What Is a Trust Fund and How Does It Work?

What Is a Trust Fund and How Does It Work?

By Cari Wira Dineen — Jun 15, 2022

Trust funds often get a bad rep—too often, we assume the people who inherit them are spoiled, entitled and ultra wealthy.

But that’s not actually true (or doesn’t have to be). Sure, trust funds might be a good place to park your cash if you’re a millionaire. But you don’t have to be rich to make a trust fund a part of your financial toolkit. A trust fund can be a useful component of your estate planning, (in addition to writing your last will and testament and picking your children’s guardians). That's especially true if you want to help your money get to your kids without a hitch when you pass away.

How do trust funds work? What is a trust fund, exactly?

We spoke to Alexander Joyce, CEO and president of ReJoyce Financial, a financial and estate planning firm in Indianapolis. He shared how you might go about setting up your kid (and your cash) with a trust.

Read on for the definition of a trust fund, how a trust fund works and whether you might need one.

What Is a Trust Fund?

Trust Fund Definition

A trust fund is an estate planning tool. It’s a legal entity that can hold property on behalf of someone or some group.

If you are the person who’s creating a trust, you’re called the grantor, trustor, settlor or trust maker. If you set up a trust through your will, you could also be called the testator or decedent. This person chooses the rules behind the trust and decides what property the trust will own (by transferring assets into the trust’s name).

The person you ultimately want to receive your money or property is your beneficiary. Being named a beneficiary of a trust is different from owning property, though, because there are generally rules attached. For example, a trust might allow a beneficiary to live in a home owned by that trust, but not rent it out or sell it. Depending on how the trust is set up, beneficiaries often end up inheriting the trust’s assets, according to some trigger like age—for instance, inheriting money when the person turns 21.

The person or entity you want to oversee the money and fulfill the various responsibilities is the trustee. This person doesn’t actually own the property in the trust but rather oversees the distribution of the property to the beneficiaries and makes sure that the stipulations put in place are being followed. Trusts can have multiple or co-trustees, or even institutional trustees (meaning that a company oversees the administration of the trust). Many trusts name successor trustees in case the first-choice trustee becomes unavailable.

In many cases, the trustee receives some sort of compensation for the effort, like a management fee.

Related Articles Do You Need Life Insurance? Term vs. Whole Life Insurance: What's the Difference? How Much Term Life Insurance Do I Need?

How Does a Trust Fund Work?

A trust fund essentially transfers ownership of the assets you put into it to the trust itself. When you create a trust, you are the grantor and often the first trustee, and you set the rules around how the assets in the trust can eventually be distributed.

To continue reading, please go to the original article here:

https://meetfabric.com/blog/what-is-a-trust-fund

What Happens If You Miss October Tax Deadline

October Tax Deadline Is Here For Millions Who Filed For An Extension. What Happens If You Miss It?

Susan Tompor, USA TODAY   Mon, October 17, 2022

Kicking the can down the road by requesting a six-month extension for filing your taxes – as a staggering nearly 19 million taxpayers did this year – means plenty of people are looking at an Oct. 17 deadline for filing their federal income tax returns.

"Yes, we are busy. It's not as bad as the first round of the busy season, but we're still pretty busy getting the individual returns prepared," said Robyn Fuller, a certified public accountant and founding partner for J&F Advisors, a small accounting firm in Detroit.

Those filing in the next few weeks will want to make sure to have all their paperwork in hand, especially for any payments they received in 2021 for the advance child tax credit. These advance payments aren't taxable, but they are an important part of calculating your tax refund when you file a 2021 return.

You also want to know the exact amount you received for stimulus payments in 2021.

"If those amounts don't align with what the IRS has in their records, that can delay in processing their return," Fuller said.

If you're filing a return now, it's best to file electronically, instead of by paper. While the tax season went somewhat smoothly for many, some who filed paper returns by the April deadline continued to wait for tax refunds in late September. Others saw their money only recently.

