The Dollar Going Off the Gold Standard: What Does that Mean?

Gold has hypnotized humans for millennia. Ancient Egypt, in particular, was a fan and used gold for everything from pyramid capstones and jewelry to masks, ornamental weapons, and funeral art for pharaohs. Historically, across nations, the precious metal symbolized wealth, status, and power. 

It wasn’t long before gold became the medium of choice for currency in many countries. Besides being eye-catching, gold’s unique qualities make it one of the few non-reactive elements that are easy to extract and carry. It’s also durable, has the right amount of scarcity, and is easily distinguishable from other metals.

The rise of the gold standard

The first recorded mint was around 650 to 600 B.C. in what is now modern-day Turkey. The stamped coins were a mixture of gold and silver and formed a convenient payment method. Other nations soon started using coins once they realized its practicality. 

Then around 800 A.D., during the Tang Dynasty, China paved the way by creating the first paper money. The government used these certificates to pay local merchants. It was only in the Song dynasty, in 1023, that the government enacted a law declaring only government banknotes as an acceptable payment method. These banknotes could be exchanged for metal coins, salt, or liquor. 

It would take centuries for other countries to adopt a paper currency, and centuries more for the gold standard to come into being. The gold standard backs the value of money with gold so that people can convert currency into a set amount of gold. 

The U.S. established a united national currency in 1787 through the U.S. Constitution, which gave Congress the powers of coining money and regulating its value. The country used a mix of copper, silver, and gold coins until gold was pushed out of circulation by silver’s declining value. It wasn’t until 1834 through the Coinage Act that there was a shift back to gold. 

While the country flirted with paper currencies in the mid-1800s, it was with the National Banks Act in 1863 that the government established a national currency. Citizens could still redeem the money for silver or gold. On the other side of the ocean, the United Kingdom’s Parliament had already passed the 1844 Bank Charter Act, where Bank of England notes were recognized as legal tender and fully backed by gold. Congress would eliminate silver as an exchange option only in 1900 through the Gold Standard Act.

The first hit to the gold standard

Up until the early 1900s, the United States had a big problem that put the nation’s financial stability at risk; bank runs. Banking panics occurred when people withdrew money from banks because they doubted the bank’s solvency. This was often brought on by another nearby bank closing or market conditions. Ironically, large crowds withdrawing money at once often drove otherwise stable banks to close. 

Bank closures during runs were a symptom of another issue with the country’s monetary system—that of its legal tender not being able to grow and contract to meet consumer demands. Congress created the Federal Reserve in 1913 in response, commonly referred to as “the Fed,” to address the problem. 

The Fed was charged with maintaining the gold standard, but it indirectly loosened strict ties between the dollar and gold. To keep banks afloat during panics, the Federal Reserve could create Federal Reserve notes, a new form of money, and only needed to equal in gold a fraction of the money issued.

Major historical events causing the gold standard to crumble

Only a few short months after Congress created the Fed, the U.S. and European governments temporarily suspended the gold standard to fund military expenses during World War I. By the end of the war, many countries returned to a modified gold standard or abandoned it entirely. For instance, Germany couldn’t go back to the gold standard because much of its gold was lost in making payouts to other nations for the damages it caused. 

Countries realized during the war that it wasn’t necessary to tie their currency to gold for a healthy economy. In fact, when the Great Depression hit the United States in 1929, the gold exchange standard contributed to deflation and high unemployment rates in the world economy. As the Great Depression worsened, countries still clinging on to the gold standard dropped them entirely—including the U.S., which completely abandoned it in 1933

During that year, President Franklin D. Roosevelt issued an executive order stating that all citizens turn in their gold. Cash also couldn’t be converted to gold anymore. Then in 1934, Roosevelt enacted the Gold Reserve Act, which built up the nation’s gold reserve by banning gold’s export, stopping its convertibility, and restricting its ownership. In turn, the government raised gold’s price to $35 per ounce to inject more money into the economy and help the nation recover from the Great Depression. 

During World War II, gold’s role was also severely hampered in the international landscape under the Bretton Woods Agreement of 1944. Whereas before countries could exchange their currency for gold, allied countries agreed to redeem their money for dollars instead—effectively transitioning the world to a U.S. dollar standard instead of a gold one. The agreement made sense because the U.S. held three-fourths of the gold supply and countries already used dollars to settle accounts with one another.

How inflation and a looming gold run became the last two nails in the coffin

Since under the Bretton Woods Agreement countries weren’t converting currency to gold, there was less of an incentive to keep currency values the same as official rates. The U.S., being the key player of the system, also issued too many dollars to keep the gold price at official rates and prices stable in the economy. The resulting inflation only worsened in the ensuing years. 

Decreasing domestic exports as other nations like Japan became more competitive also meant that, eventually, there was more foreign-held currency in the world economy than gold. This made it more desirable to convert U.S. dollars to gold and threatened the world’s confidence in the dollar and Bretton Woods System. 

Fearing a gold run and desperate to address domestic inflation, in 1971, President Richard Nixon announced the country would stop converting dollars to gold at a fixed value, completely abandoning the gold standard. 

In 1976, the government officially severed any ties to the gold standard by changing the dollar’s definition to remove any references to gold. The dollar became purely a fiat currency, meaning paper money and coins are legal tenders only because the government says so and not because they are backed by gold.

The impact of moving away from the gold standard on monetary policy

Liaquat Ahamed, a professional investment manager and author of the Pulitzer prize winner, “Lords of Finance: The Bankers Who Broke the World,” states in his book that the break with gold was mostly responsible for pulling the nation out of the Great Depression. It allowed the U.S. government to adjust the supply of money in the economy and influence interest rates. In later years, Nixon’s announcement also stopped dollar-rich foreigners from emptying the nation’s gold reserves.

