38. Pieces of Eight: A History of Global Reserve Currencies, Q4 Market Analysis & Inflation

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Hugh Sifu: [00:00:00] All right, guys, welcome back to Thoughts of a Random Citizen. I am your host as always Hugh Sifu. Today, Pieces of Eight global reserve currencies, what they are and kind of how and what is going on with today in that light and just an overview of the market inflation and a bit more. I'll just kick it off, so you guys don't have to wait any longer. The first global reserve currency that I'll mention is really starting to come to light when we have developed a real global trade. From Africa to Asia, India, to Europe, and now the America's money and currency needed a common acceptance, enter the silver coin era. While countries had different coins, it was generally accepted that these 26 to 28 grains of silver were able to be traded no matter where you were. There was a generally accepted exchange rate from silver to gold as it wasn't as much the country necessarily who had backed these coins, but the value of the silver inside the coins. There have been six major reserve currencies if you will because these countries dominated global commerce and were the leaders in their era.

In which all that was transacted was measured by the currencies dominating the world trade scene. As I just mentioned, it wasn't necessarily the country as much as the silver coins. What makes the US dollar, for example, the world reserve currency that it is today besides the Bretton Woods Agreement, is that over 60% of global foreign exchange reserves are held in US dollars. Understanding that you'll see why that on average, [00:02:00] the world reserve currency status last about 95 years since the beginning of global trade and dominant countries and currencies. As of today, the US is about 77 years of that 95 average. Knowing that, let's take a look back to where it all started.

While one could go back further to the 13th century and the Italian Renaissance for actual global trade as we know it today, it really starts with Portugal in 1450. Portugal at this time had begun to control the age of spice trade that was previously controlled by Muslim traders. In addition to the extremely profitable spice trade, in 1444, just six years before, this is when Portugal brought the first large shipment of kidnapped slaves from Africa to Europe creating an entirely different industry.

While this was obviously terrible, one thing to remember is that the inhabitants of the current Portuguese territory at the time were often enslaved as well as enslaving others. It wasn't as much about race as it was just a slave industry that the Portuguese dominated. On top of that domination, it was all about making money off the backs of any poor person of any color. However, this then paved the way for the Portuguese to play a leading role in the Atlantic slave trade for the next 100 years. Although they continue that until the mid-1800s.

As the Portuguese Empire looked much different than it currently does today, that changed in 1530 due to the Portuguese succession crisis. That crisis paved the way for a new global reserve currency and a country to step in. This is what allowed the Catholic monarchy or the Spanish Empire to take control of the Iberian Peninsula [00:04:00] or what you know today as present-day Spain and Portugal, and enter the Pieces of Eight, which is the name of this episode. I don't know why. I just like Pieces of Eight reminds me of Pirates of the Caribbean. The Pieces of Eight though were actually the Spanish dollar or Peso. They were used globally during the foundation of the Americas and actually used up into the mid 19th century in the US. The Spanish dollar coin was worth eight reales and could be physically cut into eight pieces or bits to make change hence the name Pieces of Eight.

The dollar coin could also be cut into two bits and quarters, which is why everyone who makes fun of Americans for having a 25¢ piece. This is where it originates, which became the American slang for a $0.25 or 25¢. Back then coins were valued based on their actual weight in gold or silver, like I'd mentioned before. Not just on what they look like, not whose face was printed on the coin or emblem, but the Spanish coins were preferred over other occurrences because they had a mild or pattern edge, which prevented dishonest traders from shaving shillings off the coins without being detected. Another reason that if you see that pattern which it still is today, that's why. That's why the edges of the coins are that grated thing, because back in the day, people used to actually cut off the metal because that's what the valuable part is.

Now coins are just made from nickel and worthless, but anyways, so these Spanish dollar, Peso, Pieces of Eight coins were able to be cut up into these eight slices and pay for pieces of things less expensive than a full coin. This revolutionized the way that we bartered and the economy forever, because [00:06:00] it enabled a better way to pay for things. On top of this, South America had huge silver deposits, which aided to the availability and success of these Pieces of Eight that were widely used as the Spanish Empire created millions, if not billions of the Spanish Peso or Pieces of Eight from actual silver.

However, all good things come to an end, so did the reign of the Spanish dollar as the global reserve currency into the Netherlands in 1642. When the Spanish Empire took over the Iberian Peninsula, they also closed the trading routes that the Dutch had used and cut relations with them. As the Dutch, obviously weren't just going to pack up their bags and go home, they had to develop new trading routes to Asia.

