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[TOP STORY] How we view money

Mohammed Nalla, founder and strategist of moe-knows.com, on whether bitcoin is the glass bead or seashell of our time.

SIMON BROWN: I’m talking with Mohammed Nalla, a founder and a strategist at Moe-Knows.com. Mohammed, I really appreciate your time. You’re in Toronto, Canada. So we’ve some time zone fun to play with there. 

You published a really interesting piece on your website – What is Money? It’s something which has always fascinated me ever since I was a little kid. At its heart, I suppose, you’d say, it’s a go-between, it’s a medium of exchange. And, as long as you and I agree on it, that medium can be money in a sense.

MOHAMMED NALLA: Absolutely. Simon, thanks for having me, thanks to the listeners as well. Money is this abstraction. People don’t think about it. It reminds me of that old saying of the fish that’s swimming around and says to the fish next to him, ”I’m looking for the ocean”. The guy says, “It’s all around you.” And he says, “Oh, this is water. I’m looking for the ocean.” That’s kind of what money is. It’s this go-between. I guess the origin of it is that, as humanity emerged out of a barter system, it just wasn’t practical to say, “Here, take my cows. I want some wheat.” Maybe I don’t want your wheat. And so it kind of evolved from that. 

And in the early days, it was little shiny glass beads, it was seashells. And then over time it evolved, it became gold coins. It became what we now know today as kind of fiat currency or money – whether that’s rands or dollars. And I think we’re at the cusp of another evolution in how the world is seeing money. 

That’s why I thought it was also quite timeous to write an article like this, because what is our relationship with money? How do we see money, and where is it going over the course of maybe the next decade or two?

SIMON BROWN: I suppose for a long time, as you say, it was glass beads. It was seashells, which didn’t perhaps meet all of the requirements. You say it needs to be durable, portable, divisible and uniform, and seashells and glass beads don’t meet all of those requirements. 

I suppose in a sense gold was our first sort of proper money in that it really worked like money. And it worked incredibly well for thousands of years. Before that, it would have been the Spanish and silver. And then we kind of got off that gold – and that’s when things sort of started to go perhaps a little bit wobbly.

MOHAMMED NALLA: I think so. Gold – for those who follow me on Twitter, that’s @MohammedNalla – you’ll know I’ve been a gold bug for quite some time. I’ve always liked gold. It’s because it’s nice and shiny, but it’s also becausE gold ticks all of those boxes that we mentioned. Money has got to be durable. It shouldn’t perish, so you tick that box. It’s got to be portable, so you’ve got to be able to move it across from location to location so that it can function as a medium of exchange. It’s also going to be divisible. So you’ve got to be able to say, “I’ve got a coin of gold, I’ve got a 10th of a coin” or whatever it is. Or, even like normal currency, rands and cents, dollars and cents, so that you can facilitate different transaction sizes.

Then quite importantly, as you mentioned, it’s got to be uniform. That means that it’s a standard unit, rather than having these different variants. That’s why, for example, things like seashells and beads wouldn’t work. With gold, we could eventually get it to a certain level of fineness that meant that a particular gold coin was worth what it was worth, wherever it was. 

And then, lastly and quite importantly, there’s got to be a limited supply or perceived scarcity. I think that’s where we kind of came unstuck, Simon. Remember, the world had this gold standard up until 1971. For a variety of reasons, different countries have fallen off the gold standard following World War II. And once that was done, the US dollar was effectively the only global currency that was still backed by gold.

And then eventually Vietnam happened, and the US went the same way as many other governments. They had to pay for these massive expenses. They had large deficits, but they had a finite supply of gold. And the only way to allow and facilitate that expansion of the monetary base was to decouple from a gold standard. That effectively happened in 1971. 

And so, from 1971 till now, yes, the US dollar has still been the global reserve currency, but we’ve also seen an erosion of trust from the general public. And this has really become where the momentum has gathered some steam in more recent times – do people trust governments and sovereigns and central banks with the underlying value of their money? I would argue that that trust was certainly eroded, and continues to be eroded in more modern times. 

With the advent of these massive stimulus programmes – obviously, yes, we’ve had the global financial crisis and now we’ve got a pandemic – this fear of rampant money-printing eroding the value of a dollar or of the rand is real. And that’s why I think this is certainly something that’s become quite topical again.

SIMON BROWN: And one of the key points is – and it was probably always around, my monetary history doesn’t go far enough back – inflation is perhaps part of that breakdown of trust, and it comes directly from printing money. Now, whether it’s for the Vietnam war or whether it’s for a pandemic, you put more into supply. 

That is to your fifth point, which is that limited supply. As we are printing more and more of it, money is being devalued. My R100 doesn’t serve as well this year as it did a year or a decade ago. That must breed mistrust to a degree into monetary policy and politicians. 

MOHAMMED NALLA: Remember that we’ve had inflation-targeting as the main kind of policy anchor, certainly in a market like South Africa. So that’s important because it serves to protect the value of the rand in your pocket. But the simple reality is if we look at it all the way back to 1971 which is when effectively the world decoupled from the gold standard, we had – and I talk specifically of the US here, and you can extrapolate that to any number of economies around the world – inflation effectively became one tail. 

Now, what I mean when I say that is, if you look at historical cycles, you’ve had periods of inflation and deflation. So prices can go up, but prices can also go down, and they correlate with the business cycle and economic cycle. 

