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33
Evolution of Money<br />
“<br />
Neither a state nor a bank ever have<br />
had unrestricted power of issuing paper<br />
money without abusing that power.<br />
”<br />
–David Ricardo, British Classical Economist<br />
M<br />
oney is arguably one of the greatest inventions in human<br />
history. By facilitating trade and growth, money enabled a highly<br />
complex economic system that has helped raise our standard of living,<br />
spark new technologies, and create immense amounts of wealth.<br />
However, the trouble with money has always been<br />
the same. Although economists mostly agree that<br />
money has certain properties, there is no universal<br />
monetary system that everyone agrees upon.<br />
For this reason, how a monetary system should work<br />
is open to interpretation, and this can lead to its abuse<br />
and misuse. Throughout the history of money, we’ve<br />
seen precious metals debased by short-term thinkers,<br />
catastrophic occurrences of hyperinflation or deflation,<br />
and even the destruction of entire fiat currencies.<br />
credit are intertwined in the current banking<br />
system is one example. Another is the invention<br />
of decentralized digital currencies such as<br />
Bitcoin, which make it clear that people’s<br />
interpretations of money can turn on a dime.<br />
In the Evolution of Money, we explore early<br />
origins of money, the birth of credit, today’s<br />
monetary landscape, and what a digital future<br />
may mean for how money works.<br />
In modern times, the concept of money has<br />
become even blurrier. The way that cash and<br />
34
Evolution of Money<br />
CHAPTER MAP<br />
Derivatives<br />
CURRENCY AND<br />
THE COLLAPSE<br />
OF THE ROMAN<br />
EMPIRE<br />
pg. 39-44<br />
Monetary Systems<br />
COMPARING THE<br />
WORLD'S MONEY<br />
AND MARKETS<br />
pg. 49-54<br />
But having hard<br />
money is just one<br />
side of the coin<br />
Total global debt is a<br />
$200+ trillion market today<br />
Much of global<br />
debt is held by<br />
central governments<br />
Debasing money can<br />
have empire-altering<br />
consequences<br />
THE PROPERTIES<br />
OF MONEY<br />
pg. 37-38<br />
THE HISTORY OF<br />
CONSUMER CREDIT<br />
pg. 45-48<br />
Debt Explosion<br />
Government Spending Habits<br />
35
THE GLOBAL<br />
WAR ON<br />
CASH<br />
pg. 57-62<br />
Digital payments are<br />
faster and more<br />
efficient than cash<br />
DISRUPTING<br />
PAYMENTS<br />
pg. 63-64<br />
Digital Wallets<br />
Governments<br />
seek to eliminate<br />
physical cash<br />
2017 was a<br />
remarkable year for<br />
Bitcoin and other<br />
cryptocurrencies<br />
HOW MUCH<br />
GOVERNMENT<br />
DEBT EXISTS?<br />
pg. 55-56<br />
BITCOIN: THE<br />
JOURNEY TO<br />
$10,000<br />
pg. 65-66<br />
Initial Coin Offerings<br />
36
THE<br />
PROPERTIES<br />
OF MONEY<br />
There are some truths<br />
that can be discerned<br />
about money.<br />
¥35.8M<br />
Many economists<br />
and experts in the field<br />
agree that money is a:<br />
MEDIUM OF EXCHANGE<br />
Can be used to intermediate the<br />
exchange of goods and services.<br />
UNIT OF ACCOUNT<br />
A standard numerical unit of<br />
measurement of market value for<br />
goods, services, and other transactions.<br />
STORE OF VALUE<br />
Maintains its value over time<br />
and can be spent or exchanged<br />
at a later date.<br />
FOR EXAMPLE<br />
FOR EXAMPLE<br />
FOR EXAMPLE<br />
Salt was used as a currency in<br />
several ancient civilizations.<br />
Housing prices in Japan can be<br />
compared using the yen as a<br />
unit of account.<br />
An ounce of gold could buy a<br />
toga in Roman times, and it<br />
can still buy a nice suit today.<br />
37
ACCEPTABLE<br />
Everyone must be<br />
able to use the money<br />
for transactions.<br />
!<br />
Despite these common truths, the very concept<br />
of money is in flux and there are still problems.<br />
In other words,<br />
MONEY<br />
MUST BE:<br />
FUNGIBLE<br />
One unit is viewed<br />
as interchangeable<br />
with another.<br />
DURABLE<br />
An item must be able<br />
to withstand being<br />
used repeatedly.<br />
1<br />
What happens if money<br />
no longer holds its value?<br />
2<br />
ZIMBABWE<br />
Where does money’s<br />
value come from?<br />
C<br />
DIVISIBLE<br />
Can be divided<br />
into smaller units<br />
of value.<br />
LIMITED IN SUPPLY<br />
The supply of money in<br />
circulation ensures values<br />
remain relatively constant.<br />
UNIFORM<br />
All versions of the same<br />
denomination must have<br />
the same purchasing power.<br />
PORTABLE<br />
Individuals can carry<br />
