Investing means understanding value. What is valuable and why? To whom and for how long?
Who assigns the value? Is the value steady, fluctuating or cyclical? How does individual confidence or market confidence affect the value?
Paper money is a claim on value. It is not the value itself. Paper certificates are an I.O.U. I owe you this item or this amount of money
.
Paper money becomes valuable when you cash it in
for a valuable resource or item.
Why do currencies fluctuate in value against each other? What gives the paper money you hold in your hand value? Does a currency have value in itself or does it reflect the value of something else?
A paper currency should reflect the economic growth of the nation it represents. This means national capital; the manufacturing, agricultural and transportation growth is the national capital or collateral
.
When this association is no longer maintained by the banking system, more and more paper currency is printed with NO associated economic growth. This causes hyperinflation, the massive loss of purchasing power.
Hyperinflation means too much paper currency has been put into a banking system in comparison to the nation's economic growth. This causes the value of the paper currency to fall. The consumer needs more and more paper currency to pay for the same item or service.
Rob Kirby describes how gold fits into the economic picture (Feb 2016). Gold is a highly condensed form of collateral value.
Gold is physically recognizable, durable and rare. It is also a tradeable and portable measure of economic growth (a manufacturing/production measure). Most importantly, gold is not man-made or manufactured and does not lend itself to easy 'over-production, forgery, or replacement with an updated version'.
Does debt matter? How is it profitable for banks to offer loans at zero or negative interest (ZIRP and NIRP)?
What about compounded debt? What happens when debt is ignored or hidden? Why do debt and solvency matter?
Banks take bundles of mortgage loans which are debt and sell them as a
financial product
. For example, a bank may advertise a bundle of 100 securitized
mortgate loans as an investment
.
When someone purchases this investment
which is all debt, what is the value?
What are bonds? Bonds are debt-notes, a note saying I Owe You This Amount
.
Bonds are a debt-related investment. Bonds are an IOU from a business or institution. There are municipal bonds, corporate bonds, mutual fund bonds, treasury bonds and more. The underlying assumption about bonds is solvency; how solvent is the issuer of the bond? Is solvency based on collateral? What happens when you use debt (bonds) as collateral?
Our modern debt-based financial system is based on the assumption that there is always enough 'debt-based-money' in paper or digital form to keep personal and business transations flowing.
Read this fascinating account
of how bonds are treated as an item of physical value (collateral) in the global markets:
What is a 'repo loan'? ...where you sell a bond for cash and promise to buy it back later with interest...
At some point, collateral (a real physical item of value) must back bonds or credit.
The 2008 market crisis was caused by unsustainable credit (debt) in the housing markets. ....The 2008 global financial crisis was centered on mortgage debt.
There was too much of it that couldn?t be repaid. When the value of the
collateral ? homes ? headed down, the bubble popped....
TheCrux.com, This is another ?subprime? bubble waiting to blow..., Bill Bonner, Aug 2015
Another investment key is understanding the general or global trend of a specific market. For example, how to determine whether the US markets (DOW, Nasdaq, S&P, NYSE) are in a general rising or falling trend?
Modern money theology typically says 'more easy-money' (usually in government treasury bonds) is needed in order to increase consumer spending (demand) and 'liquify' the banks. But in reality, creating more debt only amplifies and temporarily postpones the original problem which will re-appear as a bigger problem at some future date. Consider the 1929 US stock market crash analysis below.
Most commentaries will typically say that the Fed should have bailed-out the banks in the stock market crash of 1929 and added massive amounts of 'easy-money' into the money supply. This would only have postponed and amplified the problem.
David Stockman correctly details the real problem causing the 1929 crash, which is
the same as todays: ...the banking system collapsed [in 1929] because it was insolvent after the 15-year, debt-fueled boom
of World War I and the Roaring Twenties, not because it was parched for liquidity or because the Fed had been too
stingy in the provision of reserves....
[Source below]
Read the full 1929 Stock Market Collapse analysis.
Another important concept is the velocity of currency. Mike Maloney gives an excellent explanation in his Hidden Secrets of Money series in episode seven. Fast Forward to 7:30 min to listen to the velocity of currency explanation.
The modern stock market has a dizzying array of financial contracts that hide or postpone real valuation. Understanding how these contracts work requires some research. Financial contracts such as futures, options, derivates and various swaps all typically have: a.) specific time span, b.) interest rates, c.) collateral of some type, d.) principal investment money.
How solvent are our banks? How much dollar debt are we printing each year? And why does a gold standard matter? Premier financial detective and statistical analyst, Jim Willie PhD, presents insider data correlations with fascinating background information, telling it like it is:
...the dollar is going to rise, rise, rise some more and then vanish...Why is this happening?
...we're not seeking any solutions. We are relying on war, we're not liguidating banks and we're printing money to cover our debt...