Monetize this, but not that

Part I: The meaning of monetization:

When fiat money starts losing its store of value attributes, (e.i. when its purchasing power drops), people turn to “monetize” other assets that preserve value better - and use them as “money” instead.

Monetization literally means turning something into money. For the purposes of this essay we define it as: the act of using or trading a commodity or asset primarily as “money”, with the asset’s intended productive use becoming a secondary consideration.

The closest modern example would be residential real estate in large U.S. or Canadian cities. In Canada, the price of residential real estate has become so disconnected from the underlying economy, that it displays clear signs of being monetized. A few examples:

Just this year, the average price of a home in Canada has already increased by $100,000 - and that’s just 6 months in.

According to Statistics Canada, the median household income in Canada was $76,000/year in 2020. Even assuming consecutive 8% increases from 2020 to 2023, the empty house has still “out-earned” the people living in it in 2023 - and it's not even June.?

Let me say that again, an empty house earns, on average, more than two people doing full time work over the same period.

Canadian & U.S. real estate, on average, preserves value better than fiat currency.?

Because of this dynamic people buy real estate to store their wealth. Renting the assets, or living in them, become a secondary consideration. Homes appreciate in value whether they are rented or empty. The appreciation of the asset over a year is such that it covers the foregone rent income. As a result, Toronto and other Canadian cities have a bad problem of “empty homes”. So much so that it had to pass a special tax for it.

A different way of saying this is: houses go up in “price” over time, not in value.?

Going up in price means you can sell the house at the higher price, but would barely have enough money to purchase a very similar house in a similar neighbourhood.?

If the house has gone up in value, you should be able to purchase a bigger/nicer house in a similar neighbourhood.?

When a house goes up in dollar terms, more often than not it is simply maintaining the original purchasing power of your dollars - it is not giving you additional purchasing power. To demonstrate this, look at the chart of Canadian real estate prices vs. the Canadian money supply below:

Part II: Permissioned Monetization

Modern economies establish incentives and regulatory requirements that favor the monetization of certain assets, such as government bonds, the local stock market, and local real estate, while disfavoring the monetization of other assets, such as gold and Bitcoin. This deliberate decision serves strategic goals.

The primary goal is to prioritize monetization of assets that help governments maintain power, while preventing society from monetizing other assets that the government may not consider strategically important for the same purposes. Let's examine the monetized asset classes and the reasoning behind each one:

Monetized Asset 1: Government Bonds

After the U.S. went off the gold standard in 1971, it had a big narrative problem. Because gold is clearly a monetized commodity, if its price increased in U.S. dollar terms, it meant that people were choosing to save in gold, and not the U.S. dollar. Gold going up in price undermines the trust in the U.S. dollar. As with Bitcoin, there would be no other reasonable explanation for its increase in price other than “the dollar is doing poorly”.

The government needed central banks globally to monetize (or purchase) a different asset for their reserves. To accomplish this, it first orchestrated an arrangement whereby key oil-exporting countries would price and sell their oil in U.S. dollars, and invest their excess U.S. dollar savings in U.S. government bonds. This would ensure military protection from the U.S., and “peace” in the region.?

Similarly, with China the U.S. “traded” access to its consumer market for Chinese exports, in exchange for China using the excess savings from its sales to invest in U.S. government bonds. If you look around at which central banks are holding the most U.S. treasuries, you’ll find a lot of U.S.-aligned countries.?

Additionally, it passed local regulation that forced its domestic banks to invest client deposits into U.S. government bonds.?

All of this caused Central Bank gold reserves to decrease from the mid 1960s until 2009.

Conversely, the amount of U.S. government debt held by foreign central banks exploded during the same period…

When the public asks “why are U.S. government bonds doing so well” - the answers can range from “Because we are the strongest economy in the world”, to “because people trust the United States of America and its army”.. or insert any other patriotic response.

Monetized Asset 2: The Stock Market

The next asset class that governments prioritize becoming monetized is its local stock markets. Again, there are clear strategic reasons for this:

For one, the local pension and retirement programs are largely dependent on increasing stock prices. To incentivize this behaviour, governments create “tax-sheltered” options for local investors to pour money into their local stock markets. This ensures that more people will be contributing to the pie over time.