money with them and<br />
transfer it to others.<br />
3<br />
What happens if money supply is no longer limited?<br />
UNITED STATES MONETARY BASE (IN BILLIONS)<br />
$4,400<br />
$4,000<br />
$3,600<br />
$3,200<br />
$2,800<br />
$2,400<br />
$2,000<br />
$1,600<br />
$1,200<br />
$800<br />
$400<br />
0<br />
1985 1990 1995 2000 2005 2010 2015<br />
4<br />
What is the difference between money<br />
and debt, and how much is there?<br />
$7.6 trillion<br />
All coins and banknotes<br />
$97.5 trillion<br />
World’s “Broad” Money<br />
$233 trillion<br />
Total Global Debt<br />
SOURCES: FEDERAL RESERVE BANK OF ST. LOUIS, IMF<br />
EVOLUTION OF MONEY 38
CURRENCY AND THE COLLAPSE<br />
OF THE<br />
ROMAN EMPIRE<br />
The Roman Empire conquered much of the known Mediterranean world.<br />
At its peak, the empire encompassed up to 130 million people over a span<br />
of 1.5 million square miles, all connected by about 50,000 miles of road.<br />
39
TRADE WAS VITAL TO ROME.<br />
It allowed a wide variety of goods to be<br />
imported into its borders and generated vast<br />
wealth for its citizens. While the city of Rome<br />
itself only had 1 million people, the Empire<br />
grew rapidly – and the cost of maintaining<br />
such a huge empire grew along with it.<br />
BRITAIN<br />
Roman Empire, 200 AD<br />
Main trade route<br />
Slave trade<br />
Goods traded:<br />
Grain Textiles<br />
Marble Timber<br />
Metals Wild animals<br />
Olive oil Wine<br />
ATLANTIC<br />
OCEAN<br />
GAUL<br />
ITALY<br />
BLACK SEA<br />
Administrative, logistical, and military costs kept<br />
adding up, and the Empire found creative new<br />
ways to pay for things. Towards the end of its days,<br />
the Roman Empire experienced hyperinflation, a<br />
fractured economy, localization of trade, heavy<br />
taxes, and a financial crisis.<br />
SPAIN<br />
MEDITTERRANEAN<br />
SEA<br />
SYRIA<br />
MAURETANIA<br />
EGYPT<br />
AFRICA<br />
CURRENCY DEBASEMENT WAS ONE OF<br />
THE MAIN FACTORS THAT LED TO<br />
THE ROMAN EMPIRE'S DEMISE.<br />
SOURCE: ANCIENT.EUZ<br />
EVOLUTION OF MONEY 40
ROMAN DEBASEMENT<br />
The major coin used during the first 220 years<br />
of the Empire was the Denarius – a silver coin<br />
worth approximately one day’s wages for a skilled<br />
laborer or craftsman.<br />
At first, these coins were of high purity, holding<br />
about 4.5 grams of pure silver. But soon the supply<br />
of precious metals began to dwindle. Roman<br />
spending was limited by the amount of denarii that<br />
could be minted. This made financing the pet<br />
projects of emperors challenging.<br />
How was the latest war,<br />
thermae, or palace<br />
to be paid for?<br />
SIMPLE. THEY<br />
DECREASED THE<br />
PURITY OF THE<br />
COINAGE. IN DOING<br />
SO, THEY WERE<br />
ABLE TO MAKE<br />
MORE “SILVER”<br />
COINS WITH THE<br />
SAME FACE VALUE.<br />
90% SILVER 50% SILVER<br />
41
With more coins in circulation, the Roman government found it could keep<br />
spending. And the more it spent, the less silver each coin contained.<br />
SILVER CONTENT OF A ROMAN DENARIUS<br />
% of silver in a Roman denarius<br />
100%<br />
90%<br />
80%<br />
70%<br />
60%<br />
50%<br />
40%<br />
30%<br />
20%<br />
10%<br />
0%<br />
64-68<br />
161-168<br />
193<br />
Didus Julianus<br />
219-222<br />
Elagabulus<br />
238<br />
Pupienus & Balbinus<br />
244<br />
Philip<br />
255-60<br />
Valerian<br />
268<br />
Claudius II<br />
75% X2<br />
5%<br />
By the time of Marcus Aurelius, the<br />
denarius was only about 75% silver.<br />
Caracalla tried a different method of<br />
debasement. He introduced the “double<br />
denarius”, which was worth 2x the<br />
denarius in face value. However, it had<br />
only the weight of 1.5 denarii.<br />
By the time of Gallienus, the coins had<br />
barely 5% silver. Each coin was a bronze<br />
core with a thin coating of silver. The shine<br />
quickly wore off to reveal the poor quality<br />
underneath.<br />
SOURCES: FOUNDATION FOR ECONOMIC EDUCATION<br />
EVOLUTION OF MONEY 42
THE CONSEQUENCES<br />
By 265 AD, there was only 0.5% silver left in a<br />
denarius and prices skyrocketed 1,000% across<br />
the Roman Empire. With soaring logistical and<br />
administrative costs and no precious metals left to<br />
plunder from enemies, the Romans levied higher<br />
taxes against the people to sustain the empire.<br />
“NOBODY SHOULD HAVE<br />
ANY MONEY BUT I, SO THAT<br />
I MAY BESTOW IT UPON<br />
THE SOLDIERS.”<br />
–Caracalla<br />
who increased soldiers’ pay by 50% near 210 AD<br />
Wages and Coinage<br />
Soldiers demanded far higher wages as the<br />
quality of coins diminished.<br />