As of late June, the IRS finally completed processing all of the originally filed Form 1040 paper returns without errors that it received in 2021. It's a first-in, first-out process. Once the returns received in 2021 were processed, the IRS could move on to the paper returns received this year.

The accumulation of paper returns has been a troublesome development since the COVID-19 pandemic shutdowns shook up the system.

Why Did So Many People Request A 2022 Tax Filing Extension?

Every year, a group of people just naturally drag their feet past April and file Form 4868 to request the automatic six-month extension. By filing that form, you get more time to file a completed tax return, not more time to pay your tax bill. You want to pay any amount due – or pay as much as you can – by the April deadline to avoid interest and penalties on what is owed.

This year, the numbers filing for extensions exploded to record levels as some taxpayers hoped the IRS would extend the deadline. Others worried that some last-minute tax changes could be around the corner from Congress. And many weren't sure how to calculate the child tax credit or the recovery rebate credit.

How to request a tax extension

 To continue reading, please go to the original article here:

https://money.yahoo.com/october-tax-deadline-looms-millions-151824434.html

How to Legally Avoid The Gift Tax on Money

How to Legally Avoid The Gift Tax on Money

Eric Reed   Thu, October 20, 2022

The gift tax is a tax levied on any unilateral transfer (a gift) from one person to another. The federal tax is aimed partially at making sure wealthy families don’t use gifts to bypass the estate tax.

The federal gift tax applies to any kind of taxable assets, including cash, securities and real estate. When the gift tax applies, it is the donor who pays, meaning that if you give a taxable gift you owe any applicable taxes. If you receive a gift, it is rare, if ever, that you owe taxes.

It is exceedingly rare for someone to owe money due to the gift tax. This tends to apply only to the wealthiest of households due to the tax’s high exclusions. This is because the purpose of the gift tax is to prevent wealthy families from avoiding the estate tax by simply gifting all their money to each new set of heirs. Here’s what you need to know.

Consider working with a financial advisor as you seek ways to transfer wealth to family members or loved ones.

What Is the Gift Tax?

Per the IRS, this is a tax levied on “[a]ny transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.” If you give something of value and get less than it is worth in return, it is considered a gift and may be taxable under this law.

Importantly, this applies if you give something of value and get a nominal amount in return. (In law this is called a “de minimis” transaction.) For example, say you want to give your children the family house. Instead of giving it outright you sell it to them for $100. You do this because ordinarily a property sale doesn’t trigger the gift tax. From a legal standpoint the parties have exchanged assets so the only relevant tax would be on any capital gains.

However, in this case the sale price had no bearing on the fair market value of the property (otherwise known as “full consideration”). As a result you would owe taxes on the difference between the house’s sale price ($100) and its fair market value. Structuring this sale specifically to avoid the gift tax would be a form of felony tax fraud.

This is a particularly common type of tax evasion among family businesses and within closely held real estate companies.

Should you owe gift taxes, the applicable tax rates range from 18% to 40%, depending on the amount of the taxable gift. This tax is progressive, meaning that each bracket only applies to its segment of value. For example, no matter how much you give as a gift, you only pay 18% on the first $10,000.

Gift Tax Exclusions

As noted in our introduction, the person who gives the gift owes any relevant taxes. However, you don’t owe taxes on any gift that falls within an applicable exclusion. The gift tax comes with two forms of exclusions, the annual exclusion and the lifetime exclusion.

To continue reading, please go to the original article here:

https://finance.yahoo.com/news/legally-avoid-gift-tax-money-130019143.html

The US Dollar Is Irrationally Strong Right Now

The US Dollar Is Irrationally Strong Right Now

Notes From the Field By Simon Black  October 19, 2022

By the summer of 1497, Ferdinand and Isabella of Spain were presiding over a rapidly growing empire.

Christopher Columbus had already claimed most of the Caribbean islands on their behalf. Plus Pope Julius II had awarded virtually all of the western hemisphere to Spain in the infamous Treaty of Tordesillas.

Spain was quickly on its way to becoming a global superpower. Ferdinand and Isabella knew it, and they realized that they needed a strong currency to match their strong empire.

