When investing in currencies, the first step to understanding what a currency it would be necessary to understand the value of money; for this purpose, this article will discuss the history of currency and different governments’ approaches to financing and capital.
To gain an understanding, we will look at the first world currency, called shekel, created 5000 years ago by the Mesopotamians. Reading this may be unclear because it may not seem relevant to understanding money.
This is relevant because to understand investing, money and finance, the first step is to understand what money is. Money was a method of replacing a bartering system, and original money was tied to the value of the grain.
In 1971, America came off the gold standard. It broke with the Bretton Woods agreement, which was an agreement in 1944 where America became the globe’s first global currency and that America would become the guarantee of gold being exchanged for the US dollar.
Again, all this information can be overwhelming and hard to grasp. This is why I shall explain currency and its relation to finance capitalism and government in this article.
The East Asian method of finance and the West
Modern East Asian finance in China, Singapore, Malaysia, South Korea and Japan’s practice of using finance as capital to invest in their economy is not guided by the traditional Western understanding of money as a means of investing in projects that give a return on the original investment.
In Japan, money which is capital, is used not for economic purposes but for political purposes for the good and well-being of the state. This method of understanding capitalism comes from Japan from the 7th century CE was the Japanese Emperor had the power to forgive debts.
The Japanese have a long history of using this method to advance the national interest; for example, when America opened up Japan to foreign investment, capital and trade in 1852 with Commodore Perry, this led to the rapid industrialisation of Japan.
The Japanese home islands are resource-scarce, so the only way the Japanese could survive in the mercantilism and Imperial age was to borrow money and invest in Japan’s industrialisation. The Japanese were quite successful in building their hegemony in East Asia.
Before the advent of the 21st century, the two main economic ideology was mercantilism; this is where Imperial centres like France and the United Kingdom traded primarily with their overseas territories inside their Imperial markets.
What this meant for the Japanese was that to survive in this kind of economic order, Japan had no choice but to go into debt and seek resources from its neighbours in Korea, mainland China and other East Asian countries for a united Japan to survive.
This all changed after the Second World War; what the Americans created were economic security and the world’s first truly global trade order.
Free trade, as in the modern understanding, did not exist until 1946, with the Americans becoming the guarantee of a global currency, the US dollar supported by the US gold reserve at Fort Knox and the American’s ability to patrol international shipping lanes for the Western alliance against the Soviet Union.
Much historical context goes into understanding finance, to put it simply in the East Asian context; due to the Japanese conquering most of mainland China and other East Asian states, the Japanese left behind their finance culture.
This meant in real terms because the Americans were the guarantee for global trade; this meant East Asian nations like Japan, Singapore, and Hong Kong could industrialise within 30 years, unlike the British, which took seven generations and the Germans, who took five generations to industrialise.
The accessibility of cheap money meant that nations could industrialise quickly across the path towards industrial relations was started by the British in the 1780s and could be followed at even quicker rates by nations developing today. For example, it took the Chinese 40 years to industrialise. The Chinese success came at a steep price, with its financial credibility in tatters and the nation crammed in seven generations of development within one generation which is a phenomenal achievement.
Unfortunately, no price is too high when it comes to borrowing to meet the Communist Party’s aims of maintaining a united China by keeping idle hands busy this is according to the geopolitical writer and geopolitical analyst Peter Zeihan.
In 2020 China was 34.9 trillion yuan in debt which is the equivalent of 5.4 trillion American dollars. This comes at around the equivalent of 40% of China’s GDP.
The best guess of the calendar year 2022 is that it is now 385 trillion yuan, equivalent to $58 trillion US dollars. The Chinese have embraced the Chinese philosophy of the economy serving the state’s needs, not the pursuit of true success regarding economic development.
This paragraph makes it clear and confusing why nations in the West and Asia are printing money off the magic money tree. I shall explain in the next section the concept of Keynesian economics and Fiat currency.
Fiat currencies and Keynesian economics
Modern-day currencies are no longer tied to real-world resources; for example, as mentioned above, the British and Americans used the gold standard in the 1930s as a means of exchanging a real-world product that is valuable in tying its worth to a currency.
However, when the United States under Richard Nixon was president in 1971 took the US dollar off the gold standard; he did this for two reasons, the first being that there are over 6 billion pieces of gold in the world and there’s not enough gold supply for a currency to function as a global currency.
The second reason why the United States came off the gold standard first in 1932, president Frederick Roosevelt and the British did the same in 1931 before the Americans were that by coming off the gold standard and taking the worth of money away from a resource, it meant the money supply could increase.
The Keynesian economic theory created by John Maynard Keynes, a liberal economist, was that by increasing the money supply, money could be used to invest and grow the economy.
From the paragraph above, you can see where the East Asian and Western models have met and created an easy supply of capital.
The problem with Fiat currencies is that they have no basis in reality; without a currency being tied to a real value, that currency itself will lose any true legitimacy.