Silver content of coinage (%)<br />
Wages of soldiers (Denarii)<br />
90%<br />
600<br />
80%<br />
70%<br />
500<br />
60%<br />
400<br />
50%<br />
40%<br />
30%<br />
20%<br />
10%<br />
300<br />
200<br />
100<br />
More coins were needed to pay for<br />
goods and services and at times there<br />
was runaway inflation. Wealth was<br />
transferred away from the people and<br />
the economy became paralyzed.<br />
This trifecta of hyperinflation, soaring<br />
taxes, and worthless money led to much<br />
of Rome’s trade being dissolved. By the<br />
end of the 3rd century, any trade that was<br />
left was mostly local, using inefficient<br />
barter methods instead of any meaningful<br />
medium of exchange.<br />
0 50<br />
100 150 200 210<br />
43<br />
Years AD
THE COLLAPSE<br />
During the “Crisis of the<br />
Third Century” (235-284 AD),<br />
a combination of invasion,<br />
civil war, plague, and<br />
economic depression<br />
plunged the Roman Empire<br />
into near collapse. Trade<br />
networks were disintegrated<br />
due to the dangers of<br />
barbarian invasions.<br />
429 VANDALS CROSS<br />
FROM SPAIN TO AFRICA<br />
406 VANDALS,<br />
ALANS AND SUEBI<br />
ENTER GAUL<br />
SUEBI<br />
ALANS<br />
VANDALS<br />
TRADE NETWORKS WERE<br />
DISINTEGRATED<br />
AND SUCH ACTIVITIES BECAME<br />
TOO DANGEROUS.<br />
HUNS CHECKED<br />
BYGALLO- ROMAN<br />
FORCES IN 451<br />
GALLIA<br />
CARTHAGE<br />
439 CARTHAGE<br />
FALLS TO VANDALS<br />
402 WESTERN CAPITAL<br />
MOVED TO RAVENNA<br />
401-2 ALARIC’S<br />
FIRST INVASION<br />
ROME<br />
OF ITALY<br />
410 ALARIC<br />
INVADES ITALY<br />
AND SACKS ROME<br />
395 HUNS<br />
410 ALARIC<br />
CONTEMPLATES<br />
INVASION OF SICILY<br />
AND AFRICA BUT<br />
DIES OF ILLNESS<br />
382 VISIGOTHS SETTLED<br />
SOUTH OF DANUBE RIVER<br />
UNDER TREATY<br />
DANUBE RIVER<br />
395-7 VISIGOTHS UNDER<br />
ALARIC REBEL AND RAID<br />
BALKANS AND GREECE<br />
Roman Empire<br />
Visigoths: 357-382<br />
Visigoths: 395-410<br />
Visigoths: 412-418<br />
Vandals, Alan and Suebi: 406-411<br />
Vandals: 429-439<br />
Huns: 370-451<br />
Battle<br />
378 VISIGOTHS DEFEAT AND<br />
KILL EMPEROR VALENS AT<br />
BATTLE OF ADRIANOPLE<br />
ASIA<br />
370 HUNS<br />
429-39 VANDALS CONQUER<br />
NORTH AFRICA PROVINCES<br />
AFRICA<br />
BY 476 AD, THE WESTERN<br />
ROMAN EMPIRE WOULD<br />
CEASE TO EXIST.<br />
SOURCES: FOUNDATION FOR ECONOMIC EDUCATION, SHORTHISTORY.ORG<br />
EVOLUTION OF MONEY 44
The History of<br />
CONSUMER CREDIT<br />
Today, credit is everywhere and consumers rely on<br />
it to buy many goods, from smartphones to homes.<br />
While credit may seem like a modern invention,<br />
it’s actually been around for at least 5,000 years.<br />
45
3500 BC<br />
Sumer<br />
50 BC<br />
Roman Republic<br />
1787<br />
England<br />
Sumer is the first urban civilization with<br />
about 89% of its population living in cities.<br />
It is thought that consumer loans for<br />
agricultural purposes are first used here.<br />
Around this time, Cicero notes that<br />
his neighbor bought 625 acres of<br />
land for 11.5 million sesterces.<br />
Cicero writes, “nomina facit,<br />
negotium conficit” – or, “he uses<br />
credit to complete the purchase.”<br />
Philosopher Jeremy<br />
Bentham writes a treatise<br />
called "A Defense of Usury,"<br />
arguing that restrictions on<br />
interest rates harm the ability<br />
to raise capital for innovation.<br />
England 1826<br />
1500<br />
Age of Discovery<br />
As European explorers and<br />
merchants begin trade missions to<br />
faraway lands, the need for capital<br />
and credit increases.<br />
The Manchester Guardian<br />
Society is formed and later<br />
begins issuing a monthly<br />
newsletter with information<br />
about people who fail to<br />
pay their debts.<br />
BC AD 1000<br />
1800 BC<br />
Babylon<br />
1545<br />
England<br />
1803<br />
England<br />
The Code of Hammurabi<br />
is written, formalizing the first known<br />
laws around credit. Hammurabi<br />
establishes the maximum interest<br />
rates that can be used legally:<br />
800<br />
Dark Ages<br />
The Church bans usury, the practice of<br />
charging interest on loans, for all laymen<br />
under Charlemagne’s rule (768-814 AD).<br />
The first country to<br />
establish a legal rate of interest is<br />
England in 1545, during the reign of<br />
Henry VIII. The rate is set at 10%.<br />
A group of English tailors come<br />
together to swap information about<br />
customers who failed to settle their<br />
debts. It is the earliest available<br />
account of credit reporting.<br />
On loans of grain,<br />
the ceiling is<br />
33.3% per year<br />
“...lend, expecting<br />