So on June 13, 1497, they announced a major monetary reform called the Medina del Campo, named for the site of a popular medieval banking conference at the time.

The monetary reform was sweeping; they abolished most other coins in their domain, and re-established the real as the primary currency across Spanish lands.

The real was a silver coin, weighing about 0.1 troy ounces or roughly 3.2 grams. And coins were minted in denominations of ½, 1, 2, 4, and 8 real.

Over time, the 8-real coin (real de ocho) became the most popular; it was known as a “Piece of 8”, and eventually the “Spanish dollar”.

By the mid-1500s under King Charles I of Spain, the Spanish dollar had become the world’s primary reserve currency. From the Americas to Europe to Asia, global trade and commerce were quoted and often settled in Spanish dollars.

Dutch and Portuguese traders visiting Macau in the 1600s, for example, would frequently buy goods from Chinese merchants using Spanish dollars.

In 1704, Queen Anne of Great Britain decreed that the Spanish dollar would be legal tender in the American colonies. And in 1792, the newly independent United States passed the Coinage Act which defined the US dollar as equivalent to the Spanish dollar.

The Spanish dollar’s dominance in global finance was unparalleled. But like all reserve currencies that came before, it too lost its luster.

Eventually the Spanish Empire’s strength faded. The government defaulted on its debts, confiscated private wealth, and suffered embarrassing military defeats.

The Dutch guilder then began to displace the Spanish dollar in commerce and trade. And by the late 1800s, the British pound had become the world’s dominant reserve currency — matching the British Empire’s unparalleled size and economic power.

This lasted until the mid-20th century when, after World War II, the United States dollar became the world’s primary reserve currency — a status the dollar has enjoyed for decades.

Having the world’s reserve currency is an extraordinary privilege. It means that the rest of the world literally HAS to stockpile your currency.

For example, whenever a company in Peru does business with a supplier in Malaysia, that transaction is quoted and settled in US dollars. This means that the banking systems in both Peru and Malaysia HAVE to maintain substantial holdings of US dollars in order to facilitate these transactions.

This is the biggest reason why foreigners own trillions and trillions of dollars of US government bonds; bonds are the largest and most liquid financial instrument available for foreign investors who need to hold dollars.

And because of this need for foreigners to own US dollar assets, foreigners own a whopping $7.5 trillion worth of US government bonds, roughly 25% of the national debt.

This is really an enormous benefit for the US. And for an easy example, we need look no further than to the United Kingdom.

The British pound was the world’s dominant reserve currency more than a century ago. Today the UK is still a significant economy. But they no longer have the unique reserve currency advantage.

Now, you may be aware that, a few weeks ago, the British pound and British government bonds (known as gilts) began plummeting after the British government announced a series of tax cuts and economic reforms.

It turned out that the bond market wasn’t thrilled with the plan, so investors began dumping their British gilts and pounds.

It was a full blown panic. And soon, the central bank had to step in to bail out the bond market. The Chancellor was sacked. And the Prime Minister canceled her planned tax cut.

Essentially the British government had to capitulate to the demands of investors.

This is actually normal in countries that don’t enjoy reserve currency status. If a government wants to borrow money from the bond market, politicians have to appease investors and lay out a plan that will give everyone confidence.

But not in the United States.

Because the US issues the global reserve currency, the government can engage every ridiculous antic imaginable.

They can fail to pass a budget (multiple times) resulting in a government shutdown. They can lock down the entire economy and pay people to stay home. They can pass a multi-trillion dollar spending package and insist it “costs nothing”. They can slash interest rates to zero or engineer record high inflation.

And yet foreign investors will STILL buy US government bonds. And the dollar actually becomes STRONGER.

It’s totally insane. None of that would be possible if the US dollar weren’t the world’s reserve currency.

The curse of the reserve currency, however, is that policymakers usually believe their status will last forever. Spanish, Dutch, and British leadership never envisioned that their currencies would falter and be displaced by a rising power. And yet it happened.

The same fate awaits the US dollar.