In the process, they developed a company that would compete with the likes of the Portuguese, British, and Spanish Empires. You might know this company, the Dutch East India Trading Company, probably to this day, it was the largest company in the world and they did something at the time that no one had ever done before them. To enable people to purchase parts of a company to later be paid back at a later day. Yes, that's right. The Dutch East India Company was the first-ever publicly-traded company, which was the cause of their immense power. They also were the first to create paper money and replace the use of coins, which was a much cheaper option for them.

In addition to the war with the British Empire in Asia later on, their dot com bubble or NFT craze of the day was actually tulips. Eventually, these became worthless because people at one time wanted to buy tulips, [00:08:00] and God knows why because they were popular. Eventually, people were like, "You know what? I don't really want that anymore." That trusted form of money became worthless. At that time, France decided it was a good time to invade and conquer the Netherlands because they were not only poor but had just been in war in Asia with the British Empire and were decimated.

In 1720, we now have a new world reserve currency, France ignoring that the Netherlands just went bankrupt, partly due to their new paper money issuance decided to issue their own. Where, of course, they issued more after the government required more lowered their interest rate issued some more and eventually went bankrupt. Hopefully, this sounds familiar. Where yes, the British Pound decided it was time to make itself known in 1815.

Because the British Empire was the global trade clear front runner, they held onto the global reserve status until 1944, where after two world war wars, high unemployment, their financials weren't the best and the US took over until now. What did we learn from all this? Well, apparently the US government has learned absolutely nothing but war and printing money are sure signs that you will lose your reserve currency status.

Now, moving forward to today, but a bit back in the history, I guess, to the formation of the US. Under Article 1, Section 10 of the United States Constitution, the authors of the constitution decided it was pretty important to not allow what had happened during the extreme inflation [00:10:00] of the Continental Congress. If you're not familiar with this they decided to print money to help fund the costs of the war with Great Britain during the revolution, American revolution, which it eventually led to an extreme debasement of the Continental paper dollar which was the US dollar at the time which is the sole reason for the inclusion of this part of the constitution.

This was during the mid-1700 a time when printing paper was the new thing, see Dutch and France above. However, unlike the French, the founders decided to make sure that this didn't happen to the new nation that they were forming. This and meaning inflation and debasement of their currency in which they already found out they did. That part, Article 1, Section 10 of the constitution reads, "No state shall among other things coin money, admit bills of credit, make anything but gold and silver coin a tender in payment of debts."

They, the writers of the constitution, were aware of what had happened to fiat currencies in the past especially one of their own creation, being the Continental paper dollars, and decided that this was to be included to avoid any future debasement. You can take this any way you want but our currency today could reasonably be perceived as a violation of the constitution as our current dollar, this fiat currency and not backed by gold or silver which means something other than gold or silver is being used as a tender in payment of debts which is a violation of Article 1, Section 10.

While I don't see this being something that will actually make people think twice about using the currency, I do think it's a clear red flag that one, we're soon going to see runaway inflation like we did in the past, [00:12:00] and two, return to any other system than that of fiat in the future. Why is all of this being said until due? Because as this is also a market analysis as well as a slight history lesson as much as you just learned, we are at a point where if the economy or the stock market apparently nowadays, starts to crash even a little that looks bad for the current government in power. Then while you don't want to consider politics in the stock market which is true, you have to at least consider that when in today's day and age we have a fed that artificially inflates the market by pumping money into the system and buying bad debt, it should at least be on your radar.

I think with the midterms coming up next year, we have a really troubling issue coming up around the corner with one, global supply chain issues capping how much companies are going to be able to report. With those such issues, we've seen the stock market continue to hit new highs although growth hasn't really exceeded much of what it was in 2019 absent a few companies.

There are a few who are obviously doing great, but as a whole, it's a bit concerning. Another reason next year is worrying is because year over year growth will start to be seriously affected considering we are comparing at the moment against a pandemic. On top of these things, I don't really care about the opinion of raising minimum wage but with the fiat currency that has already been devalued in serious talks of inflation and buying power, this will only accelerate and realize those fears especially when we have a shortage in productive jobs being taken.

Meaning companies are trying to hire but there are a lot of vacant positions out there. [00:14:00] I'll address this specifically more in a second so remember Adam Smith and foreign manufacturing. On top of all of these things, there's more, we just had the lowest export numbers which is drastically hurting our GDP and energy prices that are quite expensive. We are attempting to steer away from oil and gas and these are at the moment essential to our daily life.

