Financial Unorthodoxy: Practicable Views on Money, Banking and Investing

By Andreas Niederwieser

»Your financial acumen can help reprivatize our economies and have you become a force for good – no matter the scale.«

Personal sovereignty and independent thought are indispensable conditions for prosperity. They require knowledge and determination on the part of the individual. Financial Unorthodoxy seeks to provide you with the information needed to realize your potential as an autonomous actor in matters of finance and applied economics. We will explore fundamental topics such as the purpose of money, the relationship of fiat money and credit, the collusion of banks and governments as well as the tenets and markers of real wealth. Since free choice demands an understanding of the options provided, you will learn about different asset classes, investment approaches, diversification, performance measures, market mechanics and the basics of stock market analysis.

This book contains a mix of widely accepted theory and an interpretation of facts, which some may view as unorthodox. It constitutes a rejection of the most common commercial wisdom and intends to equip you with a set of skills that enriches your decision making.

• Language: English
• Publisher: tredition
• Release date: Aug 6, 2023
• ISBN: 9783347996878

Andreas Niederwieser

I am a statistician by trade who takes a great interest in financial markets and economics. My first book, "Financial Unorthodoxy - Practicable Views on Money, Banking and Investing", was conceived in response to a perceived abdication of personal responsibilities in matters of private wealth management and economic thought. I hope to incite my audience to be critical of common financial wisdoms and, most importantly, think independently about their finances. To that end, I aim to provide facts and views on a variety of essential topics that every person should ponder at some point in their adult life. I had not foreseen myself ever authoring a book, but personal circumstances afforded me the time and motivation to make it happen. Despite holding a degree in related subjects, I would consider my approach to economic writing rather unacademic. My knowledge is derived from personal experience and careful observation of that which seems to conveniently elude the trendsetters and potentates.

Book preview

Preface

Financial Unorthodoxy is a passion project, spawned by a combination of personal circumstances and a concomitant perception of peculiar developments in recent years. As I witnessed my views on finance irreconcilably diverge from a consensus opinion, I felt increasingly compelled to consolidate them in writing. The resulting text is meant to concisely convey a fundament, upon which informed financial decisions can be based, and a worldview, which hopefully emboldens you to critically evaluate the orthodox dogma.

We shall start out by exploring the monetary system and reviewing some conceptual points about wealth and risk. Building upon an understanding of the fundamental units of account, I will subsequently present a variety of investment vehicles and contextualize their properties. The third part of this book, Investing Concepts, should impart a rudimentary toolkit for navigating the world of financial decisions. Finally, we will focus on stock market investing as it covers critical skills that apply to many areas in finance, rounded off by a few practical considerations regarding a variety of related topics.

This book blends facts and views rather nonchalantly in an attempt to exceed the sterile recitation of that which is readily available. As you progress throughout it, the chapters tend to decrease in significance, while they increase in practicability. In the footnotes you may find additional information, clarifications or general commentary. The contents of this book are designed with an international readership in mind. As a consequence, further study of your local reality is recommended.

At its core, Financial Unorthodoxy consists of an entirely unscientific enumeration of various financial concepts, which together will form a largely self-contained body of thought. This book will not touch upon any particular investment strategies, as that would contradict its principles. Instead, I wish to present you with the knowledge and interpretations you may use to arrive at your own conclusions. Managing one’s wealth is a highly personalized and private task. The increasing centralization of investment philosophies is, in my view, not only detrimental to one’s personal prosperity, but also to the living standards of large portions of society. I would like to see competence returned to the individual and I hope this book may contribute toward that goal.

Money, Wealth and Reality

1. Money and Banking

A brief History of Money

The impetus for money is a desire to justly exchange something of value with other members of society. The original, yet comparatively inefficient, practices of bartering evolved into a monetary system as certain items used in trade became universally interchangeable representations of value in the economy. Any such item must simultaneously serve as a medium of exchange, a unit of account and a store of value. These attributes enable a monetary object to confer upon its holder the benefits of transferring the labor of the present to consumption in the future. They allow for a streamlined allocation of resources and a shared understanding of value among cultures.

Throughout history different objects were used as money. Societies will naturally tend towards usage of the optimal monetary object given their environment and technology, whether it be rare shells on their island or fancy crystals in their rivers. As early as 5000 years ago, gold and silver had established themselves as the predominant objects used in trade. The metal based monetary system was first formalized in the 7th century BC through the mintage of coins of various denominations in the Mediterranean¹.

The first banknote was printed only in the 17th century AD² and represented a paper claim to the denominated weight in gold or silver, stored with the issuer of the promissory note. Merchants were incentivized to exchange their precious metal coins for banknotes as these streamlined trading transactions³. However, the paper money system exposed the holder of the banknote to the counterparty risks associated with the prudence of the bank, who promised that it possessed the metals for which it had underwritten these notes.

The Fiat System

The concept of fiat⁴ money, upon which the modern financial system rests, was finalized during the socalled Bretton Woods II agreement in 1971. Therein, the United States decided to depeg its currency, the US Dollar, from gold for good. Today, neither the Euro, the Yen, the Pound Sterling⁵ nor any other major currency is backed by anything, but the debt which it represents, the governments which require its usage and the militaries which enforce any such rule. The fiat money system allows for the unlimited expansion of the money supply through the fractional reserve banking system and direct central bank interventions.

Banks have a license to create money by taking in deposits and lending against them, subject to a reserve requirement. That is, for every unit of money that a bank customer deposits, the bank can lend out roughly 1/reserve requirement⁶ units. The money, which the bank lends out, had not existed prior to the initialization of this accounting transaction. The recipient of the newly created currency, say the seller of an apartment, thus receives somebody else’s debt and calls it his money. The money supply grows through the creation of debt and prices in the economy adjust accordingly.