Reserve currencies are usually displaced when economic power is in decline. Given the mountain of debt owed by the US government, the stagflation surging across the US economy, and the complete ineptitude to do anything about it, it certainly looks like that decline is taking place right now.

In general it would be foolish to think that the dollar will remain the dominant global reserve currency forever. And its displacement may take place sooner rather than later.

Once that happens, things will become a LOT more difficult for the US government. They’ll most certainly have to raise taxes. The central bank will have to print more money, sparking more inflation.

And we’ll likely see revolts of the bond market, just like what happened in the UK; just imagine the US government forced to capitulate its sovereignty to the demands of foreign lenders.

But that’s the future. For now, the dollar is still the top dog, only because it hasn’t been displaced (yet).

In fact, at the moment, the US dollar is irrationally strong.

Despite inflation that has reached multi-decade highs, and the growing national debt, the dollar is near an all-time high against the British pound. It’s at a 20+ year high against the euro. It’s strong against many major currencies. It’s even been strong against other asset classes including precious metals, crypto, and more.

So this may be a good time to consider the future and think about turning at least a portion of your irrationally strong dollars into another asset that can stand the test of time.

 To your freedom and prosperity,

Simon Black, Founder Sovereign Research & Advisory

https://www.sovereignman.com/trends/the-us-dollar-is-irrationally-strong-right-now-143374/

What Are the Safe Places for Keeping Cash?

What Are the Safe Places for Keeping Cash?

By Jennifer VanBaren

Store your cash somewhere safe where burglars are not likely to look.

If you have cash at home and are looking for a safe place to put it, consider one of these options. Some people prefer hiding cash in their homes, in a safe spot where no one will find it. Others prefer putting their cash in the bank where they don't have to worry about it. Before putting your cash somewhere, make sure that it will be safe, so you can be free from worrying that something will happen to it.

Fireproof Safe

Put it in a fireproof safe. Cash is made from paper and will burn if exposed to fire, therefore if you are going to put it in a safe, be sure the safe is fireproof. Many companies sell safes strictly for storing cash; which are called cash safes. Theses safes protect the cash from fire, if a fire occurs in your home. It also protects the cash from burglars.

Safe Deposit Box

Store it in a safe deposit box. If you prefer not to store the cash in your home, rent a safe deposit box at a bank. No one will be able to break into the box, and the boxes are semi-fireproof. The only downside with a safe deposit box is that with most banks the boxes are not insured.

Bank Account

Deposit the cash in a bank. Choose an account that is FDIC insured. This insurance protects your money up to $100,000. This is a very safe option for depositing money because even if the bank goes bankrupt, the government will reimburse you for your deposit.

There are numerous options with accounts that offer FDIC insurance, including savings accounts, checking accounts, money market accounts and certificates of deposit. Most of these types of accounts pay the depositor interest on money placed into these accounts. U.S. Treasury bonds are also a safe investment for storing cash. The government, as of 2011, has never defaulted on bonds. They are a good investment that earns a small yield too.

To continue reading, please go to the original article here:

https://www.sapling.com/10006674/safe-places-keeping-cash

The Best Way to Keep Paper Currency From Becoming Moldy

The Best Way to Keep Paper Currency From Becoming Moldy

By Jenn Foreacre

Mold is a live fungus that gets its food by dissolving food materials with secreted digestive enzymes. Mold is naturally attracted to dark, moist places, such as basements, bathrooms and heavily wooded areas. Mold causes damage and deterioration, and it is also bad for your health.

The best way to prevent paper currency from developing mold is to keep it cool, dry and away from dark places that naturally contain mold.

Mold Prevention

Find a cool, dry place to store your paper currency. Closets, dresser drawers and boxes that will be put into storage are all ideal, as long as they are kept as clean and as dry as possible.

A clean area is one that is free of dirt and debris that could eventually harbor mold, or contain enough moisture to attract mold. Keep the air dry by ensuring that any outside drainage is sufficient and by using caulk or a silicone sealant to seal up any cracks around doors, windows and water pipes.

