Purchasing Power

Purchasing Power

Arguably the biggest casualty of the Vietnam War was on August 15th, 1971 when Nixon ended the direct convertibility of the dollar to gold. Since the United States abandoned the Gold Standard in 1971, the United States Dollar has lost 98% of its purchasing power. So after 55 years, for every dollar indexed to 1971, the American citizen is left with 2 cents. Hopefully, the United States never removes the penny from circulation...what would be the purchasing power of the dollar then?

Here at Invest Like A Farmer we have long been champions of owning gold, indeed we were among the first to suggest investors consider buying their own gold mines (in the form of gold mining claims.) Why is that? Investing ultimately boils down to cash flow. Cash flow implicitly implies a certain standard of living or purchasing power. Purchasing power over time is paramount, and gold is one of the best stores of wealth (toil) of any asset class. You do not want to have to earn your money twice!

Alan Greenspan once quipped that: "I can guarantee the amount of future Social Security benefits and for how long, but not their purchasing power." That is a very salient comment. At some point, cash flow needs to be tethered to reality, and that reality is purchasing power. Gold is elemental in its ability to store value.

For many Americans outside of the Baby Boomer generation the American Dream remains elusive, if not completely out of reach. It is out of reach because assets of high quality (read real estate) are in high demand with frequent hoarding by both generational wealth and corporations now. The world is awash in cheap goods and services labeled as "free" which collectively siphon off trillions of zinc pennies at a time, but those assets of true value (real estate, education, healthcare to name a few) are very dear indeed.

Assets of true value are almost unobtainable for younger generations because: 1) there is an artificial shortage of housing (lack of supply for several reasons), 2) there has been virtually zero real wage growth in 50 years, 3) there has been an utter collapse in the purchasing power of the USD.

Since time immemorial governments have debased currency in the attempt to spend more than the currency can afford; some of the earliest known tricks were to make coins of lower grade gold or silver, make coins smaller, cut edges off, change from gold and silver to silver and copper, change from metals to paper that was redeemable for gold or silver, paper that was redeemable for nothing, and most recently electronic money which can have an infinite supply and perfect traceability.

Much of the reason why America grew so quickly was an abundance of land and the California Gold Rush of 1849. The Gold Rush triggered one of the greatest migrations in human history. That also added in today's dollars TRILLIONS in "God's money" aka gold to the financial system. Gold is so powerful FDR actually criminalized the ownership of gold in 1933 via Executive Order 6102!

There has rarely been a better time to purchase or stake a gold mining claim in the United States. With gold trading at $5,000 oz-t. mineral rights on these claims can be worth millions of dollars in gold. Of course one must have sufficient knowledge, capital, and the willingness to work; but the average high school student properly trained, duly equipped and unleashed in gold country stands to make more in a week than an entire summer flipping burgers or mowing lawns.

As the Age of AI dawns upon us, many layers of work will disappear. Vast segments of labor will no longer exist. Promises of utopian society have begun to emerge with Universal Basic Income solving humanity's woes. The reality, however, almost always reverts to basic human nature of self-preservation and survival. Our bet at ILAF is that gold will have a central role in that future of protecting purchasing power, stock up.

Pipes & Rails

 Pipes & Rails

Velocity of Money is "a measure of the number of times that the average unit of currency is used to purchase goods and services within a given time period." The chart above illustrates the historical rate of money usage, with gray-highlighted areas indicating recessions. Up until the mid-1990s the velocity of money was pretty stable. Something happened in the late 1990s however that permanently slowed the usage of traditional forms of money...the internet sparked a tsunami of credit card usage.

Although in circulation for decades prior to the internet surge, credit cards had typically been a "wallet utility" in place of cash or check, not the primary form of payment. With the rise of the internet using a credit card to pay for goods became the de facto solution (readers of this blog old enough to remember eBay prior to credit cards at the dawn of e-commerce will remember sending physical checks to sellers for auction wins!)

Credit cards, however, are not included in the velocity of money because they are considered a debt instrument, hence in the late 1990s we see a precipitous falloff in the velocity of money which usually would be consistent will a massive recession (we have had those as well, most notably the internet bubble, 9/11, 2005 commodities crunch, 2007-2009 global financial crisis, and of course more recently the global pandemic 2020-2021.) One trend has remained in an upslope though; credit card issuances and credit card transactions.

Consider the fact that there are well over 2.8 BILLION credit cards in circulation globally. Although that leaves several billion people uncredit-carded, the credit card companies are working hard to close that gap.  One of the most stunning statistics, and there are many which would make an actuary gleeful, are the daily number of transactions. A Nilson Report indicated in 2018 that there were approximately 1 billion transactions PER DAY. This report is simply fascinating and worth a read. 

OK, so what does all this credit card talk have to do with being a financial farmer? A lot. My theory is that we  should be looking to own velocity; put another way own the roads and tollbooths, not the cars. Or maybe more relevant to today's fascination with "cryptocurrency," own the pipes and rails that it travels over so you can make REAL money on transaction volume. Consider the potential of non-cash transactions projected in the coming years:

Until citizens have the opportunity to own a tax collection and enforcement agency like the IRS, the next best thing in the financial world is to own velocity. It is a bet on population. It is a bet on commerce. It is a bet on technology. The underlying currency itself isn't necessarily as important as the monopolistic positioning of the "pipes & rails" on which it travels; ie we should NOT really be concerned whether dollars or bitcoin or Swiss Francs are being swapped, but rather that we're getting a piece of every single transaction at scale.