But, following 1971, with the massive expansion of debt that we’ve seen globally, you’ve seen one-tailed inflation where central bankers effectively want to try and curb inflation, but they want to keep it on the open side of things rather than have deflation manifest. And that’s really where you’ve seen this one-tailed erosion of the value of a dollar, for example. So the example I use is, if you look at a dollar today it’s worth the equivalent of only 15 cents in 1971 dollars. That speaks of massive erosion.

SIMON BROWN: And that’s 40 years, pretty much. In my working lifetime you’ve seen massive erosion in that value.

MOHAMMED NALLA: Simon, 1970 to now is five decades, but these macrocycles take a long time to play out. The other example, if you want to really go back into the history that I’d use, the Romans effectively had what was called the Roman debasement – just the same kind of thing. They had to pay for these wars, and what they had to do then was that they devalued each gold coin or silver coin by decreasing the amount of pure gold or pure silver in the coin. That took about 300 years but resulted in the fall of the Roman empire. 

So that’s kind of span of time that we’re talking about here; 50 years is just a blip in the greater span of history. But I do think that these things seem to be gathering some sort of momentum.

SIMON BROWN: It is a blip, but let’s be quite clear – and you make it quite clear there — that the Roman empire, one of the key reasons why it collapsed was the debasement of its currency and the impact. It might’ve taken three centuries to happen, but it’s not a non-causal event if you are debasing. Again, we had a global financial crisis, we’re currently in a pandemic, but the last decade and a bit has seen printing presses the world over going absolutely crazy.

MOHAMMED NALLA: Absolutely. I think now more so. You’ve got the rise of MMT, or modern monetary theory, which is certainly scaring a lot of people. You’ve got these massive stimulus cheques. And the difference this time around is that during the financial crisis of 2008 you had massive quantitative easing. But all of that kind of got trapped in the financial system. 

This time around it’s going to flow through into people’s pockets. It’s a fiscal stimulus as well as a monetary debasement, and maybe that results in this inflation that we’re talking about. 

Do I think it all falls in a heap right now? No. But I do think that people need to contextualise this in a much longer-term timescale and understand what is happening around them because it really will inform how you go about managing your own financial affairs. 

In my article, Simon, which people can find on my website, Moe-knows.com, I also go and look at what it means for the man or woman on the street in terms of whether your asset prices actually have kept pace with this mandatory debasement.

And if you look at that, the real winners were basically gold and equity markets, the S&P 500 for example. Over the period, the houses have kept up some of the paces, but it means that people who are earning a salary that doesn’t necessarily keep track with that inflation have been left behind. And it’s generally why people with assets, with financial assets more specifically, tend to have been able to hedge themselves or create a buffer against this sort of monetary debasement. 

But let’s not fool ourselves. It doesn’t necessarily mean that we’re getting phenomenally richer. It just means that we’re keeping pace with what the value of our money should have been.

SIMON BROWN: Yes, we’ve been treading water. And I like your point around time. I often criticise gold. It peaked in the early eighties and then didn’t peak again until what, August 2011, when the US got a minor downgrade. But in the bigger picture 30 years is absolutely nothing. 

That that brings me to the last question. Enter Bitcoin, and there’s a lot to be said in favour of Bitcoin, there’s a lot against it. Volatility means it can’t be a currency. But volatility, if I look at Bitcoin, ticks all those boxes – durability, portability, divisibility, uniformity, and limited supply.

MOHAMMED NALLA: Look, Bitcoin is still probably in its infancy. We probably need an entirely different show on this. Simon, on my podcast Magic Markets it’s something that we actually discussed in a recording we did last night, and it should be released quite shortly. But there’s a lot to go into it. Yes. It’s durable, it’s a digital asset. Yes, it’s portable, it can move easily across borders. There’s visibility. You can add a whole bunch of decimal points to it. Yes, it’s uniform. 

In fact, for me, the saving grace is Bitcoin scarcity. There’s a limited supply that comes through. Some of the other challenges with Bitcoin, however, come about in terms of whether it is going to be acceptable for transactional purposes – the fact is that it takes quite long to transfer and clear, and there are actually still some transaction fees. 

And then, lastly, there’s a massive regulatory risk to Bitcoin because, remember, sovereigns and central banks are going to be loath to give up let’s call it their sovereignty over money. And so you’re likely to see – and in fact just yesterday I saw an article citing Christine Lagarde from the ECB saying that Bitcoin needs to be regulated. That’s also because it’s new. There have been some nefarious bad actors using it in unintended ways, and consequences obviously flow from that.

 So, yes, I think it’s in its infancy. The concept – I like the concept. I like the concept of crypto assets in general, but I think we’re just starting to scratch the surface of where this can go, and I certainly wouldn’t advocate going out there and buying it. Certainly, with the volatility that we’re seeing right now, it doesn’t suit my risk appetite.

 But something that needs to be said is that I think this distrust that we’ve spoken about is being borne out of this debasement of fiat currency and money as we know it. It’s going to give birth to, I guess, the next age or generation of how we view assets, and certainly how we view money. Is Bitcoin the glass bead or the seashell of our time? I think that’s really the question we should be asking.

SIMON BROWN: Again, back to time. Bitcoin’s 10 years – that is baby, baby steps in the process. We’ll leave it there. Mohammed Nalla, founder and strategist at Moe-knows.com. Mohammed, I really appreciate your insights.

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