Even with a push, which I'm all for, it'll be years before we even get to half. Yes, 50% of our energy being produced by sources other than green. As of 2020 and the last full year of data we had, we were at 23.07% of green/clean energy, nuclear is included in this. Like I said, I'm 1,000% all for completely green energy. Just Google pictures of China and the pollution or places in India and see the fog and smog that they live in.

I think we're being only slightly naive of how quickly we can change to a zero-emission economy. It's always funny to me when I see articles about how ahead of the curve Europe is on green energy and how we need to follow their example. Then they give names of countries that are aiming to kill off coal entirely and never mind the fact that we ourselves in the US only use 10% of coal because we use petroleum and natural gas, but Europe is using this language smartly, good for them. All the while mentioning countries like Portugal, Belgium, Sweden, and Denmark, all very small countries who of those, Denmark is the leader having over 50% come from renewable sources. [00:16:00] Tiny countries not even entirely green yet. If you go to Tasmania, off of Australia, it's an entirely green island.

If you want to use a comparison, maybe go that route even though Australia itself not so green, but still we act like Europe is so far ahead of us in this race to cut off all what petroleum, natural gas, and coal which is where we're getting like 70% more of our energy, it's a big project. Anyways, I'm straying from the point a little here. The issue is how difficult it is in the time we want to do it. It's the fact that we will be shutting down parts of our economy and try at the same time to build another or be it better way forward by focusing trillions to something that is only affecting us at home. Something that when you step back and remember what we're talking about here, the world reserve currency, you'll remember that it's necessary for it to be exchanged worldwide.

When you look at the world and how much we're producing for it that's only going down and then you realize what our 10-year plan is to spend a bunch of money only at home. That's not meaning that we're going to be spending a lot abroad. Remember the petrodollar and that being a major reason that the US has kept its reserve status for all this time while being an aiding factor at the very least because the US dollar is a backing for that entire economy. Oil and gas in the Middle East are using the dollar for its exchange.

When we pull out of this system, it means countries like China, Russia, and the Middle East who don't care as much about pollution [00:18:00] will most likely find another currency to trade in. If we are no longer a big buyer of that petroleum and oil in the Middle East, then why do they care to exchange with our currency? Honestly, we need to get everyone else working towards that zero-emission goal otherwise it's all for none.

China has zero targets for a zero-emission economy no date announced. That means they can be pumping out a bunch of emissions in the year 2100. India just announced over the last two days that they have a 2070 target. Considering Europe and the US only account for 14% of the entire world's population, and when you look at our manufacturing total with Europe's albeit at the moment it's 40% of the world, these will only get closer as we see the world develop over the course of the next 25 years. Without a united global effort to reduce the emissions 14% of the world won't really be enough to make a change if you followed that there.

While we should be leading by example, we should also proceed with caution not to make sure that we don't lose our clout along the way, globally, especially regarding the use of the dollar abroad. Lastly for this whole inflation issue, as we discussed earlier about the constant replacement of the reserve currency and the US after the world wars being the dominant player in the importance of the global economy, we have seen this story be less and less true.

While one would argue for China to replace the reserve currency. I don't necessarily foresee that event happening because of the fact that they're a communist regime. We could move to a system [00:20:00] where the UN might make some declaration, because of the ever-shrinking boundaries globally, and creating this new world for everyone and governance system, or we could see something like a Bitcoin replace the dollar, but the dollar will eventually be replaced. It's just a matter of when. We are paying people more, working less with record job vacancy numbers, producing and manufacturing less, not buying and using the US dollar to trade oil and gas as much, buying bad debt, and then letting our good debt be bought.

Oh, yes, and we're printing money the entire time, developing an increasingly greater number of social programs, and overpaying for them, which we'll dive into next week on a great interview I have coming up. One might start to see how this will hurt the status of the dollar and is also cause for concern of inflation, potentially hyperinflation. I'm not getting into if the social programs are good or bad, I'm just explaining how the strength of our money per dollar might be decreasing in the near future. If it helps, I'll explain why this could be potentially serious in a different way.

Adam Smith, nicknamed the father of economics, main principle, for not only the individual but the collective society to prosper was that there must be more people who have jobs than those who don't, something that we are doing quite well. However, the second and far more important one, for collective prosperity, is an increase in the productivity of those jobs. What I'm seeing is that the more important of the two is falling by the wayside today, [00:22:00] because there is not as much productivity from each of the jobs that we are producing, while we're now paying more, which will cause inflation.