nothing in return”<br />
10%<br />
–Luke 6:35<br />
On loans of silver,<br />
the ceiling is<br />
20% per year<br />
SOURCES: QUANTUM FUTURE GROUP, AMSTRONG ECONOMICS, PERSEUS, THE GUARDIAN, THOUGH COMPANY,<br />
UNIVERSITY OF TORONTO, NEW WORLD ENCYCLOPEDIA, DENVER POST, EXPERIAN<br />
EVOLUTION OF MONEY 46
1864<br />
New York<br />
On the eve of the Civil War, R. G. Dun<br />
and Company – formerly known as<br />
The Mercantile Agency – establishes<br />
an alphanumeric system for tracking<br />
the creditworthiness of companies.<br />
This system would remain in use until<br />
the twentieth century.<br />
$$$<br />
1919<br />
Detroit<br />
General Motors creates the “installment<br />
plan”, which allows regular families to<br />
afford a new car with 35% down payment.<br />
1950<br />
USA<br />
By 1950, the typical middle class American has<br />
revolving credit accounts at different merchants.<br />
Maintaining these different cards is<br />
inconvenient and Diners Club is introduced –<br />
the first multi-purpose charge card.<br />
USA 1955<br />
Early credit reporters use millions of<br />
index cards, sorted in a massive filing<br />
system, to keep track of consumers<br />
around the country.<br />
To get the latest information,<br />
agencies scour local newspapers for<br />
notices of arrests, promotions,<br />
marriages, and deaths, attaching this<br />
information to individual credit files.<br />
1850 1900<br />
1899<br />
Atlanta<br />
Retail Credit Company is founded and<br />
begins compiling an extensive list of<br />
creditworthy customers.<br />
The company later changes its name to<br />
Equifax. Today, Equifax is the oldest of the<br />
three major credit agencies in the U.S.<br />
USA1930<br />
Efficient U.S. factories are<br />
pumping out cheaper consumer<br />
products and appliances.<br />
Following the lead of GM, now<br />
washing machines, furniture,<br />
refrigerators, phonographs, and<br />
radios can be bought on<br />
installment plans.<br />
USA 1958<br />
BankAmericard (now Visa) is<br />
“dropped” in Fresno, California.<br />
American Express and<br />
Mastercard soon follow,<br />
offering Americans general<br />
credit for a wide range of<br />
purchases.<br />
$$$ $ - $ - $ $ - $ - $<br />
By this time 2/3 of all autos are<br />
bought on installment plans.<br />
47<br />
SOURCES: TIME, AMERICAN RADIO WORKS, DINERS CLUB, PHILADELPHIA FED, BANK OF AMERICA
1960<br />
USA<br />
1970<br />
USA<br />
1989<br />
USA<br />
35%<br />
Payment<br />
History<br />
30%<br />
Amounts<br />
Owed<br />
At a time when the technology is<br />
limited to filing cabinets, the postage<br />
meter, and the telephone, American<br />
credit bureaus issue 60 million<br />
credit reports in a single year.<br />
The first Fair Credit Reporting Act<br />
is passed in the U.S. It establishes a<br />
standard legal framework for credit<br />
reporting agencies.<br />
The FICO score is introduced, and<br />
quickly becomes a standard system to<br />
measure credit scores based on<br />
objective factors and data.<br />
It is still used by 90 of 100 of the<br />
largest institutions in the U.S. to<br />
assess credit risk.<br />
10%<br />
Credit Mix<br />
15%<br />
Length of Credit History<br />
10%<br />
New Credit<br />
1960 2000<br />
1964<br />
USA<br />
The Association of Credit Bureaus in the U.S.<br />
conducts the first studies into the application<br />
of computer technologies to credit reporting.<br />
Accuracy of data is also improved around this<br />
time by standardizing credit application forms.<br />
1980s<br />
USA<br />
The three biggest credit bureaus attain<br />
universal coverage across the country.<br />
2006<br />
USA<br />
VantageScore is created through<br />
a joint venture between the top<br />
three credit scoring agencies.<br />
Today<br />
The Information Age<br />
has enabled a new era<br />
in consumer credit and<br />
assessing risk. Today,<br />
credit reports are used<br />
to inform decisions<br />
about housing,<br />
employment,<br />
insurance, and the<br />
cost of utilities.<br />
equifax<br />
experian<br />
transunion<br />
SOURCES: BIAISE ET PAGANO, THE BALANCE, FIN WEB, MY FICO, VANTAGE SCORE<br />
EVOLUTION OF MONEY 48
Silver<br />
COMPARING THE WORLD’S<br />
MONEY &<br />
MARKETS<br />
Millions, billions, and trillions…<br />
how much money exists in the world?<br />
Interestingly, what is considered “money”<br />
depends on who you are asking. This visualization<br />
simplifies the complex world of currencies, assets,<br />
and other financial instruments.<br />
The end result? A visually pleasing and<br />
enlightening new way to understand the<br />