An active stock market allows for capital formation and local companies to access capital to grow. This also benefits the country in that companies with capital can invest and create more jobs - jobs that then contribute to the health of the local stock market.

By encouraging participation from local investors, governments also enhance the liquidity available in that market, which in turn draws more participants and investors from other markets globally.?

The combination of deep liquidity, fast price discovery and property rights almost forces all global investors to participate in the U.S. (and to some extent the Canadian) market.

In summary, a rising stock market keeps local investors and companies happy. Happy investors and happy companies means happy voters.?

And most importantly, if and when anyone asks why the stock market is going up in price, you can say “because U.S. companies lead every industry”, or “because there’s a premium to listing in the U.S. stock market”, “because the U.S. economy is roaring and international investors want to participate” - or any other patriotic response.?

In reality, the answer is much more trivial. Look at the S&P 500 chart priced in gold below:

As we can see, the S&P 500 might be breaking record after record when priced in U.S. dollars - but if we price the S&P 500 in gold, the performance becomes lackluster. From the chart we can see that the S&P 500 is not worth a lot more in gold terms today than it was in the late 70s. Almost all of the appreciation has been the dollar getting weaker - not the S&P 500 becoming more valuable as reflected by its price in gold.?

But, similar to government bonds, saying that U.S. companies got stronger sounds a lot better than saying the U.S. dollar got weaker.

Monetized Asset 3: Real Estate

As we showed in the first example, real estate is a monetized asset class in the U.S., Canada and other developed countries. Similar to the other monetized asset classes above, there’s a clear strategic reason that governments allow this.?

First, monetizing real estate leads to consumption of more real estate. This, in turn, leads to demand for real estate construction, which is a very physical activity and creates jobs of all levels in the economy.?

By incentivizing home ownership for its local citizens, and allowing for the continued monetization of the asset class, the government allows its citizens that own property to build wealth, which they can later redeploy into the economy. The proverbial American Dream.?

Last, and perhaps most importantly, is that the answer to “why real estate is going up in price” is socially acceptable and makes the government look good. Somehow, people still believe that “land is limited” (especially in Canada, hint hint), and that “we cannot build houses faster than people reproduce (or arrive into the country)” are sensible explanations as to why real estate prices go up. I find this very comical.

To demonstrate the difference, consider that the Canadian Money Supply has increased by roughly 34% since early 2020. And, unironically, the average price of detached properties in Toronto has increased by 31% since the pandemic.?

But I guess “your house is up in price because everyone wants to come to Canada” sounds a lot better than “you didn’t actually make any new money, we just printed 30% more dollars and your house is the same”.?

The first answer gets you reelected, the second one makes you look like a fool.

Part 3: Closing Thoughts

Government actions are often motivated by the need to get re-elected. To achieve this, they must be able to control the narrative. Monetizing the right assets and controlling the narrative means winning the election. However, if other assets are monetized and the narrative is lost, the election may be lost as well.

It is important to note that the assets that governments want to monetize have tight narratives that are positive for them.

The biggest problem governments face when allowing gold or bitcoin to be monetized is violation of the narrative. Increases in the price of bitcoin and gold cannot be explained in a way that is positive for the government. In fact, they expose mismanagement and reckless printing of currency. Bitcoin and gold are assets whose primary purpose is to protect value. If their prices are increasing, it means the assets or dollars they are priced in are becoming less valuable. This indicates that the government is not doing a good job.

Having more bitcoin or gold does not buy a government's debt, prop up their artificial real estate markets, or feed their unsustainable pension liabilities.

Holding bitcoin allows individuals around the world to opt out, protecting the value of their savings from monetary mismanagement. This creates independent voters with critical thinking, who can put a check and balance on the government. Ultimately, more people will see the benefits of this and become "bitcoiners", leading to a more transparent society. People do not need to be "fooled" into acting the way the government wants. We should all be educated about how the system works and empowered to improve it. Bitcoin gets us closer to that future.