But other side effects of moving away from the gold standard are arguably not as great. Because currency isn’t backed by gold, it’s much easier to print and borrow money, which might explain why the U.S. debt is $22.8 trillion (as of 2019). More dollars in the economy also creates inflation and cheapens the dollar’s value. When dollars don’t stretch as far as they used to, it’s the nation’s poorest who struggle the most to survive and make ends meet. 

Could we see a comeback of the gold standard?

Going back to the gold standard enforces more accountability in government borrowing and money printing. But, in practicality, a shift back to the gold standard is more idealistic than realistic. 

The United States only had a genuine gold standard for 54 years of its history, from 1879 to 1933. Before that, it had a bimetallic standard, and afterward, it was only a semi-gold standard that gradually moved to a fiat-only standard. And the move to pure fiat happened because it wasn’t possible to maintain links to the gold standard while ensuring the nation’s economic stability. What worked in the past wouldn’t work again in today’s complicated money system.

The gold standard was useful in establishing a financially secure economy during simpler times. However, most world economies are now too complex to rely on limited gold reserves or another commodity. In addition, the U.S. also doesn’t have enough gold at today’s fixed rates to pay off debts with foreign investors. With the move back to gold is almost an impossibility, the season is ripe for non-commodity backed types of currencies to flourish in today’s economy.

CeFi vs. DeFi – What’s the difference and which one is right for you?

With an ever-expanding asset class known as “cryptocurrency,” there are always new terms popping up and it’s easy to get lost among the crypto jargon. One of the larger points of discussion over the past year has been around platforms for crypto-backed lending — particularly around DeFi and CeFi. What do these terms mean and what’s the difference between them?

CeFi stands for centralized finance. Companies that fall into this category include SALT, Coinbase, and Kraken, whereas DeFi, which stands for decentralized finance, includes protocols like AAVE, Compound, and Anchor. The main difference between these two platform types is the degree of centralization for the decision makers of the financial services platform a user can engage with. CeFi platforms are typically governed by corporate entities that can create their own lending requirements such as  deposit minimums,  the KYC (Know Your Customer) requirements, and how the profits of the platform will be handled subject to rules and regulations where the company is domiciled and may be subject to reporting requirements. With DeFi, the goal is to move toward decentralization where the community will be the body that governs the DAO – creating the rules, which may include decisions around how to pay developers, interest rate methodologies to price loans, fees and rewards for providing liquidity to pools, etc. By holding the governance tokens of the Defi platform, you will typically be granted voting rights, able to propose changes to the protocol, and permitted to participate in making decisions regarding the future growth of the platform (partnership, etc. In theory, eliminating the principal-agent issue in financial services firms should provide a more streamlined offering with optimal resource allocation. 

Having laid out the clear differences between CeFi and DeFi, you can see there are pros and cons to each.  On one end, CeFi helps to onboard the masses, as it is generally more user-friendly and more widely trusted given it tends to mirror the security and look and feel of traditional financial products. Most importantly, CeFi companies are “centralized entities” with officers and board members associated with government registered entities rather than a smokescreen of anonymous individuals that can be anywhere in the world. Additionally, CeFi offers customer support with live agents versus asking a community of individuals that may not be trained or knowledgeable about the product offering.  With SALT for example, if you’re a loan holder who clearly attempted to make a deposit to cure the health of your loan during a market crash and had trouble getting the transaction to go through due to high transaction volume, we try our best to work with you to make it right. With DeFi platforms however, this is not the case, as the platform only functions according to the underlying smart contract and user are required to interact with the protocol using browser wallets that require a certain degree of technical knowledge.  Finally, the security risk embedded in smart contracts creates reluctance among institutional investors; constantly defending against the numerous attack vectors are difficult for the average person to keep up with. 

So how do you choose between DeFi and CeFi? Technically you don’t have to. Are you a tech savvy crypto user who likes security and ease-of-use, but is also willing to take on a bit more risk for greater flexibility? Or maybe you like being in the know about the inner workings of the various companies that make up the crypto industry and want to be well-versed in both platforms? If you answered yes to either of these questions, consider familiarizing yourself with both platform types and experiment (within reason) with what each platform type will allow you to do. If you’re someone who relies on crypto for its reputation of anonymity, the governmental interference in the CeFi world will likely taint your view of CeFi platforms, which means you may be better suited to DeFi. For those who value customer service and get prickly when they think about a company being run by an anonymous community, CeFi is likely the better choice for you.   

 

Whether you tend to side more with DeFi or CeFi, there’s no denying that CeFi is the best and only way to bridge to DeFi in the sense that you’ll likely need to use a CeFi platform to onramp and off ramp into  DeFi .  Perhaps this will change in the future and there will be easier ways to bypass CeFi and jump straight into DeFi or perhaps governments, by having control over CeFi platforms will always maintain some level of control over DeFi platforms, too. This then begs the question: how decentralized is decentralized finance? 

If you want to explore CeFi and are considering getting a loan backed by your bitcoin, ether, or another cryptocurrency, visit saltlending.com or click the button below to create an account.

Finance Strategists: Interview with CEO of SALT Justin English

image of Justin English, CEO of SALT

Introduction

Success leaves clues.

Finance Strategists sat down with Justin English, CEO of SALT Lending. He shared his thoughts on the past, present, and future of the company, as well as the insight he has gained from running the business.

Who is Justin English?

Q. Who are you and what’s your background?

I’m Justin English. I joined SALT as CEO in May 2020. Prior to my role as CEO, I was first and foremost an early customer and investor in SALT and began consulting for the company and serving on its board in fall of 2019.

Before joining SALT and entering the crypto space, I spent more than 15 years across the private equity, early stage venture capital, consumer products, supply chain, manufacturing, distribution, and consumer services industries.

An entrepreneur at heart, I’ve been personally invested with capital and have spent my career understanding business drivers to influence implementation in the real world, which has aided me in my ability to serve as an advisor to early-stage organizations as well as those that are growing and scaling.