vast universe of global assets.<br />
How this<br />
visualization works:<br />
Each square<br />
this size<br />
is worth<br />
$100 billion<br />
Silver<br />
The value of all<br />
above-ground silver<br />
stocks (estimated by<br />
some at 1 billion oz) is<br />
$17 billion using a<br />
$17/oz spot price.<br />
49
Cryptocurrency<br />
50 Richest People Biggest Companies<br />
California’s GDP<br />
ALPHABET<br />
APPLE<br />
BITCOIN<br />
ETHEREUM<br />
THE REST<br />
MICROSOFT<br />
FACEBOOK<br />
TENCENT<br />
AMAZON<br />
Cryptocurrency<br />
Wealthiest People<br />
Biggest Companies<br />
California<br />
The world’s fastest growing<br />
asset class is cryptocurrency –<br />
but even Bitcoin looks tiny in<br />
the grand scheme of things,<br />
when compared to other<br />
global markets.<br />
In aggregate, the world’s 50<br />
richest people are worth a<br />
hefty $1.9 trillion.<br />
Apple is the world’s largest<br />
public company by market<br />
capitalization, worth $869<br />
billion.<br />
America’s most populous<br />
state is also an economic<br />
powerhouse with a GDP of<br />
$2.7 trillion. That eclipses the<br />
economies of most countries.<br />
GATES BEZOS BUFFETT<br />
$90B $112B $84B<br />
SOURCES: MACROTRENDS, COINMARKETCAP (CRYPTOCURRENCY: LAST WEEK OF DEC 2017), FORBES, BEA (CALIFORNIA GDP 2017 Q2)<br />
EVOLUTION OF MONEY 50
Fed’s Balance Sheet<br />
Gold<br />
Stock Markets<br />
21%<br />
PRIVATE<br />
INVESTMENT<br />
UNITED KINGDOM<br />
UNITED STATES<br />
JAPAN<br />
CHINA<br />
$3.5T<br />
14%<br />
OTHER<br />
48%<br />
JEWELRY<br />
EURO AREA<br />
Added During QE<br />
CENTRAL<br />
BANKS & IMF<br />
17%<br />
REST OF THE WORLD<br />
51<br />
Federal Reserve<br />
Balance Sheet<br />
Between 2008 and 2014, the<br />
Fed’s balance sheet jumped to<br />
$4.5 trillion from $1 trillion due<br />
to controversial quantitative<br />
easing (QE) programs.<br />
The World’s Gold<br />
The world’s total above-ground gold<br />
reserves are estimated at 187,200 tonnes<br />
by the World Gold Council.<br />
Using a $1,275/oz spot price, the world’s<br />
gold is worth $7.7 trillion.<br />
SOURCES: FEDERAL RESERVE, WORLD GOLD<br />
COUNCIL, WFE, CIA, IIF, INVESTOPEDIA<br />
The World’s Stock Markets<br />
The market capitalization of all of the world’s<br />
stock markets is equal to $73 trillion.<br />
38%<br />
29%<br />
REST OF<br />
THE WORLD<br />
5%<br />
11%<br />
7%<br />
10%
Global Money Supply<br />
Global Debt<br />
8% 92%<br />
Physical<br />
Non-Physical<br />
Global<br />
Money<br />
Supply<br />
The total value of the world’s money is<br />
$90.4 trillion. This includes coins, banknotes,<br />
money market accounts, as well as saving,<br />
checking, and time deposits.<br />
Global<br />
Debt<br />
This is the total amount of debt, including that<br />
accumulated by governments, corporations, and<br />
households. Together, it adds to $233 trillion,<br />
which is 318% of global GDP.<br />
EVOLUTION OF MONEY 52
Derivatives<br />
The low end estimate of the size and scope<br />
of global derivative markets is $544 trillion<br />
on a notional contract basis.<br />
The high end estimate (not shown here) for<br />
the value of all derivative contracts is as high<br />
as $1.2 quadrillion. The truth is that no one<br />
really knows the exact size of the market.<br />
The positives are derivatives can be used to help<br />
allocate and take price risk out of everything from corn<br />
to cattle to stock. There are good derivatives that are<br />
self-regulating such as interest rate swaps and currency<br />
forwards. I’ve been working for exchanges for 41 years. I<br />
do not think regulation is incompatible with an efficient<br />
market. I think derivatives promote efficiencies.<br />
–Dr. Richard Sandor<br />
Mixed views on derivatives<br />
Many finance professionals consider<br />
derivatives to be “zero-sum” trades.<br />
in other words, there is a winner and<br />
loser on each side of the bet.<br />
However, other experts warn that the<br />
massive size of the derivatives market<br />
could pose significant risk to global markets.<br />
The derivatives genie is now well out of the bottle, and<br />
these instruments will almost certainly multiply in variety<br />
and number until some event makes their toxicity clear.<br />
Central banks and governments have so far found no<br />
effective way to control, or even monitor, the risks posed<br />
by these contracts. In my view, derivatives are financial<br />
weapons of mass destruction, carrying dangers that,<br />
while now latent, are potentially lethal.<br />
–Warren Buffett<br />
WHAT’S A DERIVATIVE?<br />
A derivative is a contract between two or<br />