Keep the temperature on the cool side, as cool air doesn't hold as much moisture as warm air does. Run an air conditioner or a dehumidifer as needed. An air condition produces cool air by removing moisture from the environment and then cooling it.

Dehumidifers simply remove moisture from the air. Dehumidifers are available in varying sizes; make sure to choose one that is appropriate for the size of the room you wish to dry out. For small storage areas, consider using a product such as Damp Rid (see Resources), which uses special moisture-attracting pellets to remove water from the air.

Store paper currency in special plastic envelopes known as Mylar holders. Unlike normal plastic bags, storage bags and plastic wrap, Mylar holders do not contain any PVC materials, which over time can deteriorate and release chemicals and gases that can damage paper currency and lead to its deteroriation.

Place a single sheet of paper currency inside each Mylar holder, and carefully stack multiple Mylar holders together. Secure with a rubber band or a tie, and place the protected paper currency in a cool, dry place.

To continue reading, please go to the original article here:

https://homesteady.com/how-6151037-prevent-mold-bread-box.html

The 10 Commandments of Wealth and Happiness

The 10 Commandments of Wealth and Happiness

Stacy Johnson • August 17, 2021

I've been offering money advice for more than 35 years. Here are the 10 most important things I've learned.  I’m now financially independent, but I didn’t get this way overnight. Nor did I do it by selling books, offering seminars or appearing on “Oprah.” I did it the same way you’re doing it: one paycheck at a time over long periods of time.

A few years back, one of my young staffers suggested I condense everything I’ve learned into a few simple ideas to serve as a guide to those starting out, starting over or maybe realizing they’re not where they’d like to be.   While certainly a challenge, it’s a worthy one.  So here goes: the 10 commandments of achieving financial independence — and maybe getting a little happier while you do it.

1. Live Like You’ll Die Tomorrow, But Invest Like You’ll Live Forever

The ease of making money in stocks, real estate or other risk-based assets is inversely proportional to the time horizon. In other words, making money over long periods of time is easy — making money overnight is the flip of a coin.

Money is like a tree: Plant it properly, care for it occasionally — but not obsessively — then wait.

The biggest winner in my IRA is Apple. I believe I bought it in 2002 or 2003, and I still have it. Had I been listening to CNBC or some other media outlet promoting trading, I almost certainly wouldn’t still own it.

The lesson? Enjoy your life to the fullest every day — live like you’re going to die tomorrow. But since you’re probably not going to die tomorrow, plant part of your money in quality stocks, real estate or other investments. Then, hold onto them.

Don’t ignore your investments entirely. Sometimes fundamentals change, indicating it’s time to move on. But don’t act rashly. Patience pays.

2. Listen To Your Own Voice Above All Others

My job as a consumer reporter has included listening to countless sad stories about nice people being separated from their money by people who weren’t so nice. These stories run the gamut from real estate deals to work-from-home scams, but they all start the same way: with a promise of something that seems too good to be true.

And they all end the same way: It was too good to be true.

If someone promises they can make you 3,000% in the stock market, they’re either a fool for sharing that information or a liar. Why would you send money to either kind of person?

When someone promises a simple solution to a complex problem, stop listening to them and start listening to your own inner voice.

https://www.moneytalksnews.com/7-dumb-ways-you-waste-money-daily/

7 Places To Save Your Extra Money

7 Places To Save Your Extra Money

Published June 27, 2022   By Liz Hund

Whether you’ve come into an inheritance, earned a bonus at work or made a profit selling your house, having extra money gives you a chance to grow your savings and maybe fulfill a goal, such as saving for a down payment on a new car. But deciding on the best place to stash your cash isn’t always easy.

Return on investment is an important factor to consider, but liquidity and the length of time before you need to access the cash are also important. Safety and investment costs should also be considered when determining where you should save your money. With that in mind, here are some options to consider.

1. High-yield savings account

A high-yield savings account is an attractive option for those who want to grow their savings while having easy access to the money, just in case.

To put the earnings into perspective, the yields on traditional savings accounts are typically very low, as little as 0.01 percent APY. But the top high-yield savings accounts earn above 1 percent APY.