Q. Who has been your biggest influence, and why did they have such a significant effect on you?

My college economics professor had a significant impact on my ability to think critically and bring insight into a discussion. Before each class, we were all expected to read The Economist and be prepared to discuss that week’s issue of the magazine. Our entire grade was based on these discussions and the insights we produced throughout them.

The exercise taught me to pay close attention to the nuances of the story or issue being discussed and formulate intelligent, thought-provoking questions as a result. I learned to identify the most common assumptions on which people would base the discussion and then question and poke holes in those assumptions. I’ve leaned on this tactic throughout my career and still use it today, as it always makes people stop and think, resulting in a more insightful discussion overall.

Q. Knowing what you know now, what advice would you have given your younger self?

I was extremely stubborn when I was younger and set on learning in my own way, through my own failures. If I could give one piece of advice to my younger self, it would be to use my resources and learn from the achievements and failures of those who came before me rather than repeat their mistakes and failures purely out of stubbornness.

Business

Q. What is SALT Lending?

SALT is a fintech company with a focus on crypto assets. Our mission is to build products that increase access to financial opportunities and give people more control over their ability to generate long-term wealth.

The first to offer crypto-backed lending, we accept crypto assets as collateral for cash loans, enabling crypto holders to get value out of their assets without having to sell or rely on the traditional banking system.

Aside from our lending product, we are excited about the upcoming launch of the SALT Card — a crypto-backed credit card that will allow customers to borrow against their crypto assets and use their crypto for everyday purchases without having to spend any of it, all while earning crypto rewards with every purchase.

Q. What makes SALT Lending different from its competitors?

SALT is different from our competitors in three key areas: the combined experience within our team enables us to continuously improve operational processes and make space for innovation; our management team and our ability to build and invest in value-creating technology (SALT Stabilization, StackWise, our Loan Management System, trading execution platform); and the fact that we’re leaning into transparency and compliance and have been a publicly reporting company since early 2021.

From a customer perspective, we often stand out for our customer service, as SALT customers love knowing that at any point, they can speak to a real person who can walk them through any issues they’re experiencing or answer any questions they may have.

Q. What led you to join SALT Lending?

Having started as an early investor and SALT customer back in 2017, I was among the first to ever hold a crypto-backed loan and explore SALT’s platform. I experienced the benefits and pain points of the product first-hand and later joined the Board of Directors, which enabled me to provide feedback on the technology and product offerings and offer guidance on what improvements could be made.

I continued to be a customer throughout my engagement with SALT and took on the role of CEO in 2020 with the intent to improve our lending product and expand our product suite to provide greater value for our customers.

Since becoming CEO at SALT, my goal has been to create products that incentivize people to develop strong financial habits that will enable them to build generational wealth– the SALT Card is the first manifestation of this goal, as we seek to take the traditional concept of credit and disrupt it.

With this product and future products, we want to change the way people think about debt and credit and empower them to move from building up “bad debt” to generating wealth simply by developing better habits and getting more value out of the assets they already own.

Q. What has the experience of building the business taught you?

While I’ve learned a lot from building the business at SALT, some of the greatest things the journey has taught me are leadership and softer skills, which I’ve come to realize are way more important than I’ve previously given them credit for.

Aside from that, I’ve learned the importance of pragmatism when it comes to making business decisions. I’ve seen so many peers fall into the trap of becoming too emotionally invested in something to the extent that the sunk cost bias clouds their judgment and creates a tunnel vision mindset.

I’ve always been a pragmatic person, but my experience as an entrepreneur and my current role as CEO at SALT have helped hone my ability to compartmentalize and look at things from different angles. I make a conscious effort to take a step back and look at problems from a really plain, simplistic view.

For me sunk cost equates to learning, not failure. In leading a business I’ve learned that when it comes to problem-solving and decision-making, you have to invest time and energy and take note of the process and the journey as you go along.

With this mindset, I’m able to emotionally detach from the investment itself and look at it not as a sunk cost, but as a necessary process that has enabled me to make more informed, objective, and sound decisions.

Q. Where do you see things headed for you and the company in the next five years?

As crypto becomes more widely adopted and emerging businesses continue to challenge the traditional financial system, we want to help consumers achieve financial freedom by shifting the way they think about credit and wealth.

The traditional system does not set consumers up for financial success. In fact, it does the opposite, as it is structured in such a way that encourages the accumulation of “bad debt” and borrowing against future income to enable living outside of one’s means.

Once consumers fall into this trap, it’s extremely hard for them to get out of it and it becomes cyclical. We want to fundamentally change the way people think about their finances by educating them and building products like the SALT Card that incentivize good habits like saving and building generational wealth.

Note: This article was originally published on Finance Strategists.

Cryptocurrency Investments Within Traditional Portfolios

image of portfolio featuring real estate and other traditional investments mixed with cryptocurrency investments

Disclaimer: Buying cryptocurrency comes with risks. This article is for informational and educational purposes only and does not constitute investment or financial advice.

Bitcoin was introduced in 2009 as a decentralized, peer-to-peer payment system that relied on digital coinage rather than central-bank-backed currency. The anonymity and transparency of the blockchain technology on which Bitcoin operated opened the door for other forms of digital currency — cryptocurrency — as an exchange medium.

As demand for digital monies increased, so did its potential value as an asset. This led speculators to acquire Bitcoin, Ether, and other forms of cryptocurrency for potentially large returns. And, despite its volatility and relative newness, cryptocurrency is quickly gaining acceptance among investors as a diversification mechanism for portfolios.

A glance at the glossary: Traditional and alternative investments

Traditional investments in a typical portfolio consist of stocks, bonds and cash. The values of these assets are pegged to markets and trading platforms, as well as economic fundamentals. Many of these holdings are also regulated by government agencies. For example, stocks traded on the New York Stock Exchange are regulated by the U.S. Securities and Exchange Commission.  

On the other side of the (asset) coin, alternative investments consist of everything else that can increase or decrease in value. The coin or stamp collection gathering dust in your dresser’s top drawer could be considered an alternative investment as it could increase in value over time. Real estate, intellectual property, and artwork also fall into this category.