more parties that derives its value from<br />
the performance of an underlying asset,<br />
index, or entity.<br />
Examples of derivatives<br />
• Futures contracts<br />
• Forward contracts<br />
• Options<br />
• Warrants<br />
• Swaps<br />
If there were no derivatives, there would be no<br />
bank loans at all today, because people want to<br />
get fixed-rate 30-year loans, but banks don't want<br />
to keep 30-year loans on their books.<br />
–Jeff Greene<br />
EVOLUTION OF MONEY 54
UNITED STATES<br />
In nominal terms, the U.S. leads the world<br />
with roughly $20 trillion of government debt.<br />
JAPAN<br />
Japan has a sky-high 239%<br />
debt-to-GDP, but over 90% of<br />
this debt is held domestically.<br />
SHARE OF GLOBAL DEBT: 31.8%<br />
18.8%<br />
ITALY<br />
FRANCE<br />
GERMANY<br />
UNITED<br />
KINGDOM<br />
INDIA<br />
CAN<br />
3.9%<br />
3.8%<br />
3.8%<br />
3.7%<br />
2.5%<br />
2.3%<br />
SPAIN<br />
MEXICO<br />
KOREA<br />
AUSTRALIA<br />
BELGIUM<br />
NETHERLANDS<br />
GREECE<br />
ARGENTINA<br />
SWITZ.<br />
SINGAPORE<br />
EGYPT<br />
2.0%<br />
1.0%<br />
0.9%<br />
0.8% 0.8%<br />
0.8%<br />
0.6% 0.5% 0.5%<br />
0.5%<br />
0.5%<br />
POLAND<br />
TURKEY<br />
IRELAND<br />
SWEDEN<br />
RUSSIA<br />
ISRAEL<br />
TAIWAN<br />
PAKISTAN<br />
THAILAND<br />
MALAYSIA<br />
S. AFRICA<br />
FINLAND<br />
COLOMBIA<br />
IRAN<br />
NORWAY VIETNAM DENMARK IRAQ<br />
0.4%<br />
0.4%<br />
0.4%<br />
0.3%<br />
0.3%<br />
0.3%<br />
0.3%<br />
0.3%<br />
0.3%<br />
0.3%<br />
0.2%<br />
0.2%<br />
0.2%<br />
0.2%<br />
0.2%<br />
0.2%<br />
0.2%<br />
0.2%
How much government debt exists?<br />
According to 2016 IMF estimates, governments have accumulated $63 trillion<br />
in total debt. The U.S. alone makes up almost a third of that amount.<br />
CHINA<br />
200%+<br />
175%<br />
7.9%<br />
REST OF WORLD<br />
How to read<br />
this chart<br />
Size<br />
Share of Global Debt<br />
COUNTRY<br />
NAME<br />
2.5%<br />
Color<br />
Debt as a Percentage of National GDP<br />
150%<br />
125%<br />
100%<br />
3.6%<br />
75%<br />
50%<br />
ADA<br />
2.2%<br />
BRAZIL<br />
The IMF warns that if Greece continues<br />
at its current pace, debt-to-GDP will hit<br />
a whopping 275% by 2060.<br />
25%<br />
0%<br />
AUSTRIA INDONESIA PORTUGAL<br />
0.5% 0.4% 0.4%<br />
Lebanon, perhaps surprisingly,<br />
has the third highest debt-to-GDP<br />
ratio in the world, at 149%.<br />
SAUDI<br />
PHIL. UAE QATAR<br />
ARABIA<br />
0.2% 0.1% 0.1% 0.1% 0.1%<br />
LEBANON<br />
SOURCE: IMF<br />
EVOLUTION OF MONEY 56
THE<br />
GLOBAL WAR<br />
ON<br />
CASH<br />
There is a global push by lawmakers to eliminate the use of physical cash around the world. This<br />
movement is often referred to as "the war on cash", and there are three major players involved:<br />
THE INITIATORS<br />
THE CROSSFIRE<br />
THE ENEMY<br />
WHO?<br />
Governments, central banks<br />
WHO?<br />
Citizens<br />
WHO?<br />
Criminals, terrorists<br />
WHY?<br />
The elimination of cash will make it<br />
easier to track all types of transactions,<br />
including those made by criminals.<br />
WHY?<br />
The coercive elimination of physical<br />
cash will have potential repercussions<br />
on the economy and social liberties.<br />
WHY?<br />
Large denominations of bank notes<br />
make illegal transactions easier to<br />
perform, while increasing anonymity.<br />
HOW DID THIS PUSH TOWARDS A CASHLESS SOCIETY START, AND COULD IT BACKFIRE?<br />
57
Since the late 1990s, technology has<br />
made non-cash transactions more<br />
viable. By 2015, there were 433 billion<br />
cashless transactions worldwide.<br />
282<br />
BILLION<br />
2010<br />
433<br />
BILLION<br />
2015<br />
TODAY, THERE ARE MULTIPLE WAYS TO PAY DIGITALLY, INCLUDING:<br />
INTERMEDIARIES<br />
PayPal, Square<br />
ONLINE BANKING<br />
Visa, Mastercard, instant bank transfers<br />
SMARTPHONES<br />
Apple Pay<br />
CRYPTOCURRENCIES<br />
Bitcoin<br />
SOURCES: CAPGEMINI, BNP PARIBAS<br />
EVOLUTION OF MONEY 58
THE FIRST SHOTS FIRED<br />
The success of these new technologies has prompted lawmakers<br />
to question whether all transactions should now be digital.<br />
Here is their case for a cashless society:<br />
2<br />
More traceable money<br />
results in higher tax revenues.<br />
All cashless transactions would<br />
require a third party.<br />
1<br />
Removing high denominations of<br />
bills from circulation makes<br />
it harder for terrorists,<br />
drug dealers, money<br />
launderers, and<br />
tax evaders.<br />
$1 million in $100 bills weighs<br />
only 22 lbs (10 kilograms).<br />
Criminals move $2 trillion<br />
around the world each year.<br />