You can open a savings account to build an emergency fund or save for a vacation or home repair while having safety and liquidity.

If you need to access portions of your money from time to time, savings account restrictions might be a problem. There could be a limit of six withdrawals or transfers per month, depending on the bank’s policies.

Another thing to note is that a high-yield savings account might offer a sign-up bonus or interest rate bonus, but you’ll likely have to maintain a sizable minimum balance in the account to earn the higher rate.

2. Certificate of deposit (CD)

The main difference between a savings account and a certificate of deposit is that a CD locks up your money for a set term. If you withdraw the cash early, you’ll be charged a penalty.

CDs can be disadvantageous when interest rates are low. But they also protect savers from falling interest rates because they allow you to lock in a fixed rate.

Though longer-term CDs offer better interest rates, you’re unable to access the funds during that time without paying a penalty in most cases.

One strategy to grow your earnings is to open several CDs that mature at different times. This is called CD laddering. Laddering offers flexibility and less risk than one big CD with one maturity date. By having several short- and long-term CDs, you can take advantage of higher interest rates without too much risk and still have the flexibility to take advantage of higher rates in the future.

To continue reading, please go to the original article here:

https://www.bankrate.com/banking/savings/places-to-save-your-extra-money/#financial-planner

The Worst Kind of Financial Advice

The Worst Kind of Financial Advice

Posted October 14, 2022 by Ben Carlson

A new research paper from an economist at Yale did a deep dive into 50 of the most popular personal finance books of all-time.  If you’re a personal finance nerd like me you should be familiar with the authors — Dave Ramsey, Suze Orman, Robert Kiyosaki, Ramit Sethi, David Bach and the like.

The point of the paper was to show how typical personal finance advice differs from academic economic models.  For example, most personal finance books say you should start saving from an early age to develop good habits and take advantage of compound interest.

The author of the paper, James Choi, disagrees:

Because income tends to be hump-shaped with respect to age, savings rates should on average be low or negative early in life, high in midlife, and negative during retirement. From this perspective, the common policy of making the default retirement savings plan contribution rate not depend on age is suboptimal.

The idea here is most young people don’t make a lot of money so they should enjoy themselves and put off saving for retirement until middle age when most people enjoy higher incomes.

So who is right here — the economist or the personal finance experts?

They’re both right and they’re both wrong.

Certain people do need to start saving when they’re young to develop good financial habits, even if it’s a small amount of money. Middle age usually does bring more income but also more responsibilities.

For some, there will always be a good reason to put off saving until later so they need to start early.

For others, they can plan things out better. They understand the typical lifecycle of income trends and will have no problem putting money aside when they’re older so they can enjoy their youth while they can.

It really depends on the personality, circumstances and emotional make-up of the person in question.

Far too many “experts” these days profess to have the singular piece of advice that will solve all of your problems.

Just read this one book — it will change your life!

Just follow these 10 steps and you’ll find success!

Just read this quote by some guy who died 2,400 years ago and you too can gain enlightenment!

Just follow the exact same path I followed and you are sure to end up rich!

The problem with this kind of advice is it fails to recognize the hard work, personal circumstances, temperament, timing and luck involved.

To continue reading, please go to the original article here:

https://awealthofcommonsense.com/2022/10/the-worst-kind-of-financial-advice/

How to Prepare for an Economic Slowdown

How to Prepare for an Economic Slowdown

By Denise Hill

Predicting an economic downturn can seem as mystical and convoluted as reading tea leaves. However, the economic tea-leaf readers — financial experts — are warning that the economic winds are changing.

Even though unemployment is still low, there are other economic indicators causing financial analysts to predict lean financial seasons. First, economic growth has all but stalled.

The rate of wage increase has stagnated. The Constant Maturity Treasury (CMT) rates, which are used to measure and predict future interest rates, economic growth, and output, are near flatlining — and threatening inversion. This means that as the economy continues to slow down, consumer interest rates will rise and investment earnings will lose momentum, possibly even losing money.

