Thinking differently about how we store capital
There's an investment thesis gaining notoriety online and even on traditional media based on a concept we have been talking about in the column for some time. I, however, was not clever enough to give the "trade" a name, but JP Morgan coined an apt phrase for this idea earlier this year. The concept is now being called "the debasement trade."
I will take the term "debasement trade" and expand it into a broader context I have been exploring -- one I call "fiat debasement." Fiat debasement is the notion that the governments of the world, primarily the U.S., the European Union, Japan, China, Brazil and even Australia have, through poor governance, deficit spending, corruption and general incompetence, mismanaged their respective fiscal houses to a point where the various fiat currencies issued by their central banks are being debased.
When we say "debased," the term is being used to describe a general loss in the value and appeal of using fiat currency to store capital. As economic actors in the U.S. economy, we primarily perceive this debasement as the price for goods and services going up -- which we of course refer to as inflation. We all know the U.S. economy has been plagued by a more rapid inflation since 2021, and longer-term grinding inflation going back decades. Whether we like it or not, the inflation occurs under both political parties, so this isn't a red team, blue team thing, and blaming the other party is not going to help anyone address this persistent trend. So let's dig in.
What is the debasement trend? The viability of any currency is based on a couple key features which must be agreed upon by its users. First and foremost, the currency must serve as a medium of exchange -- people using it must be willing to trade labor, goods and services for it in the context of a voluntary transaction. I work for you, you pay me in dollars, I take those dollars and buy stuff. This is how our economy works, and I don't see this changing in my lifetime.
Moving on, the currency must also serve as a unit of account. When we talk about the value of assets in America, the conversation is based on the dollar value of those assets. No one values homes or cars in gold, or beanie babies, or even cryptocurrency (sorry, crypto disciples). This unit of account feature of fiat currency requires us to count our wealth in the units we call dollars. I also don't see this changing anytime soon.
The third critical feature, however, is that the currency should serve as a store of value -- and this is where the debasement theory comes into play. We already know money left in a non-interest-bearing state (like cash in the mattress) will lose purchasing power over time due to inflation. The debasement theory goes beyond the concept of simply losing purchasing power. Debasement posits that capital stored in fiat currency will also lose actual asset value, particularly in the context of other potential assets the capital could be stored in -- such as real estate, gold, some cryptocurrency and stocks. Said simply, under debasement theory these other assets may appear to go up in value over time, not because of fundamental supply and demand forces, but simply because we are valuing them in fiat currency which is actually losing its ability to store value.
I know this is complicated for a Sunday morning, but it's important. Fiat debasement requires people to think differently about how capital is stored, without thinking differently about the way the currency is earned and spent.
Debasement now acknowledges governments cannot be expected to reform. It also acknowledges the only fiat currency more poorly perceived than the U.S. dollar is just about every other fiat currency in the world, so the topic of the dollar losing reserve status becomes only marginally relevant if the dollar remains the best of the worst world fiat options.
When we dispense with the apocalyptic drama so often surrounding currency discussions, and simply realize we all need dollars to survive -- and this is not going to change -- but at the same time will only become less wealthy and secure over time if we decide to hoard excess capital in dollars instead of storing them in assets over time, a productive framework begins to emerge.
While debasement does not dispense with the need to balance short-term and long-term money needs, and account for personal needs for liquidity and tolerance for financial market volatility, it does require we think differently about how we store our capital. It also helps explain many of the asset value trends that have occurred over the past decade.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