Unlike traditional investments, alternative investments are often (not always) “non-correlated,” meaning their appreciation or depreciation isn’t tied directly to the overall market. Rather, their value rises and falls, based on demand and perceived worth by other investors. Your coin collection will appreciate if other coin collectors and investors perceive value in that asset (and are willing to pay you for it). When used correctly and sanely, alternative investments provide great diversification to portfolios.

Currencies: Exchanges and investments

Now, back to cryptocurrency. Bitcoin and others are mediums of exchange, similar to fiat currencies such as yen, dollars and euros. And, investors buy fiat currency as alternative investments through the Foreign Exchange Market or FOREX. Cryptocurrency can also be considered an alternative investment, as it can increase (or decrease) in value. Furthermore, as it is not correlated to markets or the economy, it can offer portfolio diversity.

But, unlike government-backed bills and coins, cryptocurrencies have no FOREX-type exchanges. Cryptocurrency exchange-traded funds (ETFs) do exist in some countries, but the U.S. has yet to authorize this form of trading. The closest is Grayscale Investment Trust’s Bitcoin Investment Trust (GBTC), which allows investors to trade in shares of the trust, as opposed to actually buying and selling digital coinage. 

Very high-risk hedge cryptocurrency funds are available for investment, but most of these require a large initial investment fee. What this means is that, if you are interested in adding cryptocurrency to your portfolio, you will need to find a cryptocurrency exchange, buy the coins or tokens directly, and secure them in a digital wallet.

Protecting yourself, diversifying your portfolio

Cryptocurrency is a viable alternative investment. To use it as such, you need to take steps to ensure that it brings positive value to your portfolio. Here’s how.

Educate yourself. Take time to thoroughly research and understand your targeted cryptocurrency. Know its track record, value, and potential returns, as well as longevity. You don’t want to find yourself with disappearing tokens or coins if the cryptocurrency you acquired and stored suddenly bites the dust.

Monitor consistently. Unlike traditional investments and certain alternative investments, your cryptocurrency holdings will require ongoing observation and scrutiny. It’s essential that you keep on top of cryptocurrency news and trends, to know when it’s time to buy or sell your holdings.

DYOR. If you hear something about a digital coinage that’s too good to be true, it probably is. Do your own research and look out for red flags like “Ghost” team members. The term refers to those who hide behind anonymous identities or fake profiles, versus live individuals, who are happy to share their experience and credibility in the space. Because crypto is unregulated, it’s on you, the investor, to take the time to carefully investigate the seller and its claims before making a purchase.

Restrain yourself. Keep the percentage of crypto in your portfolio to a level that you’re truly comfortable with; experts suggest that if you’re still feeling it out, dedicating 1% of your portfolio to cryptocurrency will provide enough exposure, without excessive downsides. Another study, released by the National Bureau of Economic Research, indicates that 4% to 6% of a portfolio should hold Bitcoin, with a minimal investment of 1% of assets in the space.  Of course, it’s all about your risk tolerance and there’s no right answer, which is why the previous DYOR step is so essential.

A balancing act, with care

Even with their volatility and vulnerabilities, cryptocurrencies can be useful when it comes to adding variety, and potentially reducing risk to your traditional investment portfolio. But, investments in Bitcoin, Litecoin, Ether, or some of the newer digital coins are not for the faint of heart. If the goal is to add crypto to your holdings, do so carefully, and back your actions with plenty of research. Also it’s important to understand that if your intent is to use crypto investments to diversify your portfolio, be wary of letting yourself get too caught up in price speculation and making a fortune.

SALT introduces StackWise, offers crypto rewards to loan holders

StackWise logo with wallet showing bitcoin rewards

We’re excited to announce StackWise, our latest product for crypto-backed loan holders. With StackWise, you get a portion of your monthly payment back to your wallet in the form of crypto rewards. Rewards are available in Bitcoin, Ether, or USD Coin — you can choose your reward type and can change it any time prior to your next monthly payment. Once you start stacking crypto rewards, there are a couple of ways to use them: 

  1. Leave the crypto rewards in your collateral wallet to reduce your loan-to-value ratio (LTV) and minimize the risk of Stabilization 
  2. Withdraw your crypto rewards and use the funds as you wish

Note: Anyone with a crypto-backed loan that originated in 2022 is eligible for StackWise. If you have a loan that originated prior to 2022, contact [email protected]. Our Lending Team is ready to help you start earning StackWise rewards by refinancing your loan or extending the current loan terms.

Keep reading for more details on StackWise and how it works.

How it works

How do I know how much of my monthly payment I’ll get back?

With the launch of StackWise, all loans are priced at an interest rate of 9.99% with a net rate (the actual rate after crypto rewards are factored in) that depends on your chosen LTV. You can reduce your net rate even further by redeeming SALT Tokens. Once you know your net rate, you can determine your rewards rate. For example, if you take out a loan with a 30% LTV and you do not redeem SALT Tokens, your net rate will be 7.50%, meaning your rewards rate will be 4.49% (9.99% interest rate – 5.50% net rate = 4.49% rate reduction or what we call “rewards rate”). 

chart showing lending rates and rewards rates

Taking this example, if the loan amount is $5,000 with a 9.99% interest rate, you’d expect to pay $499.50 in interest over the life of the loan. 

With StackWise however, your rewards rate is 4.49%, which means you’ll get back 4.49% of the total loan amount over the course of the loan, effectively making your net rate 5.50%. Therefore if the term of your loan is 12 months, you will receive $18.71 back in crypto rewards each month for the duration of your loan. So instead of paying $499.50 in interest, you are getting crypto back each month, meaning your actual interest paid at the end of the loan will be $274.98, resulting in $224.52 saved on the cost of your loan. 

And remember, the lower the LTV you choose, the higher your rewards rate and savings will be. Add SALT Tokens to the mix, and you can save even more on your loan (and no, you can’t buy SALT from us, but if you already hold SALT, you can redeem it for a lower net rate).