If inflation really is going to be bad moving forward, what should we do and what to do in today's market, at least? I really want to emphasize preparing yourself, or better yet, protecting yourself from such inflation or global currency change. While a lot of people are saying Bitcoin is the only way to prepare yourself, well, I think it's a good bet. It is just that. If you are attempting to protect yourself against inflation, I'd really recommend protecting yourself in other ways that involve hard assets. Remember, when I mentioned how we are buying our crap debt, and other countries are buying our good debt? Well, that is what we should be focusing on, is to buy our good debt.

Right now, we just had malls go on a massive discount or property of all kinds, maybe not housing real estate specifically, but because of this massive pandemic, commercial real estate definitely went on discount. Now, I know most people out there don't have the ability to go out and buy a mall. However, you can invest in more real estate, especially if you have a larger portfolio or if you don't plan on moving for a while. If you aren't like me being someone who moves around every few months, then there's no reason you shouldn't be buying the place you're living in.

While I have my own opinions about buying an apartment that is attached to a building, which gives you less of the right to do what you want, depending on where you live, I really think the best way to prepare yourself for not only inflation, but the potential for something [00:24:00] not so great for the US dollar is real estate and or hard assets in general, especially if you've been in the market to see it hitting new highs.

Because if you take that fiat currency that hasn't had this crazy inflation that potentially might be around the corner, and you've made that money along the way, then it's time to go out and use that money and secure that money because it might get to a point where you aren't able to use it with the same power it has right now. Otherwise, all the money you're making if the worst-case scenario happens, will then reverse and will inflate past the point of usability. Now I'm never saying put all your money in one thing, but right now diversifying beyond the stock market or bond market is what you should be considering. I don't mean by buying REITs and buying gold miners on the market. No.

I'm talking about buying physical hard assets. Moving on from the terrible depressive fact of inflation, I'll tell you what I'm eyeing in the market right now because I always do that. Honestly, if you've listened to my past two market analyses, it's going to be the same. I still like GBTC right now, because of two reasons. One, the discount is insane. Yes, I'm aware it has a 2% management fee. However, this isn't much different, the 2% management fee, for most mutual funds, and to be able to get a 15%, recently, as well, I checked, it's probably more, discount to NAV, net asset value. If and when that finally reverts back to a premium, that's a huge gain on the current purchase price alone.

That's not even including the gains that I see Bitcoin having in the near term. Second is their attempt to convert into an ETF. [00:26:00] Obviously, that will lower the 2% management fee, but also get rid of the premium discount issue. It will actually track bitcoins step for step based on their net asset value. I've talked on this a few times before in regarding grayscale Bitcoin trust, so I probably won't talk too much more on it but my previous concerns are still remaining unchanged, you don't have the ability to trade as often as you would and as the Bitcoin market is open 24/7. However, with the market and the way it's shaping up for the next six months shouldn't be an issue in my opinion.

There is still that 2% management fee though, but we'll have to keep an eye moving forward because the discount is just too good to pass up on. I also like small caps moving forward, because they've underperformed compared to the rest of the market this year. On top of that, they're the one place I consistently see undervalued companies. When everything is overbought, or just plain stupid expensive, and we're still seeing value out there, then it's time to go there. Because it will be found. I don't see a large rotation out of value in dividend-paying stocks, as a lot of what I see there is pretty spot on in regards to the value of those companies.

Some may be a bit expensive, but some not too much. I don't see much of a rotation out of that. However, I do caution the Nasdaq moving forward, as I think this is probably where they'll be pulling from and then next year, definitely six months. Small caps this time of year perform well anyways. October 31st is the deadline which has already passed. When a lot of the mutual funds and planners have their tax loss deadline. It's the time where they lock up their losses to aid in taxes. [00:28:00] For those of you who don't know, that's why sometimes we'll see that bottom in October.

While the next few months ahead tend to be better for the maybe not so well-performing stocks of the year so far. That's not a great basis to go off of. I just figured I'd let you know, October 31st is when they lock in their losses. With the recent surge and inflation, I think that while typically the Feds tapering might not help the stock market, the timing, and the announcement will actually ease fears continue to the inflation in the short term. As for bonds, still totally against them but I just think that we're already expecting it's already just priced in to the market. I think that they're already expecting that.

At this point, once they start to ease tapering, that means fears for future inflation will be eased. That's why I think that and I know, I've been talking about inflation the entire episode, but I really don't see it becoming an issue until potentially halfway through next year, potentially, as we really start to see the lingering effects of the post-pandemic world, so I caution but at the same time, I think you have time to prepare yourself. One thing people might not be aware of is that the outsourcing of our jobs and what happens if we decide to bring everything back home.