Preparing for a recession is similar to preparing for a tropical storm: There's no way to predict just how bad things will get, but burying your head in the sand and hoping for the best is a horrible idea. Here are a few things you can do to stormproof your finances against the coming economic slow down.

Beef Up Your Emergency Fund

The first thing you do when prepping for a storm is prepare your home for the onslaught. People in coastal areas board up windows and surround their homes with sandbags. An emergency fund does the same thing financially. It's the added installation and protection that can assist you when the economy dips.

It can't stop the winds, or prevent the rain, and it may not stave off all damage, but it does provide an added layer of protection. And it provides you a fighting chance to preserve what you've worked so hard to build.

The traditional emergency fund is anywhere from three to six months' worth of daily living expenses — and even larger for people with high expenses, large salaries, or a job that would be difficult to replace. During lean economic times, you want to save more than the standard recommended amount.

Under normal circumstances, the average bout of unemployment lasts roughly three to six months. However, experts believe that number is slowly creeping up and could double in a sluggish economy.

It has been suggested that you plan to be unemployed at least one month per every $10,000 you earn. So if you earn $70,000 a year, you should plan for an unemployment that lasts at least seven months.

This formula is a great gauge in helping you determine how much you need in your emergency fund. (See also: 7 Easy Ways to Build an Emergency Fund From $0)

Adjust Your Budget And Pay Down Debt

To continue reading, please go to the original article here:

https://www.wisebread.com/how-to-prepare-your-money-for-the-coming-economic-slowdown?ref=relatedbox

The People Who Engineered Record Inflation Want To Control Cryptocurrency

The People Who Engineered Record Inflation Want To Control Cryptocurrency 

Notes From the Field  By Simon Black  October 3, 2022

On the First of May in the year 1716, a swashbuckling Scottish entrepreneur was making this pitch of his lifetime to the head of the French government in Paris.  The entrepreneur’s name was John Law. By all accounts he was incredibly charismatic and had a flamboyant, larger than life personality. He was something like Adam Neumann, formerly of WeWork… the kind of person who could talk anyone into anything.   And John Law’s pitch that day was to launch an entirely new financial system.

King Louis XIV had just died eight months before, leaving France in terrible financial ruin. Decades of endless wars, palaces, and profligate spending had bankrupted the French government.

The situation was so dire, in fact, that there was hardly any gold left in the French treasury. So the new head regent of the government, Duke Philippe II of Orleans, was desperate for a solution.

Law made him a bold proposal: the Duke would provide Law with a special banking license. And in exchange, Law would create a new system of paper money that would bring more gold into France and help pay off the crippling national debt.

Philippe agreed. And, only a few weeks later, John Law’s new Banque Generale Privee was in business.

It turned out that people loved the idea of paper money. And within a year, his paper bank notes were circulating widely throughout the French economy, and the government even accepted them for tax payments.

Law made his paper money even more valuable in late 1717, after he had taken control of the Mississippi Company.

The French Mississippi Company was something like the Dutch East India Company; it was a private enterprise that had received a royal monopoly over all the land and resources in France’s American colonies.

Almost immediately after securing rights to the monopoly, Law offered shares of the Mississippi Company to the public; it was like a giant IPO.

But Law sweetened the deal by allowing people to pay up to 75% of the share price using his bank’s paper money.

The Mississippi Company IPO was a smashing success. It was so popular that Law was offered bribes, sex, and political favors from French nobles in exchange for the opportunity to buy a few extra shares.

The famous philosopher Voltaire was eye witness to this, and wrote, “I myself saw him pass through the galleries of the Palais-Royal followed by dukes and peers, Marshalls of France, bishops of the Church.”

And at first the share price soared. Bear in mind the Mississippi Company had zero activity. Hardly anyone was living in France’s southern colonies in America, and there was virtually no trade or commerce going on.

The government even tried deporting criminals to America, trying to increase the population of the colonies. They offered hundreds of acres of land for free to anyone who would go. Yet economic activity still failed to transpire.