UI of StackWise on desktop showing rates, monthly payments and rewards

How do I review my StackWise rewards in my dashboard?

You can review your rewards anytime via the SALT desktop or mobile app. Once you login to your dashboard, you’ll see everything from your rewards rate to rewards schedule, to your next reward amount and your total rewards earned. You’ll also see a section titled “Receive Rewards in,” which allows you to change your selection between BTC, ETH, and USDC. For example, if you set your rewards to BTC for the first 2 months of your loan and then decide to switch to USDC for the remaining months, you’ll see your initial BTC rewards in your Bitcoin wallet and then will begin to see your following rewards in your USDC wallet.

image of UI for StackWise rewards schedule

Don’t have a loan with us yet? We’d love to work with you!

The most confusing economic concepts explained: Negative interest

negative interest rates_ man standing next to bag of money

The Fed’s stated interest rate, which determines just how much lenders can get back on their investments, has been abysmal over the past several years; cash investments, particularly in traditional savings and checking accounts, are currently one of the lowest-earning opportunities available.

Is it possible to get worse for investors? In part four of our series on the most confusing economic concepts explained, learn what a negative interest rate is and how it affects you and your investment strategies.

What are negative interest rates?

Interest is expressed as an annual percentage rate or APR. For as long as many of us can remember, APRs have always been positive. For example, if a bank loans you money and you get a positive interest rate (say 3.5%), they’ll get the original loan amount back (the principal), plus their earnings which are based on the interest rate you received. Even in times of economic trouble, a positive interest rate, or anything above 0 percent, ensures that the lender makes something from their loan. They may not profit after operating expenses, but they will make something. 

Anything under 0 percent is called a “negative interest rate.” This can cause issues for the market, as it actually costs banks money to lend out cash. What’s their incentive to do so if they can’t break even? There may not be one. Some of the riskier loan opportunities to businesses could dry up, investments would lose significant value, and the everyday consumer with cash in interest-bearing bank accounts may find themselves actually paying the banks to store their money. Not ideal!

How do negative interest rates work?

In the instance of a negative interest rate, consumers would be more likely to take on debt, since it would be much cheaper to make those monthly repayments. From houses to cars, cash-strapped households may find it the perfect time to borrow, all while investors shy away from cash assets that are set to lose money during a negative interest rate period.

So, it’s good for loan demand, since it’s so cheap to borrow, but banks would have no reason to take on unnecessary risk. Cash and fiat-based systems wouldn’t perform well, and investments could shift to something more tangible until rates bounce back to positive.

How do negative interest rates affect you?

Is there a chance of negative rates in our future? The U.S. doesn’t currently have much experience with a negative interest rate. While European countries have taken the plunge in an effort to provide consumer relief, the Fed isn’t an advocate of negative rates and even came out with projections of keeping things just north of zero until at least 2022. However, the perfect storm of COVID-response stimulus spending, which has caused the Fed to put over $120 billion a month into the economy, has some fearing hyperinflation. 

In either hyper-inflation or negative rate scenarios, investors will find it less reasonable to stick with traditional cash-based investments. They may seek out “alternative” investments, including bullion and crypto. Regardless of your investing strategy, it’s smart to look at examples of times we have come close to negative interest rates and even watch other countries as they navigate these uncertain waters. Negative rates may be a way to get consumers to start taking risks again, but, for investors, it’s a scary prospect that few have really prepared for. 

Has inflation got you worried about the future of cash markets? Sign up for our newsletter, and receive updates on ways you can use your crypto to your advantage—even in times of negative interest and hyperinflation.

The most confusing economics concepts explained series part 3: Supply and demand

scale showing supply and demand

Have you ever wondered why the price of something might change suddenly? Like, for instance, the skyrocketing prices of above-ground swimming pools amidst the coronavirus pandemic? One common reason lies in the concept of supply and demand. This economic principle has a very real effect on how products are priced and your ability to obtain the goods and services you want and need.

What is supply and demand?

“Supply and demand” is a fundamental economic model that explains how the availability of a product or service (the supply) and the number of people who want to buy it (the demand) determine its price. For example, the supply of a popular, limited-edition pair of sneakers can determine how much people will pay for them. If there is a limited supply, and they are set to sell out quickly, the asking price can be higher than a similar sneaker with a much larger supply that people know they can buy at any time. However, there is a limit to the asking price. Even enthusiasts will eventually refuse to buy at a certain price point.

As a consumer, you only have so much money to spend, and if you buy a pair of sneakers, you can’t buy anything else with that money. So the cost of the sneakers has to match their value to you. The seller must try to ask for the highest amount they can without tipping the scales and turning off your sneaker demand. This relationship, or tension between supply and demand, can keep the prices for many goods within a reasonable range—provided they aren’t interfered with artificially.

There’s more to it

Whether you look at shoes, real estate, or stocks, the less there is of something, the more the seller can ask for it—assuming there’s a real demand. For example, there may be only two houses available in a particular lakefront residential area, but if the water is polluted or if it’s next to a noisy highway, the houses will still be hard to sell at anything but a very low price because the demand will be poor. However, if the location is desirable, the lack of choices will increase the demand and prices. 

There are also some instances where supply can’t keep up with demand, and the seller can continue to sell at the highest price possible. The price may be kept high until the demand falls, or the supply increases to the point where there is no threat of losing out by waiting for a better price.

Perceived supply and demand matters

One final thing to know about supply and demand is that it doesn’t depend on facts to influence the market. A perceived supply can determine price just as much as actual supply. When consumers worry that there may be a shortage of an important household staple, it could cause them to assume a limited supply and run out to buy more than they normally would. 

We saw this in the spring of 2020 when COVID-19 was hitting the news cycles and people were stocking up on toilet paper. The uncertainty of the situation caused people to speculate that there may not be enough toilet paper for their needs, so they bought more than usual and prompted a shortage, as well as a price increase. This caused the perceived threat to become (at least for a time) a reality. 

