Book Summary:
- Money is something we use to pay for goods and services using its physical representation as notes and coins or increasingly their digital equivalents.
- Money doesn't need to have a value in its own rights
- If enough people within an economy can agree that something represents money, then that's what it is. But some things work better as money than others (gold vs leaves)
- Modern currencies don't have a fixed value
- When you look at prices in gold rather than pounds or dollars, they've either stayed the same or declined rather than increased. House prices have become more expensive in money (dollar, pounds) but not in gold. Food cost have fallen dramatically when measured in gold.
- Money's "buying power" has dramatically and consistently decreased over the last 150-1200 years.
- Inflation is a persistent substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency
- Inflation is good for people who are in debt and potentially bad for everyone else
- Governments want inflation because it's better than deflation and it makes it easire to manage their own debts
- Long term generalized inflation results from the amount of money in the economy increasing faster than the amount of goods and services you can buy with it
- Whenever the people in control of money (king, governments, etc) have had the opportunity to devalue it for their own gain, they've tended to take it
- The gold standard allowed countries to trade with one another easily by fixing their individual currencies to gold. However, constraint on the money supply (convertibility into gold) always get abandoned during times in trouble (war, pandemic).
- Central banks oversee the creation of all money in the economy
- Central banks influence the amount of money creation by setting the price of lending via base rate.
- Money is created when a loan is made by commercial bank, and this is where the most money in economy comes from.
- In theory, lower interest rates lead to more borrowing. But psychology is an important factor, people will over-borrow when they're confident even if it's expensive, and will reluctant to borrow at any price when they're fearful
- Borrowing by individuals is massively important in the money-creation story since banks create money to lend it. Majority (by volume), company borrowing isn't from bank hence it's only a minor part of money creation.
- Governments borrow to raise money for the many activities they undertake - either because they can't raise enough money from taxation or because they don't want to
- When the cost of government borrowing rises, interest payments will be higher, and the accumulated debt could become a serious problem
- Quantitative Easing (QE) is economist-speak for 'creating money' intended to generate consumer spending.
- Government used QE to avoid crisis
- How to make the most of your money
1. Forget about growing your wealth with savings
2. Take on debt (responsibly)
3. Be wary of fixed-income investments
4. Invest in real assets (commodities, property, infrastructure)
5. Invest in stock market boringly
How to be thriving financially, whatever the economic weather:
- Don't rely on government
- Follow events, not narratives
- Think real, not nominal
- Take control, or diversify
- Understand that no one understands
- Expect the unexpected
- Understand your value