Eventually the French public realized the truth; there would be no gold, no gems, and no riches coming from the Mississippi Company. And the stock price began to quickly collapse.

Law tried to prop up the stock price by creating more paper money (backed by absolutely nothing), and using that new money to buy shares of the Mississippi Company.

But all he ended up doing was creating inflation; with so much new paper money circulating in the economy, prices everywhere rose.

By May 1720, retail prices in France had doubled. It was full-blown hyperinflation, and people panicked. They feverishly began selling off their Mississippi Company shares and trading their paper money, for any real asset they could get their hands on.

One nobleman, Duke Henri-Jacques de Caumont, dumped all of his paper in exchange for a warehouse full of candles. A Parisian merchant sold his in exchange for crates of chocolate and coffee.

(This is one of many examples of history showing that real assets tend to do well in times of inflation.)

Shortly after, Law officially suspended the conversion of his bank notes into gold and silver, and the paper money instantly became worthless.

At the peak of all this insanity, if you can even believe it, the French government made John Law its Comptroller-General.

In other words, the guy who created the biggest financial bubble in French history was put in charge of government finances.

I couldn’t help but think of this story when I watched a group of central bankers talking about cryptocurrency at a conference in Paris last week.

Among others, the heads of the US Federal Reserve and the European Central Bank participated in a panel discussion that, for anyone who actually understands crypto, can only be described as hilarious.

Naturally they started with the old anti-crypto tropes, talking about “the lack of transparency” and how criminals use crypto.

These are completely laughable points. Criminals use iPhones, American Express, and JP Morgan Chase as well. Should we cancel those too?

And as for crypto’s lack of transparency, the opposite is true. Every Bitcoin transaction is traceable on the blockchain for the entire world to see.

Yet with every passing sentence, these bankers demonstrated that they know absolutely nothing about crypto… and quite possibly banking too.

At one point they slammed stablecoins that didn’t have a 1:1 backing; stablecoins are specialized tokens that represent, for example, 1 US dollar per token. So there is supposed to be at least one US dollar in reserve for every token in circulation.

Lately there have been a handful of high profile stable coins that didn’t have sufficient reserves. So their criticism is fair.

But this leads to an obvious question: if a 1 to 1 reserve standard for stable coins is so critical, why don’t we demand the same of our banking system?

Central Banks are among the most prominent regulators in banking. And they have completely condoned a fractional reserve system whereby commercial banks are only required to keep 10% (or less) in reserve.

In other words, these people are perfectly fine that commercial banks gamble most of their customers’ money on the latest investment fad of the day.

It’s fine to be outraged when a few stablecoins aren’t 100% reserved. But they should be equally outraged that commercial banks aren’t even 10% reserved.

The biggest laughs, though, took place when these central bankers started talking about rolling out their own digital currencies.

The Fed wants to create a DollarCoin. And the European Central Bank wants a EuroToken.

This is truly rolling on the floor, laugh out loud funny given that these people have no clue about technology.

The Federal Reserve’s most important payment system, FedACH, which processes over 50 million transactions per day, still takes 2-3 days for payments to clear. It’s so outdated, it’s as if they’re still sending satchels full of cash via Pony Express.

It’s also ridiculous that the people who have failed in every possible aspect of their responsibility think that they’re qualified to administer a brand new financial system.

These Central Banks failed to anticipate inflation. They failed to recognize it. They failed to do anything about it for more than a year. And now they’re hellbent on causing a recession.

They’ve pretty much been a complete disaster. Yet now they want to be in charge of crypto too. Are these people serious??

To me this is really one of the great benefits of crypto, and of real assets. Holding paper money is ultimately a vote in favor of central bankers, an expression of confidence that they know what they’re doing.

Personally I have little confidence in these people. And that’s why I think it makes sense to hold other types of assets that they don’t control, including real assets (real estate, commodities, productive businesses, etc.) and decentralized crypto assets.

To your freedom,  Simon Black,  Founder, SovereignMan.com

The people who engineered record inflation want to control cryptocurrency | Sovereign Research