So whether real or perceived, supply shortages can drive demand. Further, demand can be reduced by supply surpluses. And this ongoing ebb-and-flow causes the prices you’re asked to pay to fluctuate. 

The Most Confusing Economics Concepts Explained: Purchasing Power

Purchasing Power, man looking at chart

Have you wondered why your dollars don’t stretch quite as far as they did last year or the year before? How about 10 years ago? Many factors continue to drive inflation up which, in turn, lowers what a dollar can buy. This leads us to the confusing economic concept we’ll explain this month: purchasing power. 

What is purchasing power?

Purchasing power refers to the number of goods and services that you can buy with an amount of currency. For example, if you can buy a month’s worth of food for a family of four with $500, your money has more purchasing power than when $500 can only buy three weeks’ worth of food. But why is purchasing power important?

Why is purchasing power important?

Purchasing power has far-reaching impacts from the individual level to the global economy. 

People need items like food, clothing, and shelter, and manage their budgets to meet those needs. When the cost of necessities becomes too high for the wages earned in an area, economic problems result. Excessive inflation and reduced purchasing power are hard on communities, and statistics have found correlations between crime and poverty

Purchasing power, inflation, and investments

There’s another aspect to purchasing power that’s important, however, and that is in relation to investing and the markets. When purchasing power goes down, it’s almost always due to inflation. For investors, this drop in inflation matters. Inflation can help them make more money on loans they issue to borrowers but it can also make some investments too expensive to participate in, such as real estate or bullion.

Hyperinflation, or the rapid inflation of currency (usually a rate of more than 50% per month), can be a sign of an unhealthy economy and can spook investors. It also may be very hard for small businesses to access the loans and lines of credit they need to expand product offerings or provide services to new areas. This can reduce activity in the market.

The global impact

The global impact of a lower purchasing power in many countries at once is real, as well. Significantly weakened economies have resulted from prolonged periods of hyperinflation and decreased purchasing power, which can lead to the destabilization of more than currency. An entire country’s credit rating may decrease, leading to opportunity losses for the country’s citizens, ruined trade agreements, and difficulty in achieving global expansion. In countries where hyperinflation is the norm, political unrest has often resulted. Lebanon saw a 50 percent increase in the cost of basic consumer goods, one of the factors leading to mass protests.

A steady decline in purchasing power

It’s not surprising that a dollar doesn’t buy near what it did 100 years ago ($1 in 1913 equals $26 in 2020). The history of purchasing power in the U.S. is a predicted one of decline. The dollar has consistently bought less decade after decade, with few exceptions. Significant historical moments, such as the oil crises in the 1970s and 1980s or the dotcom bubble of the 1990s have pushed purchasing power down more rapidly. Even with the dollar bouncing back here and there over the years, 1913 marked the high point of purchasing power for the U.S., and we have never returned to that level.

Solutions for diminished purchasing power

An out-of-control decrease in purchasing power can be catastrophic for an economy. When people can’t make their money stretch to buy the food or housing they need, the government may step in and try to quell the negative consequences. One way they may do this is by monitoring the consumer price index; then, the Federal Reserve may choose to drop interest rates to encourage borrowing, lending, and purchasing. Other mechanisms, like increasing minimum wage or offering tax incentives, are other methods to help bring purchasing power back up, at least temporarily.

While decreasing purchasing power can start small, usually at the household level, it has vast effects that can reach the global economy at large. What we see in a family’s budget, for example, may be a sign of larger economic forces and shouldn’t be ignored.

The Evolution of Money

Evolution of money

Entrepreneur Jim Rohn famously mused, “Time is more valuable than money. You can get more money, but you cannot get more time.” Mr. Rohn may have been more right than he knew because while time has infinite value, money, by itself, has none. Whether you’re holding a dollar, a franc, some yen, a metal coin, or a seashell, it has no value—not until someone wants it. This goes for anything that can be traded, but the reality is far harsher when it comes to the paper people carry in their wallets in the hopes of exchanging it for goods and services. At the same time, money is, in some ways, an important block in the foundation of modern society. Why? Let’s take a closer look at the evolution of money to find the answers.

A brief history of money

Bartering

Before people carried around pieces of paper that symbolized value, they would trade goods and services with each other to make transactions. Each possession had a relative value. This means that what it meant to the holder was not necessarily equal to what it meant to the person to whom they wanted to give it in exchange for something else.

Take, for example, a farmer who grew potatoes but needed tomatoes. The farmer may approach his friend who grew tomatoes and offer him 10 potatoes for 10 tomatoes. The friend may say, “Well, to part with these 10 tomatoes, I’m going to need 15 potatoes.” If the potato farmer agreed and had that many potatoes to barter, he would present them, make the exchange, and both parties would leave the transaction satisfied.

On the other hand, if the potato farmer approached a different farmer with the same proposition, the transaction may not go as planned. If the second farmer already grew potatoes, he may ask for something else. It could be corn, beets, or another type of produce. But the other farmer may also prefer a tool or some form of service from the potato farmer. Each transaction was, therefore, relative. Currencies, although abstractions of value, brought concreteness to previously relative transactions. One of the progenitors of modern currency was salt.

Salt

Salt itself used to be a currency (fun fact: this is how we got our name). Far more than a common seasoning, salt has been at the center of trade and culture for multiple millennia—to the point where the word “salt” is at the root of the word “salary.” Salt, as a flavor additive, has long been a valued commodity. The word “salad” comes from when the early Romans used to add salt to vegetables and leafy greens. 

Before the large mass-production of salt became commonplace, the production of salt was a time-consuming process. And as people figured out different ways of producing it, its production was limited to maintain its value. Therefore, people with a salt surplus had a coveted commodity.

The Egyptians used to use it as part of their religious offerings. This lead to salt becoming the currency of choice while trading with the Phoenicians. The practice continued for many centuries and spread across much of the developed world. Marco Polo, while traveling through China in the 11th century C.E., noted how the Chinese used to boil water to create a salt paste that, when formed into a cake, was worth two pence.

