Castles Made of Sand
"And so castles made of sand fall into the sea, eventually" — Jimi Hendrix
When you look at a painting from a distance, you see things that go unnoticed when you’re close. The world is like a painting. When you look at it from afar, you stop taking things for granted.
Something I’ve been considering lately is that nothing lasts forever. Bear with me, I’m not going through a break up. I’m talking about empires, countries, and economic systems.
Do you remember the state of Prussia? Me neither, but I didn’t make it up. It was an European country for 4 centuries. Stretching Northern Germany, Poland, the Baltic countries, and Western Russia, Prussia existed from 1525 until 1947. Now you only hear about it in history lectures.
I imagine Prussians making future plans before the WWII. Maybe some of them wanted to become maths teachers, while others wanted to have their own orchard — if the Prussian weather allowed for it. Little did they know that their country would cease to exist after the conflict. They took for granted things would remain the same. Like we do now.
The pillars
As investors we find comfort in believing stocks will perform well in the long term. It is well known the stock market has done well for decades. But this is no guarantee that it will do alright in the future. We’re like turkeys being fed and taken care of until Thanksgiving comes. When our Thanksgiving will come we don’t know. Maybe we’ll be alive to see it, or maybe not. But it will come at some point.
As taxpayers, we see taxes as a necessary evil. Something you can’t legally avoid. Taxes are almost as old as western civilisation itself. Dating back to 5000 years ago, the first tax recorded was in ancient Egypt. The Pharaohs used to take in 20% from grain harvest — quite reasonable for the time. But other forms of taxation, such as the income tax, are hardly 100 years old. Income tax was introduced in the U.S. in 1913.
In other words: before 1913, the U.S. had no income tax and everyone was doing fine.
By the late nineteenth century, the United States had become a leading global industrial power, building on new technologies (such as the telegraph and steel), an expanding railroad network, and abundant natural resources such as coal, timber, oil, and farmland, to usher in the Second Industrial Revolution.
— History of the United States (1865 - 1917), Wikipedia
At the supermarket we expect to find 357 different kinds of wet tissues to wipe our butts. But not so long ago, the vast majority of people didn’t have water supply at home. Nowadays there’s the looming threat of water scarcity worldwide.
Half of the world's population could be living in areas facing water scarcity by as early as 2025. Some 700 million people could be displaced by intense water scarcity by 2030. By 2040, roughly 1 in 4 children worldwide will be living in areas of extremely high water stress.
— UNICEF
Solid financial returns, taxes, products at the supermarket, running water… These are all things we take for granted. But history proves that nothing lasts forever.
Falling into the sea
Maybe I’m not practical enough, but I find it amazing how most investors take the current system for granted. Systems flourish and then decline.
In my eyes, traditional finance is steering the world off a cliff.
It all started in 1913, when the first World War began. Most western countries bid farewell to the Gold Standard at the time. It seems gold was too restrictive to finance military expenses. Europe was torn to pieces after the war finished. European currencies, too, were debauched by an inflationist frenzy.
The Gold Standard was gone forever. When the war was over, it was extremely unpopular for Western countries to peg their currencies to gold again. No one wanted to acknowledge the debasement they had gone through. So everyone stuck to printing notes that were backed by thin air.
Thus was born the credit economy we have today.
Gold is money. Everything else is credit.
— J.P. Morgan
What’s wrong with traditional finance
The system is rotten by design, but if that is not evident for you, here are some facts:
The purchasing power of the USD has fallen more than 95% since the Fed was created in 1913.
Since 1971, wages and productivity growth have decoupled. No matter how efficient a country is at producing. Wages don’t grow proportionally. Rarely do they grow in real terms on a yearly basis.
Some countries suffer from arbitrary economic sanctions. Russian, Cuban, Iranian, Venezuelan or North Korean people don’t deserve to live in misery just because they don’t have the right government regimes for the rest of the world.
90 years ago, a family could save for a home down payment in 2-3 years. Today it takes more than 7 years to do that.
Due to demographic factors, European countries won’t be able to pay retirement pensions in the near future. The solution? Raising taxes for everyone.
Most of these facts can be found on WTF Happened in 1971.
A new economy
People associate cryptocurrencies with speculation and easy money. Governments try to tie them to criminal usage too. I’m not going to deny that. Most people invest in crypto to make money, and a small minority use these assets to sell illegal goods or launder money. But cryptocurrencies offer much more than that. Namely, they uncover a new economy.
An economy where transactions are instant.
An economy with no central banks.
An economy with no arbitrary sanctions.
An economy where no one confiscates your assets.
An economy that respects your privacy.
An economy with no borders.
An economy where you’re your own bank.
And a large list of advantages.
This new economy is already flourishing in the Web3 sector, where companies all over the world are changing the way we do finance. This is challenging too. It means we have to rethink everything — consuming, asset management, or accounting.
Accounting proves especially hard. If it’s already hard in traditional finance, how do we even get started with cryptocurrency? This is the question that Umar Mallam Hassam asked himself when he left his job as an accountant and ventured into this new economy. He founded the Crypto Accounting Academy, where he offers an in-depth formal training for finance professionals looking to learn about this new economy.
Next cohort starts on May 16th — you can sign up on this link.
Key takeaways
Empires, countries, and economic systems rise and fall.
Things we take for granted were once unfathomable, like electricity.
Our current financial system is flawed by design.
There are alternative ways of doing finance. The web3 sector proves this point.
Photo of the week
I’ve been on a road trip through Southern Portugal and Western Andalusia. I will post many pictures from this trip in the coming post, but here’s one of my favourites so far.
You are on the right wave link. Food for thought!
Another great post Alejandro touching on many topics that interest me. Its especially interesting how we assume things will stay the same, but over a long enough timeframe, they very rarely do. We flick the light witch and light emerges, or our televisions turn on when we press the on button. As you discuss, what happens when one day this doesn't happen? I'd argue it would come as a shock to many, so thank you for raising awareness of it. I hope you're enjoying your road trip!