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What’s Wrong with Money?

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What’s Wrong with Money?

The Biggest Bubble of All

MICHAEL ASHTON

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Copyright © 2016 by Michael Ashton. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, ortransmitted in any form or by any means, electronic, mechanical, photocopying,recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the1976 United States Copyright Act, without either the prior written permission of thePublisher, or authorization through payment of the appropriate per-copy fee to theCopyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978)750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to thePublisher for permission should be addressed to the Permissions Department, JohnWiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201)748-6008, or online at http://www.wiley.com/go/permissions.

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This book is dedicated to my wife, Diane,and to our joint investments in the future:

Andy and Lila.

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Contents

Preface ix

Acknowledgments xiii

About the Author xv

PART I HOW MONEY LIVES AND DIES 1

CHAPTER 1 What Is Money, and Why Do We Need It? 3

CHAPTER 2 “Fiat” Money 19

CHAPTER 3 The Role of Central Banks and the (Limited) Powerof Monetary Policy 27

CHAPTER 4 Bitcoin: A Solution and a Different Problem 39

CHAPTER 5 How Fiat Money Dies 47

PART II WHERE ARE WE NOW? 55

CHAPTER 6 Don’t Believe Everything You Read (But BelieveSome of It) 57

CHAPTER 7 Central Bankers Are Monetarists No Longer 67

CHAPTER 8 Central Bankers in the Global Financial Crisis 77

CHAPTER 9 Where Are We Now? 99

CHAPTER 10 My Prescription 125

PART III HOW TO INVEST WITH INFLATION IN MIND 129

CHAPTER 11 Only Three Miracles 133

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viii Contents

CHAPTER 12 Inflation-Aware Investing and the Easy Way 143

CHAPTER 13 Liability-Driven Investing for Individuals 159

CHAPTER 14 Investing for a Currency Calamity 173

Index 179

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Preface

Every person in authority, whether at the Federal Reserve(Fed) or the European Central Bank (ECB), in the White

House or at 10 Downing Street, on Capitol Hill or in Parliament,says that we should not worry. Sure, there are holdouts—peoplewho worry, like we do—but they are marginalized as cranks orbackbenchers.

What are we worried about? In 2000, we had a burstingstock market bubble that produced a fairly brief but painfulrecession. Central banks and legislators sprang into action bydrastically cutting interest rates and extending jobless benefits,among other things. “Don’t worry! It’s Greenspan to the rescue!”we were told. For a while, it seemed as if they were right. Theeconomy recovered, although we now realize that the actionsof the authorities set up another, bigger bubble.

In 2007, the second bubble within a single decade startedto come undone; it popped in 2008. The ensuing recession wasdeeper, and longer, and the response from monetary and fis-cal authorities was more dramatic. The scale of the responsewas an order of magnitude larger, with trillions of dollars ofdeficit spending and the implementation of quantitative easing(QE) on a massive scale. The breadth of the response was alsoimpressive, with every major central bank not only droppinginterest rates but also implementing its own version of QE.Dramatic? The response was desperate. Certain central bankspursued policies that drew criticism at the time, not becausethey were of limited effectiveness but because they were of

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x Preface

questionable legality under the central bank’s authorizing leg-islation. But it was a classic case of the ends being taken tojustify the means: In the end, the world was saved from finan-cial immolation and if you have to break a few eggs to makean omelet, who cares? After the fact, even some of the origi-nal critics begrudgingly recanted, saying that in the heat of themoment clearly something had to be done, and any alterna-tive proposal would have to be tested against a policy that,ultimately, worked.

In the United States, the unemployment rate is below 6 per-cent again. Banks are lending. The hyperinflation predicted bythe hyperventilated never, in fact, happened. Budget deficitsare coming back down. Japan and the Eurozone have seem-ingly averted deflationary collapses as well, and although manybank depositors in Cyprus were “bailed in” (in other words,their money on deposit was confiscated), the European cur-rency union has so far proven inviolate. Although, to be fair,we haven’t heard the last of Greece.

Winning!So why are we worried? The crisis is over! Disaster averted.

And soon—although we have to use our imagination aboutwhat “soon” is—the Federal Reserve will begin increasing inter-est rates to put monetary policy on a more normal footing. Allof the worst predictions have failed to materialize. Game, set,and match to the financial interventionists. Right?

We are worried because this doesn’t feel right. We see aperpetual motion machine, and although we can’t write downthe physics equations for why it shouldn’t be working, we haveintuition that tells us it shouldn’t. If the seemingly insane scopeand scale of the policy response was successful in doing whatit is purported to have done—to have added millions of jobs,saved thousands of banks and put the stock market on themoon—with no evident side effects, then why the heck haven’tcentral banks and legislatures been doing this forever? Eat all

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Preface xi

the chocolate you want, and don’t gain weight! It sounds like agreat deal.

But we know something is amiss. This book describes whatthat is. The unfortunate fact is that each subsequent crisis hasonly been repaired by weakening a more fundamental layerof our financial lives. The crumbling equity market edificewas repaired, at the cost of the housing and credit markets.The housing and credit markets have been repaired, but atwhat cost?

This book is about the most fundamental layer of all: thestructure of money itself. Over the last century, our concept ofwhat money is, at its very root, has gradually changed. Whatbacks money today is simply this: trust. There is nothing elsebehind our dollars, our euros, our sterling, our yen, our francs. . . but trust that someone else will accept it at a reasonablypredictable level in exchange for stuff we need. And this iswhy it matters so much that policymaker responses to the lastfew crises have whittled away at that trust. This is why it isso disturbing that these policymakers say “trust us” while theymonkey with money.

Never before has so much ridden on trust. And never beforehas that trust been so abused, and so stretched. What’s wrongwith money? Nothing, and everything.

What’s Wrong with Money: The Biggest Bubble of All is struc-tured thus:

In Part I of the book I explain what money is, how it differsfrom related concepts of wealth and currency, and why we needmoney in the first place. How has money evolved from beingbacked by something to being backed by only trust? What is fiatmoney, and why is it any better or worse than non-fiat types?What can we learn from the experience of bitcoin? One of thethings we can learn from history is how fiat money regimestend to end. Perhaps that will help us figure out where weare going.

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xii Preface

In Part II, I tackle the current circumstance. It is key tounderstand how the actions of fiscal and monetary agents inresponse to the global credit crisis have impacted us today,and how those actions narrow the set of potential future out-comes. And I will tell you how I personally think this wholeepisode is likely to end. Spoiler alert: There is no perpetualmotion machine.

In Part III, I tell you how this should affect the way youarrange your investments, today.

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Acknowledgments

Ican’t believe I wrote the whole thing.This book was the surprising (to me) result of an inspir-

ing conversation I had with my good friend Karl Strobl, whoadmonished me to warn the countryside about the perils ofrelying on a system of money whose edifice is built on theshifting sands of trust. From the moment that Karl suggestedthe title What’s Wrong with Money, the book came alive in myhead and in a few short months it was reality.

The whole team at Wiley is terrific, but I must single outExecutive Editor Bill Falloon. Bill has rejected (kindly) so manyof my ideas in the past that when he said he liked this one Iknew that it must really be a good idea. Also special thanksto Meg Freeborn, who quarterbacked the project and was soencouraging throughout.

My wonderful family deserves special mention, and notsimply because of their boundless love and support. I wastasked with this manuscript only a few days before we begana month-long road trip, complete with dog—and deadline. Myfamily tolerated my sneaking away to write a thousand wordshere, a thousand words there, and never complained. Wordscannot express my appreciation. A road trip with a dog isstressful enough already!

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