Bronze castings

As time progressed, around 770 B.C.E. the Chinese began developing bronze representations of the things they were trading. For example, if a farmer wanted to trade a hoe for a hammer, he would present a bronze casting of a hoe and give it to a carpenter—or someone else—in exchange for a small bronze hammer. The bronze statue could then be exchanged for the real thing. This solved the problem of having to physically transport large or cumbersome objects to places of trade.

Coins

Soon, it became more practical to use coins instead of little castings of valued objects. This approach maintained the convenience of being able to carry an item in your pocket and added an extra convenience: the ability to easily manufacture them.

The manufacturing of money was first performed in Lydia, which is now in the west of Turkey. This was the first mint. Inside, people manufactured coins that represented value. Around 600 B.C.E., Lydia’s ruler, King Alyattes, made the first official state currency. The coins were manufactured using electrum, which consists of a naturally-occurring combination of silver and gold. Each coin was stamped with a picture, and each picture represented a different value. Thus was born the concept of denominations. This system of minting denominated money helped facilitate a more efficient trading system, propelling Lydia to being a powerful, wealthy empire.

Paper

The Chinese made the switch to paper currency around 700 B.C.E. The distribution and use of the bills were carefully regulated by the emperor. In fact, on the bills, there was an inscription warning people that if they counterfeited the money, they would, literally, lose their heads.

After some time, banks began adopting the use of paper money. Inside the bank would be an amount of gold that corresponded to paper money the bank could issue to individuals with whom they did business. For example, if someone deposited half a pound, or eight ounces, of gold, at the bank today, according to the rates at the time of this writing, it would give them $15,197.60. The person would then be able to use that paper to purchase goods and services.

If the individual went and bought a new horse, perhaps spending $8,000 of his money, the person who sold the horse could take that paper money to the bank. The bank would then give the horse-seller $8,000 worth of gold. This gave birth to the modern concept of money, with gold as the underlying asset of value.

Currency-based conflicts

As more countries adopted the use of currency, some took advantage of the, admittedly arbitrary, value of money. They would do things that would cause the value of another country’s currency to rise. On the surface, this may sound like a good thing. However, when a currency is inflated, the cost of the goods within the country goes up. This inflation is due to the fact that more work has to be performed to produce the goods being traded. If someone were to do the same amount of work they did before the currency was inflated, they wouldn’t get paid enough to cover their bills. With goods that cost too much, a country wouldn’t be able to trade with others that could help them build the weapons and armies they needed to engage in war. Currency battles for the sake of weakening another nation continue to this day.

Credit cards

Similar to how going from bronze castings to coins made transactions easier, going from paper to credit cards made buying and selling more convenient for 20th-century consumers. With a credit card transaction, the money of the individual is still held within a bank, but the credit card is used to make the transfer. This is made possible due to two concepts: fungibility and transferability

When a unit of value is fungible, it has the same value as another unit with the same denomination. For instance, a $10 bill in Boston has the same value as a $10 bill in Los Angeles. And the same goes for an electronic transaction that provides access to $10 stored in a bank. Thanks to fungibility, an individual can put $1,000 into a bank and get a credit card that has a $1,000 spending limit. The transferability of money refers to the fact that money can be moved from one party to another. In a credit card transaction, this happens electronically.

The bank that supports a credit card transaction can also allow the person to spend more than they actually have by lending the individual money. The conditions of the loan agreement are contained within the credit card contract. In many cases, the individual may not have enough money in the bank to cover the transaction. Therefore, they agree to put at least that much, and often a percentage more, into the bank in exchange for the right to spend the money the bank lent them. The use of debit and credit cards and the process behind credit card payments are pivotal factors in the evolution of money. They set the stage for a crucial monetary concept: electronic payments.

Electronic payments

Electronic payments are at the heart of the culmination of the evolution of money. In many ways, electronic payments solve the original problem money sought to tackle more efficiently. When money was first conceived, it’s creators were trying to create an abstraction of value that was fungible, transferable, and easy to spend and accept. With credit and debit card payments, electronic transactions become commonplace while providing a solution for everything money was meant to be.

 However, one problem still remained: the middleman. If you have someone working as a go-between that generates wealth by charging you to spend money electronically, how can you guarantee a transparent, trust-worthy, error-free, corruption-free transaction? 

Enter cryptocurrency. With the onset of bitcoin, cryptocurrency became an efficient way to both provide an electronic, tradable abstraction of value and, once again, provide the world with a one-to-one, two-person transaction, devoid of a middleman. But the crypto movement wasn’t arbitrary. The signs have been there for years.

The historical signposts that pointed to cryptocurrency

Because cryptocurrency is such an innovative idea, it’s easy to lose track of the fact that it was born, not so much out of innovation but out of necessity. The modern monetary system has, in many ways, been broken for quite some time. For many decades, there have been signs pointing to the need for a better solution.

Interest rate manipulation

Perhaps one of the most powerful historic indicators of the need for an alternative to typical fiat currency was revealed in the 1970s. The interest rates, designed to help stabilize the United States economy, ended up doing the exact opposite. When the government manipulated interest rates to help slow the inflation of common goods, it ended up having the opposite effect. Inflation skyrocketed as certain goods saw huge leaps in their prices. While some people could afford to pay the higher costs, others couldn’t and had to go without essential items.

Even though companies selling their goods to other Americans during a period of inflation may benefit, those exporting American-made goods suffer. Because it costs more to produce goods in the United States, companies have to charge buyers from other countries more. Consequently, some goods become unaffordable for international buyers and they look to other countries to get what they need. This impacts the gross domestic product (GDP) of the country suffering from inflation, hurting their overall standard of living. Because the government can choose to print money anytime it wants, regardless of whether or not there’s enough gold to support the printed currency, inflation in the modern system can easily spin out of control. As in the 1970s, it can start with a poorly adjusted interest rate and have global implications.