Central banks can create new currency as they please, by buying assets on the open market with freshly printed money. Additionally, they have direct control of the risk-free interest rate, a lower bound upon which most risk assets are priced. This interest rate in turn alters the demand for credit and thereby the rate of growth of the money supply. A low interest rate environment stimulates demand for loans as they become relatively cheap, consequently increasing asset prices and the amount of money in circulation.

Should you desire to exchange your money at your respective central bank today, they would simply return that note back to you. The long-term value proposition of any such currency is meager and can be visualized by comparing the purchasing power of a unit in the past, with that of one today, against any good or service of your choosing. Any acquisition will require a larger quantity of money as time progresses and this is in spite of efficiency gains, which will have driven real prices down. Fiat currencies are debt-instruments and calling them money is rather misleading, but, for the sake of readability, I shall continue to refer to them as such.

Government Overreach and Inflation

Inflation is classically defined as an increase in the quantity of money. Inflation is a government policy! Its consequences are felt when prices rise and the currency holders’ purchasing power decreases. This direct result of inflationary policies is usually estimated via consumer price indices which aim to measure the rise in prices of consumer goods, or equivalently, the loss of value of the currency as a result of its dilution.

An increase in the money supply in a fiat-based system is caused by bank lending and central bank printing, commonly executed through the purchase of various types of debt instruments. Inflating the currency allows governments to spend excessively and to centralize the economy without taxing its citizens outright. Inflation harms savers in particular, who will lose wealth in real terms when the rate of price increases exceeds the return on their savings. The consequences of this fact are dire: frugality and investment are sacrificed for reckless consumption and stunted growth.

The common scheme deployed by governments involves central banks, which are governed by unelected officials, buying government debt with freshly printed money. This happens all over the world, yet Japan is the poster child of such policies. The Bank of Japan owns more than half of all of Japan’s federal debt in 2023. The private banks, which are regulated by their respective central banks, are happy to oblige, because they retain the right to levy a special tax through their own money creation privileges: They enjoy the benefits of leveraging the spread of the interest rates paid to their depositors versus that which they demand for loans of their debtors. The public accepts this for it is either unaware or benefiting⁷.

The excessive creation of money destabilizes the economy. It distorts money’s function as a unit of account and a store of value. It leads to social unrest when people start to notice its impact in the form of price increases. An inflationary policy used to finance fiscal deficits allows governments to crowd out the private sector, centralize power, interfere with markets and increasingly encroach on financial liberties. Paper and digital money get debased by excessive creation and die when people wake up to that reality. Every currency of this nature has eventually suffered such a fate. In fact, given the relatively recent invention⁸ of the fractional-reserve, fiat system, we are currently running the most unhinged experiment of this kind to date.

Most central banks officially target a 2% annual inflation rate as measured by a consumer price index of their own design. We should expect any index of this sort to approach the lower bound of what one may reasonably consider the increase in prices to be for an average consumer, since the government is incentivized to maximize the opacity of their theft⁹. Yet this rate, which remains undisputed as appropriate by central bankers and many experts, will half your purchasing power in only about 35 years. In fact, this loss is expedited by chronic underestimation of the actual price level growth, which for most developed countries will run closer to 5% per year.

Some economists argue that inflation is desirable and even necessary because it stimulates the economy and incentivizes spending. In a constant money supply economy, prices would fall as technology improves for the same level of demand. Put differently, as we get better at producing goods, prices will go down if an increase in the supply of money does not offset it. Given this scenario, some experts claim that people would stop spending in hopes of even lower prices in the future. This conjecture requires the belief that people would delay essential consumption indefinitely and that they prefer consumption over investment as a principle – a view which I do not share. Deflation, or the reduction in debt outstanding, is dangerous to our financial system primarily because of the toppled pyramid¹⁰ of leveraged fiatclaims, that is in need of exponentially¹¹ expanding credit to sustain itself.

Central banks’ QE¹² money-printing policies, alongside interest rate controls, which purposefully seek to distort and suppress free market functions, are a man-made disease which nibbles away at the fabric of a free, hopeful and fair society. It is also not new, albeit the availability of tools to steal from the frugal has never been more copious. The Roman Empire, for instance, inflated its currency by continuously decreasing the precious metals content of its coins throughout its later days. If only they had known, that the modern people would come to be appeased by no content at all – at least for a while.

CBDC: A Brave New Currency?

Central Bank Digital Currencies are the money of our dystopian future. Every major central bank is currently developing this improved currency system, which promises increased efficiency, lower costs and better transparency. Nigeria, with its eNaira, has been the first major country to release a CBDC, with the eEuro and eUSD likely to follow in the coming years. While some of the arguments for their introduction may hold true, they pose a significant risk to our liberties, as I see it.

Firstly, these currencies will not merely be a digital¹³ version of the existing one, but really an entirely new monetary system. Therein lies one of the main appeals for governments: the CBDC may reset the debt system. Some contrarian analysts expect that the CBDCs will be introduced in times of severe crisis, hailed as the new anchor of the system and distributed generously among the poor to increase adoption. They may then set a limit of the amount of money you will be able to transfer from the old currency, say the Euro, to the new one, the eEuro. Transfers of large quantities of cash between the currencies may remain gated at first and entirely abolished later on. As time passes the value of the old currency depreciates and so too will the liabilities of governments, who are debtors in the old, but not the new system. Thus, a debt reset has been achieved and the creditors as well as cash holders fitted the bill – a beautiful solution in the eyes of many governments, which are already on an entirely unsustainable fiscal path.

Secondly, as time goes on, CBDCs can be used to serve the appetite of an increasingly authoritarian political mindset. In essence, the only functional difference between your digital money today and a CBDC of tomorrow is that the CBDC is under direct