The U.S. $100 bill is the most<br />
popular note in the world, with<br />
11.5 billion of them in circulation.<br />
This gives regulators more<br />
control over the economy.<br />
3<br />
Central banks can dictate interest<br />
rates that encourage (or discourage)<br />
spending to try to manage inflation.<br />
Banks incur fewer costs<br />
by not having to handle cash.<br />
It also makes compliance<br />
and reporting easier.<br />
Lawmakers say that cash, especially large<br />
denomination bills, must be eliminated.<br />
Cashless transactions are<br />
faster and more efficient.<br />
The “burden” of cash can be<br />
up to 1.5% of GDP, according<br />
to some experts.<br />
Yet, cash is still used for about<br />
85% of all transactions worldwide.<br />
59<br />
SOURCES: FEDERAL RESERVE, UNODC
DECLARATION OF WAR<br />
Governments and central banks are moving<br />
swiftly in some countries to eliminate cash:<br />
NORWAY<br />
SWEDEN<br />
Banks have started<br />
removing ATMs from<br />
rural areas.<br />
SOUTH KOREA<br />
Aims to eliminate paper<br />
money entirely by 2020.<br />
SINGAPORE<br />
AUSTRALIA<br />
A 2016 UBS report<br />
recommended a ban<br />
on the $100 bill.<br />
DNB, Norway’s biggest<br />
bank, proposed a ban<br />
on cash in 2016.<br />
Eliminated the $10,000 note<br />
(its highest note) in 2014.<br />
USA<br />
Policymakers are pushing to<br />
abolish $50 and $100 notes.<br />
VENEZUELA<br />
The Venezuelan government launched<br />
an oil-backed token in 2018, used to pay<br />
for taxes, fees, and other public services.<br />
FRANCE<br />
Considering banning cash for<br />
transactions over €1,000.<br />
EUROPE<br />
The European Central Bank<br />
has stopped producing new<br />
€500 notes, over concerns that<br />
they facilitate illicit activities.<br />
GREECE<br />
Citizens must now declare<br />
all cash over €15,000<br />
held in safes or other<br />
non-bank storage.<br />
INDIA<br />
In 2016, Indian Prime Minister<br />
Narendra Modi demonetized<br />
500 and 1,000 rupee notes.<br />
Overnight, this eliminated<br />
86% of the country’s notes.<br />
People could theoretically<br />
exchange 500 and 1,000 rupee<br />
notes for higher denominations,<br />
up to a limit of 4,000/person.<br />
Sums higher than 4,000 had to<br />
be routed through a bank<br />
account – yet only 50% of<br />
people have bank accounts.<br />
SOURCES: FORBES, THE GUARDIAN, ZERO HEDGE, VERDICT<br />
EVOLUTION OF MONEY 60
CAUGHT IN THE CROSSFIRE<br />
The shots fired by governments fighting the war on<br />
cash may have several unintended casualties.<br />
1 01<br />
Cashless transactions would always<br />
include some intermediary or third party.<br />
03<br />
Certain types of transactions (e.g. gambling)<br />
could be barred or frozen by governments.<br />
PRIVACY<br />
02<br />
Increased government access to personal<br />
transactions and records.<br />
04<br />
Decentralized cryptocurrency could be an<br />
alternative for such transactions.<br />
Savers could no longer have the<br />
individual freedom to store wealth<br />
“outside” the system.<br />
Eliminating cash makes negative<br />
interest rates policy (NIRP) a<br />
feasible option for policymakers.<br />
01<br />
02<br />
A cashless society also means all<br />
savers would be “on the hook” for<br />
bank bail-in scenarios.<br />
Savers would have limited abilities to<br />
react to extreme monetary events like<br />
deflation or inflation.<br />
03<br />
04<br />
2<br />
SAVINGS<br />
3<br />
HUMAN RIGHTS<br />
01<br />
02<br />
Rapid demonetization has violated people’s<br />
rights to life and food.<br />
In India, removing the 500 and 1,000<br />
rupee notes caused multiple human<br />
tragedies - with unaffordable food,<br />
disrupted freedom of movement, and<br />
patients being denied treatment.<br />
03<br />
Demonetization also hurts people<br />
and small businesses that make their<br />
livelihoods in the informal sectors of<br />
the economy.<br />
61
With all wealth stored digitally,<br />
the potential risk and impact of<br />
cybercrime increases.<br />
Hacking or identity theft could<br />
destroy entire life savings.<br />
01<br />
02<br />
Cybercrime is already expected<br />
to cost the global economy over<br />
$6 trillion by 2021, according to<br />
Cybersecurity Ventures.<br />
03<br />
4<br />
CYBERSECURITY<br />
AS THE WAR ON CASH ACCELERATES,<br />
MANY SHOTS WILL BE FIRED.<br />
WHO WILL TAKE THE<br />
MAJORITY OF THE DAMAGE?<br />
SOURCE: CYBERSECURITY VENTURES<br />
EVOLUTION OF MONEY 62
M. NAMESON 12 / 25<br />
Disrupting<br />
M. NAMESON 12 / 25<br />
Payments<br />
The current payments landscape is<br />