This can be seen when the Chinese government loosened restrictions on financial transfers to establish the yuan as an international currency.
Unfortunately for the Chinese, the Chinese citizens have shuffled more than $1 trillion in assets beyond the reach of the Chinese government.
This event highlights that due to the massive debts the Chinese state has incurred, it has devalued the value of the yuan and the confidence in the Chinese currency.
Cryptocurrencies are a method of exchange without any central authority through a medium transferred through a computer network; the best way to think of crypto as an investment is like an exchange rate from one currency, for example, the US dollar to the Sterling.
Currently, globally there are 20,268 cryptos available some are inactive; this means there is a host of platforms to buy cryptocurrencies, with the best platforms being Coinbase which has over 30 million users, CoinTracking which helps you to manage your crypto portfolios.
The key to buying cryptocurrencies is to research the currencies and platforms the best way to understand the platforms that enable the purchasers of the currencies is to compare them to trading platforms like Robin Hood in terms of functions.
Crypto enables users to transfer cash without the interference of governments; however, with crypto being new and people getting familiar with buying cryptocurrency, the market will be very volatile to speculation, which makes Crypto an excellent opportunity to make money.
The negatives with crypto are that it was created by tech-savvy people, which means it was not marketed correctly; crypto is a new method of currency exchange, but it has no guarantor.
Currencies and governments
Financial assets and currencies need to be tied to a real-world value, unfortunately, depending upon interpretations of global economy economics, according to the historian David Starkey is no longer linked to a “practical economy”.
Economics was developed when there was a genuine scarcity of resources; if no iron ore natural resources were required for industrialisation, a country or region would be unable to industrialise.
The Americans have successfully created since 1946, and the Bretton Woods agreement in 1944 was to create a global, financial and trading system where the old barriers to trade no longer existed.
What this meant was that nations, according to Adam Smith, an economist and philosopher, could begin to specialise in their regions or nations’ special value-added products and services in accordance with their needs.
With the economies of scale becoming global, this brought an end to the economies of scarcity and brought the Western world more than the developed nations in East Asia unprecedented growth and prosperity since the ending of the Second World War and the Cold War in 1945 than 1989.
Unfortunately all this high money supply has devalued the worth of currencies and destroyed any real understanding and value of economics and responsible investing since the financial crisis of 2008 and since United States came off the gold standard the world as a nearly 50 years of cheap money.
What this means is that the prices of assets as increased as the money supply has become more readily available; however, rather than investments in developing the economy, much of this new wealth has been invested in assets like the housing market.
We are experiencing in the United Kingdom and the United States, as well as other Western and Eastern nations, the actions of governments over the previous decades finally coming home to roost. For too long, currencies had not been attached to any true value.
They have been attached to a national economy and, in some cases, the oil price in the case of the US dollar.
However, it would help if you were forewarned that there are many interpretations when understanding currencies. For example, the current currencies globally are officially Fiat currencies with no real attachment to value.
The alternative that could be used to attach currencies to a natural resource would be energy; this would be a great way to ring real value to currency because without energy, a modern economy and society would be unable to function.
Electricity and other forms of energy that power modern industrial society has been artificially devalued due to the efficiency of getting those resources for the economy.
Without the resources that power modern technology, the way the world functions are no longer viable. This is something that can be real value added towards a currency.
Suppose you are interested in trading in traditional currencies, cryptocurrencies or other investment forms such as infrastructure, technology and real-world products. In that case, it is strongly recommended that you do your research.
There is a massive difference between the actual value of currencies and the real world economy and what is necessary available prices in the global market space; for example, people who are investors do not currently have a grasp of what crypto is. With this being the case, this is an excellent opportunity due to the volatility of investing in crypto in the short term; however, crypto does not seem to have any actual value to what is currency, such as its worth, compared to a resource like gold or energy.
There are also linkages between the state economy, currencies’ value, and internal stability. For example, during the writing of this article, in October 2022, the United Kingdom has just lost its prime minister Liz Trust which created a lack of confidence and instability within the stock markets and financial markets for investors because the government lost its credibility for financial confidence.
When selecting your options for investments, the key’s research, research and research if you are investing in a country, you will not be just investing in the assets but the stability of the nation as a whole. I am writing this not as an expert but as a generalist.
I spend my time researching history, politics and the real-world economy because there is a colossal difference between what is real and what is perceived. At the moment, Apple has 95% of its infrastructure in regard to manufacturing in China.
Due to the Chinese instability in Its financial system, political system, and rivalry with the United States, Apple could be unable to produce new phones for years should it lose its infrastructure base. These kinds of key details can help an investor or somebody conducting research to make well-informed decisions.
Plenty of resources can be found in blogs, YouTube and through educational books and courses that can help people make well-informed decisions.
U.K.’s Economic Problems link