With cryptocurrency, the supply of each token is either limited or controlled by the currency’s governance team—a group of individuals and token-holders who make decisions using a voting system. This helps control the inflation of each cryptocurrency. Also, because the currency isn’t hindered by national borders, you have one common means of purchasing goods and services, and its value is the same regardless of where you are.

The housing crisis

The financial crisis of 2007 was another bellwether for the global economy because it highlighted the corruption that can occur when you have profit-hungry “middlemen” involved in transactions. When someone wants to buy a home, they often have to get a loan from a bank. The bank decides who they will lend the money to, as well as how much they will make that person pay, in interest, for the right to use that money. In theory, the system makes sense. However, as the world saw in 2007, when the banks, hungry for profits, abuse the system and those involved, it can have far-reaching implications.

If the interest rate at which money is lent isn’t decided by a bank but by mathematical equations that take into account real supply and demand factors, the lenders can only earn more by lending more. Manipulating interest rates for the bank’s bottom line would be a thing of the past. Cryptocurrency also addresses the problem of predatory lending. The economic crash was partially a result of banks lending money they knew couldn’t be repaid—and then selling the problematic loan to another, unsuspecting, bank. When transactions happen between two people instead of three, the middleman, and his potentially greedy ambitions, are removed. Cryptocurrency, therefore, eliminates some of the major causes of the financial crisis of 2007.

SALT Lending: A historical turning point in the evolution of money

Throughout history, the utility, divisibility, verifiability, and fungibility of salt made it a perfect asset to be used as a method of trade and currency around the world. Through the products and services at SALT, the legacy continues. SALT is now bridging the gap between cryptocurrencies and traditional lending. 

Even though cryptocurrencies are, in many ways, a superior monetary solution, they are still not yet widely accepted. With SALT, holders of crypto can get loans using their digital assets as collateral. You can then spend the USD or stablecoin you get any way you’d like. SALT empowers those in the cryptoverse, allowing them to turn the most innovative monetary solution since, well, salt, into liquid assets.

Learn more about SALT loans today!

The stable makeup of stablecoin

stablecoin, man with laptop staring at different fiat symbols

In 2008, Satoshi Nakamoto released the Bitcoin white paper, introducing the concept of a decentralized currency to the public. From that time on, many have turned to cryptocurrency for an alternative to traditional fiat currencies that offers decentralization, transparency of exchange, and ease of use—especially when it comes to international exchanges.

However, along with the plaudits have come disadvantages, notably the volatility of digital assets relative to the US Dollar. The perceived value of a specific cryptocurrency by investors can lead to wide fluctuations in the value of Bitcoin, Ether, and other types of crypto. This, in turn, can make cryptocurrency more difficult to use as a medium of exchange or store of value.

Enter stablecoins, an inherently less volatile option being considered the best of many worlds. They provide a desirable link between the stability of fiat currency and the decentralization and efficiency of cryptocurrency.

What are stablecoins and where did they come from?

Stablecoin is a catch-all phrase for cryptocurrency that is pegged to specific reserves or other asset types. More specifically, stablecoin is divided into four groups:

  • Fiat-collateralized stablecoins: Cryptocurrency assets secured against real-world currencies, such as USD Coin (USDC) and Gemini Dollar (GUSD).
  • Commodity-collateralized stablecoins: Cryptocurrency assets fixed against commodities, such as oil, gold, and silver. One example is Pax Gold (PAXG), which is one of the collateral types available on SALT’s platform.
  • Crypto-collateralized stablecoins: Algorithmic stablecoins that mint dollar equivalents based on the value of the crypto provided to backstop each unit.
  • Non-collateralized stablecoins: Stablecoins that automatically adjust its aggregate supply to maintain a certain price or pegged asset. 

The first stablecoins, BitUSD, and NuBits, came online in 2014 and were collateralized through various other cryptocurrencies. Also released in 2014 was RealCoin (now Tether), the first crypto to be backed by so-called “real” assets. Active dollar-based stablecoins today include Paxos Standard, TrueUSD, USD Coin, Tether USD, and Gemini Dollar.

How to use stablecoin for a crypto-backed loan

Though it might not be a strong addition to an investment portfolio, stablecoins are useful in many ways. For example, at SALT Lending, as a provider of crypto-backed loans, we accept stablecoins for:

  • Making direct payments on crypto-backed loans. Reimbursement via stablecoin is nearly instant, with minimal time lag between payment and acceptance.
  • Maintaining a more stable loan to value ratio on a loan, by boosting stablecoin holdings as part of overall collateral.
  • Depositing stablecoin at any time to protect the cryptocurrency collateral value during a market downturn. Stablecoin payments can be made outside of normal banking hours or holidays, unlike cash or fiat payments, meaning borrowers can manage loans without the need for a bank.

SALT also offers loan payouts via stablecoin or fiat currency. The advantage of a stablecoin payout is that only a stablecoin address is required, no bank account is needed.

The potential of stablecoins

Cryptocurrency enthusiasts see value in stablecoins given their decentralized properties, ability to facilitate better payment rails for global commerce, accessibility in unbanked jurisdictions, and programmability to streamline business operations.

Meanwhile, more traditional institutions are researching stablecoins for their potential in cross-border lending and overseas transactions without conversion into fiat, or sovereign currency. The Bank of Canada mentioned the use of stablecoin in its 2020 vision, focusing on it as a part of emerging payment technologies. Meanwhile, The U.S. Office of the Comptroller of the Currency released guidance indicating that national banks are free to hold reserve currencies for stablecoin.

While much of the world continues to rely on fiat currency for financial operations, digital currencies have been quickly disrupting this archaic financial infrastructure. Of those currencies, stablecoins could bridge the divide between cryptocurrency volatility, decentralized ownership, and providing banking solutions in otherwise untouched jurisdictions.

For more information about cryptocurrency loans and stablecoins, contact SALT Lending.