Before the world switched to a fiat monetary system, people who wanted to build wealth kept their savings in a bank. Interest rates tended to equal the average rate of profit, which was enough for all but a small minority of professional investors and entrepreneurs.
This all changed with the move to a fiat monetary system and the devaluation of money. Today, the majority of households own stocks – not because they wish to be investors, but because it is the simplest means of protecting savings. As a result, the political system has become highly involved in market outcomes. The real return of securities markets has been greatly diluted, created perverse incentives, and global risks for the economy.
Before the creation of the Federal Reserve Banking System, the class of investors was small and limited to finance professionals. Everyone else earned income on their savings by keeping their savings in a bank. For example, the interest rate was 8.1% in 1798
This changed in the 1920s, the Federal Reserve System fueled a huge credit expansion that caused the stock market bubble. Easy credit drove the return of the stock market to dramatically exceed the return on savings. We know what happened next
Savings in a pre-fiat, gold-backed monetary system
In a market economy, the rate of business profit tends to equal the interest rate. The rate of profit tends to even out across all sectors since money flows to more profitable sectors until the rate equalizes. Capitalists borrow money in proportion to the rate of return on investment. When investments are more lucrative, the interest rate increases until the cost of borrowing money equals the potential return – and vice versa. In this manner, savers in a pre-fiat monetary system needed to keep their money in a bank to reap the rewards of a growing economy.
Savings in a fiat monetary system
In a fiat monetary system, the government artificially lowers the interest rate by expanding the money supply. Savers have to shelter their wealth in inflation-protected assets because the fiat system devalues savings through inflation.
Wealthy families have other channels to protect their wealth - such as real estate and business interest, but for the middle class, their main means of protecting savings are their 401k and their primary home.
The corruption of the joint-stock company by fiat money
The publicly traded company exists to allow investors to pool funds together in a common enterprise, without incurring unlimited liability for its debts. Participation in a public company ought to come with high risks – offset by high rewards.
When a company needs funds, it used to raise them through bonds and other forms of debt – with debtors being paid before investors.
This model is very different from the current system. By the time a publicly traded goes public, most of the risk and therefore return has already been taken by venture capital, which only a small group of private equity investors have access to.
Because so many savers participate in the market, politicians are strongly motivated to intervene in market outcomes. The 2001 and 2008 financial crises led to the 2002 Sarbanes-Oxley and the 2010 Dodd-Frank Act. These regulations made it much more expensive to go public, which has led to an over 50% decline in the number of publicly traded companies.
There are now just 3,530 publicly traded companies in the U.S. Anyone can buy a stock on their phone today, but by the time the government lets the company sell you shares, most of the profit potential has already been captured by wealthy venture capitalists and private equity investors.
Dividend yield has decreased from 5.49% in 1871 to 1.33%
. Because government debt outcompetes private debt, companies issue stocks to raise money instead of bonds.
Likewise, the price to earnings rate over double historical rates, as savers flock to the stock market – not seeking high returns, but trying to preserve wealth.
Furthermore, the political system is highly motivated to avoid downturns in the market. Politicians cannot prevent economic destruction (that mostly comes from the economic miss-allocation they cause), but they do inflate market prices through inflation. Easy credit transfers wealth from dollar users to investors, while at the same time, capital gains taxes transfer much of those gains to welfare recipients. (By “welfare” I mean all recipients of government benefits, individual and corporate.) All this activity accelerates the inflationary death spiral caused by our unstainable welfare system.
Stock ownership in a free market should be high-risk, high-reward
Stock ownership should be a high-risk, high-reward endeavor for professionals. By contrast, savers should earn the rewards for their thrift by keeping their savings in a bank. A savings account is the original “index fund ETF.”
Bitcoin as a return to sanity
Bitcoin has a limited supply and cannot be manipulated by politicians. In a growing economy, Bitcoin is a deflationary currency. This makes it ideal as a means of saving money.
Bitcoin savings accounts (such as currently exist in crypto-lending platforms
) offer investors a higher return at a higher risk. USD stablecoin interest rate is around 9%. I would guess that this reflects a 6-7% rate of profit plus a 3% adjustment for inflation.
There is no easy way out of the current mess. The same forces driving more and more of the public to become market speculators also make those markets ever more unstable and unprofitable. Loan-bearing crypto deposit accounts (whether they hold stablecoins or cryptocurrencies) are rapidly growing in popularity and may become the high-yield savings accounts of old for savers everywhere.