the ruling government.
But how much can they really control, when the liquidity of global currency markets and its key players – global banks, financial institutions and Central Banks exert such a dominant influence?
The plot thickens when we consider that, in practical terms, more than 95% of money in circulation is created through credit extension by commercial banks, in response to demand from both the “real” and “financial” sectors of the economy, as well as governments. The financial sector is especially challenging to control, as derivative instruments introduce significant gearing into financial transactions that are themselves often indirectly dependent on the underlying credit performance of the businesses they represent.
Please do yourself a disquieting favour and watch the movie “The Big Short” about the housing market crash of 2008 as a sobering example of how this can go wrong!
The amount of credit thus extended is indirectly regulated through financial instruments, mainly the interest rate, under control of the Central Banks (or in some cases by agreement between them and the Fiscus where the Central Bank is not an independent regulatory authority).
From a real world business design perspective, these considerations can pose a significant financial design problem, depending which side of the equation the new business is most exposed to. By way of example, we consider the ZAR-Euro exchange rate over the past 20 years – a typical timeframe within which real world financial investments in industry will produce their financial results.
- If the business was incurring most of its costs in ZAR but selling on the European export market, it would have flourished;
- The other way it would have experienced a 330% rise in input costs, probably resulting in its collapse;
- Similarly, if the business was financed mainly from Euro-based investors, the ZAR amount to be repaid would have escalated by a similar 330%, compared to what may have been expected in 2000;
- By extension, the European investor, if electing to leave his equity vested in the ZAR-denominated business, would have experienced a substantial devaluation in his investment.
All of this high drama, yet none of it under direct control of the business management and executive team…
Commodity-backed currency
For most of the 20th century, major world economies were predominantly operated under the “gold standard”. Under this convention, currency in circulation was considered representative of gold held by the State or Central Bank. Bearers of representative currency could have it exchanged for the commodity backing it up. The US left this standard in 1971, prompting the rest of the world to adopt the US Dollar as reserve currency and signalling a global switch to fiat money.
A major challenge faced by a fiat currency (and by extension any long-term capital investment programme designed to build equity based on and denominated in that currency) is the erosion of trust in the government of the issuing State, should it falter in its relationship with global capital markets. The death spiral reads like a cheap thriller:
- The economy of that country starts to spiral out of control as global market players start to vote with their feet and exit the prevailing trust agreement (read “junk status debt ratings”) leading to rapid devaluation of the currency;
- The ruling government turns to populist rhetoric (“the problem existed before we came to power; our problems are caused by the wealthy; white monopoly capital; the world does not want us to succeed” etc etc);
- As the State runs out of funds to meet its debt obligations, it resorts to expansionist fiscal policies (read “printing money”};
- If left unchecked by the Central Bank (who is typically seen as a pariah resisting needed reforms by now) a combination of patronage, corruption and rising inflation sets the currency on an irreversible death spiral, leading to total economic collapse;
- This could also destroy industrial investment programmes, although the investment capital would still have to be repaid;
- Modern-day examples abound – see the current state of the Turkish and Argentinian economies.
Digital currency
Recent trends have seen digital currencies enter the market, with some, especially developing market economies, seeing an exponential rise in the popularity and trustworthiness of digital cryptocurrency, even exceeding that of the national fiat currency.
Some of these currencies avoid the need for an intermediary, like a bank or government, and offer cheaper, instantaneous settlements, provided both seller and buyer are registered on the same network.
We distinguish four types of digital currency, which we will only mention in this article, but for which further details could be provided on request:
- Fiat currency in digital form, only accessible in digital or electronic form, like the ZAR you may be accessing when using the banking app on your cell phone. This is also called a regulated digital currency, as it represents the official fiat currency. It is not a cryptocurrency and requires an intermediary to transact the currency;
- Virtual currencies, an unregulated digital currency controlled by its developer, the founding organisation or a defined shared network protocol. Examples of such currency owners include mobile phone companies, where users can buy products and services using airtime;
- Cryptocurrency, a virtual currency that uses cryptography to secure and verify transactions as well as manage and control the creation of new currency units. Bitcoin was the first commercially successful one, since joined by many others;
- Central Bank Digital Currency (CBDC). A clear indication that established financial regulators are taking the development of digital currencies seriously is the recent announcements (during 2020) by the Central Bank of Sweden, among others, to launch the first commercial pilot of their own Central Bank Digital Currency. At present, 114 countries have active CBDC programmes.
- Johan "Honey Bear" van Tonder