We actually export our inflation abroad to China to India, and others make goods much cheaper for us than if we were to bring that manufacturing home. If we did do that, it would actually create greater inflation. One of the main reasons we actually export our jobs and our manufacturing while it might be thought to be [00:30:00] because corporations want more profit, it's actually at least in part to not affect the nation with increased inflation. This is also why I like a certain industry so much that I've been praising for a while now, which has the potential to not only bring manufacturing more local but also keep inflation low.

3D printing is a computer-driven additive manufacturing technology used for producing the final product from a digital model by laying down successive layers of materials. It actually saves energy by 40% to 60% as it eliminates shipping and other logistical activities as well. This is quite important because as we discussed earlier, we want to find greener solutions. In addition to that, additive manufacturing is supposed to increase more than 11 times from 12 billion to 146 billion by 2030. The last thing I'll say, which is another company that I've been talking about for a while is KSU, Kansas City Southern.

This is entirely because of the supply chain reaching across the world with political regimes that we only find relations becoming more hostile, but also because the US is now in a position to really benefit someone closer to home and investing in KSU also prepares you for, if we do move away from India and China regarding manufacturing to help improve local supply chains. Yes, this someone is Mexico. Obviously, the border is an issue or it was an issue. I don't know. I haven't been home for a while, but why have we been wasting our time fixing the problem, the wall, instead of spinning our efforts, enabling that country to prosper, because the problem is that we don't want uneducated or non-beneficial people to enter the country. [00:32:00] Well, educate them or enable them to prosper so then they can be beneficial. Think about it. Why do Canadians not care to come down into America?

For one of the many reasons, they tell me when I'm traveling outside in the world, it's because they're a wealthy country. If we enabled not India, not China, but in Mexico to be a more prosperous nation, that would benefit all of us and our neighbor. If it's your next-door neighbor, and you're consistently you and build a bigger and bigger fence, that's not really very nice to them, but if you're like, "Hey dude, come over for a party, have a few beers," that's chill. Why would you hate your neighbor when they just live right there?

Anyways, remember if we bring those manufacturing jobs back to the US, like I mentioned before, how it would cause inflation. If we bring those jobs to Mexico, be good and friendly neighbors, create jobs south of the border and stop so many issues at the border because we would be investing in our neighborhood instead of Asia's neck of the woods. That solves so many issues with one swing.

I'm not saying stop completely globalization or anything like that, but why we don't put effort into closer relations with South and Central America is beyond me. Anyways, a good play on if we do go this route is KSU, Kansas City Southern because they will, assuming everything goes through, by 2024, have the first rail network expanding from Canada to US to Mexico. They have an agreement builds something like 2,000 more rail miles in Mexico. Also haven't utilized as many newer efficiencies that CP, Canadian Pacific, will bring with them after the merger. This is going to be a great company in the next 5 to 10 years, in my opinion.

[00:34:00] After all of those things, I'll leave you with just these two, one, reserve currencies have a shelf life. Because we've put off inflation by manufacturing abroad for so long, and now we're calling for those jobs to be brought back home, we also want to pay more money to everyone and continue to print. On top of the heap of everything else, just mentioned, continue to construct a debt ceiling to the moon. It seems like a perfect storm that our enemies, the ones buying our debt, are well aware of.

Two, the M2 figure most commonly used to measure the amount of a country's money supply has recently reached $20.5 trillion as of July, 2021. For comparison, back in January, 2020, that figure was 15.4 trillion. Quick math for you all, that's 25% of all US dollars in existence has been created in the last 18 months alone. We have a few trillion-dollar packages coming down the pipeline, but that's it. That's all I got guys. I hope that you guys enjoyed that long depressing lingering episode. Inflation's definitely a thing.

There is still a good value in the market though, and just be prepared, put your money that has power today, and put it in assets that aren't going to be hyper-inflated, pretty simple. Other than that, guys, next week, I do have a phenomenal interview that I'm super excited for, with Robert. He is a doctor. We will talk about all things under the sun in regards to medicine, big pharmacy, and probably more. It should be a really fun conversation that I hope you guys tune into.

[00:36:00] Other than that, I'm pretty busy over the next few weeks. It'll be some really good content for you guys moving forward in regards to just really good conversations with really educated and interesting people. That way you don't have to hear me bitch on the soapbox anymore for at least two months. Other than that guy, I will talk to you next week on Thoughts of a Random Citizen. Cheers.

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