moving at a blistering pace.<br />
Today’s technology allows for payments<br />
to be faster, cheaper, and decentralized.<br />
In just a couple of decades, coins, paper<br />
money, and plastic cards are being<br />
rendered archaic relics of the past.<br />
Digital payments are taking over.<br />
The ubiquity of smartphone ownership, combined with<br />
these disruptive technologies, make mobile payments<br />
one of the quickest growing markets in existence.<br />
Mobile Payments Market (Global)<br />
$2,849B<br />
$3,000B<br />
Many technologies are still emerging to reach their full potential<br />
CAGR*<br />
39.2%<br />
$2,500B<br />
$2,000B<br />
$1,500B<br />
$1,000B<br />
P2P payments<br />
Blockchain<br />
Near-field<br />
communication<br />
Facial recognition<br />
$392B<br />
2014 2020E<br />
$500B<br />
$0<br />
*Compound Annual Growth Rate<br />
63<br />
SOURCE: FUTURE MARKET INSIGHTS
To see the potential of payment<br />
markets, just look at China:<br />
China’s third party internet payment market was<br />
estimated at RMB 19.2 trillion ($2.4T) in 2016,<br />
with a year-on-year growth rate of 62.2%<br />
according to iResearch.<br />
The up and coming alternative payments market<br />
is growing at an astonishing speed, providing<br />
many opportunities for investors.<br />
China<br />
USD $2.4tr<br />
62.2%<br />
YOY Growth<br />
Cryptocurrencies are a key example, having already soared<br />
past a total market capitalization of over $600 billion.<br />
Bitcoin Ethereum Bitcoin Cash<br />
1,000+ other<br />
currencies<br />
$234B<br />
$266B<br />
$75B $42B<br />
SOURCES: RESEARCH, COINMARKETCAP (DEC 31, 2017)<br />
EVOLUTION OF MONEY 64
Cryptocurrency experienced a breakthrough year<br />
in 2017. Bitcoin skyrocketed 10x in value, breaking<br />
the $10,000 psychological barrier. Here is its<br />
journey to that landmark valuation.<br />
JANUARY<br />
China cracks down on<br />
Bitcoin, partly to control capital<br />
outflows – transactions over<br />
50,000 yuan must be reported<br />
MARCH<br />
The number of GitHub<br />
projects related to<br />
Bitcoin passes 10,000<br />
2017 was the year the ICO<br />
went mainstream as a funding<br />
mechanism. Cumulatively,<br />
$5.7 billion was raised by ICOs.<br />
According to a 2017 report by<br />
Mangrove Capital Partners, the<br />
average return of 204 ICOs<br />
sampled was 1,320%.<br />
BITCOIN PRICE<br />
(USD)<br />
2017<br />
JAN<br />
FEB<br />
MAR<br />
APR<br />
95%<br />
95% of all ICO funding<br />
(all time) was raised in 2017.<br />
Over $1.4 billion was raised in<br />
ICOs in December 2017 alone.<br />
ICO FUNDING<br />
(MILLIONS)<br />
$2.32<br />
$17.00 $19.42<br />
$103.74<br />
All previous ICOs<br />
$294.8<br />
65
MARKET CAP<br />
$25B $50B $100B<br />
MILESTONES<br />
MAY 4<br />
138 days<br />
$1,000 to $2,000<br />
AUGUST 1<br />
Bitcoin forks into two digital<br />
currencies, Bitcoin (BTC)<br />
and Bitcoin Cash (BCH)<br />
A hard fork is when a cryptocurrency’s<br />
code is altered, resulting in an old and<br />
new version (i.e. two currencies)<br />
23 days<br />
$2,000 to $3,000<br />
SEPTEMBER 4<br />
People’s Bank of China<br />
announces a freeze<br />
on ICO funding<br />
AUGUST 5<br />
63 days<br />
$3,000 to $4,000<br />
SEPTEMBER 12<br />
JP Morgan’s<br />
Jamie Dimon calls<br />
Bitcoin a “fraud”<br />
SEPTEMBER 8<br />
It’s leaked that China is<br />
shutting down all Bitcoin<br />
exchanges in the country<br />
SEPTEMBER 28<br />
South Korea bans<br />
raising money<br />
through ICOs<br />
OCTOBER 20<br />
61 days<br />
$4,000 to $5,000<br />
10 days<br />
$5,000 to $6,000<br />
OCTOBER 24<br />
Bitcoin<br />
Gold fork<br />
13 days<br />
$6,000 to $7,000<br />
OCTOBER 30<br />
Vietnam bans<br />
Bitcoin and other<br />
crypto payments<br />
2 days<br />
$9,000 to $10,000<br />
7 days<br />
$8,000 to $9,000<br />
17 days<br />
$7,000 to $8,000<br />
$10,000<br />
$9,000<br />
$8,000<br />
$7,000<br />
$6,000<br />
$5,000<br />
$4,000<br />
$3,000<br />
$2,000<br />
$1,000<br />
Between January 1 and<br />
December 31, 2017, Bitcoin’s<br />
market capitalization surged<br />
14x to reach a whopping<br />
$220 billion. It remains to be<br />
seen whether cryptocurrency<br />
can reach mainstream<br />
adoption, or whether it is a<br />
speculative bubble ready to<br />
burst. One thing is for certain:<br />
investors all over the world<br />
are watching closely.<br />
MAY<br />
JUN<br />
JUL<br />
AUG<br />
SEP<br />
OCT<br />
NOV<br />
DEC<br />
$232.04 $462.03 $574.78 $134.15 $607.49 $947.96 $840.94 $1,442.09<br />
SOURCES: COINDESK, COINMARKETCAP, MANGROVE CAPITAL PARTNERS<br />
EVOLUTION OF MONEY 66